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Adam Thierer is the director of telecommunications studies at the Cato Institute.

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WHAT'S YOURS IS MINE

CATO INSTITUTE

Contents

Introduction.........................................................................................................1Part I: Open Access: Theory and Reality1. The Case against Forced Access....................................................................................92. Debunking "Natural Monopoly" and "Essential Facility" Rationales for Forced-Access Regulation.....................233. Why Network Proliferation Spells the End of the Essential Facilities Doctrine.....................................37Part II: Case Studies: How Forced Access Harms Specific Industries4. Case Study 1: Open Access to the Electricity Grid.................................................................475. Case Study 2: Open Access to Local Telephone Networks.............................................................556. Case Study 3: Open Access to Broadband Services...................................................................657. Case Study 4: Must-Carry Mandates on Cable and Satellite Networks.................................................918. Case Study 5: Open Access to Software.............................................................................99Part III: Conclusion9. What Really Protects Consumers and Network Reliability-Markets or Mandates?.......................................105Notes................................................................................................................109Index................................................................................................................125

Chapter One

Despite its advocacy by regulators, misguided consumer advocates, and opportunistic businesspeople, forced-access regulation has many problems.

Problem 1: Forced Access Is a Taking of Private Property

Forced-access regulation is essentially at war with private property rights. In one sense, forced-access regulation is really nothing more than a variant of socialism since it demands that private companies surrender control of their systems or technologies to a governmental vision of efficient and proper distribution of resources.

Forced-access crusades are always undertaken in the name of advancing consumer choice, competition, and "openness." But even if forced access helped advance these ends, the ends do not justify the means. Free market competition means that private property owners-even owners of network properties-are at liberty to use their property as they see fit, and citizens are free to shop around for better arrangements when they feel they are not getting the best deal possible. The alternative is that of government bureaucrats demanding that control over private property be surrendered. Commenting on open-access conditions imposed on the AOL Time Warner merger, American Enterprise Institute scholar James K. Glassman noted that regulators "have served notice to high-tech firms that if they make big investments in new products like cable modems and instant messaging services, their property rights to those innovations may be stripped from them at will for political reasons."

Moreover, because forced-access regulation forces private property owners to surrender the ownership or control of their property to regulators, there remains a legitimate question of whether it represents an unconstitutional taking under the Fifth Amendment to the Constitution. Some scholars, such as J. Gregory Sidak of the American Enterprise Institute and Daniel F. Spulber of the Northwestern University Graduate School of Management, argue that this is the case even for industries that were formerly treated as regulated monopolies, such as electricity and local telecommunications. They argue that these entities deserve compensation for the past investments or "stranded costs" they have incurred in the past.

The facilities of the regulated network industries did not fall like manna from heaven, but rather were established by incumbent utilities through the expenditures of their investors. Utilities made past expenditures to perform obligations to serve in expectation of the reasonable opportunity to recover the costs of investment plus a competitive rate of return. Investors must be compensated for those past costs; it follows a fortiori that investors must be offered additional compensation if existing responsibilities are perpetuated or new burdens imposed.

Stranded cost recovery remains a controversial proposition given that these entities enjoyed geographic service monopolies and guaranteed rates of return. But while these sectors do not necessarily deserve any special consideration or compensation for the investments they made decades ago, what should not be the least bit controversial is the proposition that these entities deserve to be compensated for future takings of their property in a deregulated marketplace in which they have lost their monopolistic service territories and guaranteed rates of return.

Consequently, if forced-access mandates are being applied to such network industries in an attempt to transition them into a more competitive marketplace, they will need to be compensated for the costs they and their investors are now incurring as they deploy new systems and technologies. Regulators cannot continue to confiscate network assets without just compensation merely because certain portions of those networks may have been deployed years ago. Of course, as discussed below, the better solution is to end all exclusive service territories and regulatory advantages for these entities and comprehensively deregulate these markets immediately to avoid such takings controversies in the future. If forced-access mandates are not applied, of course, there would be no takings concern to begin with.

It has also been alleged that a regulatory taking might occur when "must-carry" rules are imposed on cable and satellite companies. Such regulations require those companies to carry the signals of broadcast television stations without compensation. Must-carry mandates were imposed on the cable industry through the Cable Television Consumer Protection and Competition Act of 1992 and on the satellite industry through the Satellite Home Viewer Improvement Act of 1999. The rules compel firms to carry broadcast television signals on their networks without receiving compensation for doing so.

"Must-carry rules constitute a taking of property," argues Harvard Law School constitutional scholar Laurence H. Tribe. "Must-carry rules do not simply regulate the manner in which cable operators use their systems. Rather, they effectively condemn a portion of cable operators' property and turn it over to third parties who are entitled to exclusive use of the channels in question on a continuing basis. This system is effectively the exercise of eminent domain power over a portion of the cable system." Roger Pilon, vice president of legal affairs at the Cato Institute, has noted that, "Under must carry ... we have in essence a publicly sanctioned private condemnation, with local broadcasters 'taking' the channels that belong to cable operators. And as is the case with so many modern regulatory takings, the cable operators are made to serve the public-and made to serve their broadcast competitors, in particular-while bearing the whole...