Tag Archives: regulatory capture

The Gigi Sohn FCC Nomination

Gigi Sohn recently was interviewed by The Verge and discussed her nomination process to become the fifth FCC Commissioner. It’s a fascinating read about the process of being nominated for a position that must be confirmed by the Senate. From the day she was nominated, Sohn was not allowed to talk in public during the long 500 days she was under consideration about issues considered by the FCC. She was first nominated for the position back in October 2021 and only recently withdrew as a candidate. As she describes it, it’s a dreadful process for anybody to go through.

Today’s blog isn’t specifically about Sohn but rather about the FCC and who controls it. In my opinion, Sohn was ultimately not considered because she has spent her career as an advocate for the public and for taking positions that favored small corporations and startups over giant corporations. It’s disheartening that somebody who has sided with the small guy over giant corporations in the past has little or no chance of becoming an FCC Commissioner.

By definition, regulators are supposed to be neutral arbiters that represent both the public and the industries they regulate. An FCC Commissioner (or a regulator at any federal agency) is supposed to equally look out for citizens as well as industries. It’s often been said that perfect regulation is one that leaves both sides a little unhappy because it considers what is best for both the public and industries in every decision.

I’ve written before about regulatory capture. Regulatory capture is an economic principle that describes a situation where regulatory agencies are dominated by the industries they are supposed to be regulating. Economic theory says that an industry has succumbed to regulatory capture when regulators predominantly side with the industries being regulated instead of the general public.

The concept of regulatory capture was proposed in the 1970s by George Stigler, a Nobel prize-winning economist. He described the characteristics of regulatory capture as follows. This list describes current broadband regulation to a tee.

  • Regulated industries devote a large budget to influence regulators at the federal, state, and local levels. The general public does not have the resources to effectively lobby the public’s side of issues.
  • Regulators tend to come from the regulated industry, and they tend to take advantage of the revolving door to return to industry at the end of their stint as a regulator.
  • In what Stigler labeled as corruption, regulators tend to automatically side with the industries they are supposed to be regulating.
  • In the extreme case of regulatory capture, the incumbents are deregulated from onerous regulations, while new market entrants have hoops to jump through.

The two best current examples of regulatory capture are the broadband and banking industries. There is no question that the power of the broadband industry is concentrated among only a few firms. Comcast, Charter, AT&T, and Verizon together serve 75% of all broadband customers in the country.

The FCC is a textbook example of a captured regulator. The FCC under Ajit Pai went so far as to deregulate broadband and to wash the FCC’s hands of broadband as much as possible by theoretically passing the little remaining regulation to the FTC. It’s hard to imagine an FCC more under the sway of the broadband industry than the last one.

There was no chance for the Sohn nomination to succeed because the big ISPs and the big broadcasters began attacking her as soon as she was nominated. Everybody who knows Sohn says that she is two things – extremely knowledgeable about the industry and fair-minded. That sounds like exactly who ought to be a federal regulator.

Perhaps the most telling part of the story is this was not political. Sohn was nominated by a Democratic president and was to be confirmed by a Democratic Senate. Sohn was supported by a wide range of folks including the ultra-conservative One America News (OAN). But the large ISPs and large broadcasters brought enough pressure that the nomination never even made it to the floor for a vote. Perhaps the ultimate measure of regulatory capture is when industries get to accept or reject their regulators.

Is Broadband Regulation Dead?

I ask this question after Gigi Sohn recently withdrew her name from consideration as an FCC Commissioner. It’s been obvious for a long time that the Senate was never going to approve her nomination. Some Senators tried to blame their reluctance to approve on Sohn’s history as an advocate for the public over big corporations.

But the objections to Sohn were all the kinds of smokescreens that politicians use to not admit the real reason they opposed the nomination. Gigi Sohn is not going to be the next Commissioner because she is in favor of regulating broadband and the public airwaves. The big ISPs and the large broadcasting companies (some companies which are both) have been lobbying hard against the Sohn nomination since it was first announced. These giant corporations don’t want a third Democratic Commissioner who is pro-regulation.

In the past, the party that held the White House was able to nominate regulators to the FCC and other regulatory agencies that reflected the philosophies of their political party. That’s been a given in Washington DC, and agencies like the FCC have bounced back and forth between different concepts of what it means to regulate according to which party controlled the White House.

But I think the failure to approve Sohn breaks the historical convention that lets the political party in power decide who to add as regulators. I predict this will not end with this failed nomination. Unless the Senate gets a larger majority for one of the parties, I have a hard time seeing any Senate that is going to approve a fifth FCC Commissioner. If Republicans win the next presidential race, their nominee for the fifth Commissioner slot will also likely have no chance of getting approved.

The primary reason for this is that votes for an FCC Commissioner are no longer purely along party lines. The large ISPs and broadcasters make huge contributions to Senators for the very purpose of influencing this kind of issue. That’s not to say that there will never be a fifth Commissioner, but rejecting this nomination means it’s going to be a lot harder in the future to seat FCC Commissioners who embrace the position of the political party in power, like was done by Ajit Pai and likely would have been done by Gigi Sohn.

I think we’re now seeing the textbook example of regulatory capture. That’s an economic principle that describes a situation where regulatory agencies are dominated by the industries they are supposed to be regulating. Economic theory says that it’s necessary to regulate any industry where a handful of large players control the market. Good regulation is not opposed to the large corporations being regulated but should strike a balance between what’s good for the industry and what’s good for the public. In a perfectly regulated industry, both the industry and the public should be miffed at regulators for not fully supporting their issues.

The concept of regulatory capture was proposed in the 1970s by George Stigler, a Nobel prize-winning economist. He outlined the characteristics of regulatory capture that describes the broadband industry to a tee.

  • Regulated industries devote a large budget to influence regulators at the federal, state, and local levels. It’s typical that citizens don’t have the wherewithal to effectively lobby the public’s side of issues.
  • Regulators tend to come from the regulated industry, and they tend to take advantage of the revolving door to return to industry at the end of their stint as a regulator.
  • In the extreme cases of regulatory capture, the incumbents are deregulated from any onerous regulations while new market entrants must jump through high hoops.

The FCC is a textbook example of a captured regulator. The FCC under Ajit Pai went so far as to deregulate broadband and to wash the FCC’s hands of broadband as much as possible by theoretically passing the little remaining regulation to the FTC. It’s hard to imagine an FCC more under the sway of the broadband industry than the last one.

There is no real fix for regulatory capture other than a loud public outcry to bring back strong regulation. But that’s never going to happen when regulatory capture is so complete so that it’s impossible to even seat a fifth Commissioner.

Regulatory Capture

Regulatory capture is an economic principle that describes a situation where regulatory agencies are dominated by the industries they are supposed to be regulating. Economic theory predicts that regulators caught by regulatory capture act in ways that protect incumbent providers instead of the public interest. Unfortunately, the broadband industry is one of the best (or worst) examples of regulatory capture.

Economic theory says that it’s necessary to regulate any industry where a handful of large players control the market. Good regulation is not supposed to be antagonistic to large corporations but should strike a balance between what’s good for the industry and what’s good for the public. In a perfectly regulated industry, both the industry and the public should be miffed at regulators for not fully supporting their issues.

The concept of regulatory capture was proposed in the 1970s by George Stigler, a Nobel prize-winning economist. He described the characteristics of regulatory capture as follows. His list matches what’s happening in the broadband industry to a tee.

  • Regulated industries devote a large budget to influence regulators at the federal, state, and local levels. It’s typical that citizens don’t have the wherewithal to effectively lobby the public’s side of issues.
  • Regulators tend to come from the regulated industry, and they tend to take advantage of the revolving door to return to industry at the end of their stint as a regulator.
  • Regulation from the legislative process tends to become corrupt, such as when politicians vote for bills they don’t understand in return for contributions. Actual regulators can also be corrupt – but often regulators side with the industry over the public because they have an industry perspective.
  • In the extreme case of regulatory capture, the incumbents are deregulated from any onerous regulations while new market entrants have hoops to jump through.

There are many examples throughout history of economic cartels that successfully captured regulators. For example, the railroads in the 19th century ran roughshod over the economy and regulators. Unfortunately, the best current example of regulatory capture is the broadband industry, perhaps closely followed by big agriculture and big pharmaceuticals. There is no question that the power of the broadband industry is concentrated among only a few firms. Comcast, Charter, AT&T, and Verizon together serve 75% of all broadband customers in the country.

The FCC is a textbook example of a captured regulator. The FCC under Ajit Pai went so far as to deregulate broadband and to wash the FCC’s hands of broadband as much as possible by theoretically passing the little remaining regulation to the FTC. It’s hard to imagine an FCC more under the sway of the broadband industry than the last one.

But federal regulators are only the tip of the iceberg. The large ISPs have convinced most state regulators to deregulate (or never regulate) broadband. The ISPs spend an immense amount of money in state legislatures trying to get laws passed that favor the big ISPs or that disfavor any potential competitors. The surest sign of regulatory capture is that the big ISPs are also active at the local level and pressure City and County Councils to not consider local broadband projects. There is an immense lobbying effort currently underway to dissuade local politicians from using ARPA grant money for broadband.

We don’t have to look far to see how the industry has gotten its way with regulators. The U.S. has some of the most expensive broadband in the world. Tens of millions of homes have little or no broadband. The broadband industry has the worst overall customer service among all industries- and that’s saying something. The big ISPs abuse customers in other ways such as quietly monetizing customers’ private data.

There is no real fix for regulatory capture other than a loud public outcry that brings back strong regulations. That can start at the FCC, but even that isn’t going to put a dent in the influence of the ISPs at the state and local level.