Regulatory Overkill

The Wall Street Journal today contains an interesting column, entitled Regulatory Overkill, by Alan H. Meltzer, professor of political economy at Carnegie Mellon University. He rebuts current claims that we need more economic regulation of financial markets, by noting several instances in the past 30 years where new financial regulation was met by innovative circumvention in the marketplace.

For example the Basel agreement of the 1970s required governments to create equivalent risk standards in all the principal lending countries. The agreement required banks to increase their capital if they increased mortgage loans and other risky assets. In response, the banks develop new instruments that moved risky loans off their balance sheets. He provides several other examples of similar marketplace responses. He concludes:

“Regulators and most politicians are good at developing rules and restrictions, but poor at thinking about the incentives that the market will face. If the incentives are strong, the market circumvents the regulation.”

DOJ approves Sirius/XM merger

The Department of Justice today issued a statement that it had closed its investigation of the Sirius -- XM Radio merger without taking action, finding that there was no evidence that the merger would substantially reduce competition. It found that the parties did not substantially compete with each other with respect to existing customers (because each customer has a sunk cost of the equipment he has installed in his car). With respect to new customers, the Department stated:

"For potential new subscribers, past competition has resulted in XM and Sirius entering long-term, sole-source contracts that provide incentives to all of the major auto manufacturers to install their radios in new vehicles. The car manufacturer channel accounts for a large and growing share of all satellite radio sales; yet, as a result of these contracts, there is not likely to be significant further competition between the parties for satellite radio equipment and service sold through this channel for many years."

Most important, it found that the market for retail competition was not limited to the providers of satellite radio. It said:

"In the retail channel, where the parties likely would continue to compete to attract new subscribers absent the merger, the Division found that the evidence did not support defining a market limited to the two satellite radio firms that would exclude various alternative sources for audio entertainment, and similarly did not establish that the combined firm could profitably sustain an increased price to satellite radio consumers."

The merger still has to gain the approval of the Federal Communications Commission.

DOT and European Commission to Conduct Joint Study of Airline Alliances

DOT and European Commission issued simultaneous press releases Tuesday announcing a joint study of the the competitive impact of Airline alliances. This is great news because the anti-competitive nature of airline alliances is well known -- otherwise, why would airlines have had to ask for antitrust immunity. Under immunized agreements, carrier such as Delta and Air France, or United and Lufthansa, agree on prices and schedules that they will operate on major transatlantic routes. DOT approved such agreements under the theory that the joint monopoly to major gateways would be disciplined by the effect of competition on other routes to Europe. There never was any proof to support this claim, and it is encouraging that regulatory agencies on both sides of the Atlantic will now examine the results.

The EC press release summarized the goals of the study as follows:

The European Commission and U.S. Department of Transportation (DOT) have launched joint research aimed at deepening their understanding of transatlantic air services. The research will explore the robust growth of airline alliances, the effect of alliances on airline competition, and possible changes in the role of alliances following the EU-US Air Transport Agreement. A final report summarising the main findings of the research will be published in mid-2009.

The wheels of the agencies grind slowly, but consumers can hope that they will ultimately result in increased competition on the Atlantic.

FCC Imposes Three Billion in Costs on Cell Phone Companies without Economic Analysis

The Federal Communications Commission has, with little advance notice, issued a new regulation requiring all cell phone towers, no matter where located, to have a backup power supply of at least eight hours. An Associated Press article today describes the regulation, the opposition of wireless operators, and a stay issued by the DC Circuit Court of Appeals pending oral argument, which is scheduled for May.

The rule results from the proceedings of an independent commission set up by the FCC to study communications problems that arose during Hurricane Katrina. The recommendation for backup power was one of many made by the commission and considered by the agency in a rulemaking proceeding. In July, 2007, the Commission issued a final rule in the proceeding instituting a nationwide regulation requiring backup power for cell phone companies and other communications providers. (72 F.R. 37655) Several organizations petitioned for reconsideration because the regulation violated the Administrative Procedure Act (72 F.R, 57879), and then filed petitions for review with the appellate court, when their claims were rejected.

The striking thing about the rulemaking is that there is absolutely no discussion of economics, even though the rule imposes enormous costs on the industry. The AP article notes that there are 210,000 cell towers and roof-mounted cell sites nationwide, and quotes one industry estimate that the per-site price will be up to $15,000. This suggests an outer range of costs imposed by the regulation amounting to $3,150,000,000. Some towers already have backup power, so the final results would probably not be this high. But, nevertheless, one would hope that an agency would undertake some economic analysis to weigh the proposed benefits against the costs of the regulation.

The proposed rule is also a nationwide bludgeon that does not seem necessary. There are undoubtedly some cell phone towers that overlap others. I recall looking at a tower map on the Internet with respect to my home in suburban Washington, and finding that I was within the range of five different towers. To all of these require emergency backup power? Moreover, there are many towers in rural areas where there would be relatively little damage from loss of service. Does every tower along Interstate 25 in northern New Mexico require backup power?

There is also no consideration of the relative risk of a natural disaster. There may be a risk of hurricanes along the Gulf and East coasts, and earthquakes on the West Coast, but the vast middle of the country is quite stable, with only occasional flooding and tornadoes. Only in Washington would a regulator think that a uniform national law is required.