Lies, Damn Lies, and Statistics

Over the past several months, the Federal Communications Commission – first through its hired economist, and later through Staff – has released over 100 regressions that purport to analyze the data the Commission has collected about the Business Data Services market. Each time, the FCC announced that the regressions show that incumbant local exchange carriers (ILECs) retain market power for legacy DS1 and DS3 services. Each time, economists, including those the FCC asked to conduct peer reviews of the FCC regressions, observed that the regressions suffer from significant flaws that render them unreliable, including the severe correlation/causation problem that economists refer to as “endogeneity,” incomplete and incorrect data on pricing and the number of competitors, mismatches in the pricing and competitor data, and incorrect methods for computing the statistical significance of the results. And each time, we noted that some of the most significant of these flaws are not fixable because of the limitations of the data available to the FCC’s economists.

Without reliable evidence of significant market power, there is simply no data-driven basis for new heavy-handed rate regulation of BDS services. Chairman Wheeler astutely declared soon after joining the FCC that “[i]ncentivizing competition is a job for governments at every level. We must build on and expand the creative thinking that has gone into facilitating advanced broadband builds around the country…Working together, we can implement policies at the federal, state, and local level that serve consumers by facilitating construction and encouraging competition in the broadband marketplace.” But, as the record in this proceeding makes clear, government rate regulation will not “facilitate advanced broadband builds around the country.” Instead, it will do exactly the opposite – discourage facilities-based entry by limiting the returns, particularly in rural areas, available to those willing to risk investing and punishing those that already have taken that risk.