Archive for the ‘crony capitalism’ Tag

Crony Capitalism & the Internet   Leave a comment

Were you happy with your doctor and did you get to keep him? Were you happy with your insurance policy and do you still have it? Have your premiums gone down … or up?

Yeah … the ACA is a cautionary tale of what happens when large corporations and government get into bed with one another. The ACA was written by large medical corporations behind closed doors in collusion with our elected representatives and, with a few notable exceptions, it has largely been a disaster.

So now we have Net Neutrality. Do we think it wasn’t written in a way that will make it harder for new companies to offer Internet service?

If I wasn’t a broke novelist taking informed pot shots from the cheap seats, I’d bet money that the telecoms now have an effective tool against smaller, more efficient competitors and that consumers will have few options for Internet service.

Oh, but you believe the politicians who say that if they hadn’t stepped in things would be much worse?

In a truly free market, telecoms like Comcast and Time Warner would have to adjust their practices or go out of business. They’d be replaced by options that would give us better service at lower prices. Some of the new options would depend on taking advantage of the freedom to charge more for certain types of Internet … which is exactly what Net Neutrality seeks to eliminate.

Barriers to competition tend to work in the favor of large corporations which can more easily afford to forego profits in the short term in order to profit in the long term. This sort of predatory capitalism blocks the smaller companies out of the market and leaves the field wide open for the larger companies that helped to write the regulations in the first place.

 

But hey, don’t take my word for it. Go research it for yourself.

Duct Tape Alert   Leave a comment

I will start out by saying that I couldn’t care less about lost government revenue. The federal government needs to be put on a diet, so lost revenue looks like a good thing to me. My rage here has nothing to do with revenue.

This has to do with the administrative state and myriad of convoluted regulations that allowed this to happen. Some of my irritation is directed at Doyon, which may deeply impact Alaska Native corporations because of these shenanigans. As Alaska Native corporations are joint-partnered in many construction projects in Alaska, this has the potential for deeply affecting Alaskans in general.

This is what crony capitalism looks like, but it wouldn’t be possible without the Federal Communication Commission creating a monopolistic system for the airwaves. This is the same organization that has now seized control of the Internet and, if you don’t believe this sort of thing will now be commonplace in that government-created monopoly, you’re foolish.

Lela

http://www.nytimes.com/2015/02/25/business/dealbook/how-loopholes-transformed-dish-network-into-a-very-small-business.html?_r=0

NEW YORK TIMES

DEAL PROFESSOR

STEVEN DAVIDOFF SOLOMON

Charles W. Ergen, the billionaire who controls the satellite TV provider Dish Network, and his company are about to make a cool $3.25 billion — courtesy of the American taxpayer.

This windfall came from a recent successful auction of wireless spectrum that raised more than $40 billion for the American treasury. But it will be $3.25 billion less than it ought to be, if Mr. Ergen and his clever lawyers have their way.

The reason is that Dish Network bid for licenses through a newly formed vehicle that claimed to be a “very small business” under the Federal Communications Commission rules and was entitled to a 25 percent discount.

At this point you may be scratching your head. How can Dish, a company with a $34 billion market value, be a “very small business”? Indeed, to qualify for the discount, a very small business must have revenue not “exceeding $15 million for the preceding three years.” Dish in its last full fiscal year had almost $14 billion in revenue.

Through sleight of hand and aggressive use of partners and loopholes, Dish turned itself into that very small business, distorting reality and creating an unfair advantage.

Here is how it worked for $7.8 billion of Dish’s winning bids (it had $13 billion in winning bids in all).

A new company, Northstar Wireless, was formed to bid on the spectrum. Dish Network Corporation indirectly owns 85 percent of Northstar Wireless.

But a new company is not enough. After all, anyone could then simply form a new company and save similar billions of dollars. In its rules, the F.C.C. counts the revenue of affiliates and the controlling owners of the bidding entity for purposes of determining whether a business is a very small one.

For the first loophole, the lawyers went to Alaska.

Doyon is an Alaska Native regional corporation, created as part of a federal government settlement of native land claims back in the 1970s.

Based in Fairbanks, Alaska, Doyon has more than “19,000 shareholders, and is the largest private landowner in Alaska,” according to its website. It has at least 12 different operating companies, including one that operates seven drilling rigs on the Alaskan North Shore. It purpose is to serve the Native American community in central Alaska, and its shareholders are all Native American descendants.

Doyon owns 15 percent of Northstar, a stake it acquired for $120 million; Mr. Ergen’s Dish owns the other 85 percent. Even though Dish is the majority owner, Doyon was designated as the manager of Northstar.

Doyon’s control over Northstar is the key to the small-business discount. Dish contends that it lacks control — Doyon has all the votes — and so its own revenue is not included in calculating whether Northstar is a very small business.

Still, you may be wondering how Doyon itself can qualify as a “very small firm.” After all, being the largest landowner in Alaska and an owner of oil rigs must count for something.

And indeed, Doyon’s average annual profit over the last five years has been more than $18 million.

It comes down to what may be the most obscure exemption in the F.C.C. rules.

There are regulations specifically for the dozen or so companies organized under the Alaska Native Claims Settlement Act. For them and other Indian tribes, the agency does not count the revenue from “entities owned and controlled by such tribes or corporations” unless the revenue comes from gambling. And so only Doyon — the holding company — is counted, and it has no revenue for these purposes because all of its money was made in its other companies.

And so, Dish has erected an edifice that it used to reap that $3.25 billion in savings.

By this point, your head may be exploding.

The rest of Dish’s winning bids — worth about $5.5 billion — were done under a partnership with John Muleta, the former chief of the F.C.C.’s wireless telecommunications bureau, and relied on similar loopholes. As a former government official, Mr. Muleta has no real revenue and so meets the test of being a “very small business.”

No doubt Dish and its lawyers are high-fiving one another and patting themselves on the back. By giving 15 percent ownership to Doyon at a discounted price, they have saved themselves billions.

Taxpayers, however, may want to ponder what those billions of dollars could have done in the coffers of the government — a new bridge or money for schools, perhaps.

And this is not a new issue. The “small firm” exemption has been known to be a problem at the F.C.C. for years. The Congressional Budget Office in 2005 wrote a report highlighting how it was used mostly by big companies instead of the small firms it was intended to benefit. Moreover, the office found that the program provided little benefit to consumers while providing a big discount to companies. In a 2006 auction, AT&T successfully used this structure with Doyon.

The latest spectrum auction — and the attention it has received — may finally push the F.C.C. to eliminate this exemption. It’s hard to see how it benefits anyone but Dish and Doyon, which both get free money for not doing much of anything.

More immediately, the agency should take a good, hard look at the structure of the arrangement.

Doyon has control over Northstar in its day-to-day operations, but the agreements also require Northstar to be managed according to a five-year business plan agreed to by Dish in advance. No deviation in any material respect can be made without Dish’s approval through a subsidiary. Not only that, but there is a multipage list of things that Northstar cannot do without approval from Dish’s subsidiary. These restrictions include spending more than $2 million, selling the company or paying any executive more than $200,000.

Given Dish’s significant control and the requirement that Doyon cannot deviate from a previously agreed business plan, Dish is having its discount but still getting effective control. Though the F.C.C. may have passed on this issue without scrutiny before, this instance would seem to provide grounds to challenge the exemption claim.

Ajit Pai, an F.C.C. commissioner, followed up by saying that Dish’s bid made a “mockery” of the exemption and called for further investigation.

Dish has been busy trying to defend itself, arguing in a presentation to the agency that this program “helps increase auction revenue” by allowing more parties to bid.

You have to laugh, because even if true, this credit was never intended to help companies like Dish bid and earn them billions.

Mr. Muleta has turned into a very rich man overnight. Doyon put up only $120 million and now owns 15 percent of an entity worth almost $8 billion. Mr. Ergen, who is worth more than $22 billion, according to Forbes, is even richer. If the F.C.C. wants to encourage more bidders, it would seem that other, fairer ways are possible.

In a statement, Doyon defended the strategy, saying its participation in the auction helped push up the prices “three times more than was expected.”

“We followed the designated entity (‘D.E.’) program rules and did what Congress intended: create competition,” Aaron M. Schutt, the president and chief executive of Doyon, said in the statement. “By any measure, the D.E. program delivers solid value for the American taxpayer.”

Mr. Muleta did not respond to an email request for comment. A representative of Dish directed me to a conference call with analysts earlier this week in which Mr. Ergen argued that Dish “went by the rules” and that by bidding, it created more value for the government.

In an era when banks and oil companies are at times publicly vilified as not being good corporate citizens, Dish’s strategy for the spectrum auction comes across as among the most brazen, least civic-minded act by a corporation in years. The involvement and enrichment of Mr. Muleta, a former government official, only makes it worse. Manipulating the system this way may win points with shareholders and lawyers, but it will serve only to fuel the public’s cynicism over large corporations and government.

Correction: February 26, 2015
The Deal Professor column on Wednesday, about Dish Network’s bidding for wireless spectrum, misidentified the company that created Northstar Wireless, an affiliate of Dish, to participate in the auction. It is Doyon, which owns 15 percent of Northstar — not Dish, which indirectly owns 85 percent.

Lela on Federal Overreach   Leave a comment

Thom had something come up, so I’m posting instead. Thom’s latest article highlighted some very interesting issues of crony capitalism and government competing against private enterprise. I don’t want to venture far from that, so I’m mainly expanding upon my reply from last week.

Chattanooga’s fiber optic case is an example of government stepping into a role where private enterprise is available to do the job. In stark contrast, you have Michigan and other states banning Tesla’s direct sales in order to protect existing industries, which is a form of crony capitalism. Neither of these are states’ rights issues. Last week, I explained that the solution to these issues is not setting aside state sovereignty. When government, whether federal or state, picks winners and losers in the marketplace it reduces competition which ultimately harms the consumer by saddling them with higher costs and fewer options.

I “get” why the City of Chattanooga wants a fiber optic system. It allows a smart grid system that will give the municipality total control over the electric consumption in people’s homes. That’s not how they advertise it, of course, but that is the natural outcome. I fail to see a direct benefit to electric consumers of having the government in control of their electric consumption, but further, I just plain object to the use of federal dollars to provide cable television to a local market already served by commercial providers. Here’s an article on the subject:  http://www.washingtonpost.com/blogs/the-switch/wp/2013/09/17/how-chattanooga-beat-google-fiber-by-half-a-decade/.

I would note that here in Alaska, many services are or previously were provided by government because no private providers existed. Growing up our electric, water, sewer, and phone were provided by the City of Fairbanks and if they had not provided those services … private enterprises would have developed to provide them. How do I know? Because outside of Fairbanks’ city limits, an electrical cooperative was formed to provide electricity, a telephone company was created to provide telephone, and a water company came into being to provide water to the urban area just outside the city limits. It took longer, but it happened. Eventually, the electric cooperative bought the municipal electric company, the telephone utility was sold to a private telecom and the water company took over the water and sewer system (this was not a money-maker and the City essentially gave it away). They even found a buyer for the district steam heat utility. All of these government utilities are in private hands, even in the very government-heavy state of Alaska.

Tesla is a different situation and a prime example of crony capitalism. GM and Ford provide a great deal of tax revenue to states like Michigan. Tesla does not. When these moribund corporations whined that they couldn’t compete against this newer company, Michigan chose to support the companies that provide the state with revenue rather than the competitor who doesn’t. I don’t agree with that. I’m just explaining how it worked. That is crony capitalism at its most bald, protecting entrenched industries against new competition.

And, if you involved the federal government …?

We actually know how that would turn out because it already has. The federal government bought GM for a period of time to keep it from going out of business. It heavily subsidized Chrysler. Crony capitalism exists at all levels of government, but it is particularly egregious at the federal level. If Tesla isn’t allowed to sell cars in Michigan, state residents can find a way to purchase the car in another state. It’s inconvenient, but doable. If the federal government decides something can’t be sold in the United States — now it’s a much larger issue that affects us all.

Neither of these issues is a states’ rights issue. We have lots of examples where the federal government imposes a one-size-fits-all standard on the entire country that doesn’t make sense for some states. I brought up the issue of Positive Train Control, which might have some benefits in the Lower 48, particularly on the dense Northeast rail network, but is going to shut down passenger train service in Alaska, where it isn’t even needed.

Here are some examples of other federal overreach. The one that catches my eye is the EPA’s proposed cutting of 30% of carbon dioxide emissions from coal plants by 2030.  This is another example where some states can easily achieve this, but others (Alaska) cannot. Obviously solar energy is not going to work for us. Wind energy works great where there’s lots of wind, but no so much in the still Tanana Valley. Geothermal would be amazing, but for practical reasons we haven’t built our communities on the sides of volcanoes. The vast majority of our electric generation in Alaska comes from coal and we have an 800-year supply at current consumption levels. So a 30% reduction in carbon dioxide emissions from coal plants likely means at least a 25% reduction in electrical usage here in Alaska.

Can you imagine what not having electricity means in Alaska? Just imagine what it means where you live and then imagine it where the winter nights are 20 hours long and the temperatures drop to -50F without wind chill.

Now break the illusory icicles off your beard and consider why I might think a one-size-fits-all federal standard for everything is a really bad idea.

 

Lela on Sovereignty   1 comment

Lela Markham Davidson Ditch CorrectedThis is what Thom had to say last week on states rights.

We definitely see the Civil War from different perspectives. The United States of American (formed under the Articles of Confederation) came into being when the Americans decided that they would no longer tolerate the caprice of George the III and elitism of Parliament. The American colonies seceded from Great Britain. They tried to do it peacefully, but England chose to prosecute a war against them by moving on strategic locations like Boston, New York and Charleston. The colonists had no choice but to fight back or be subjugated. Consider Ft. Ticonderoga to be the 18th century equivalent of Ft. Sumter. And just as the Revolution might have been averted by George and Parliament recognizing the rights of the colonists, the Civil War was an unnecessary event caused by the political cowardice of Congress and the hubris of President Lincoln. Had the South won the war instead of the North, we might view all this differently.

A primary element that has separated the United States of America from virtually every other nation in history is the concept of it being “a nation of laws, not a nation of men.” For a country to be considered a nation of laws requires that nation adhere to its foundational laws — which here in the US is the Constitution. Subsequent statutory law is meant to be subordinate to Constitutional law, not subject to the political whims of a president, Congress or even the Supreme Court. The 9th and 10th amendments make it clear that the states did not think they were ceding their sovereignty when they ratified the Constitution. Several states required the Bill of Rights in exchange for their ratification of the Constitution. Those amendments could be set aside, of course, by the procedure established for modifying the Constitution, but they haven’t been. They’ve just been ignored. The very fact that state legislatures must ratify amendments to the Constitution speaks to an understanding of states rights that no longer exists in this country.

When laws are too numerous, abusive, designed to help or penalize one group at the expense of others, are formulated by unelected bureaucrats, or are subject to the caprice of the monarch in the White House, then the law is no longer based on the Constitution and we are no longer a nation of laws, but of men.  Goodbye liberty, hello tyranny.

I’m not sure liberty is such an old-fashioned idea. It appears people still have a longing for it. And states are much more able to protect liberty for their small citizenship than is a huge federal government.

You’re mixing apples and oranges with your examples, by the way. Neither are really states rights issues. Tesla is suffering from government-corporation cronyism while Comcast and AT&T in Chattanooga are suffering from government competing against them in the marketplace. Michigan gets revenue from the car manufacturers while Tesla is an outside company that provides little or no revenue to Michigan while competing with their bread-and-butter industry. I’m not saying its right. I’m just explaining it.

If government were small and permitted only to do a very few things, this would not be an issue because it would not need as much revenue. Neither example has to do with states rights because the federal government does the same thing. The federal government’s record on both is not substantially better than those of states. Google Goodyear, Dole Fruit, and Solyndra for examples. Both issues could be solved satisfactorily by the government getting out of business. Here in the Alaska, the cab drivers of Anchorage are seeking to keep Uber out and the City of Anchorage must decide whether to stay cozy with their revenue providers or do what the people want? Hmm … We’ll see how that works out.

Meanwhile, a private company called Quintillion is bringing fiber optic to parts of the state by laying the cable from England down the Dalton Highway Corridor. They’re being helped by favorable State permitting and Department of Transportation allowing them to use some remote facilities, but government is by and large not paying for it. The attached article does a good job of explaining the project and future plans.

The State of Alaska was offered this opportunity with the same stimulus funds Chattanooga is using to fund EPB, but Sarah Palin declined, so the Native corporations listed in the article (private companies) stepped up to provide fiber optic to several villages using private funding. I suspect that within five years, a high-speed fiber network will be available throughout the Railbelt region — still privately funded. GCI and AT&T are already investigating doing it in Fairbanks. That’s progress without government intervention.

But these are not states rights issues. These are examples of the government’s unhealthy interference in the private marketplace — either by favoring some companies or setting itself up as a competitor against others. States rights has to do with federal overreach into areas where state governments can and should be in control.

Have you ever heard of Positive Train Control? The train received GPS information about its location and where it is allowed to safely travel. Equipment on board enforces this information and prevents unsafe movement. It’s a good technical innovation that could save lives in the dense Northeast rail corridors. And since those rail routes cross state lines, you can make an argument for interstate (federal) control.

Applied to Alaska, however, it’s stupid.

First, not surprisingly, the Alaska Railroad goes nowhere near a state line, so there’s no interstate argument here. Driven by the National Transportation Safety Board, the Federal Railroad Administration has demanded that the Alaska Railroad develop a PTC system for collision-avoidance, speed control and a centralized control station. The system has a price tag of around $160 million, which is more that the ARR’s annual operating budget. If the equipment is not in place by the end of 2015, the ARR will no longer be able to provide passenger service, which will devastate our tourism industry.

The reason for this is that Alaska only has one rail line between Seward and Fairbanks, 500 miles apart. But here’s where it gets silly. Only four trains run on that track every day. While there are sidings about every five miles, the north-bound and south-bound trains meet twice daily in Denali Park. Since they exchange passengers at that point, they wait for one another. While operating, they keep in touch with the dispatch center and each other through radios and sat phones. Top speed is also only 50 mph and with a transit time of 12 hours (the federally mandated limit for train operators), there is always a second pilot and fireman on board, so falling asleep or dying at the controls is not a problem. We also use Automatic Train Control which is similar to PTC  without the hefty price tag. Bottom line is, we’ve never even had a close call on the ARR and the odds of such an event are extremely low. Our waiver application was denied and we’re now working on a deferment until 2018 so we can get the financing together (oil prices being what they are, you know?)

Thom StarkPTC is simply a one-size-fits-all federal law that says single track is a head-on collision in the making and therefore you must install this expensive system regardless of whether it is needed. THIS is a states rights issue. When federal bureaucrats who are not familiar with a situation try to make regulatory law from a distance without regard to what makes sense in a state — then the federal government is out of hand and needs to be set back.  And it’s not an interstate transportation issue because the Alaska Railroad goes nowhere near another state.

That’s just one example. I could give you at least a dozen more examples of where the federal government imposes edicts from on high, often through regulatory law, that place unfunded mandates on states that do not make sense for those states.

I’m waiting for the day the federal government mandates we all drive electric cars, turning the highway commute time from Fairbanks to Anchorage from seven hours to three days due to recharges. Now that would be idiocy! But can we deny that it’s coming?

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