Mr. MELODY. You are correct. One does need standards on which one can license, but one could design standards to have very little competition, or one could also design standards that have much more competition.

So in that sense, the allocation of the frequencies is not a matter that is solely devoid of economic input on the competitive question. In fact, the Office of Telecommunications Policy has had a study done that would indicate that a substantially increased number of VHF broadcast licenses could be fit into the existing allocational system with some minor modifications.

There is a question of designing the standards which are going to allocate broadcast frequencies so as to either encourage competition or to limit competition. But clearly, that does introduce a unique sarcity problem which does not exist in most telecommunications common carrier regulations.

Senator HUDDLESTON. I have a few questions on the structure of the proposed Commission on Regulatory Reform. Do you think it is significant whether the Commission is considered a part of the executive branch or the legislative executive Commission?

Mr. MELODY. My own preference would be to have it as the tool of Congress. I think this is perhaps biased by the fact that, historically, we have had a lot of commissions as a part of the executive branch and not much has come from them. I realize there have been some as a part of Congress, also.

My biggest concern about the Commission is the Commission be given a short life, specifically a mandate for change, and not be used as an excuse to stop or delay other worthwhile proposals.

Senator HUDDLESTON. Do you think it advisable to have the President appoint the Chairman and Vice Chairman or should this be done by perhaps the membership of the Commission?

Mr. MELODY. I would have to say I have no strong reason for proposing one or the other.

Senator HUDDLESTON. You mentioned that it should have some restricted time in which to accomplish its objectives. Do you have any suggestion as to what an appropriate time would be?

Mr. MELODY. I think 1 year is plenty, Mr. Chairman.

Senator HUDDLESTON. How broad or how specific do you think the Commission's scope should be?

Mr. MELODY. I think the Commission should be requested to return with specific recommendations for dealing with specific regulatory agencies or specific regulated industries, and I would list them by name. So for example, there ought to be a plan or a set of alternative plans proposed for communications, transportation, power, et cetera. Senator HUDDLESTON. You envision this as a legislative package that would come back from the Commission?

Mr. MELODY. In the form of proposed legislation, yes.
Senator HUDDLESTON. Does counsel have any questions?
Mr. TURNER. Yes, I do, Mr. Chairman.

One of the witnesses this morning was interrogated with respect to the A.T. & T. case. The subject has come up in prior hearings. The concern seems to be developing here as to just how these two cases are going to proceed in tandem together and how the work of the Federal Communications Commission, can be utilized by the Justice Department in presenting the case.

Are you familiar with what the Federal Communications Commission has been doing in the area of investigating and developing facts with respect to the relationship between A.T. & T. and Western Electric?

Mr. MELODY. Yes, sir.

Mr. TURNER. Would you give us your feelings about the scope of that evidence and the degree of depth in which they went to update it? Is there a substantial amount of evidence that has been developing? Mr. MELODY. I think it is certainly the most thorough investigation, in my view, that has been taken of the Western Electric-A.T. & T. relations since the 1930's when the FCC was created.

As I view the role of the A.T. & T. task force, the FCC body that is engaged in this investigation, they are involved in a specific hearing and the immediate concern of the Commission is a matter of telephone rates. So I do not know even if the FCC or the task force has the power to recommend divestiture.

Mr. TURNER. This is exactly the point I want to get at, with respect to discovery and only on the issue of obtaining information fact, data, evidence as far as you know, it has been done in a competent, legal manner, obtained under oath and they do have a body of information that could be available to any attorney who is representing the United States in the larger case?

Mr. MELODY. Certainly.

Mr. TURNER. That would be a logical place to go to obtain a witness without necessarily obtaining any comment as to whether there should be divestiture or not. At least FCC would be a body where we could look for facts already obtained.

You are shaking your head yes.

Mr. MELODY. That is correct and that is the first place I would look.

Mr. TURNER. One of the things we have had experience with in the antitrust field has been the enormous amount of time taken up between the time the complaint is filed and the time that trial is assigned. That time is primarily taken up in the form of discovery, the obtaining of facts and the meeting of motions on both sides to perfect the pretrial discovery in order to get to the trial.

I am asking for your opinion. Do you think a great deal of that time in the A.T. & T. case has already been cut shorter as a result of the FCC investigation?

Mr. MELODY. Yes. I think that it should be substantially shortened. My concern is, shortened from what to what? Whether it has been shortened enough, I do not know. Whether it has been shortened from a 5-year process to a 2-year process, I do not know. I know the FCC task force has been at work in a very intensive review. There has been a substantial amount of information put into the public record, and the task force is going to be putting direct testimony in by its own witnesses sometime within the next 6 months. Again, that is all material that I would consider directly relevant to the Justice concern. The question is, I do not want to indicate that is necessarily enough. Justice still may need another 2 or 3 years for all I know.

Mr. TURNER. With respect to the subjects to be considered by the proposed study Commission, you may have been here this morning when I went over some additional items.

Would you not feel that the absence of Federal regulation in certain areas should be considered by the Commission?

Mr. MELODY. Certainly. As a conceptual matter, there may be industries for which technology in particular has changed and one no longer needs regulation. The concern is, if you abandon regulation, what you generally find is the industry is still concentrated and you cannot simply follow through with one step. What you would need to do is follow through to the second step, namely, to insure that it is competitive, which would generally require some kind of antitrust action. Mr. TURNER. That goes to my second point. The effectiveness of the prosecution of the antitrust laws, as well as the laws themselves, should be another area, should be consistent with any studies of deregulation.

Mr. MELODY. It would have to be.

Mr. TURNER. Finally, the third one that comes along, and we could spend a considerable amount of time on this-the Senate Antitrust and Monopoly Subcommittee has-is the area of unregulated concentrated markets and their direct impact on our economic condition. Senator Metcalf, seems to feel that is one of the more important things which such a study commission might look into.

What is your reaction to it?

Mr. MELODY. I agree with the Senator's concern. It is something that ought to be looked into. I would question whether this is the Commission that ought to do it, simply for this reason: The more the Commission tries to take on, I suspect, the less it is going to be able to do effectively.

I believe that the Industrial Reorganization Act is something that would allow investigation into some of those industries. I would prefer to pursue that matter as a separate thing.

Mr. TURNER. My final question. You referred to policy planning in regulatory agencies as being an essential part of their responsibility. How can there be policy planning and how can it be implemented while at the same time regulatory decisions are required to be made on a quasi-judicial adversary basis?

Mr. MELODY. I do not see the adversary native nature policy planning in any way. On occasion, regulatory agencies have started to move in this direction. The problem has been that there has been no specific immediate decision required, so they generally have not done anything.

Let me cite an example. In about 1966 it became clear to the Federal Communications Commission that there was a growing technological interdependence and interrelationship between the computer and communications industry and there was going to be a long series of problems arising, including the definition of what was communications and what was data processing. Where does the scope of the regulation extend when the computer is doing switching as well as data processing? Is the computer performing communications functions? The FCC, in one of its finer moments, tried to examine this question from the standpoint of what its long-range set of policies should be, and it gathered a substantial amount of information.

The difficulty was that in gathering the information, the FCC did not follow through and design a system of policies that it would use as a guide to its longrun development of these industries.

I think the adversary process is just as necessary to the planning function as it is to the normal day-to-day regulation, in that, you have information coming from different sources, I think we can consider all the sources as vested interests. So you need critical examination of all of it, and the best way is through an adversary process. The adversary process, however, does not just have to take place in a formalized legal setting.

Mr. TURNER. Thank you.

Senator HUDDLESTON. Senator Brock, do you have questions?
Senator BROCK. I have no questions.

Senator HUDDLESTON. Counsel?

Mr. STATLER. If a study Commission is formed and it comes back with the recommendation that after a certain number of years, selected regulatory agencies either will be phased out or eliminated within a time certain unless Congress reauthorizes them, what would be your response to that kind of recommendation?

Mr. MELODY. I think it would depend on what the alternatives

were.

Mr. STATLER. Let me clarify: Specified agencies would be phased out unless Congress said that they should continue by statutory enactment.

Mr. MELODY. I guess my reaction would depend on what else went with it. If it was simply a phaseout of regulation, for example, in an industry which I think is clearly concentrated, I would be concerned. To cite an example, there has been much discussion about natural gas production. I am not an advocate that regulation of natural gas production has been good, but I think if we take existing regulation off natural gas production, there is certainly enough concentration in the industry that it is not going to help the consumer. If that was the sole objective, the sole mandate, I would be very concerned. If it was accompanied with requirements to move with the application of antitrust laws to enforce competition, I would say generally that might be a good idea, as long as a specific, reasonably short period was specified. I express my concern here as founded in the fact that technology does change and economic conditions change, so it may well be that if this is a 10- or 15-year process we are talking about, 10 or 15 years from now the most desirable industry conditions might be very changed.

Mr. STATLER. Might it not be a sufficient purpose that such a requirement or recommendation would require Congress to pay much closer attention and exercise much better oversight over the regulatory agencies. That is, Congress would have to determine, based upon actual performance, whether these agencies ought to be continued, whether they are performing their responsibilities.

Mr. MELODY. Any focus upon that question is one that has been sadly lacking in the past, and it gets us down to the industry structure, namely, what is the extent of competition, what is the extent of monopoly, and how do we justify the monopoly that is there? That needs to be done by someone. If commissions are going to remain in somewhat the same form as they are now, that has to be the focus, and perhaps a dictated focus from Congress as to what the cornerstone of their policies are.

Mr. STATLER. Thank you.

Senator HUDDLESTON. Mr. Melody, do you agree with some of the previous witnesses who have indicated that current antitrust type practices in industries that are regulated are contributing considerably to the inflation that we have, the higher prices than the customer ought to have to pay?

Mr. MELODY. The matter of concentration is definitely a cause of our inflationary problems. However, I would like to qualify that by saying it is a long-run cause which I think is apparent from the testimony before this committee. It is going to require solutions that take a fairly long period of time. Clearly to deal with the current inflationary problems, we need much more than that.

Senator HUDDLESTON. Thank you very much. We appreciate your appearance.

[The prepared statement of Dr. Melody follows:]

PREPARED STATEMENT OF DR. WILLIAM H. MELODY, ASSOCIATE PROFESSOR OF COMMUNICATIONS ECONOMICS, ANNENBERG SCHOOL OF COMMUNICATIONS, UNIVERSITY OF PENNSYLVANIA

I. QUALIFICATIONS

My name is William H. Melody. I am Associate Professor of Communications Economics in the Annenberg School of Communications, University of Pennsylvania, a position I have held since January 1971. Prior to my present position I was a Senior Staff Economist at the Federal Communications Commission for four and one-half years.

I have a Ph. D. degree in economics from the University of Nebraska. My major area of study and research was the regulated industries. I have previously taught courses in industrial organization and the economics of regulation at Iowa State University and the University of Nebraska. Presently at the University of Pennsylvania I direct a program of graduate teaching and research in communications economics, regulation and public policy. My recent research and writing includes: co-editor (with G. Gerbner and L. Gross) of Communications Technology and Social Policy (Wiley, 1973); "Interconnection: Impact on Competition, Carriers and Regulation," in S. Winkler, ed., Computer Communications: Impacts and Implications (ICCC/IEEE, 1972); "Economic Implications of Vertical Integration," with M. I. Irwin, in The Telecommunications Industry: Integration vs. Competition (Praeger, 1971) by M. I. Irwin; “Regulation and Competition in the Field of Data Communications," (Paris: OECD, 1971); "Interservice Subsidy: Regulatory Standards and Applied Economics," in H. M. Trebing, ed., Essays on Public Utility Pricing and Regulation (Michigan State University, 1971); and "An Evaluation of Pricing Practices and Policies in Domestic Communications," with H. M. Trebing. (Staff Papers, President's Task Force on Communications Policy, Clearinghouse of Federal, Scientific, and Technical Information), June 1969. These publications are all directed to the study of various aspects of the industrial and regulatory structure of the communications industries. Although my research and writing in recent years has focused on the regulation of the communications industries, I have maintained my activity in the study of other regulated industries and the regulatory process. This statement is addressed primarily to the traditional public utility industries, with special reference to communications.

I have testified as an expert witness before the Federal Communications Commission, the Postal Rate Commission, several state regulatory agencies as well as the United States Senate. I have consulted from time to time with corporations in the communications industry, government agencies, international organizations and other institutions on communications matters.

II. DEFICIENCIES OF THE REGULATORY PROCESS

Efficiency in the allocation and use of economic resources in competitive markets is derived from an absence of monopoly power by the competing firms. The inefficiency of monopoly is derived from an imbalance in economic power that enables a monopolist to exploit his position. Monopoly power permits private