As we begin 2015, it is appropriate to unveil the regulatory crystal ball and make our predictions for the FCC and the telecom industry for the year to come. Things will not get any easier for the Commission this year since it failed to solve so many of the outstanding issues it faced in 2014. 

There are many questions to be answered this year: 

Can a Democratic FCC Chairman satisfy a Democratic president and a nervous Democratic base by instituting more government control over the Internet, while facing an increasingly hostile Republican Congress with the GOP now in firm control of both houses? 

Will Congress rewrite the Telecommunications Act to assert control over broadband services? 

Will ILEC special access services face additional regulation? 

Will the FCC establish rules for Internet protocol (IP) interconnection? 

Will state public utility commissions succeed in their legal battle to regain control over intrastate access charges? 

The political pressure on the Commission has never been greater. If the Commission worked in a political vacuum, there is little doubt, we would already have permanent net neutrality, and we would have universal service rules in place based on sound economic principles. However, with the President and Congress so heavily invested in Internet regulation, and small ILECs using their political savvy to lobby for increased universal service protections, the Commission increasingly is in danger of sacrificing sound economics for political compromises. 

In addition, the Commission is well aware that regardless of the decision it makes on any particular disputed issue, it will face years of legal appeals. Thus, the Commission must make decisions that have the highest probability of withstanding legal scrutiny, while still making at least some economic sense and at the same time ensuring that it is appeasing its political critics. These pressures are tough to balance and will certainly make 2015 a difficult challenge for the Commission.           

With that introduction, let’s take a look at some specific 2015 issues the industry and the FCC most solve:

• Net Neutrality    

Recent reports indicate that the FCC will adopt a new Order on February 26, 2015, that will create new rules for regulating broadband Internet access service.  While no one knows exactly what the Commission will decide, a couple of things are pretty clear.  First, any new Internet “no blocking” and “no discrimination” rules will apply for the first time to both wireline and wireless services.  Previous rules applied to wireline services only.  Second, the Commission will reject its 2014 Internet regulation proposal.  That proposal, which would have permitted carriers to adopt commercially reasonable priority-based agreements made the most sense economically, but has become politically untenable due to pressure from the President and scare tactics from consumer advocates.

Therefore, the FCC in 2015 will choose between reclassification and some type of hybrid solution.  Reclassification of broadband Internet access as a telecommunications service will lead to years of litigation and uncertainty for the industry. There is almost 100 percent certainty that large ISPs such as Verizon and AT&T would pursue their legal appeals all the way to the Supreme Court if the Commission proposes to reclassify broadband Internet access service as a Title II service. This holds true even if the Commission attempts to use its forbearance power to eliminate some of the more onerous aspects of Title II such as mandatory unbundling, price controls and tariffs. It would be easy for consumer advocates to challenge FCC forbearance proposals and no ISP would ever rely on forbearance for future protection against Title II requirements.         

FCC Chairman Tom Wheeler is aware that any attempt at reclassification, even with forbearance will be greeted with years of legal appeals. He also knows reclassification would face an uncertain legal future since there is in our opinion a greater than 50 percent chance ISPs would prevail in Court. That is why our crystal ball predicts that the Commission will propose hybrid rules for the Internet.

Yes, we are well aware that this is probably a minority view at this point, since it seems increasingly likely that the Commission will yield completely to the political pressure and support reclassification. Nevertheless, we trust (i.e., hope) the Chairman will somehow find the courage to resist. Moreover, the hybrid approach does include aspects of reclassification.

In the hybrid approach the FCC would reclassify the portion of a broadband provider’s network that interfaces with so-called edge providers as a Title II service, while regulating the remaining portion that interfaces with end users as a Title I service. In this approach, the Internet would be divided into two types of users:

Edge Provider - Any individual or entity that provides any content, application, or service over the Internet, and any individual or entity that provides a device used for accessing any content, application, or service over the Internet.

End User - Any individual or entity that uses a broadband Internet access service.

While agreements between carriers to prioritize traffic may be permitted in this hybrid approach, there would be a key change from the Commission’s original net neutrality proposal. No priority agreement would be presumed lawful.  Parties signing agreements would have to demonstrate that the agreement would benefit consumers and is available to similarly situated customers. Thus every agreement would face a burdensome and time-consuming review before considered just and reasonable.

The key advantage of the hybrid proposal is that it would have the best chance of surviving a legal challenge. By dividing the Internet into two piece parts, the Commission would not have to reverse its original decision to classify broadband Internet access as an information service. The hybrid service would be a “new” service and subject to classification for the first time.

Regardless of how the Commission chooses to regulate the Internet in 2015 there will be legal appeals and continued uncertainty for the Industry. Parties opposing all attempts at reclassification, including the hybrid proposal, have argued that this will lead to network investment cut-backs and adversely impact employment and the economy. That hypothesis will surely be put to the test in 2015 and beyond.

• The Transition to the IP-Based Network

2015 should see significant technology transition trials (AT&T in Alabama and Florida) and CenturyLink in Las Vegas). These trials will provide meaningful data for the Commission and the states to use to analyze the effects of the transition from the Time-Division Multeplexed (TDM) network to one based on IP.  Unfortunately, the trials will not develop rules for IP network interconnection nor will they guarantee that wholesale providers have functional wholesale services available in the new network environment.

Striking an unusual optimistic note, the crystal ball predicts that the Commission will finally address IP interconnection in 2015. There are simply too many CLEC complaints, along with state proceedings addressing this issue, for the Commission to continue to remain silent. However, any proceeding that addresses IP interconnection is likely to drag on into 2016 and beyond, suggesting that at least for the new future LECs are on their own when it comes to negotiating IP interconnection agreements.

Industry comments are due in the first quarter of 2015 regarding the Commission’s Notice of Proposed Rulemaking (NPRM) in Docket 14-174. This proceeding is addressing CLEC concerns about the availability of wholesale services during the transition to the IP network. 

While the Commission has tentatively concluded that ILECs must provide equivalent wholesale access to CLECs on equivalent rates, terms, and conditions, nothing has been finalized. While a Commission order in this proceeding is possible before the end of the year, it is more likely that an industry debate of exactly what constitutes an equivalent wholesale service will drag on into 2016, leaving CLECs increasingly vulnerable to the whims of ILECs.

Ending any remaining industry controversy over the availability of unbundled DS1 and DS3 copper loops when ILECs retire copper facilities, the Commission will require ILECs to make the same functionalities available to CLECs in their IP fiber networks.

• Special Access Investigation

Those expecting the FCC to re-regulate ILEC special access rates in 2016 are in for a year of disappointment.  Even as the Commission compiles the data that was filed in its special access investigation and attempts to draw meaningful conclusions, it will be stymied by the fact that the Office of Budget Management reduced the required data that was filed to one year.  As we discussed previously, there simply is no way that the FCC can draw any conclusions regarding ILEC special access market power based on the single data point of one year.  Any attempts to do so will be thrown out in the inevitable court appeal.  CLECs would be better off in 2016 using their limited resources to fight for IP interconnection regulations and functionally equivalent wholesale IP services, than squandering resources on a proceeding that is now going nowhere.

• Other Issues

The crystal ball anticipates that the US Supreme Court will accept the appeals of state commissions and others to review the decision by the FCC to usurp state control over intrastate access charges.  If it accepts the case, a decision is likely by 2016. We believe that as long as the Court continues to lean conservative, a 5-4 decision in favor of the states is possible.  If that occurs, it almost surely would lead to increased intrastate access charges.

While the Commission may make some additional progress regarding the Connect America Fund for rate of return rural ILECs, it is unlikely to tackle the biggest remaining universal service issue in 2015, the issue of how companies contribute to the fund. 

The FCC concluded years ago that requiring parties to contribute based on their projected collected interstate and international end user telecommunications revenues was not working. IP revenues are increasing and are not telecommunications revenues (at least currently) and it is difficult if not impossible to identify strictly interstate traffic. Nevertheless, we believe the Commission will pass on this issue once more. Of course, if broadband interstate access providers must begin contributing to the fund if IP revenues are classified as telecommunication services, the contribution factor would fall dramatically, significantly negating this issue.

• Politics and the Telecommunications Act

Perhaps the biggest change from the past in telecommunications is the visible way politicians are actively trying to influence FCC decisions. That is not to say that in the past the FCC was not guided by politics.  Clearly, the Commission has been influenced by politicians from its inception and always will be as long as its commissioners are appointed by the President and ratified by the Senate.

However, with the President actively lobbying for Title II Internet regulation and the new majority of Republicans warning that they will seek to reduce the FCC’s authority if it chooses Title II, we are in danger of partisan politics trumping sensible economics.

It is clear that one way or another, Republicans are going to accelerate their efforts to update the 1996 Telecommunications Act to include the “proper” treatment of the Internet. While the crystal ball believes that revisions to the Act are appropriate since it focuses almost exclusively on the vanishing copper network, we would like to think that any changes would be made to benefit the public. 

However, politics in our country have become so bitter and partisan any revisions made may simply be to score political points and benefit a single political party. That, says the crystal ball, would be a tragedy for all of us.