Clearly giving in to White House political pressure, FCC Chairman Tom Wheeler let the cat out of the bag Wednesday when he announced to the surprise of no one, that on February 26, 2015, the Commission will vote to reclassify and regulate wireline and wireless broadband access to the Internet as a Title II telecommunications service. Large Internet service providers (ISPs) such as AT&T, Comcast and Verizon are certain to appeal the decision all the way to Supreme Court if necessary, ensuring that the telecommunications industry will face years of legal and legislative uncertainty.

We believe the Chairman is making a historic mistake. Reclassification has no better than a 50-50 chance of prevailing in court. Moreover, reclassification has the potential to depress industry investment and employment and increase consumer taxes.  It also removes Federal Trade Commission authority over ISPs, since that agency regulates unlawful company practices related to the provision of information services but has no authority over telecommunications services.

We discuss below more of the key infirmities in the FCC proposal, but first, here is a summary of how the Commission intends on regulating the Internet:

1. Legal Authority: Reclassifying Broadband Internet Access Under Title II

The proposal would reclassify “broadband Internet access service”—that’s the retail broadband service Americans buy from cable, phone, and wireless providers—as a telecommunications service under Title II. The Chairman believes that this step addresses any limitations that past classification decisions placed on the Commission’s ability to adopt strong open Internet rules, as interpreted by the D.C. Circuit when it rejected the Commission’s Net Neutrality Order in 2014.

2. New Rules to Protect an Open Internet

The new rules would fully apply to both wireline and mobile broadband, recognizing advances in technology and the growing significance of wireless broadband access in recent years.

No Blocking - broadband providers may not block access to legal content, applications, services, or non-harmful devices.

No Throttling - broadband providers may not impair or degrade lawful Internet traffic on the basis of content, applications, services, or non-harmful devices.

No Paid Prioritization - broadband providers may not favor some lawful Internet traffic over other lawful traffic in exchange for consideration – in other words, no “fast lanes.” This rule also bans ISPs from prioritizing content and services of their affiliates.

Reasonable Network Management - Other than paid prioritization, an ISP may engage in reasonable network management. This recognizes the need of broadband providers to manage the technical and engineering aspects of their networks.

3. Specialized Services

Some data services such as medical monitoring devices do not go over the public Internet, and therefore are not broadband Internet access services that would be subject to Title II regulation. The Chairman’s proposal will ensure that ISPs cannot use these services to undermine the effectiveness of the open Internet rules.

4. Forbearance

The proposed Order applies some key provisions of Title II, and forbears from most others. The Chairman believes there is no need for any further proceedings before forbearance is adopted.

(a) Major Provisions of Title II that the Order Would Apply

The proposed Order applies the “core” provisions of Title II, including sections 201 and 202.  Section 201 requires that all charges, practices, classifications, and regulations for and in connection with such communication service, shall be “just and reasonable.” Section 202 makes it unlawful for any common carrier to engage in “unjust or unreasonable discrimination” in charges, practices, classifications, regulations, facilities, or services.  

The Order allows investigation of consumer complaints under section 208 and related enforcement provisions, specifically sections 206, 207, 209, 216 and 217.

It protects consumer privacy under Section 222.

The Order ensures fair access to poles and conduits under Section 224, which would boost the deployment of new broadband networks.

It protects people with disabilities under Sections 225 and 255.

And, the proposed Order would bolster universal service fund support for broadband service in the future through, for the first time, partially applying Section 254 to broadband Internet service.

(b) Major Provisions Subject to Forbearance

Broadband providers would not be subject to tariffs or other form of rate approval, unbundling, or other forms of utility regulation.

The proposed Order does not require broadband providers to contribute to the Universal Service Fund under Section 254 (at least for now).

The Order would not impose or authorize any new taxes or fees – there will be no automatic Universal Service fees applied and the congressional moratorium on Internet taxation would still apply to broadband.

It is beyond dispute that this proposal would set off years of legal battles and potentially lead to diminished investment. Here are some additional problems:

(A) Regulation in Search of a Problem

Historically there have been few complaints that ISPs have engaged in discriminatory behavior while the Internet has flourished under light Title I FCC regulation.  Compare that to the world of disputes and litigation we in telecom world have faced for years under Title II.  There have been thousands of FCC decisions and hundreds of court opinions interpreting section 201 and 202 disputes between carriers.  Once this proposal becomes law, every decision by an ISP could be challenged as not being “just or reasonable,” or as a case of “unreasonable discrimination.”  Clearly, disputes will increase dramatically.  While there is little doubt that a few ISPs will always attempt to circumvent the existing rules, these instances would be better handled on a case-by-case basis rather than imposing heavy-handed regulation on an entire industry.

(B) Title II Does not Stop Discrimination

As noted above, section 202 of the Telecommunications Act allows for “reasonable” discrimination.  Under Title II carriers often pay very different prices for the same services. In fact, most of the revenues ILECs accrue for special access come from volume and term discount plans which offer lower prices to customers willing to accept their terms and conditions. The Commission has determined that these optional payment plans are cases of reasonable discrimination under section 202. Thus, reclassification of broadband Internet access service will not stop paid prioritization. Instead, it will result in ISPs required to demonstrate that the comparatively “better” service they are receiving is reasonable discrimination.  And if Title II telecom regulation teaches us anything, it is that ISPs will quickly become very good at ‘demonstrating” their particular prioritization agreement is “reasonable.”

(C) Forbearance is an Unproven Legal Vehicle

The Chairman’s proposed Order would use the principle of “forbearance” to exempt ISPs from many Title II requirements such as filing tariffs, unbundling their networks or requiring Commission approval for their rates. This authority is granted in Section 10 of the Act, which requires the Commission to forbear from applying to a telecommunications carrier any Communications Act provision or Commission regulation if certain statutory criteria are met. These criteria include:

Enforcement of such regulation or provision is not necessary to ensure that  the charges, practices, classifications, or regulations by, for, or in connection with that telecommunications carrier or telecommunications service are just and reasonable and are not unjustly or unreasonably discriminatory;

Enforcement of such regulation or provision is not necessary for the protection of consumers; and

Forbearance from applying such provision or regulation is consistent with the public interest.

It is important to note that historically, the Commission has only granted forbearance to specific carriers for specific services. It has never attempted a blanket forbearance of multiple rules for an entire industry.  Whether or not it can do so lawfully, will certainly be a key issue brought in the inevitable appeals. That is why Chairman Wheeler’s empty contention that no further FCC proceedings are needed implement forbearance is simply laughable.

(D) Reclassification is Not a Leagal "Slam Dunk"

The Supreme Court already ruled once (in 2005) that broadband Internet service is a Title I information service. The Commission can make all the claims in the world that Title II is needed now to protect the Internet, but that claim will not impress the courts.  The Commission will need a persuasive legal justification to support reclassification and fend off ISP lawyers who have the advantage of having many previous Commission orders supporting their side. Unfortunately the Chairman did not provide the legal rationale the Commission will use to justify reclassification, thus we will have to wait for the release of the Order before offering our comments. Most industry observers believe, however, that at best, the Commission has a 50 percent chance to succeed in court.

(E) ISPs May Soon Contribute to the Universal Service Fund

As part of the Chairman’s proposal, at least some of the universal service rules of the Telecom Act (section 254) would apply to broadband Internet access service. While he is careful to note that ISPs would not currently contribute to the fund, they could in the future, if their funds are needed. Thus, while the public may not pay additional charges on their ISP bills now, they soon may, since any universal service contributions ISPs are faced with would undoubtedly be passed through to consumers. For a Chairman that is already seeking increases in the Connect America fund, to claim that that his proposal would cause no new taxes is disingenuous at best.

(F) The FCC is No Longer an Independent Agency

For an issue as important as Internet regulation, the country would be much better off, if Congress decided the issue after careful debate and compromise. Unfortunately, in our polarized political world, that is not likely to happen before the FCC vote on February 26. Less than a year ago, Chairman Wheeler was against reclassification of broadband Internet access and changed his mind only after political pressure was placed on him by the President, his fellow Democrats and consumer advocates. By his actions, the Chairman has further polarized the FCC, created doubt in its independence and spurred further political battles. Republicans will seek to restrict FCC funding and authority and will speed up their attempts to rewrite the 1996 Act. If the two major political parties worked together this would be a good thing, however there is no indication that will occur in the near future, and the battles will continue.

By Andrew Regitsky, CCMI