As expected, at its contentious February 26, 2015 meeting, by an identical 3-2 vote along party lines, the FCC adopted two orders that will strongly increase federal government regulatory control of the Internet and municipal broadband networks. The actual text of these orders will be released in the next few weeks and we will provide all the important details.

In brief, here are the Commission’s actions:

Net Neutrality – The FCC determined that broadband Internet access service should be reclassified from a Title I information service to a Title II telecommunications service. However, the Commission will forebear from enforcing many of the onerous Title II requirements such as price controls, unbundling and tariffing.  For the facts we know so far, please see our February 6, 2015 blog at http://www.ccmi.com/blog/fcc-internet-regulation-decision-will-set-off-multi-year-battle. 

Municipal Broadband – The Commission preempted state law in Tennessee and North Carolina in order permit local municipalities in these states to build out their own broadband networks outside of their local jurisdictions to compete with ISPs and cable companies. The agency’s legal justification for its decision is that section 706 of the 1996 Telecommunications Act permits it to support the advancement of advanced services to the public, including “remov[ing] barriers to infrastructure investment.” For more details, please see our February 2, 2015 blog at http://www.ccmi.com/blog/fcc-vote-would-permit-cities-to-build-competitive-broadband-networks.

The media has portrayed these actions as victories for Democrats and President Obama since they have been lobbying for precisely the decisions reached by the Commission on these issues. And so they are. However, these victories are likely to be only in the short term. Both decisions will be fiercely contested in court and could lead to either legislation restricting the Commission’s authority or a complete rewrite of the telecommunications act. 

Moreover, despite the public belief that Title II classification for broadband Internet access will eliminate Internet paid prioritization, in fact, it will instead lead to lawful differential pricing based on Title II’s “just and reasonable” standard. 

Likewise, there is no evidence that permitting cities to operate municipal broadband network will lead to lower prices or better choices for consumers. Instead, there is much historical evidence that competition from the private sector is far better in incenting investment, creating jobs and providing new services at better prices.

Finally, and most sadly, the FCC has become just another polarized branch of government where political partisanship has triumphed over developing smart public policy.

Next Steps

Both orders will become effective 30 days after they appear in the Federal Register, so the effective dates will probably be in late April or May.       

Both orders will be challenged in court. The Net Neutrality Order will likely be appealed by large ISPs such as AT&T and Verizon and cable companies. While it is possible that a lottery could result in any US Court of Appeals handling the appeal, it is very likely that because of its expertise in these issues, the case will be decided by the DC Circuit Court. 

Regardless of the court, the Commission will have a difficult burden defending the legality of its decision.  Lawrence Spiwak of the Phoenix Center for Advanced Legal and Economic Public Policy Studies aptly describes the legal hurdles the Commission faces:

The first hoop the FCC needs to jump through is to explain why its original finding that broadband Internet access is a Title I information service (upheld by the Supreme Court in the 2005 NCTA vs. Brand X case) is now wrong. While the Supreme Court’s 2012 decision in FCC v. Fox Television provides administrative agencies great latitude to change policies provided they articulate a clear reason for doing so, given the plain statutory definitions set forth for both “telecommunications services” and “information services,” it is not clear that reclassification is simply a change in FCC “policy” or whether it’s a change in facts regarding how the Internet works. It’s a mundane, in-the-weeds distinction, but an important one upon which the entire scheme rests (Lawrence J. Spiwak, The FCC's Legal Gymnastics:  Why Wheeler's Title II Approach to Network Neutrality Will Lead to Litigation, Multichannel News, February 23, 2015).

The Commission must also defend its decision to forbear from mandatory tariffing of retail broadband service and for the terminating access service needed by edge providers to reach customers. In the past, the Commission has granted forbearance from price regulation based only when effective competition exists. When the agency has found a lack of competition, it has uniformly denied forbearance from rate regulation.

The problem here is that the agency has rejected the presence of competition in the relevant markets at issue in the Open Internet rulemaking. Earlier, the agency defined (and the D.C. Circuit in Verizon v. FCC upheld) the relevant product market for net-neutrality regulation as “terminating access” and the relevant geographic market as each individual [broadband service provider]. Thus, as Wheeler likes to gleefully remind us, each [broadband service provider] is a “terminating monopolist.” As to the retail market, the FCC’s recent decision to change the definition of broadband to 25 Megabits per second now means that half of U.S. households have only a single broadband provider. In the presence of these alleged monopolists, how will the commission convince the courts that forbearance does not abandon the principles of “just and reasonable” and not “unduly discriminatory’ rates?  It’s a difficult task that signals a highly-contrived legal argument (Id).

Finally, Spiwak considers the greatest threat to the Commission’s legal justification for its decision the “just and reasonable” standard in Section 201 of Title II. According to Spiwak:

Using this section, Wheeler plans to prevent paid prioritization, throttling or blocking of traffic.  In 2014’s Verizon v. FCC, however, the U.S. Court of Appeals for the D.C. Circuit concluded that the bans on paid prioritization, throttling or blocking is “zero price” regulation. Since the “just and reasonable” standard prohibits a “confiscatory” (i.e., “below cost”) rate, the FCC must devise an argument that makes a rate of zero acceptable under the “J&R” standard. It will not be an easy sell. If the FCC fails, then Wheeler’s plan will require all broadband service providers to charge edge providers for access to its customers (something they do not do in the unregulated world we have today). (Id)

Still to be determined is whether any of the challengers to the Net Neutrality Order will seek to have it stayed (deferred) until the court rules on its merits. While no party sought to have previous FCC net neutrality orders stayed, there is the possibility of such a request now. That is because with reclassification affecting company investment and potential stock prices, parties would have be able to make a legitimate case they would be “irreparably harmed” if the Order is permitted to become effective. 

The Commission will also have a difficult time defending the use of section 706 to preempt state laws.  Republican Commissioner Michael O’Rielly, who dissented from the decision, has stated often that he does not believe that section 706 gives the FCC affirmative authority to do anything. He believes that the Commission’s interpretation will be overturned by the courts.

Regardless of whether one is rejoicing or stewing about the FCC’s decisions, it is clear that the industry is entering into a long period of uncertainty. Both issues will almost certainly be decided the US Supreme Court. Unfortunately that will take at least two years if not significantly longer leaving the industry and especially its smallest and most vulnerable carriers in a precarious and uncertain position.

By Andrew Regitsky, CCMI