This is a tough time to be FCC Chairman Tom Wheeler. The public has panned his proposal to regulate broadband Internet access as a Title I information service under section 706 of the Act, arguing that allowing commercially reasonable agreements between companies would result in a two-tiered Internet.  Companies that pay more for fast Internet speeds would overwhelm smaller newer companies who would be dumped onto the slower Internet tier. This, say the critics, would be the end of the open Internet. 

As we enter the end of the comment period for the “Open Internet” proceeding, with reply comments due on September 15, the pressure on Mr. Wheeler continues to escalate. This week the usual assortment of politicians including Nancy Pelosi chirped in, claiming that reclassifying and regulating broadband Internet access as a Title II telecommunications service is "an appropriate tool to refine modern rules," and that the FCC can do so without overburdening broadband providers.

In addition, earlier this week, many of the top destination sites on the Internet, including Netflix and Reddit, displayed a perpetual "loading" symbol -- the so-called "loading pinwheel" as part of a so- called Internet Slowdown Day push against the Commission’s support for Internet fast lanes.

Chairman Wheeler has reacted to this pressure by attempting to demonstrate in a variety of ways how tough he will be in ensuring that the Internet stays “open.” On July 23, the Commission issued an Enforcement Advisory putting Internet Service Providers (ISPs) on notice that their service practices must be transparent to customers even though this has been the law since 2010. He followed that up by stating that the Commission would investigate how the largest ISPs manage traffic for their heaviest users during times of peak congestion. Then, on August 5, the Commission released its Tenth Notice of Inquiry examining nationwide broadband deployment without completing its previous Inquiry.

In early September, Mr. Wheeler complained about the lack of broadband competition in the USA. He used a speech to promote the fact that the Commission planned to promote more broadband choices, because a lack of adequate consumer choice has been inhibiting innovation, investment and economic benefits.

Most recently, on September 9, Mr. Wheeler warned that the Commission was seriously considering changing its rules to include wireless carriers in the final Open Internet regulations it proposes. This would be a major change, since wireless carriers were generally exempted from the Commission’s original 2010 Open Internet regulations, and Mr. Wheeler’s latest proposal continued that exemption. However, since now Mr. Wheeler must demonstrate his readiness to regulate the Internet, we can consider this a done deal.

So where do we go from here? While no one can know for sure what Mr. Wheeler will ultimately decide, there are several compelling reasons for Mr. Wheeler to continue advocating his proposal to regulate the Internet under section 706 while allowing commercially acceptable agreements. Here are some of those reasons:

• Lawful Discrimination is Permitted Under Title II

The contention that the FCC will control Internet pricing by treating ISPs as telecommunications ‘utilities” is simply laughable. After thirty years of working in telecom regulation, this blogger can assure you that the lawful discrimination permitted under Title II ensures carriers will pay widely disparate rates for similar services despite Title II’s price controls. Moreover, the industry will spend countless dollars litigating these rate differences instead of using those resources to innovate and serve the public.

• Title II Reclassification will Ensure Years of Litigation and Uncertainty

If the Commission yields to public pressure, and attempts to reclassify broadband Internet services as a Title II telecommunications service, the large ISPs will fight this decision all the way to the U.S. Supreme Court.  Moreover, with five conservative justices and a previous decision recognizing that (cable) broadband Internet service was justifiably classified an information service by the FCC, albeit with a telecommunications component, the Commission would have an uphill battle defending reclassification to the High Court.

• Title II Classification Would Severly Harm Internet Investment

Perhaps the least publicized reason for the Commission to stick with its original proposal is the damage Title II reclassification would do to Internet investment. This was demonstrated in a study by the Progressive Policy Institute (PPI) which analyzed the impact of rate regulation pursuant to Title II on the investment of incumbent telephone companies, entrants, and cable providers in the 1990s and early 2000s. The results demonstrated the profound effect price controls had on investment. The same type of price controls Title II advocates seek.

For example, an analysis of investments made by CLECs using unbundled network elements to reach customers found that facilities investment by CLECs was greater in states with higher unbundling rates.  In other words, the more generous the subsidy, the less facilities-based investment occurred by CLECs.

Cable television providers were contemplating entering the telecom market in the mid-1990s. However, they were reluctant to upgrade their networks to support IP-based transmissions as long as they were permitted to purchase unbundled network transmission from the ILECs. By 1999 when unbundling was limited by the courts, cable companies began to invest in earnest. In fact, average annual capital expenditure for cable operators during the three years following the 1996 Act was $6 billion. In comparison, the cable industry’s average annual capital expenditure during the three-year period after the unbundling rules were eliminated was $15.1 billion.  

Finally, in its Triennial Review Order, which became effective in October 2003, the FCC determined that ILECs would not be required to unbundle their fiber-to-the-home loops. Once the ILECs were free of this obligation they began seriously investing in their broadband networks. In the five years after the FCC’s adoption of this policy, the miles of optical fiber doubled from five to ten million. Moreover, annual wireline broadband investment by the ILECs jumped to $15.5 billion by 2008.

A summary of the PPI study can be found at:

http://www.forbes.com/sites/halsinger/2014/09/10/want-to-keep-telecom-investment-going-strong-avoid-rate-regulation-under-title-ii/.  

Thus, Chairman Wheeler has ample reasons for forgoing Title II reclassification and sticking with his original proposal. Whether he does so may well determine not just the future of Internet regulation, but also the power the Commission continues to yield in the future. Politicians on the losing side of the Commission’s decision are sure to attempt to reduce the FCC’s powers or rewrite the 1996 Telecommunications Act. Mr. Wheeler’s decision thus may be one of the most consequential in the FCC’s history.

By Andrew Regitsky, President, Regitsky & Associates