If FCC Chairman Tom Wheeler does not yield to political pressure and attempts to reclassify broadband Internet service as a “telecommunications” service, he has one key net neutrality task ahead of him. He must construct a statutory definition of “commercially reasonable,” that will permit carriers to sign individual agreements allowing preferential treatment for their Internet traffic while at the same time ensuring that other Internet users do not become second-class citizens.

If one were to strictly read press reports on this issue, most reporters have concluded that this is impossible, since if one carrier has a better deal than other carriers, then all but the favored carrier is facing discrimination and there is no longer an “open” Internet.  However, in the telecommunications world, things are never that simple.  Even under Title II common carrier regulation, carriers often face some type of price discrimination.  The important distinction is that the FCC and the courts have found some discrimination “reasonable.” 

For example, if carrier A purchases 100 DS3 circuits for 10 years, it will pay a price per circuit that is much lower than carrier B, which purchases a single DS3 circuit on a month-to-month basis.  Carrier B could claim discrimination, however, the Commission has found that lower prices for carrier A are justified because the certainty of a company purchasing many circuits over a long period ensures the provider a certain revenue stream over a protracted time period that can be invested to grow the business.  Moreover, the circuit provider has reduced costs.  For example, it may need less personnel, because it does not have monthly costs of installing or removing these 100 circuits.  In other words, there are real cost differences for the circuit provider in serving carrier A versus carrier B.  Thus, the provider can “reasonably” discriminate in favor of carrier A and offer it lower prices per circuit.  That type of cost difference is the basis of the optional payment plans that constitute so much of special access.

The same concept ought to be true in the Internet world.  The Commission should be able to develop criteria for commercially reasonable agreements that allow discrimination when justified by factors like actual cost differences, but forbid “unreasonable” discrimination when price differences in agreements are not economically justified.  Let’s see how the Commission plans on approaching this task.

In the Net Neutrality Notice of Proposed Rulemaking, the Commission states the following:

Today, we tentatively conclude that the Commission should adopt a revised rule that, consistent with the court’s decision, may permit broadband providers to engage in individualized practices, while prohibiting those broadband provider practices that threaten to harm Internet openness. Our proposed approach contains three essential elements: (1) an enforceable legal standard of conduct barring broadband provider practices that threaten to undermine Internet openness, providing certainty to network providers, end users, and edge providers alike, (2) clearly established factors that give additional guidance on the kind of conduct that is likely to violate the enforceable legal standard, and (3) encouragement of individualized negotiation and, if necessary, a mechanism to allow the Commission to evaluate challenged practices on a case-by-case basis, thereby providing flexibility in assessing whether a particular practice comports with the legal standard (NPRM, para. 111).

The legal standard is section 706 of the Telecommunications Act, which provides authority for the Commission to develop practices for the advancement of advanced services.  That legal standard has been found by the DC Circuit to apply to broadband Internet access.

More importantly are the factors the Commission proposes to use to evaluate individual agreements.  They include:

Impact on Present and Future Competition – Including whether a company’s vertical integration could unfairly advantage its affiliates.

Impact on Consumers – Including the level of transparency provided by the agreement and whether customers have the ability to opt of services provided by the agreement and not be disadvantaged.

Impact on Free Speech and Civic Engagement – If an agreement impedes the use of the Internet for First Amendment Free Speech, it would be presumed unreasonable.

Technical Characteristics - The Commission intends on reviewing the technical characteristics of the services provided in an agreement.  It seeks industry comments on how it should account for the technical differences between satellite and terrestrial broadband services when examining commercially reasonable behavior for satellite broadband providers?

Good Faith Negotiations – If the Commission adopts a “good faith” requirement for carriers negotiating agreements, would that help protect consumers?

Industry Practices -How, if at all, should the fact that conduct is an industry practice impact the application of the “commercially reasonable” rule? What should be treated as an “industry practice”?

The Commission also asks whether certain carrier conduct should always found to be unreasonable and whether it should provide carriers safe harbors for certain agreements.  For example, AT&T suggests that if an agreement is non-exclusive and not offered to an affiliate, then a Commission review is not necessary.   

The industry will now have the opportunity to provide their comments on these proposed “commercially reasonable” factors.  It would be more valuable for open Internet advocates to work to ensure that whatever factors are selected, they truly distinguish between cases of reasonable verses unreasonable discrimination, rather than continuing to chase the pie-in-the-sky Title II reclassification.

By Andrew Regitsky, President, Regitsky & Associates