In 2015 the FCC decided that it needed to assume complete control over the Internet including controlling the pricing behavior of broadband Internet service providers. After receiving a directive from President Obama, the agency decided that the most effective way to achieve control was to reclassify broadband Internet service as a telecommunications service governed by Title II of the Telecommunications Act. The Commission took this action, even though Title II was almost one hundred years old and had been used exclusively to regulate phone companies as “utilities.” In this regulatory environment, expenses and a reasonable return on net investment were provided to these companies if they adhered to certain rules, including:

• Rates for services must be tariffed and made available to all;
• These rates must be just and reasonable;
• Rates could differ in certain situations for unique customers. In other words, reasonable discrimination between customers was permitted.

Title II had many other non-pricing rules, including privacy requirements for customers, required unbundling of facilities and specific complaint and enforcement mechanisms. However today, let’s just focus on the pricing rules.

That is because in its 2015 Open Internet Order, the FCC introduced its own hybrid version of Title II. The Commission chose to waive (forebear) many of the non-pricing Title II requirements to ease the regulatory burden on ISPs. It did so because it believed it control ISP prices without burdening companies with “extraneous” Title II requirements that could depress Internet investment and employment. However, as the Phoenix Center for Advanced Legal and Economic Policy Studies (Phoenix Center) points out in a fascinating paper in its June 2017 Policy Bulletin (No. 42), the DC Circuit Court of Appeals acceptance of the Commission’s patchwork Title II requirements has provided it with almost unchecked regulatory power. The Phoenix Center States:

Surprisingly, the D.C. Circuit found in United States Telecom Association v. FCC that the agency had wide latitude to interpret the Communications Act and not only upheld the agency’s decision to reclassify but also its gross distortion of Title II. In so doing, the D.C. Circuit has extended Chevron deference beyond any reasonable limit, greatly expanding the Commission’s authority well beyond its statutory mandate.

Moreover, the FCC’s expanded authority will remain unchecked regardless of the FCC’s finding in the new net neutrality Notice of Proposed Rulemaking. It will continue until and unless Congress or the Courts decide to put a limit on the FCC’s power.

The Phoenix Center points out some examples of the Commission’s expansion of regulatory authority and its dangers. It notes that under section 201 of Title II, ISPs must file just and reasonable rates. Historically that meant that phone companies filed rates that were within a zone of reasonableness. That meant that rates could not be so low that they were confiscatory (below actual costs) and an illegal “taking of property” under the Constitution, or so high that they gave the provider an unfair profit. The appropriate zone of reasonableness was often debated by carriers and the FCC, but the Commission’s dictates were almost always accepted. However, in the Open Internet Order, the FCC required ISPs to interconnect with and pass traffic on to edge providers for free:

[T]he Commission imposed a “no paid prioritization” rule that was specifically designed to “prohibit broadband providers from charging edge providers a fee. This rule is intended to “bar providers from charging edge providers for using their service, thus forcing them to sell this service to all who ask at a price of $0.” Thus, the Commission’s rule establishes “a regulated price of zero.” Accordingly, if edge providers are “customers” of [I]SPs as the D.C. Circuit found in Verizon, then the Commission’s 2015 Open Internet Order has the unambiguous effect of requiring [I]SPs to provide carriage to edge providers without any compensation. (Policy Bulletin, p. 7).

Thus, under this “new” definition of Title II, the FCC can order rates ($0.00) that are below any rational range of reasonableness, and clearly confiscatory. This should be alarming for the entire industry.

The Phoenix Center also points out that the FCC’s new Title II requirements virtually eviscerate the “reasonable discrimination” provisions of the old Title II. As mentioned above, under Title II, carriers were permitted to charge different prices for like services if they could justify those price differences. However, reasonable discrimination was eliminated in the Open Internet Order when the Commission created the “no paid prioritization” requirement. Now, all Internet traffic is treated the same even though serving some customers might be a more expensive undertaking. Thus, an ISP could not recover costs from a specific cost causer and is forced to recover those costs from all customers. This makes no economic sense and was largely eliminated from the switched access world through access reform.

As the Phoenix Center points out, it is dangerous to have a regulatory authority that can pick and choose to follow certain political goals (President Obama’s wish that Title II apply to ISPs) and have those arbitrary choices accepted by a Court that will give economics a back seat to politics. It can lead to an agency that is out of control no matter which political party is in control. As the Phoenix Center astutely notes:

If anything, [the Open Internet Order] proves the adage that “bad facts make bad law.” While the Commission certainly has great latitude to interpret the Communications Act, the Agency must nonetheless operate “within the bounds of reasonable interpretation” and it is not at liberty to pick and choose select provisions of the statute to govern for the sake of expediency. Or does it? With the D.C. Circuit’s decision in [the Open Internet Order], the FCC apparently now has carte blanche to tailor its enabling statute to fit a results-driven outcome and trample on key due process concerns so long as it can sprinkle some pixie dust about promoting broadband deployment. And if that unbridled expansion of regulatory power doesn’t scare you, then it damn well should. (Id., at p. 22) 

By Andy Regitsky, CCMI