The FCC has a major choice to make. It must decide the future of Internet regulation. The Commission can, either respond to the uninformed scare tactics of consumer advocates and reclassify broadband Internet access as a telecommunications service potentially disrupting what has inarguably been the decades-long tremendous success of Internet growth. Or use its legal authority and experience to craft common sense rules for broadband Internet access. As we will make clear, the choice should be easy.    

In 2002, the FCC made a key decision to minimally regulate broadband Internet access when it released an Order declaring that cable modem broadband Internet access is an information service rather than a telecommunications service. In 2005, the Commission made a similar finding for broadband Internet service provided by telephone companies. The Commission’s rationale could not have been more straightforward: 

[W]e believe broadband services should exist in a minimal regulatory environment that promotes investment and innovation in a competitive market. In this regard, we seek to remove regulatory uncertainty that in itself may discourage investment and innovation (See, FCC Docket No. CS Docket No. 02-52, released March 15, 2002, at para 5).

Declaring broadband Internet access service as an information service was one of the most important decisions the FCC has ever made. It led to billions of dollars in investment in cable modem, DSL and fiber that continues unabated. Today, broadband Internet access service is utilized by millions of Americans with virtually no evidence of discrimination or abuse. 

The classification of broadband Internet service is extremely important to both cable and telephone companies. If the FCC were to suddenly rule that broadband Internet service is a “telecommunications” service under the 1996 Telecommunications Act, then the rates, terms and conditions of all broadband Internet services would become tightly controlled by the FCC. If the Commission declared any rate unlawful, it would have the authority to prescribe new “lawful” rates. Moreover, if broadband Internet service is classified as a telecommunications service, cable and telephone companies could be required to unbundle the telecommunications components of their Internet services, thus allowing competing ISPs to use these components to offer competing Internet service without constructing their own networks.

Let us be clear. The classification of a service as an information service does not mean that the service is free of regulation. Title I of the Telecommunications Act provides the FCC with ancillary authority over information services. The Commission is free to establish regulations for information services, but must demonstrate that these regulations are reasonably ancillary to the effective performance of the Commission’s various responsibilities. 

Unfortunately, thanks to unfounded fears that the future of the Internet is threatened if broadband Internet access remains an information service, the FCC has succumbed to public pressure and is considering a classification change. On May 15, 2014 the FCC released a Notice of Proposed Rulemaking (NPRM) to determine how the Internet should be regulated for the foreseeable future. The proceeding is the Commission’s response to the January 14, 2014 decision of the DC Circuit Court of Appeals that rejected its 2010 “Net Neutrality Order”. The Court rejected the Order because the Commission illegally attempted to regulate broadband Internet access as a Title II telecommunications service. 

Reclassification does not appear to be the Commission’s first choice. FCC Chairman Tom Wheeler has made clear that he believes the Commission can effectively regulate the Internet without reclassification. The Chairman believes that broadband providers should be permitted to negotiate commercially reasonable agreements allowing differential treatment for their Internet traffic, while at the same time ensuring that other Internet users do not become second-class citizens, receiving no less than a minimal level of service. If individual agreements were disputed because they allegedly hurt consumers, the Commission would evaluate each dispute on a case-by-case basis. 

Consumer advocates are very crucial of this approach. They argue that if one carrier has a better agreement than another carrier, then all but the favored carrier is facing discrimination, and consumers will be the victims. They claim that the only solution to ensure that all companies and consumers are treated the same way is reclassification. This is incorrect for at least two reasons:

First, any reclassification attempt would be bitterly opposed by a divided Congress which would seek to forbid the Commission from taking any action on broadband Internet access. Any reclassification attempt would also be litigated would lead to years of uncertainty for the industry.

Second and most importantly, the Commission already has the tools to effectively regulate the Internet. By developing an effective review process, the Commission can differentiate lawful commercial reasonable agreements from those that are unlawful. The Commission has been making these types of judgments for years for telecommunications services and can do so for broadband Internet service agreements. 

Contrary to what the public has been led to believe, a telecommunications classification for a particular service does not mean that all companies will pay the same rate for a service. In fact the opposite is true. Despite the fact that section 202(a) of the Telecommunications Act forbids unreasonable price discrimination, the FCC and the courts have found some price differentials are lawful. 

For example, if a carrier purchases 100 DS3 circuits for 10 years, it almost always pays a price per circuit that is much lower than a similar carrier that purchases a single DS3 circuit on a month-to-month basis. Consumer advocates argue that the carrier purchasing the single DS3 would be facing unlawful discrimination because it is paying a higher price per circuit. However, this is nonsense. Lower prices per circuit for multiple DS3s in this scenario are justified because there are true cost differences for the providing carrier. The providing carrier does not incur the costs of installing or removing circuits every month. It can also control and reduce its inventory costs because of the long-term predictable service levels it enjoys. Thus, the DS3 provider is economically justified in offering a lower price per circuit to long-term multi-circuit customer. This is the basis of much of the pricing of telecommunications services and has been so for years.  

The same economies of scale and cost control also apply to broadband Internet access. The Commission should be able to develop criteria to evaluate commercially reasonable agreements that allow differential prices when justified by actual cost differences, but forbid “unreasonable” discrimination when price differences in agreements unreasonably favor a particular company. For example, if Internet Service Providers (ISPs) are using more bandwidth, but provide long-term stable revenues to the Internet backbone provider, a lower rate per megabit may be economically justified. There should not be an immediate assumption that different prices mean unlawful discrimination. If further investigation is needed to ensure price differentials are economically justified, the FCC is in the perfect position to conduct such an investigation.

Clearly, the Commission has the legal authority to identify and stop unlawful discrimination on the Internet, while continuing to classify broadband Internet access as an information service. In the Net Neutrality Order, the Court affirmed the Commission’s ancillary authority over “Advanced Services” such as broadband Internet access service under section 706 of the Telecommunications Act.

In addition, since 2010, parties suspecting potential open Internet violations have had the ability to notify the Commission through self-initiated investigations, informal complaints, and formal complaints. This process should continue.

In the NPRM, the Commission appropriately proposes a multi-faceted process to promptly resolve disputes over agreements, including an ombudsperson to act as a watchdog on behalf of consumers, start-ups and small businesses:

Finally, the Federal Trade Commission, which has as its mission the prevention of business practices that are anticompetitive, deceptive or unfair to consumers, can always step in to resolve disputes over agreements.

Some agreements may never need FCC review. 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.   

A few agreements may need to be reviewed, but it is clear that the FCC has the authority, knowledge and experience to resolve any individual disagreement. After all it has successfully determined when telecommunications price differences are unlawful for years. There is no reason it cannot do the same for broadband Internet access service without resorting to a classification that would stifle broadband investment, and damage innovation. Why mess with something that is working so well?

By Andrew Regitsky, CCMI

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