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Thursday, August 4, 2005

Wireline Deregulation: A Broadband Review Lesson
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As rumors mount regarding whether the FCC will adopt an order to deregulate telephone companies' broadband offerings and what such an order would say, it's a good time for a review lesson (egoistically, of my previous comments in this blog). In particular, it is a good time to review that there are two related, yet distinct, questions the agency must answer as it establishes a new framework for regulating these services:

First, the FCC must decide when these services are "telecommunications services" and when they are "information services" (i.e., the statutory classification of these services).
Second, the FCC must determine whether and when regulatory obligations should be imposed on these services, as the statute gives the FCC some leeway in how it regulates within each classification.

In the short-hand that typically characterizes the rumor mill, this two-step analysis typically gets blurred. But only by distinguishing these steps can one discern several important implications regarding how broadband deregulation is likely to unfold -- even if such implications ultimately are muted by the nature of policymaking within the Beltway.

Classifying Wireline Broadband Services

The FCC's Supreme Court win in Brand X, while enormously helpful, only gets the FCC part of the way to its goal of promoting broadband by minimizing regulation. The Brand X decision affirmed the FCC's decision to classify cable modem service as an "information service." But the FCC cannot simply apply the same analysis to DSL and fiber-based telephone company offerings. As I have stated:

"The Supreme Court's decision relied heavily on the fact that cable modem service combines high-speed transmission with data processing functions analogous to those involved in dial-up Internet access. The Court (like the FCC) said little about whether cable modem providers should be allowed to provide transmission and data processing as an integrated service.

By contrast, the FCC's Computer Inquiry rules currently force telcos to provide transmission and data processing separately. Thus, to classify DSL and other telco broadband offerings as "information services," the FCC will not be able to rely on what telcos currently do but must engage in a more complex analysis of why rules on the books should be eliminated. Moreover, questions could arise regarding whether the FCC can eliminate these rules based on its generic authority to modify rules given changed circumstances, or whether it must satisfy the more demanding test laid out in its statutory mandate to "forbear" from unnecessary regulation."

The classification of telephone company broadband offerings is further complicated by the likelihood the FCC will allow rural companies to offer broadband as a "telecommunications service" and thereby "opt out" of the regulatory freedom the Bells and other large companies so desperately want. Why do rural companies wish to stay in the briar patch of regulation? Simple -- for them, the benefits of broadband regulation outweigh its benefits:

"[R]ural carriers . . . are especially concerned that Internet voice and other broadband technologies . . . will bypass regulatory mechanisms that . . . provide advantages to the regulated company [such as] its revenues from "access charges." These are inflated rates that local phone companies have been allowed to charge long distance companies so as to keep local phone rates below the cost of service. Access charges are especially important to the profits of rural phone companies, which typically face higher costs than the larger phone companies serving dense urban markets. But phone companies generally can impose access charges only on common carrier "telecommunications services," which are generally regulated under Title II of the Act rather than Title I. Thus, many rural carriers have broken ranks with the Bell Companies and other large carriers in asking to remain regulated under Title II, even with respect to their broadband offerings.

To the extent the FCC satisfies this desire of rural companies (and, presumably, rural legislators), it will be adding enormously to the risk of defending its overall plan to promote broadband-related services by sparing them intrusive Title II regulation. Certainly, there are theories for how the FCC could justify carving out rural carriers from the larger regulatory framework. For example, the agency could argue that courts have at times allowed it to impose Title II requirements on companies simply because they chose to offer the services in question on a "common carrier" basis (i.e., according to a commitment to serve all comers indiscriminately). According to this theory, rural phone companies could "opt out" of unregulated treatment simply by offering broadband like they would ordinary phone service. But many of these common carrier legal precedents date back to an era when the Internet would have been inconceivable and before the term "deregulation" had any meaning in concept or practice. Moreover, the logic of many of these cases is murky and incomplete. Thus, any reliance on them to keep rural carriers regulated while larger companies escape runs a serious risk that courts will conclude the agency has engaged in legal sophistry or acted arbitrarily, rather than establishing a defensible regulatory framework for broadband."

In addition, it's worth mentioning that the FCC will be basing its decision primarily on a record that dates back to early 2002 when it initiated the proceeding to classify telephone company broadband offerings. The FCC can draw from parties' most recent filings and reports summarizing in-person meetings with the agency, as well as information that the agency collects periodically to monitor broadband deployment. But it's unclear whether the agency expressly sought comment in its broadband proceedings on the impact of the Brand X decision, even though that ruling re-started those long-delayed proceedings. The agency presumably is not required to "refresh the record" here, but whether declining to do so will make a court less likely to defer to the agency on appeal may be another matter. And any record concerns that remain slight with respect to how these broadband offerings are classified could become less trivial to the extent the expected order strays into the second part of the two-step analysis, in which the FCC must decide how services within a given classification will be regulated.

Regulation of Broadband Information Services

Potential Obligations. Assuming the FCC makes good on its pledge to "level the playing field" between cable modem and telephone company broadband offerings, the latter will be classified as information services in most cases. This, in turn, raises questions about what obligations the FCC will attempt to impose -- presumably on both cable and telephone company offerings -- and which will survive inevitable court challenges. The laundry list of obligations that the FCC is likely to impose on these offerings falls short (thankfully) of the intrusive, anti-investment "economic" regulation characteristic of the telephone context (e.g., rate regulation or physical network unbundling). That said, the FCC could consider a number of "social" and consumer protection obligations that historically have been reserved for local voice and cable video service, including rules promoting national security, law enforcement, network reliability and access by persons with disabilities.

Perhaps the most hotly debated potential obligations are those proffered to promote Internet "openness." As an initial matter, it is important to note that this debate has evolved significantly over the years, as my reading of Public Knowledge's post-Brand X white paper suggests:

"The paper expresses clear disappointment that the Supreme Court rebuffed the campaign, begun at the local franchise level, to force cable modem and potentially other builders of broadband networks to allow their rivals to 'free ride' on those networks, i.e., to provide ISP 'open access.' And given Chairman Martin's stalwart support for minimizing broadband regulation, the paper acknowledges that Congress provides the most likely forum in which to pursue broadband regulation.

Yet, at least in its rhetoric, the paper does not go out of its way to parrot pleas for ISP 'open access,' at least as that siren song was defined when the FCC first blocked its ears to it during the Clinton Administration. The paper's calls for broadband competition and for access by information service providers could be read to encompass open access, but it is significant that the paper gives that term little, if any, prominence. Indeed, the paper reads as more of a justification for 'network neutrality' -- another problematic goal for government mandates, but one that falls short of the near-physical interconnection with multiple ISPs that early 'open access' mandates would have imposed. Moreover, the paper expresses the very concern that prompted the FCC to shun mandating open access, namely, the fear that such mandates might discourage companies from building the competing pipes almost everyone wants consumers to enjoy."

Nevertheless, any suggestion that the openness debate's evolution has weakened parties' resolve to entice regulators to intervene on their behalf is belied by their continued lobbying [TRDaily subscription required] assault on the FCC and Capitol Hill.

Likewise, pressure continues from within and without the government to ensure that deregulation of broadband does not endanger the sufficiency of universal service support. The irony here is that the FCC already retains permissive authority to require providers of information services and other non-common carrier services to contribute to universal service. So broadband providers can be required to pay into universal service funds regardless of how the FCC classifies their services under the statute. Moreover, the funds cannot fail to satisfy needs they meet already because contributions are designed to expand with the overall size of the fund. In any event, companies pass on these contribution amounts as line items in consumers' monthly bills. Thus, universal service concerns regarding broadband boil down to questions whether contributions are shared equally among competing providers and, of course, whether consumers will see such a large fee on any monthly bill that they revolt.

Also important are those potential obligations that historically have been imposed primarily on cable operators:

"To complete the regulatory framework for cable modem service, for example, the FCC will likely need to resurrect the proceeding it shelved when the 9th Circuit attempted to sidestep the deference to agencies that the Supreme Court has now re-established. That proceeding has asked whether cable operators must obtain an additional franchise, pay additional franchise fees, or comply with a variety of customer service, consumer protection and privacy obligations with respect to cable modem service even when it is classified as an "information service."

Although it seems unlikely that many of these obligations would be imposed on cable modem services, the possibility of such regulation raises troubling questions about whether the FCC can or should impose identical obligations on competing DSL or fiber-based offerings.

Scope of Authority. Whether the imposition of these or other obligations on broadband information services survives judicial review will turn on the amorphous contours of the FCC's authority to regulate information services in a manner that is considered "ancillary" to its authority to regulate other services under the Communications Act:

"To regulate information services, the FCC generally must pursue a policy goal that the Act specifies with respect to the regulation of traditional communications services, such as phone service. Having already classified broadband as an information service, the FCC would be hard-pressed to subject broadband to the most burdensome types of phone regulation, such as setting retail rates. If the FCC wanted to impose such rules, a court might ask, why did the agency classify broadband as an information service?

The FCC also would find it difficult to impose so-called "light touch" rules, such as requiring broadband providers to share their networks with other ISPs ("open access"), or to let consumers access the content, applications and devices of their choice ("net neutrality"). The most likely bases for imposing such obligations on information service providers are section 230 of the Act (which seeks to promote the Internet and technologies that maximize users control of Internet content), as well as section 706 (which requires the FCC to promote investment in broadband networks). These sections, however, also express Congress' expectation that the FCC would achieve these goals primarily by eliminating rules, not by adding them. Thus, the courts might look skeptically on any FCC attempts to mandate open access or net neutrality. Courts might be more comfortable permitting the FCC to adopt so-called "social" obligations, such as "911" emergency service and access by persons with disabilities. Such judicial largesse, however, could be limited to obligations that have traditionally applied to phone service that the FCC seeks to apply to phone-like services, such as voice over IP."

Conclusion: Beyond Classification and Authority

In the end, the FCC's next steps on broadband may have less to do with statutory classification or the judicially-enforced scope of its authority to regulate than what it considers both good policy and good politics in fleshing out its "minimally regulatory" vision for promoting broadband deployment. As I offered in the context of "net neutrality" mandates:

"[T]he FCC could attempt to impose [such] mandates to win in the court of public opinion, while taking its chances in the courts of law. . . . When it comes to popular fears (however unfounded) that communications companies will harm consumers, the FCC can wield its regulatory 'pistol' to great effect. And only later will courts have a chance to say the agency never should have fired a shot."

This result may seem odd in the real world, but in Washington regulatory circles, it is merely another review lesson.

posted by Kyle Dixon @ 9:52 PM | Broadband , Cable , Communications , Innovation , Internet , Net Neutrality , Supreme Court , The FCC , Universal Service , Wireline

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