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Friday, May 7, 2010

The Comcast Decision, the FCC's Third Way and the Next Communications Act
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This morning, I participated in a panel discussion hosted by The Progress & Freedom Foundation entitled, What Should the Next Communications Act Look Like? I was asked to address the Federal Communications Commission's recently announced, "Third Way" plan to regulate broadband Internet service and its relation to the "Next Communications Act" What follows are my remarks as prepared for presentation.

This Communications Act and the Push for Net Neutrality

The FCC Chairman has announced that the agency intends to pursue a "Third Way" and attempt to create narrowly tailored framework that would apply portions of Title II to those portions of broadband Internet service that the agency "re-defines" as telecommunications service.

The stated reasons for this action are to preserve the "open Internet" and implement some features of the National Broadband Plan on a sound legal basis, without creating a regulatory straightjacket that would stifle investment and innovation by ISPs. The impetus for this action is the D.C. Circuit's recent ruling in Comcast v. FCC rejecting the FCC's implied or "ancillary jurisdiction" to regulate Internet service services based on the legal theories advanced in the appeal by the agency. The FCC's General Counsel has described the action as "A Third Way Legal Framework for Addressing the Comcast Dilemma."

All I can say is "good luck." While the announced goals of the "Third Way" sound relatively reasonable, the regulatory contortions the Commission must go through to effectuate this plan are considerable.

And there are no guarantees that, at the end of the day, investment in broadband networks will continue at the same levels that we have seen under the FCC's now-abandoned "light regulatory touch."

There really is no such thing as "Title II Lite." The way the statute operates, once a service is classified as a "common carrier" or "telecommunications service," all provisions pertaining to that status automatically attach.

The General Counsel's proposal that the Commission will simultaneously forbear from enforcing the vast majority of these provisions may be hard to accomplish.

For one thing, Commissioner Michael Copps has expressed concern that the FCC "must avoid another forbearance binge."

The FCC has not yet addressed what I will call the "flip side" of declaring that broadband Internet access is actually two separate services, one being a "telecommunications service."

The flip side is that by operation of law, this imposes common carrier status on entities that are not operating as common carriers for this service today.

The courts have generally not permitted the FCC to impose common carrier status based solely on the agency's notions of good policy. In fact, the FCC has been struck down when it attempted to do so concerning the provision of "dark fiber" in the mid-90s.

To the extent the FCC has successfully imposed common carrier status in the past, it has either demonstrated that the service provider has substantial market power, or justified its actions on the basis of the monopoly provision of an essential input for competing providers (Policies and Rules Concerning Local Exchange Carrier Validation and Billing Information for Joint Use Calling Cards, CC Docket No. 91-115, Second Report and Order, 8 FCC Rcd 4478, (1993)).

Forced common carrier status via "re-definition" would need to be supported by similar record evidence. The FCC's own broadband reports, the findings of the National Broadband Plan and comments submitted in that docket by our nation's antitrust authorities that broadband Internet service markets are not marked by monopoly and are for the most part workably competitive, all point in the opposite direction.

Even assuming that the FCC could demonstrate a significant market failure warranting common carrier treatment for the transmission component of broadband Internet access service, that finding will complicate, if not preclude, its ability to engage in a "forbearance binge."

The Section 10 forbearance authority that Congress gave the FCC in the '96 Act has three tests:

  • Whether enforcement of a regulation is no longer "necessary to ensure that the charges, practices, classifications, or regulations by, for or in connection with" a telecommunications carrier or service are "just and reasonable and are not unjustly or unreasonably discriminatory"
  • Whether enforcement is necessary to protect consumers
  • Whether forbearance is in the public interest

Section 10 also directs the FCC to consider whether forbearance will promote competition in the market.

Once broadband Internet service is reclassified as containing a separate "telecommunications service," all of the provisions of Title II that pertain to common carriers generally and telecommunications services specifically automatically apply.

The FCC then has to justify each act of forbearance under this three—pronged test.

The question becomes, if the FCC has to find that the markets cannot protect consumers and competition in order to regulate the transmission component of the service under Title II, how can it at the same time find that the markets will protect consumers and competition for forbearance purposes?

There are no guarantees that it can either make this showing or that a court would accept its justifications. This is especially true in light of the Comcast decision. The court accepted the FCC's acknowledgment that it had no direct regulatory authority over Internet service providers, and found that the agency's justification of such regulation under its ancillary jurisdiction did not "hold water."

The FCC is probably correct to abandon its attempt to adopt its proposed "Open Internet" network neutrality rules under the very same theories.

But the courts are likely to be highly skeptical of its attempt to achieve very similar results through the expedient of re-defining the services into something that it has unquestioned authority to regulate.

The FCC's proposal is therefore quite the "high-wire act," where it would be declaring markets to be insufficiently competitive so that it can regulate, but sufficiently competitive so that it can refrain from regulating. The danger would be in losing that fine balance.

More importantly, the "information service" classification was not a purely discretionary action on the part of the FCC. None of the Communications Act's statutory service classifications quite fit broadband Internet access service in 1996 or 2002 or 2007 (the last time the FCC visited the question) and none quite fit it today.

In order to make broadband Internet access service "fit" within the "telecommunications service" definition, the FCC must undo its previous four determinations (cable modem, wireline broadband Internet access, broadband over power line Internet access, and wireless broadband Internet access services) that broadband Internet is a functionally integrated information and transmission offering. To do so, the FCC must:

  • Tease out the transmission component;
  • treat the transmission component as if it is being offered separately to the public;
  • declare that now there are two separate services being offered to the public; and
  • declare that one of them is a "telecommunications service."

It has to act as if this is factually true, even though there is no change in the manner in which these services are in fact provided to the public.

We have had cable modem service in our house since the late 1990s. We subscribed to a single Internet access service from our cable operator, receive a single bill for that service and pay a single rate for our cable Internet service. Although we do not use all of the capabilities offered by the operator, we experience it as a single service.

This is the common sense understanding that the Supreme Court majority applied to the matter when it upheld the FCC's cable modem decision in Brand X: the statute speaks in terms of what is "offered" to consumers and what they think they are being offered. It is not written in terms of what the FCC would like the providers to offer.

For these reasons, the FCC's "Third Way" is fraught with significant legal risk. The answer is not to pursue this option at the administrative agency level. The answer is to have Congress re-write the Communications Act for the 21st Century.

The Next Communications Act

Although I do not agree that there is a pressing need for the FCC, as opposed to some other agency of government, to act as a legal "backstop" with respect to Internet services, the fact that the agency is even contemplating such extreme legal contortions to create such a backstop is a sign that the Act is broken, and in need of repair. While it might be able to limp along with a mere tune-up or new paint job, it will more likely require an "extreme makeover."

If the Comcast decision teaches us anything, it is that the next Communications Act should not be structured so that all regulatory consequences flow from service and technology-specific definitional categories.

For these reasons, I agree with suggestions such as those of Verizon Executive Vice President Thomas Tauke and The Progress & Freedom Foundation's 2005 "Digital Age Communications Act" project.

We must move away from service-specific regulation together with vague doctrines like "ancillary jurisdiction" and look more broadly at specific practices or market problems that require a regulatory response and determine how a regulator can most efficiently and effectively address those problems, without creating new ones.

posted by Barbara Esbin @ 4:04 PM | Broadband , The FCC

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