Wednesday, June 16, 2010 - The Progress & Freedom Foundation Blog

No Such Thing As Regulatory Predictability When It's Built on an Illusion of Authority

Tomorrow at the FCC's open meeting, it is expected that the Commission will release an NOI that will seek to implement Chairman Genachowski's controversial "Third Way." Ostensibly, his plan will try to chart a reasonable balance to promote an open Internet, while at the same time keeping it free from regulation. To arrive there, the Commission will likely propose to shear away the underlying transmission component of broadband telecommunications services from ISP / information services, and impose only a "handful" (like a dash of salt, I guess) of common carrier regulations on the former to keep the Internet open for applications, services, content and devices (as if it is not now already).

We do not know what's in the NOI, nor the process toward a rule or ruling. That said, it probably doesn't matter. Call me skeptical, but you don't need to be a mind reader or have a well connected lobbyist to understand that the fix is in. Not letting the facts get in the way of the situation, the Internet, through this NOI, is going to be regulated.

Why am I so skeptical? Well, I was struck by a curious, if not mildly offensive, comment made the other day by the Chairman. At a gathering of industry representatives and government officials, Genachowski causally stated:

No one really cares what section of the statute we point to except for the lobbyists and lawyers. It would be unfortunate if that process slowed us down as a country on improving our broadband infrastructure.

This somewhat glib analysis is not unique to the present Commission. Former PFF President Ray Gifford recently pointed out that the FCC has an institutional tendency to stray ultra vires from its congressional authority. Why? At an event we held in May on crafting the next Communications Act, Gifford made this astute observation:

...[Y]ou can criticize [the FCC] from any number of directions, but what's the most remarkable thing to me... is the essential lawlessness of the place...It's a criticism to be sure, but it's not meant to be that laden with judgment. It doesn't follow procedures and protocols that normal, regular institutions would if industry and consumers were going to rely on it. It follows a much more political rhythm. And what you see coming out of the FCC are, so often, political documents. Which is why they have a record in front of the courts that the Detroit Lions have.

No one really cares. Obama's team won the '08 election, and politics have decreed that "Net Neutrality" - through formal rules and regulations, not de facto guidance via the marketplace - will be the law of the land. Even when there's no law of the land to support the rule. No matter. The Commission is free to take portions of regulations it likes, and apply them in the manner it sees fit, sort of like dining from a pu pu platter at a Chinese restaurant. "Ah, that looks good. I'll have one of those, too. Before you go, can you hand me that dish, too?"

Yummy stuff.

This cavalier attitude allows the agency to look past a central fact - we already have Net Neutrality rules. How so? Well, the marketplace, technological innovation, industry best practices and investment, and consumer empowerment have created a de facto "rules" without formal FCC intervention.

The results have been nothing short of astounding. Over the past five years - when the Internet was officially freed from the Commission's yoke - Americans have experience a virtually endless font of new services, applications, devices, content, and voices, all available via an ever-growing array of network providers. Whole new industries, wealth creation and legions of jobs have ensued. Further, American society has become more democratically engaged than at any time in our history.

You would think that would chasten the FCC's action, but it won't.

Leading up the NOI, the FCC's spin machine has furiously worked all 8 of its cylinders, saying, "Hey, don't worry. You can trust us." Singing from the same chorus book, the Majority Commissioners (as seen here) claim the Third Way will improve "regulatory predictability"; will be based on the popular wireless model of light regulation; and will continue the FCC's stellar track record of forbearing from regulation when such determinations have been reached.

I wonder about that.

The status quo seemed predictable enough for companies to inject approximately half-a-trillion dollars into broadband infrastructure over the past five years. For network providers, those investments were made in an essentially unregulated environment, based on the assumption that that plant would remain in their possession. What the new rules could do, however, is take valuable rights out of their hands, subjecting new and, perhaps more importantly, old plant to access by third-parties. They'd create what looks like a regulatory takings / confiscation.

For the new and old facilities, we have to see how the Commission allows compensation for their use. The devil will be in the details. For pre-NOI facilities, I'm not sure how that'll work. Those facilities cover 95% of American broadband access. Sure, some costs were likely figured in by network providers when they were built in order to account for the arbitrary nature of regulation. But, forward-looking pricing won't allow for adequate cost recovery, and that means a substantial monetary loss for providers. Going further, if the Commission's rules lead to all out price control of network facilities, network providers might be better off Kelo'd out of their property than maintain it for state (ab)use. Predictably, investment would dry up, and the rush to create facilities-based competition would evaporate with it, too.

Resorting to the wireless, "regulatory light" model has its infirmities, too. Sure, it has worked for the wireless industry, even though, technically, carriers are subject to common carrier regulation. Though the FCC is reluctant to admit it, data clearly shows that the wireless market is "effectively competitive," and then some. That said, it's not so much that the model works. Rather, as former PFF colleague, Barbara Esbin, notes:

...Congress permitted the FCC to deregulate the rates of commercial mobile radio service providers and that is the key difference today. There is no act of Congress permitting the FCC to implement its Third Way. Now the wireless model might be a great basis for the next act in terms of how much regulation do you need in a competitive marketplace, but it's hard to use that analogy today because of the lack of legislative authority.

Chairman Genachowski confidently states that the wireless "approach is already tried and true." Of course, one small detail has gone missing in his analysis - namely, Congressional authority. The FCC is one powerful agency, but not so powerful as to create that authority on its own.

Finally, as to the FCC's forbearance track record - yes, it has been stellar. No changes in 17 years of that authority. That is, until one looks at the anticipated NOI. In the Third Way proposal, the Commission claims that Internet services are really two separate services split between a Title II regulated transmission element, and a Title I regulated (albeit "lightly") information service element. Presently, Internet services - the two together - remain virtually unregulated. Using the Commission's Third Way reasoning, what we thus have is a constructive forbearance from regulation, short of a formal Section 10 finding in the public interest. If the NOI goes through as anticipated, that will change. The underlying transmission element will be subject to Title II formally. And, "forbearance" gone. So does the FCC's stellar forbearance track record and the implicit promise to be "nice" to network providers.

Perhaps I'm splitting hairs here and being too hard on the Commission. But what a bad first impression for the Third Way when some of the key arguments used to sell its salient "regulatory light" aspects ring hollow from the very get-go.

The yawning gap between what we anticipate from the Commission tomorrow and what we see in, say, Section 230 (b) of the Telecommunications Act of 1996 could not be more profound.

Among other things, Section 230(b)(2) states:

It is the policy of the United States--

(2) to preserve the vibrant and competitive free market that presently exists for the Internet and other interactive computer services, unfettered by Federal or State regulation

Does it get any clearer than that?

Apparently not for this FCC.

posted by Mike Wendy @ 9:48 PM | Broadband , Capitol Hill , Communications , DACA , Innovation , Internet , Net Neutrality , PFF , Regulation , The FCC , Wireline