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Capital Currents: Did the FCC Lose the Battle But Win the War?

Mon, 03/24/2014 - 7:30pm
Jeffrey Krauss, President of Telecommunications and Technology Policy

You can tell that the Court of Appeals decision that struck down the FCC net neutrality rules is important because there have been so many opinions flying around about what it means. Some commentators claim the decision goes far beyond the issue of net neutrality to give the FCC authority to regulate virtually any aspect of the Internet.

Initially, at least, the pro-regulation folks were moaning. They claimed that Comcast and Verizon would become gatekeepers who would stifle innovation and restrict end user access to content.

And initially, the free market folks were pretty happy.  Comcast and Verizon would be able to make special deals with Netflix, Amazon and other content providers to give them faster access to end users, if they want to pay for it. Right now, Netflix and Amazon pay $0 to Comcast and Verizon. That could change. 

The court decision runs 63 pages, but it isn’t until page 45 that it starts to explain why the FCC policy must be struck down.  It’s due to nearly 35 years of FCC policy to regulate telecommunications services but to not regulate services that incorporate information processing. The FCC’s Second Computer Inquiry decision, in 1980, first enunciated that principle. The details have evolved as the technology has evolved, and today the FCC policy is that Internet access is an unregulated information service. 

And similarly, regulation of telecommunications services has evolved to the point where such regulation is minimal in many cases.  Even so, telecom services are still subject to the common carrier regulatory principles of furnishing service to the public upon reasonable request, and furnishing that service on non-discriminatory terms.

The three prongs of the FCC’s net neutrality policy were transparency (disclosing accurate information regarding the network management practices, performance, and commercial terms for Internet access service); anti-blocking (prohibiting fixed broadband providers from blocking lawful content, applications, services, or non-harmful devices); and non-discrimination (prohibiting unreasonable discrimination in transmitting lawful network traffic over a consumer’s broadband Internet access service).

The court decided that the FCC’s anti-blocking and non-discrimination rules were not only consistent with telecommunications common carrier regulatory principles, but actually required Internet service provides to become common carriers. And that, said the court, was illegal because of the longstanding FCC policy that a service with information processing is an unregulated information service.

To retain those net neutrality principles, according to the court decision, the FCC should overturn the longstanding distinction between telecommunications services and information services, and should designate Internet access as a telecommunications service. In that case, the anti-blocking and non-discrimination rules would be permissible.

But the first 44 pages of the decision have now caught the attention of the industry. Those pages are devoted to an analysis of Section 706 of the 1996 Telecommunications Act, which directs the FCC to encourage the deployment of broadband telecommunications capability.

The FCC claimed that the net neutrality rules spur investment and development by content providers, which leads to increased end-user demand for broadband access, which leads to increased investment in broadband network infrastructure and technologies, which in turn leads to further innovation and development by content providers. 

Two of the three judges on this D.C. Circuit Court of Appeals bought this argument. One, Judge Silberman, did not. He asserted that the relevant language in Section 706 was not the “encourage the deployment” language but rather the methods authorized to encourage the deployment, namely, “measures that promote competition in the local telecommunications market or other regulating methods that remove barriers to infrastructure investment.”  But the net neutrality rules don’t promote competition in the local telecommunications market. They might promote competition between content providers, but that’s not what the law covers. 

And regarding the infrastructure investment aspect, the FCC never identified any barriers to infrastructure investment.  Indeed, with the widespread deployment of smart cell phones using LTE advanced mobile communications technologies, it’s difficult to argue that there are any barriers to infrastructure investment.

What’s next?  Parties may appeal the part of the decision that says Section 706 gives the FCC authority to regulate the Internet.  They could either ask the full Court of Appeals to review the 2-1 decision, or they could appeal to the Supreme Court. Both are longshots.  Other parties could go to the FCC and ask the FCC regulate Internet access providers as common carriers.  I think that’s a longshot, too.

So for now, by a 2-1 court majority, the FCC can regulate the Internet in virtually any way it wants, so long as it doesn’t run afoul of the longstanding distinction between telecommunications and information services, and so long as the regulations can be characterized as encouraging the deployment of broadband telecommunications capability.  At least, that’s what some commentators think.

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