Op-eds and Articles

Forbes: The Truth Behind The FCC’s “Fact Sheet”

By / 2.6.2015

Earlier this week, the FCC gave us a sneak preview of what’s in store for its upcoming order on net neutrality. The ironically named “Fact Sheet” is anything but—it is filled with half-truths and internal contradictions.

At the urging of protestors and “public-interest” groups, the FCC has arrived at a fairly radical prescription—regulating Internet service providers (“ISPs”) as public utilities—and is now looking for ways to justify its approach. The problem with this politically driven result is that it exposes the FCC’s pending order to significant litigation risks, and it undermines the agency’s long-standing credibility as a dispassionate expert agency in the eyes of Congress.

The biggest whopper of the “Fact Sheet” is the claim that the FCC will forbear from rate regulation: “the Order makes clear that broadband providers shall not be subject to tariffs or other form of rate approval, unbundling, or other forms of utility regulation.” (emphasis in original). Really? By choosing to ban paid priority while permitting unpaid priority for “reasonable network management,” the FCC has effectively imposed rate regulation: a zero access price for priority arrangements within an ISP’s network.

In a further nod to rate regulation, the FCC previews that the order “will apply” sections 201 and 202 of the Title II, which will permit edge providers such as Netflix to complain that an ISP’s access rates for interconnection are “unjust and unreasonable.” The result of any such complaint process, assuming the edge provider prevails, would be a regulated access rate. And yet the FCC would have the public believe that its so-called “light-touch” Title II approach—an oxymoron if there ever was one—is free from rate regulation.

The entire purpose of embracing Title II was to permit edge providers to achieve near-zero access fees for interconnection. Under the now jettisoned “commercially reasonable” approach from section 706, which the FCC’s May 2014 notice of proposed rulemaking seemed inclined to adopt, Netflix would have little assurance of getting its access fees down to zero. Any such concerns have now been allayed. This is the very essence of rate regulation.

The “Fact Sheet” is also dishonest when it comes to the likely taxes that broadband customers will face as a result of reclassifying Internet service as a telecom service. It claims that the “Order will not impose, suggest or authorize any new taxes or fees – there will be no automatic Universal Service fees applied and the congressional moratorium on Internet taxation applies to broadband.” (emphasis in original)

The mere inclusion of broadband revenues in the rate base for federal universal service—also promised by the “Fact Sheet” as a way to “bolster universal service fund support”—will generate about $500 million in new federal fees for residential consumers. This stealth tax arises because voice revenues, which form the current rate base for universal service, are disproportionately paid by businesses. Even without an increase in program demand, the formulas used to generate federal universal service fees will automatically shift the burden at the margin away from businesses and onto consumers.

Moreover, states and localities don’t need the FCC to “suggest or authorize” any new taxes to include broadband revenues in their own rate base. Existing state and local fees that apply to the “obligations of a telecommunications carrier” could easily be extended to Internet service after reclassification.

Indeed, Vermont’s telecom director admitted this week that he is already counting on the new source of funding: “One of the things that would come along with [reclassification] is the ability to assess a universal service fee on broadband services. If that happens, the money might be there to fund these higher speeds.” To the extent that states and localities tax Internet service to the same degree as they currently tax telecom service, broadband consumers would be hit with billions in new fees.

The FCC’s promise to forbear from the scariest parts of Title II is mere window dressing. The current chairman cannot make commitments on behalf of future commissioners. So if a new chair decided to make a run at mandatory unbundling, for example, the door has now been left wide open. Given Mr. Wheeler’s sharp ideological reversal relative to his statement that accompanied the FCC’s Notice in May 2014—when he vowed to bifurcate interconnection from net neutrality—there is little reason to believe that Mr. Wheeler himself won’t change his mind on forbearance in a few months.

The “Fact Sheet” lays out a blueprint for heavy-handed regulation that is certain to meet fierce litigation, and likely to meet a swift reversal by the courts on both substantive and procedural grounds. Banning paid priority, even under Title II, is highly unorthodox. While the D.C. Circuit suggested that case-by-case treatment of paid priority under Title II with the same “guilty-until-proven-innocent” presumption from the 2010 Order might be kosher, a blanket prohibition is a different animal.

And reclassifying carriers without a finding of market power seems very sketchy. Does the FCC really think that Sprint can raise wireless prices above competitive levels or exclude rivals?

Setting aside the substance, the FCC’s rush to beat Congress to a legislative solution to net neutrality has caused the agency to take short cuts, which will also be frowned upon by the courts. Neither forbearance nor interconnection has been properly briefed. Accordingly, ISPs and tech startups are complaining about potential violations of the Administrative Procedure Act.

The FCC should level with Americans on the merits and demerits of Title II. It is a highly risky maneuver that necessarily entails rate regulation and a dose of new taxes. The “Fact Sheet” sugarcoats the truth.

This piece is cross-posted from Forbes.