Tariffing the Internet: A Response to Harold Feld…

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Last month, Larry Spiwak and I released a paper entitled Tariffing the Internet: Pricing Implications of Classifying Broadband as a Title II Telecommunications Service. In this paper (and companion op-ed), we set out to answer a critical question—how exactly does reclassifying broadband as a Title II, common-carrier telecommunications service protect the Open Internet?  Despite the millions of comments filed in the FCC’s Open Internet Docket, this most basic question has yet to be asked much less answered.  If the Commission does reclassify, then the agency must design, implement and administer a particular set of rules that achieves the desired goal and is consistent with the requirements of Title II regulation.  We conclude that a straightforward application of Title II regulation to solve the Net Neutrality problem would require all edge providers (e.g., Google, Netflix, and any website) to make direct payments to Broadband Service Providers (“BSPs”) in a newly created termination market. The termination service and its prices will be tariffed.  Today, edge providers pay nothing for this service (by the choice of, not the regulation of, the BSPs), so this change is a big deal. There’s no obvious way out of this mandatory tariffing requirement, because the Commission attributes the need for such regulation to the presence of a “terminating monopolist.”  The Commission doesn’t detariff dominant firms. (Nor would the agency want to forbear, since detariffing doesn’t serve the Commission’s purposes on Net Neutrality and the tariff is the agency’s principle enforcement mechanism.)

The comments we’ve received on our paper from industry experts have been favorable.  On the other hand, we got a little pushback on the paper last week from Harold Feld at Public Knowledge on his Wetmachine blog.  Harold’s comments on the paper were few and unthreatening to our conclusions.  Mostly, Harold reiterates the superficial arguments we lament, and attempt to remedy, in Tariffing the Internet.  Let’s go through each of Harold’s criticisms, since doing so may provide clarification to our arguments and shed some light on the question of reclassification generally.

Motivating our analysis was the fact that “[a]lmost no attention has been directed at the fine details of how reclassification would be implemented.  To wit, what service is to be reclassified and regulated?  Who are the buyers and sellers impacted by reclassification?  What enforcement mechanisms are available?”  Harold’s first complaint regards our assessment of the record, stating that various parties have provided details like “reverse the [FCC’s] 2002 cable modem ruling, the 2005 DSL reclassification order, and the 2007 mobile broadband declaratory ruling.”  Apparently Harold still cannot recognize the fact that these are superficial arguments.  Reversing these decisions would not magically create a set of Net Neutrality regulations. In fact, reversing the cable modem decision would not even make cable broadband a telecommunications service, since the FCC never defined it as such in the first instance—the cable modem order was a case of first impression.  Also, these Commission rulings, as well as Harold’s cite to 47 C.F.R. 8.11(a), all point to a “mass-market retail service.”  Net Neutrality is not about mass-market retail service. Net neutrality is about the relationship between the broadband providers and edge providers, not between broadband providers and consumers.  The FCC, the DC Circuit, and even some advocates of reclassification recognize this most basic fact. Early on, net neutrality was about end-users (differential pricing based on bandwidth), but it wasn’t long before the edge providers commandeered the popular concept and made it about them.

When Harold does turn to the relevant “second side of the market” between the broadband providers and edge providers, he goes right back to his comfort zone of the superficial by claiming that the Commission could simply treat such relationships like intercarrier compensation.  As is typical, Harold offers no details on how this intercarrier compensation scheme would work in practice.  Inter-carrier compensation is, as the term implies, compensation between “carriers.” For inter-carrier compensation to apply, at least in its present form, all edge providers must become telecommunications carriers and submit to Title II regulation.  In doing so, perhaps we could avoid tariffing a termination service under Section 203 (which addresses carrier-to-customer relationships), but the fact is that we’ve merely replaced the tariff with the requirement that all edge providers negotiate interconnection agreements with BSPs.

Harold finally turns to our forbearance argument, challenging our conclusion that the FCC faces a high hurdle to forbear from the tariffing requirement since the reason the regulation is required is because there is, by the agency’s determination, a monopoly (or gatekeeper) with incentives to behave badly.  Critically, the issue here is not just that there’s just a terminating monopoly somewhere in the transactions flow, but that regulation is required because of the incentives created by the presence of a terminating monopoly.

Harold has consistently held that forbearance to a “Title II Lite” will be easy, but his analysis of forbearance is flimsy.  The FCC’s experience with forbearance reveals that it is a very long and protracted process, as the agency generally takes both the full year plus the ninety-day extension time periods allotted to it to make a decision.  It is certainly rare.  Forbearing from tariffs is not, as Harold appears to believe, the same decision as forbearing from accounting rules. Competition may not be relevant to whether or not a carrier should report one thing or another in its ARMIS data, but is always relevant to detariffing a service.  What Harold did not and cannot provide is a decision by the Commission to forbear from tariffing in the absence of competition.  There is no such decision.  It would be a very strange decision indeed to detariff a dominant firm and especially so when the intervention is price regulation—and net neutrality regulation is unquestionably price regulation.

Also, detariffing would be pointless. Just because the agency doesn’t require tariffs doesn’t mean the Commission can then set a price that is confiscatory, not just and reasonable, and unduly discriminatory as reclassification advocates want them to.  Nor could it effectively enforce Section 201 and 202. To detariff is to surrender enforcement of 201 and 202 to competition. So, if the FCC did forbear from tariffing, then reclassification is pointless. Harold’s proposal that the Commission detariff after cutting-and-pasting the tariff in the transparency filings is just plain silly.  It’s like calling cancer “candy” and expecting a different result.  Besides, transparency requires only that the BSPs state what they are doing—it is not a regulatory restraint on behavior.

Harold’s best efforts failed to reveal any defects in our analysis. In fact, his comments increased my confidence in our conclusions and once again reveal the superficial nature of the reclassification debate.  I am hopeful, however, that his blog will direct attention to our paper and to getting people to think a little harder about how reclassification plays out.  I suspect that effort will raise the level of the debate, and considering the sad state of the present discussion, that would be a welcome change.