Title II Reclassification and the Price Regulation of Retail Broadband Services…

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Last month, Larry Spiwak and I published a paper entitled Tariffing the Internet: Pricing Implications of Classifying Broadband as a Title II Telecommunications Service in which we outlined how the reclassification of broadband as a Title II telecommunications service would work in practice. (See Larry’s Op-Ed for a condensed version.) Since net neutrality seems aimed at prohibiting “paid prioritization,” we concluded that reclassification must lead to a positively-priced and tariffed termination service. That is, edge providers will be required to pay broadband providers to terminate their traffic. Today, they do not. No one has yet to make any reasonable argument against the proposal, though numerous experts have affirmed our logic. In fact, our proposal seems fairly obvious once the evidence is considered. When you recognize who are the buyers and sellers of “paid prioritization” and what type of regulation is being done, a tariffed termination service is the most natural approach to net neutrality under Title II. We also concluded that the Commission could not forbear from tariffing the termination service (that is, regulating it) given that the agency has concluded that the termination market is a monopoly. There’s no FCC precedent for detariffing a monopoly. Besides, if the agency didn’t tariff termination service, then it would not be regulating the price of termination, and controlling the price of termination seems to be a requirement of addressing paid prioritization.

One criticism of our paper is that we improperly focused on the termination market. Harold Feld, for instance, argues that net neutrality requires only the regulation of mass-market retail service and not a termination service, and Free Press’s Matt Wood claims there is no such thing as a termination market. Yet, its seems obvious enough that paid prioritization is not about the relationship between end-users and broadband providers, it’s about a termination charge being levied by broadband providers on edge providers. Indeed, the Commission makes it abundantly clear that the relevant transaction is between broadband providers and edge providers. So Harold and Matt are plain wrong (see my detailed response here and here).

But, just for fun, let’s assume arguendo that Harold and Matt are right—the FCC needs to regulate the retail market to protect the Open Internet. What happens then? Well, let me tell you: it isn’t pretty.

Let’s assume that retail broadband service is reclassified as a Title II service in the next Open Internet order. If, as the D. C. Circuit in Verizon determined, net neutrality is price regulation, then in the normal course of business the Commission (and state commissions too) would be required to regulate the prices of the retail services so that they are just and reasonable (Section 201 of the Act) and not unduly discriminatory (Section 202 of the Act). (We detail all of this in Tariffing the Internet.) This price regulation is effectuated through tariff filings (Section 203 of the Act). Significantly, by statute tariff filings are a requirement, not an option; the FCC’s attempts to set aside tariffing failed prior to the 1996 Telecommunications Act. The 1996 Act, however, permitted the agency to forbear from sections of the statute, thereby allowing the agency to set aside tariffing requirements under certain conditions and it has done so for long-distance and wireless services. (See our recent paper and Larry’s recent op-ed in The Hill on forbearance.) It is this forbearance authority that some net neutrality advocates claim can be used to avoid the price regulation of retail services (along with many other onerous regulations from Title II), creating a “Lite” form of Title II regulation.

There’s a huge problem with this “Title II Lite” argument even if we look to the retail market. Specifically, if the Commission reclassifies broadband Internet access as a Title II telecommunications service, then the agency’s standing decisions and positions mean the Commission is likely stuck with regulating (via tariffs) the retail prices of broadband services. Indeed, as I explain in a moment, the Commission faces significant impediments to using its authority under Section 10 to forbear from tariffing a retail broadband service.

In its approach to forbearance, the agency has concluded that competition and forbearance typically go together. With the exception of oddball cases like accounting rules, in its recent decisions the agency has refused to forbear when it decides there is no competition (i.e., monopoly). Naturally, if net neutrality is about the termination market which is arguably served by a “terminating monopolist,” then forbearance is not possible in that market (as we argue in Tariffing the Internet). But for now, we are talking about the retail market. What, according to the agency, does competition look like in the retail market? A recent FCC analysis finds that “[a]t the current FCC benchmark for high-speed Internet service … the majority of Americans have a choice of only two providers.” And, according to FCC Chairman Tom Wheeler, “[m]eaningful competition for high-speed wired broadband is lacking [because] the majority of Americans have a choice of only two providers.” In fact, Chairman Wheeler stated that “even two ‘competitors’ overstated the case.”

You may be thinking that two competitors is not monopoly, and you’d be correct (and also smarter on economics than most people talking about telecommunications policy these days). The problem is, however, that under current FCC precedent, two competitors isn’t enough for forbearance either; the agency claims that duopoly is not “effective competition” and is not “sufficient to ensure just, reasonable, and nondiscriminatory rates and practices, and to protect consumers.” Indeed, under current agency precedent, forbearance requires that “the petitioner demonstrate that it lacks market power.” (An improper but nevertheless current standard, as I’ve detailed here.) Since the Chairman has determined that “[m]eaningful competition for high-speed wired broadband is lacking,” forbearance from retail rate regulation could be precluded which means reclassification could lead to formal price regulation—including tariffs—of retail broadband services.

But, perhaps there are a few escape routes.

For one, the Commission could conclude that retail wired broadband service is effectively competitive even if a duopoly. But, in doing so, it would declare its Chairman ignorant of the facts, since he has already stated that he believes “meaningful competition is lacking” among providers of high speed broadband.

Or, the Commission could conclude the retail wired broadband market has more than two providers, say by including satellite broadband in the market. Again, to reach this conclusion the FCC staff would have to declare its Chairman ignorant of the facts and that it could no longer conclude that broadband was not being reasonably deployed in a timely manner, which potentially weakens the agency’s use of its Section 706 authority.

Or, the Commission could conclude that wired broadband service is not the relevant market, but that wired and wireless services were substitutes. Yet again, given that Chairman Wheeler has concluded that “today it seems clear that mobile broadband is just not a full substitute for fixed broadband,” in doing so the Commission would declare its Chairman ignorant of the facts.

From what I’ve seen of Chairman Wheeler, none of these options sounds promising.

While I am not aware of any call for the Commission to regulate retail broadband prices (and I suspect it would be disastrous if tried), the legal requirements of Title II do not simply bend to the agency’s or advocates’ desires. If paid prioritization is to be regulated, then price is to be regulated, and under Title II the price regulation of a carrier-to-consumer service is executed via tariffs. Forbearance of price regulation via tariff might be a sensible strategy if not for (at least) two hurdles: (1) forbearance is the surrendering of the agency’s control of price to the market and net neutrality appears now to be about the regulatory control of price (i.e., a ban on paid prioritization); and (2) the Commission’s precedent on forbearance and its claims about industry structure interfere with a straightforward forbearance determination. If the agency believes net neutrality rules are required, then the path set forth in its 2014 Open Internet NPRM seems to be the most sensible approach, especially since, as Congressman Henry Waxman recently conceded, Title II cannot be used to prohibit paid prioritization. As such, Title II reclassification is not just messy, costly and legally risky, but it’s also an impotent strategy for achieving the ostensible goals net neutrality.


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