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Net Neutrality: FCC Theory Would Extend Beyond ISPs Under Title II

This is the first in a series of net neutrality posts that will address fundamental questions presented by the prospect of applying per se net neutrality rules under Title II.

There is more at stake than net neutrality in the reclassification debate at the Federal Communications Commission (FCC). Imposing per se prohibitions against business-to-business arrangements involving ‘paid prioritization’ under Title II would be a radical departure from the core principles embodied in our communications laws. Yet the nature of this departure and its predictable consequences have received little attention thus far. That must change.

By its own logic, the theory of ‘gatekeeper control’ the FCC relied on to justify its imposition of per se net neutrality rules extends to any Internet intermediary that is capable of blocking, degrading, or favoring particular Internet services, applications, or content. If the FCC were to apply this theory under Title II, it would be required to impose net neutrality obligations on a host of Internet companies that have not been subject to common carrier regulation, including Google, Apple, and Netflix.

Summary of Regulatory Theories Governing Communications

A brief review of the prevailing theories of communications regulation in different eras is helpful in understanding why many companies that are considered ‘edge’ providers today would inevitably be subject to common carrier regulation if the FCC imposes per se net neutrality regulations under Title II. These theories are either embodied in the Communications Act or, with respect to net neutrality, in an FCC order.

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Natural Monopoly Era. The Communications Act of 1934 presumed that telephone service was a natural monopoly. As implemented by the FCC, the 1934 Act subsidized uniformly low rates for residential telephone service through tariff filings.

Competitive Era. The Telecommunications Act of 1996 presumes that removing barriers to entry enables competition among communications services and envisions an era in which market-based competition completely supplants Title II regulation as the means of protecting consumers. The 1996 Act promotes competition and reduces regulation by removing barriers to entry.

Net Neutrality Era. The Open Internet Order presumes that Internet companies must have ‘neutral’ access to all end users on all Internet platforms at all times in order to survive, irrespective of competition. Per se net neutrality rules regulate gatekeepers in order to subsidize access to end users for upstream Internet companies, who are presumed to pass their resulting benefits on to all end users.

Natural Monopoly Era: Tariff Filings

The Communications Act of 1934 was adopted in an environment where there was no significant competition among telephone networks. The absence of competitive alternatives raised significant concerns that the telephone monopoly would charge unreasonably high prices or engage in unreasonable discrimination. Congress chose to constrain this monopoly through Title II, which requires that common carriers provide service at just and reasonable rates without unjust or unreasonable discrimination.

The tariff filing requirement in § 203 was the “centerpiece” of the 1934 Act’s regulatory scheme, and much of Title II and the Act’s procedural and administrative provisions are premised upon this requirement. Tariff filing was intended to ensure that monopoly carriers act reasonably by requiring them to publish their charges in tariffs filed at the FCC. The ‘filed rate doctrine’ forbids such carriers from charging rates or providing services other than those that are specified in a properly filed tariff. Once a filed rate is approved by the FCC, it is reasonable per se and cannot be challenged in court.

In theory, tariffs prevent monopoly carriers from charging unreasonable rates or engaging in unreasonable discrimination. In practice, however, the FCC used Title II to artificially lower the retail price of flat-rate local phone services for residential consumers by encouraging excessive per-minute rates for long distances services that were used primarily by large businesses.

The FCC achieved uniformly low, flat rates for residential phone service in local calling areas through its ‘geographic rate averaging’ and ‘carrier of last resort’ policies, which required local telephone companies to serve anyone who requested service at the same flat-rate price, even if they lived in an area that would otherwise be too expensive to serve. These and other ‘universal service’ policies produced local telephone rates that were insufficient to cover the costs of providing local service. The FCC ensured these revenue shortfalls were recovered by approving tariffs with ‘excessive’ per-minute rates for daytime long distance services. The FCC redistributed a portion of the excessive profits generated by long distance services from the monopoly long distance carrier to local telephone companies through a ‘settlements process’, which was later replaced by a combination of ‘access charges’ and explicit universal service charges.

Competitive Era: Competition and Forbearance

In 1970, the Federal Communications Commission (FCC) began actively promoting competition in communications markets in its Specialized Carrier and Competitive Carrier proceedings. The FCC initially required that competitive carriers file tariffs in the same way as monopoly telephone companies. But, after nearly a decade of experience with this approach, the FCC discovered that strict application of Title II regulations intended for monopoly carriers had actually promoted strategic behavior and inhibited innovation in markets subject to competition. Most petitions to suspend or reject competitive tariff filings had been filed by competing carriers “as a sort of competitive harassment.” This led to an “incongruous situation” in which competitive carriers “channeled considerable efforts toward delaying each other’s attempts to implement price and service innovation [through regulatory means] rather than attempting primarily to improve upon their own performance in the marketplace.” The FCC also found that, where adequate competition existed, “forces of the marketplace have been adequate to satisfy the information and service needs of communications users.”

Based on the experience it gleaned in these proceedings, the FCC established guiding principles for the regulation of communications common carriers in markets that are subject to competition:

  1. Market forces are sufficient to protect consumers from unreasonable prices and discrimination in effectively competitive markets.
  2. In markets that lack effective competition, market forces are sufficient to protect consumers from unreasonable prices and discrimination by carriers that lack market power (non-dominant carriers).
  3. Only carriers with market power (dominant carriers) are subject to the full panoply of Title II regulation, including tariff filings under § 203.

These principles were codified in the Telecommunications Act of 1996 and still guide regulation of plain old telephone service today.

The preamble to the 1996 Act expressly embraced the theory that promoting competition and reducing regulation results in lower prices, improved services, and the deployment of new telecommunications technologies. If the tariffing requirement was the centerpiece of the 1934 Act, the centerpiece of the 1996 Act is Section 10, which gives the FCC express authority to forbear from the application of all common carrier provisions in Title II. The broad scope of this forbearance provision unambiguously indicates that Congress envisioned an era in which market-based competition completely supplants Title II regulation as the means of ensuring just and reasonable charges — a vision that Section 10 enables the FCC to implement on its own. If Congress had intended that Title II regulation be preserved in perpetuity irrespective of competition, it would not have authorized the FCC to forbear from its provisions in their entirety.

Net Neutrality Era: Gatekeeper Control

In the Open Internet Order, the FCC adopted an entirely new theory of communications regulation — ‘gatekeeper control’ — that disregards the availability to consumers of competitive options and is inconsistent with the FCC’s Section 10 forbearance authority. The FCC stated that the gatekeeper theory “do[es] not depend upon broadband providers having market power with respect to end users,” because the theory assumes that companies who access end users through ISPs cannot survive, innovate, grow, and compete unless “the market for their offerings include[s] all U.S. end users” at all times.

According to this novel ‘gatekeeper theory’, the fact that end users could access a particular edge provider by using an alternative ISP is irrelevant. Though the FCC found that a lack of competition could exacerbate the concerns the gatekeeper theory is intended to address, the FCC concluded that the theory is applicable even in effectively competitive markets. First, the FCC found that the costs of switching from one ISP to another are too high for competition to prevent ISPs from setting “inefficiently high fees” for edge providers. Second, the FCC concluded that the gatekeeper theory applies even when end users already have access to multiple ISPs that enable them to access all edge providers without switching costs, because “the end user, not the edge provider, chooses which broadband provider the edge provider must rely on to reach the end user.” The FCC thus concluded that an ISP exercises gatekeeper control over access to end users merely by virtue of end users choosing to use that ISP as their preferred means of accessing the Internet at any given point in time.

The gatekeeper theory thus presumes that all edge providers must have access to all end users on all Internet platforms at all times in order to survive, innovate, grow, and compete (subject to ‘reasonable network management’), irrespective of the level of competition among ISPs. The theory also presumes that the benefits of subsidizing edge providers will be passed on to end users.

It should be obvious that the gatekeeper theory is a radical departure from the theories of regulation embodied in the 1934 and 1996 Acts, and that theory’s application under Title II would have far reaching effects on all Internet participants. By its own logic, the gatekeeper theory applies to any participant in the Internet marketplace that is capable of exercising gatekeeper control — which includes the provider of any service that is capable of acting as an intermediary between (1) end users and (2) other service, application, and content providers who access end users through that intermediary service. Any Internet intermediary that is capable of blocking, degrading, or favoring particular Internet services, applications, or content ‘upstream’ is thus a ‘gatekeeper’ under the FCC’s regulatory theory.

Because the gatekeeper theory is equally applicable to Internet intermediaries who are not ISPs, and the level of competition among such intermediaries is irrelevant under the theory, it would be discriminatory for the FCC to impose net neutrality regulations on ISPs only. In addition to being incredibly ironic, it would be arbitrary and capricious — and thus unlawful — for the FCC to impose a discriminatory regulatory regime under Title II for the ostensible purpose of preventing discriminatory behavior in the market.

The scope of the gatekeeper theory’s application under Title II is the topic of the next post in this series.

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