Development of net neutrality rules: is the third time a charm?

Author:Meisel, John B.
  1. INTRODUCTION II. ECONOMIC FRAMEWORK TO DELINEATE THE SCOPE OF COMMISSION AUTHORITY UNDER SECTION III. PARTIAL CLASSIFICATION OF BROADBAND INTERNET ACCESS SERVICE OFFERED TO EDGE PROVIDERS A. What is the new remote delivery service? B. Why is there a new remote delivery service? C. On the other hand, is there really a distinct remote delivery service? D. If a distinct remote delivery service really exists, is it a telecommunications service? IV. CONCLUSION I. INTRODUCTION

    Since defining transmission of Internet traffic over last-mile broadband facilities as outside the definitional scope of a telecommunications service, (1) the Federal Communications Commission ("FCC" or the "Commission") has struggled to develop a regulatory regime for Internet services that is judged by the courts to be legally sustainable. Specifically, the FCC has twice failed in front of the D.C. Circuit to impose some version of neutrality (or openness) rules on Internet broadband service providers (BSPs) governing last-mile commercial arrangements with edge providers. (2) Most recently in January 2014, the D.C. Circuit remanded the Open Internet order case to the Commission for further proceedings consistent with its opinion. (3) The remand opinion contained three significant decisions/findings. First, a significant hurdle in the Commission's efforts to establish statutory authority to govern the business conduct of BSPs was overcome in spite of the remand. Specifically, analyzing statutory language contained in Section 706 of the Telecommunications Act of 1996 (47 U.S.C. [section] 1302), the D.C. Circuit unanimously concluded that the Commission possessed positive regulatory authority to enact regulatory measures encouraging the deployment of broadband infrastructure. Second, and equally significant, a majority (two of three members) of the D.C. Circuit found the specific rules addressing transparency, anti-blocking, and anti-discrimination promulgated by the FCC consistent with the authority contained in Section 706. Specifically, the D.C. Circuit majority concluded that "... its [referring to the FCC] justification for the specific rules at issue here--that they will preserve and facilitate the 'virtuous circle' of innovation that has driven the explosive growth of the Internet--is reasonable and supported by substantial evidence." (4) In short, the FCC has statutory authority to develop rules governing BSPs' treatment of edge providers Internet traffic within last-mile facilities. In particular, these rules can impose restrictions that govern the commercial relationship between BSPs and edge providers (or more specifically, content, applications, and service providers) if the purpose of such rules is designed to promote the development of broadband infrastructure.

    Third, the D.C. Circuit made it clear that net neutrality rules must also be consistent with other parts of the 1934 Communications Act. In particular, this means that, given the FCC's current classification of BSPs as information service providers subject to Title I authority with its light-touch regulation, these rules must not place such severe restrictions on the commercial freedom of BSPs that they effectively become treated as common carriers subject to Title II with its more onerous set of regulations. (5) Accordingly, the net neutrality rules are subject to a common carrier prohibition. However, in the view of the D.C. Circuit, the specific anti-blocking and anti-discrimination rules developed in the Open Internet order crossed the line and treated BSPs as common carriers. The rules restricted BSPs' freedom to determine which edge providers that they must provide service and the terms and conditions of the service provided. (6)

    In order to address this legal constraint, there are two general paths that the FCC outlines in the remand proceeding to address the common carrier prohibition. (7) One option modifies the net neutrality rules in such a manner that allows BSPs sufficient discretion to block traffic or provide preferential treatment to traffic. (8) It is argued by net neutrality proponents that proceeding under such a path, the resulting revised net neutrality rules will be considerably weaker than those passed in 2010. Incumbent BSPs generally favor this option, particularly the use of a commercially reasonable standard for evaluating the legality of commercial arrangements with edge providers. A second approach to address the common carrier prohibition is to reclassify broadband Internet access service as a telecommunications service. (9) Specifically, the FCC could decide to reclassify either the entire broadband Internet access service as a telecommunications service or pursue a more targeted approach and classify as a telecommunications service only a distinct component of the overall broadband Internet access communication. (10)

    The principal aim of this article is to focus on legal and economic issues associated with the novel, partial classification approach to revising the Open Internet order. In the process of analyzing this approach, legal and economic factual findings contained in the D.C. Circuit's decision are accepted as binding ground rules upon which to construct the revised rales." For instance, the D.C. Circuit characterized the Internet market as a two-sided market in which a BSP possesses a carrier relationship with two distinct Internet participants, end users and edge providers. A secondary aim is to provide an economic framework that will help the Commission organize its approach to the development of the revised openness rules. This discussion accepts as controlling the D.C. Court's validation of the Commission's economic theory of the causes of innovation and investment in broadband infrastructure captured in what is referred to as the virtuous circle of innovation. More specifically, a supply and demand economic framework is provided to identify the effect that a proposed regulatory measure has on the quantity and quality of broadband infrastructure.

    It is predicted that the FCC decision in the remand proceeding regarding classification of Internet access service or the lack thereof will be critically important to framing the role the regulatory agency will play in the 21st century convergent communications marketplace. (12) If the FCC chooses to pursue the first option outlined above it may lack sufficient authority to be a significant factor in managing the forthcoming IP transition and related proceedings. (13)

    The article is organized as follows. Part II presents an economic framework to evaluate the impact of a proposed rule on the quantity and quality of broadband infrastructure. Part III analyzes legal and economic issues associated with the Mozilla approach. The analysis is structured in a question and answer format addressing aspects of the Mozilla approach. Part IV provides a conclusion.


    If the FCC determines through a study that advanced telecommunications capability is not being deployed to all Americans in a reasonable and timely basis, then the Commission is directed by Congress to take direct action to remedy the problem. Specifically, the Commission has statutory authority under Section 706 (a) to implement regulatory measures when it:

    (1) Identifies a barrier combined with evidence that the barrier affects infrastructure investment and/or

    (2) Identifies a threat to competition with evidence that the threat affects the local telecommunications market. (14)

    An economic way to model the factors that fall into one of these two categories is through a demand and supply framework. To be consistent with the objective of Section 706, the FCC should implement measures to increase the quantity of broadband (i.e., infrastructure) in the market. There are two distinct ways to accomplish the objective; identify a factor that shifts significantly the demand for broadband (that is, the relationship between the price of broadband and the quantity demanded of broadband) to the right or a factor that shifts significantly the supply of broadband (that is, the relationship between the price of broadband and the quantity supplied of broadband) to the right. (15) Either shift will increase the equilibrium quantity of broadband in the market. The FCC's virtuous circle of innovation, considered a binding ground rule rooted in economic theory based upon the D.C. Circuit's opinion, addresses a factor that shifts the demand for broadband to the right. The theory assumes that the demand for broadband is a function of the rate of innovation from edge providers and regulatory action that the Commission can take (such as its openness rules) to facilitate edge provider innovation will shift the demand for broadband to the right. As a result, in the short run, equilibrium quantity supplied will increase (this is a movement along the existing supply curve of network owners) which will generate supra-competitive profits for BSPs which will, in turn, shift the long run equilibrium supply of broadband to the right due to the expansion of the networks of existing broadband providers (e.g., AT&T's plans to increase significantly its wireline investment over the next three years) and the entry of new broadband providers (such as Google Fiber). (16)

    Other factors that will increase the equilibrium quantity of broadband in the market implicate actions that the FCC can take to increase the functionality (and, thus, demand) of broadband in the eyes of consumers such as FCC rules that have made VoIP services replicate desirable features (enhanced 9-1-1 calling, number portability, and accommodations for hearing-impaired users) characteristic of traditional telephone service. On the supply side, the FCC is authorized by Section 706 to work with state commissions to eliminate regulations that inhibit municipal broadband networks. (17) The added competition will shift the market...

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