The FCC's knowledge problem: how to protect consumers online.

Author:Ohlhausen, Maureen K.

TABLE OF CONTENTS I. A FRAMEWORK FOR THINKING ABOUT REGULATION: COMPARED THE FCC AND THE FTC A. The Regulator's Knowledge Problem B. The FCC's Prescriptive, Ex Ante Regulatory Approach C. The FTC's Flexible, Ex Post Enforcement-Based Approach II. NET NEUTRALITY AND THE FCC: A CASE STUDY IN REGULATOR DIFFICULTY A. What is Net Neutrality? 1. Proponents of Net Neutrality Regulation 2. Opponents of Net Neutrality Regulation B. The FCC's History of Broadband Regulation: The Road to Reclassification 1. Broadband as a Title I information service 2. The Verizon Decision 3. The Aftermath of Verizon C. The Reclassification Ruling and Order on Remand III. THE PRESCRIPTIVE RULES AND PROBLEMATIC RECLASSIFICATION A. The Order on Remand Continues the FCC's Prescriptive Rulemaking Approach 1. The Core Rules are an Unjustified Prescriptive Per Se B on Certain Forms of Vertical Integration 2. The "General Conduct" Rule is a Penumbra of Uncertainty B. The Effects of Title II Reclassification Go Far Beyond Net Neutrality 1. Collateral Effect on FTC Jurisdiction 2. Issue Creep Spurred by Rent-Seeking Behavior 3. Unclear Scope of Reclassification IV. CONCLUSION The Federal Communication Commission (FCC) has long searched for a legally sustainable way to adopt and enforce network neutrality regulation. The U.S. Court of Appeals for the District of Columbia Circuit added another detour on this path with its January 2014 decision in Verizon v. FCC, (1) and the FCC responded in February 2015 with a controversial action that, among other things, reclassifies broadband as a common carrier service subject to utility-style regulation under Title II of the Communications Act of 1934. Over the course of the FCC's journey, much has changed in broadband technology and the broadband marketplace. The Verizon decision offered policymakers a chance to take stock of these changes and to consider alternatives to regulation-a chance the FCC rejected. Imposing a set of prescriptive regulations--whether involving speeds or prices--on the dynamic and robust online environment is problematic and, ironically, could impede deployment of the Internet and harm consumers. To protect consumers online, we need informed, flexible, and fact-based enforcement supplemented with self-regulation using technical standards developed through consensus-based, multi-stakeholder organizations of engineers, consumers, and businesspeople. To the extent the government is involved, the Federal Trade Commission (FTC) model of enforcement, advocacy, and industry and consumer education is the better approach that will allow market forces to maximize consumer welfare.

Below, I first describe a framework for thinking about regulation of fast-changing industries and compare and contrast the FCC and the FTC's approaches. Next, I briefly summarize the history of the net neutrality issue, including the FCC's 2010 Open Internet Order, (2) the subsequent Verizon decision striking it down, and the most recent action to reclassify broadband as a Title II service. (3) Lastly, I offer some observations about the reclassification decision and its aftermath and suggest a path forward for protecting consumers online.


    All regulatory agencies face a fundamental knowledge problem, but they use different strategies to deal with that problem, with varying levels of success. Before analyzing how different regulatory paradigms could affect the net neutrality issue, I will first explore the knowledge problem itself and compare how the FCC and the FTC each approaches that problem.

    1. The Regulator's Knowledge Problem

      A regulation dictates how the regulated entity is to act, or not act, in specific situations. For example, the Open Internet Order prohibited wireline broadband service providers from blocking subscribers' access to content, except in limited circumstances. (4) When regulators regulate, they are making decisions for others by either prohibiting or requiring certain actions by market participants. Regulators make these decisions based, at least in part, on the relevant information they can gather about the "circumstances of time and place" these entities may face now or in the future. (5) As a result, all regulators encounter a significant knowledge problem. (6) As economist and Nobel laureate F. A. Hayek pointed out in his famous essay, The Use of Knowledge in Society, such centralized decision-makers have difficulty gathering the knowledge necessary to make good decisions for others, for several reasons. (7)

      First, such knowledge is "initially dispersed among many different individuals." (8) Each regulated entity faces unique circumstances and must make choices and evaluate tradeoffs among its options, based on the information it has at hand. (9) And every regulated entity holds unique information relevant to its specific situation at that time. Gathering even a static snapshot of all this dispersed knowledge is logistically impossible except perhaps in the smallest and simplest domains. As such, regulators attempt to compensate for the difficulty of collecting all the relevant information by extrapolating from sampled, averaged, or aggregated data. (10)

      A second difficulty facing centralized decision makers is that many types of relevant knowledge are latent and therefore not amenable to collection or summarization. (11) Individuals may not realize that the information they possess is important to the solution of a larger issue and therefore may not provide the information. Or they may not be able to detail such information in a timely manner. For example, think about your current job: If you were promoted tomorrow and had to leave detailed instructions on how to do your job, how long would those instructions take you to write? How much information would not be captured? How likely is it that you would forget something that might be important to the next person? Even the simplest jobs require significant on-the-job training because it is too difficult to capture--or even recognize--every important day-to-day requirement. (12) Complex and abstract roles are even harder to summarize. For example, a network engineer's decision-making process about when to rebalance traffic loads on various servers may be the product of years of experience and may be difficult for even the engineer to explain. Regulation cannot capture such latent knowledge. (13)

      Third, and perhaps most significantly, regulators make decisions that affect future behavior, where the "particular circumstances of time and place" lie temporally beyond the regulator's grasp. (14) Regulation is necessarily based on information about the past and predictions about the future. Thus, the regulator's knowledge problem is most acute when regulating in a fast-changing factual environment--when guesses about the future are more likely to be incorrect. (15) In such a situation, the collected knowledge quickly becomes stale. Indeed, if the regulator collects knowledge more slowly than the environment changes, even continuous information gathering cannot stop the regulator's knowledge from growing obsolete over time. (16) This problem is especially acute when regulating industries that are characterized by disruptive change, because it is even more difficult to predict future effects when industry structures and paradigms transform over time.

      Different regulatory bodies deal with these knowledge problems in different ways, based on a wide range of factors including workload, organizational structure, leadership, personnel, culture, political pressure, and perhaps most fundamentally, the guidance of their enabling statute. (17) We can see these differences by looking at the very different approaches of the FCC and the FTC.

    2. The FCC's Prescriptive, Ex Ante Regulatory Approach

      The FCC historically has taken a segmented approach to regulating different communications media, as contemplated by the Communications Act of 1934. (18) Title I of the Act gives the FCC general jurisdiction over certain communications, but offers the agency little specific jurisdictional guidance. (19) The other titles of the Act spell out more clearly the agency's authority and its treatment of communications based on their method of transmission. Thus, the Act classifies business models and outlines different requirements based on whether the business provides landline telephony (Title II), (20) radio transmission, including broadcast television, radio, and cellular telephony (Title III); (21) or "cable services" like cable television (Title VI). (22) Certain business offerings, including those classified under Title II, are considered "common carriage" and therefore face significant regulation, including rate regulation. With the convergence of various technologies-for instance, Voice over Internet Protocol (VoIP) competing with circuit-switched telephony or Internet Protocol Television (IPTV) competing with broadcast and cable--this siloed approach to regulation is increasingly out of step with reality. (23) In particular, the Communications Act of 1934, not surprisingly, did not contemplate the most extensive and widely-used communications network of today, the Internet. (24)

      When the FCC implements a statutory requirement or seeks to address a policy problem, it typically exercises its Administrative Procedure Act rulemaking authority, (25) under which it details, ex ante, the procedures that various types of regulated entities must follow. (26) The scope of such rulemakings is limited by the FCC's statutory authority. (27)

      The history of the FCC can be fairly described as a series of regulatory attempts (typically rulemakings) to fit new technologies and business models into an increasingly out-of-date regulatory model. (28) Starting with the 1913 Kingsbury Commitment, (29) through the 1996 Telecommunications Act and its subsequent implementation, (30) Congress and the FCC...

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