US Telecom and its Aftermath.

• Author: Spiwak, Lawrence J.

Table of Contents I. Background 40 II. 2015 Open Internet Order and the D.C. Circuit'S Response 41 A. "Just and Reasonable" Rates 43 1. The FCC's Approach 43 2. The D.C. Circuit's Response 47 B. Undue Discrimination 48 1. The FCC's Approach 48 2. The D.C. Circuit's Response 49 C. Forbearance of Tariffing Requirements 52 1. The FCC's Approach 52 2. The D.C. Circuit's Response 55 III. USTelecom and its Aftermath: The FCC Attempts to Regulate Business Data Services 57 IV. Conclusion 59 I. BACKGROUND

For almost fifteen years, the thorny issue of net neutrality has loomed over the telecom debate. But what started with the simple notion that the FCC should stop broadband service providers ("BSPs") from engaging in strategic anticompetitive conduct ultimately morphed into the Obama Administration's rejection of nearly twenty years of bi-partisan consensus that the Internet should be subject to "light touch" regulation under Title I of the Communications Act in favor of applying a legacy common carrier regulation designed for the old Ma Bell telephone monopoly under Title II of the Communications Act. (1) While much of the debate to date has revolved around the threshold legal question of whether broadband Internet access should be appropriately classified as an "information" service under Title I or a common carrier "telecommunications" service under Title II, the purpose of this Article is to focus on perhaps the more substantive (yet notably neglected) legal problem: the FCC's actual implementation of Title II in the 2015 Open Internet Order, specifically the ratemaking and tariffing provisions of Sections 201, (2) 2 02 (3) and 203, (4) along with its forbearance authority in Section 10. (5)

As explained in detail below, a proper application of these statutory provisions should have prevented the FCC from doing what it wanted to do in its 2015 Open Internet Order--in particular, the FCC wanted (1) to force BSPs to provide edge providers with terminating access without compensation (i.e., a regulated price of zero) in direct contradiction of Section 201; (2) to impose a blanket ban on reasonable discrimination in direct contradiction of Section 202; but yet (3) to give the patina of a "light touch" approach, to impose directly a regulated price of "zero" but use its forbearance authority contained in Section 10 to forbear from the formal tariffing requirements of Section 203--even while finding that BSPs were "terminating monopolists" and additional competitive entry was unlikely to ensure rates remained "just and reasonable." The FCC's solution to its legal pickle? To ignore the "vast majority of rules adopted under Title II" (6) by selectively picking and choosing whatever provisions of Title II it found convenient to achieve a results-driven outcome, so that it could, in the FCC's own words, "tailor[] [Title II]... for the 21st century." (7) In effect, since the statute prohibited the rules the FCC wished to impose, the FCC simply rewrote the statute. Respect at the FCC for precedent and its governing statute, it seemed, was officially dead. (8)

As to be expected, the FCC's 2015 Open Internet Order was appealed. For reasons known only to them, however, the appellants made the strategic decision to focus their legal challenge on the statutory reclassification question and deliberately not to challenge how the FCC actually implemented Title II via its rules. This strategy proved to be a costly miscalculation.

Citing the Supreme Court's seminal case in NCTA v. Brand X, (9) the D.C. Circuit found in United States Telecom v. FCC that the FCC had wide--nearly unbounded--latitude to interpret the Communications Act and not only upheld the FCC's decision to reclassify but--because no one squarely challenged the FCC's tortured implementation of Title II--also upheld the FCC's ability to "tailor" how it chose to implement Title II. (10) In so doing, the D.C. Circuit--rather by accident or by design--has taken the concept of administrative deference under the Chevron Doctrine to the extreme. (11) As demonstrated below, USTelecom may have greatly expanded the FCC's authority to set the rates, terms, and conditions of private actors well beyond its statutory mandate. Accordingly, the statutory construct of "Title II" now has no meaning; it is some bizarre legal hybrid that the FCC made up and the D.C. Circuit has, albeit indirectly, sanctioned.

This Article is organized as follows: In Section II, I present several examples of how the FCC in its 2015 Open Internet Order ignored both the plain language of Title II and extensive case law to achieve select political objectives, followed by a discussion of the D.C. Circuit's review of such legal manipulations. To provide an example of the troubling precedent set by USTelecom, I demonstrate in Section III how former FCC Chairman Tom Wheeler attempted (but, due to the clock running out by the Presidential election in 2016, ultimately did not succeed) to use the same theory of the case found in USTelecom to regulate the prices of Business Data Services. Conclusions and policy recommendations are at the end.

2. 2015 OPEN INTERNET ORDER AND THE D.C. CIRCUIT'S RESPONSE

   When the FCC was contemplating its current 2015 Open Internet Rules, it had a choice of two legal theories under which it could have proceeded. Under the first theory, the FCC could have followed the legal roadmap set forth by the D.C. Circuit in Verizon v. FCC (12) and enacted its rules using the authority provided by Section 706 of the Telecommunications Act of 1996. (13) The advantage of this approach is that because this was a relatively "greenfield" area of the law, the FCC would have had a great deal of latitude to determine its own path under a "commercially reasonable" standard. (14) The other option (which the Wheeler FCC ultimately chose) was a reclassification of broadband Internet access as a Title II common carrier telecommunications service. Of course, the downside of a Title II approach is that when you choose to apply a law designed for the old Ma Bell monopoly in 1934 to the Internet, you presumably also get the nearly eighty years of established case law that goes along with it.

   By its own admission, the FCC in its 2015 Open Internet Order imposed a "no blocking" rule that was specifically designed to "prohibit[] broadband providers from charging edge providers a fee..." (15) As the D.C. Circuit expressly recognized in Verizon v. FCC, this rule was intended to "bar providers from charging edge providers for using their service, thus forcing them to sell this service to all who ask at a price of $0." (16) With intent, the FCC's rule establishes "a regulated price of zero." (17) Thus, despite the FCC's protestations to the contrary, (18) because net neutrality is unambiguously price regulation (albeit "zero-price" regulation), the reclassification dictated by the FCC's 2015 Open Internet Order must satisfy the relevant rate-making provisions of Title II of the Communications Act. (19) These provisions include:

   * Section 201, which mandates that rates must be "just and reasonable;" (20)

   * Section 202, which prohibits "unreasonable" discrimination; (21) and

   * Section 203, which provides the enforcement mechanism for Sections 201 and 202--i.e., tariffs. (22)

   If, however, the FCC wants to refrain from imposing direct price regulation and surrender the pricing function to the market, then Section 10 allows the FCC to forbear from the tariffing requirements of Section 203 under a delineated set of circumstances. (23)

   What is important to understand is that the ratemaking and forbearance provisions of Title II are not solely designed to govern the conduct of the regulated firm (the FCC's rules serve that function), but to govern the conduct of the regulator. Indeed, whenever the government intervenes in the market--particularly when it seeks to set the price, terms, and conditions of service of private actors--a myriad of important due process concerns come to the fore that must be respected to avoid a "takings" under the Fifth Amendment of the U.S. Constitution. (24) For this reason, courts have provided detailed guidance on how the FCC is supposed to interpret these various statutory provisions. As explained in detail below, the FCC's problem in its 2015 Open Internet Order was that both the plain terms of the statute and this extensive precedent prohibited them from doing what they wanted to do. (25) The FCC's solution? Ignore the plain language of the statute and the case law in order to make up new theories of both rate regulation and forbearance under Title II de novo. Let's look at a few examples.

   1. "Just and Reasonable " Rates

      1. The FCC's Approach

         Under Section 201 of the Communications Act, all rates must be "just and reasonable." (26) However, as the D.C. Circuit remarked over thirty years ago, the phrase "just and reasonable" is not "a mere vessel into which meaning must be poured." (27) The problem, of course, is that ratemaking is not "an exact science." (28) For this reason, courts simply require that in order to satisfy the "just and reasonable" standard the FCC must set a regulated rate that falls within the zone of reasonableness. As illustrated in Figure 1, this zone of reasonableness lies between rates that are confiscatory at the low end (that is. below cost and a "takings" under the Fifth Amendment) and rates that are excessive at the high end (that is, "creamy returns," the limit of which is defined by the markup R). (29) As the Supreme Court held in its seminal Permian Area Rate Cases ruling, the zone of reasonableness is such that the rate "may reasonably be expected to maintain financial integrity, attract necessary capital, and fairly compensate investors for the risks they have assumed, and yet provide appropriate protection to the relevant public interest, both existing and foreseeable." (30) So, in attempting to set a "just and reasonable" rate, the FCC must set a rate...