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Net Neutrality and Broadband as a Utility: What's Going On?

Mainstream publications from the New York Times and Wall Street Journal to Fortune have all published thoughtful pieces lately addressing the question of whether or not broadband should be regulated as a utility. There are those who argue that, regardless of whether such treatment is warranted or even desirable, it already exists.

While the arguments are not particularly new, the challenges posed by existing regulations that do not lend themselves to the newly-dominant technologies have become increasingly acute. This is particularly true as regulators look to ensure true universal service, and market players look to fully capitalize on subsidies that are made available by government funding vehicles that exist in the name of providing true universal service and access.

As much as I've resisted the thought, the fact is that the traditional landline is, at a minimum, becoming less relevant. In most of the country, many other communications options exist for voice and video. Truthfully, we don't even think twice about how we connect. Most of the time, regardless of the technology used, we get through.

However, for those who live in rural areas where the cost to deliver such services has become exorbitant, this isn't such a no-brainer. As technology has evolved, the ability to rely on the traditional landline has become less of a given and more of a crapshoot, particularly as the physical plant deteriorates as a result of time and usage (and the occasional backhoe).

While the fight over Net Neutrality may seem to be a separate issue from broadband as a utility, in fact, the two are inseparably interwoven.

Notice of Proposed Rule Making
The Net Neutrality conversation (and in some corners, the word "conversation" should be replaced with the words "screaming match") has been going on for years, as the FCC has attempted to find a way to regulate an open Internet. As has been previously noted, the FCC's most recent attempt was largely--although not totally--invalidated by the DC Court of Appeals.

With the regulatory bits that were spared by the Court, the FCC has revised its rules and, via Notice of Proposed Rule Making (NPRM), is looking for public comments, which are due by July 15. (More information is available here).

The July NPRM has 6 major elements.:

1.) It generally proposes to retain the definitions and scope of the FCC's 2010 rules.

2.) However, the FCC seeks to enhance its transparency rule "so that the public and the Commission have the benefit of sunlight on broadband provider actions." This, according to the NPRM, will ensure that consumers and service providers have access to necessary information to understand the services they are receiving while being "able to monitor practices that could undermine an open Internet."

3.) The FCC seeks to adopt the "text of the no-blocking rule from the Open Internet Order that the DC Appeals Court struck down--but with a revised rationale. The commission's goal is to "ensure that all end users and edge providers can enjoy the use of robust, fast and dynamic Internet access."

4.) The FCC is proposing the creation of a "a separate screen that requires broadband providers to adhere to an enforceable legal standard of commercially reasonable practices," requesting guidance on identification and prohibition of harm, and "whether certain practices, like paid prioritization, should be barred altogether."

5.) The FCC is proposing a "multi-faceted dispute resolution process to provide effective access for end users, edge providers, and broadband network providers," along with the creation of a consumer, start-up, and small business watchdog.

6.) Finally, the FCC is seeking guidance on how either Section 706 or Title II of the Communications Act of 1934 as amended by the Telecommunications Act of 1996 (or any other legal sources, including Title III for mobile services) "could be applied to ensure that the Internet remains open."

The Importance of Broadband
By issuing its order defining a framework for broadband providers to be eligible for subsidies through the Connect America Fund (CAF), the Commission has taken significant action to allow subsidies to broadband providers. By taking this step, the FCC is clearly making a statement about the critical nature of broadband. Access to this funding is worth millions of dollars at minimum, and so the issue of who is eligible to receive those dollars and who isn't is back in the spotlight.

The arguments aren't new, but the question remains critical--is there sufficient competition in the broadband market so that further regulation isn't necessary? The answer, as with many hot political potatoes, depends on your perspective.

In the abstract, the argument is often made that regulation will stifle creativity and innovation. This may be true. On the other hand, without any formal regulation (ranging from enforcement of Net Neutrality to other indirect regulation through use of the CAF and other funding mechanisms), what assurance do those in rural and high-cost areas have of access to reliable communications?

Who Should Regulate?
If, and it's a big "if," it is determined that additional regulation is warranted, from where should it be derived? The FCC? The Federal Trade Commission (FTC)? Or Congress, in the form of utility regulation or some other framework? Or perhaps under the umbrella of the Antitrust Division of the Department of Justice? Volumes have been written on the legal arguments, but if the issues are boiled down to their most basic tenets, the ultimate question is really: How can consumers best be protected?

And if new regulations aren't feasible, the FCC may, as mentioned earlier, have the authority to force competition through existing regulations--the powerful Title II of the Communications Act of 1934 and auxiliary rules, and the less potent--but still viable--authority that derives from Section 706 of the Telecommunications Act of 1996.

The newly proposed rules in the NPRM allow for "commercially reasonable," deals by carriers under the authority derived from Section 706, according to Professor Tim Wu of Columbia University, It doesn't take much imagination, however, to figure out that "commercially reasonable" could imply traffic discrimination as fast and slow lane access are--or at least could be--segregated.

Title II of the Communications Act provides the FCC with its main source of authority over wired communications. Further, it gives the FCC the power to "regulate anyone who offers a 'telecommunications service,'...defined as 'the transmission, between or among points specified by the user, of information of the user's choosing, without change in the form of content of the information as sent and received.'".

Under this section of the law, the FCC has the authority to ban both "unjust" and "unreasonable" discrimination. But although legal, it's an unpopular way derive regulatory authority because it is viewed in D.C. telecom policy circles as EXTREMELY heavy handed.

Antitrust and Net Neutrality
If some Internet access is more equal than others (to paraphrase George Orwell), some content providers--and thus at least some consumers--will be disadvantaged. That is, those that can afford access to the fastest and most powerful access will be in a better position to have access to the most valuable content than those who cannot.

Further, from the perspective of an economist, the debate about Net Neutrality is really about the concern that broadband providers will enter into business relationships that will have a negative effect on some content providers, while simultaneously harming competition and ultimately hurting consumers.

According to FTC Commissioner Joshua Wright in late June testimony to the House Subcommittee on Regulatory Reform, Commercial and Antitrust Law, "This type of competitive concern is grounded in antitrust economics, and more specifically, in the 'raising rivals costs' literature,"...that defines "the conditions that must hold in real world markets for this theoretical concern to give rise to a serious risk that a monopolist will disadvantage rivals, reduce competition and harm consumers.'" Most notably, this form of disadvantage will come in the form of vertical contractual relationships, which are seen by some as harmful to consumers.

Others, including Commissioner Wright, disagree. In his remarks, Wright goes on to say that "...vertical contracts can create efficiencies by reducing double marginalization, preventing free riding on the manufacturer-supplied investments, and aligning manufacturers and distributers' incentives. Consumers benefit because these efficiencies are at least partially passed on to them in the form of lower prices, increased output, higher quality and greater innovation."

Whether you agree or disagree with this theory, the FTC Commissioner argues that Antitrust is the best way to approach the issue because of its ultimate "focus on consumer welfare {and use of] available economic tools--to address potential anti-competitive conduct in the broadband sector." Under Antitrust analysis, vertical relationships will be evaluated on a case by case basis, "creating a means, grounded in sound economics and empirical evidence, for identifying those vertical contracts that harm consumers."

There are certainly those who argue that the Internet requires little or no regulation. Obviously these people have never needed to reach out to their appropriate state public service or utility commission for help. Opponents of regulation find the concept of Network Neutrality anathema, believing that market forces should, in fact, dictate how and to whom access should be provided.

But as traditional landlines--whose local service mission fell under the regulatory eye of the states--disappear, and we rely on the Internet as the fundamental driver of most of our communications, be they voice, video or information, it is apparent that some type of federal regulation is essential to ensure that reliable communications is available to all.

Should broadband be regulated like a utility? I don't know. But I do know that regulatory oversight and enforcement power is essential to ensure that something beyond "market forces" provide all Americans who want it with access dial-tone, whatever the underlying technology.