In the Telecommunications Act of 1996 ("the Act"), Congress directed the Federal Communications Commission (FCC) and the states to encourage deployment of " advanced telecommunications capability" in the United States " on a reasonable and timely basis." The Act goes on to define advanced telecommunications as " high-speed, switched, broadband, telecommunications capability that enables users to originate and receive high-quality voice, data, graphics, and video telecommunications using any technology." The FCC has defined " broadband" as " having the capability of supporting in both the . . . downstream . . . and the . . . upstream . . . directions, a speed . . . in excess of 200 . . . kbps . . ."
Current FCC policy is to promote the expansion of broadband services to the American public by allowing market forces to deliver the product and encourage investment. This reluctance to regulate was expressed by then-FCC Chairman William Kennard in 1999:
Sometimes people talk about broadband as if it is a mature industry. But, the fact is that we don't have a duopoly in broadband. We have a NO-opoly. Because, the fact is, most Americans don't even have broadband. But how do we do it? We let the marketplace do it. If we've learned anything about the Internet in government over the last 15 years, it's that it thrived quite nicely without the intervention of government. If [sic] fact, the best decision the government ever made with respect to the Internet was the decision the FCC made 15 years ago NOT to impose regulation on it. This was not a dodge; it was a decision NOT to act. It was intentional restraint born of humility. Humility that we can't predict where this market is going . . . In a market developing at these speeds, the FCC must follow a piece of advice as old as Western Civilization itself: first, do no harm. Call it a high-tech Hippocratic Oath.
Although most what will be covered in this note applies as much to the DSL (Digital Subscriber Line) service provided over traditional telephone lines as to cable, this paper will generally discuss the issues surrounding broadband regulation using cable as that is where much of the legal and policy discussion has taken place.
In recent years, some cable companies decided to provide Internet service using a single, affiliated ISP (Internet Service Provider). This prompted many unaffiliated ISPs to call for open access – the ability to reach cable customers on non-discriminatory terms. Open access is premised on righting the historical government wrong that protected government-granted monopolies from the forces of competition. However, the FCC's market approach discourages additional regulation, no matter how noble, in an attempt to encourage investment and lower prices for consumer benefit. The FCC is not interested in helping competing ISPs unless it is necessary to protect consumers.
The two main open access models are the negotiated market approach and the cost-based pricing approach. Under the negotiated market approach favored by cable operators, open access means negotiated commercial agreements between cable operators and ISPs in a free market with prices and terms varying depending on the parties' needs and capabilities, but not on ISP affiliation. Under cost-based pricing, the FCC would require operators to sell line access to ISPs at cost so that they would not be able to assert their monopoly power.
Either measure requires that the FCC establish a standard to measure the degree of openness that is required, to determine if the cable operator is violating the FCC regulations. However, the negotiated market approach would still be preferable from an economic point of view as it avoids the immense problem of government pricing and allows for less regulation, thus ensuring greater market input into pricing schemes and services offered.
The FCC encountered this very problem when setting the prices charged by telephone ILECs (Incumbent Local Exchange Carriers) to CLECS (Competing Local Exchange Carriers), for the use of their network equipment, pursuant to the Act. The FCC there adopted the Total Element Long Range Incremental Cost (TELRIC) pricing methodology, ignoring the historical costs of building telephone networks and looking only to the future costs of adding new users, and set default pricing. In coming to this determination, the FCC looked at the claims put forth by both ILECs and CLECs as to real costs, but both of them had great incentive to manipulate the cost figures in an attempt to benefit themselves. As a result, the FCC instead developed its own inaccurate economic model, which incorrectly defines opportunity cost and misunderstands market pricing. As one author put it:
We conclude that [the FCC is using] an improper method for setting prices of interconnection and unbundled network elements because the existing retail prices that would be used to compute incremental opportunity costs . . . are not cost-based. Moreover, the [FCC] does not provide any mechanism for moving prices towards competitive levels; it simply takes prices as given.
In the case of broadband cable Internet service, the ISPs will try to convince the FCC that costs to the cable operator are very low and call for forward pricing only, and the cable operators will try to convince the FCC that the costs are very high and that the pricing should include historical costs. Both numbers will be far off and the FCC will be forced into making the same inaccurate pricing guesses.
Before definitively answering the open access question, the FCC would have to first classify Internet services under the Act to understand its regulatory powers. Originally, the FCC had declined to comment on how it classified broadband Internet service under the Telecommunications Act and effectively decided to allow for market regulation. Because of the FCC's market approach, proponents of open access were forced to convince local regulatory authorities to take up the cause. The questions were whether local regulatory agencies had the power to regulate cable Internet access and, if they did, whether regulation was necessary for competition or if cable operators would adopt open access policies on their own.
" Telecommunications" is defined as " the transmission between or among points specified by the user, of information of one's choosing, without change in the form or content of the information as sent or received." " Telecommunications service" is defined as " the offering of telecommunications for a fee directly to the public . . . , regardless of the facilities used."
" Information service" is defined as " the offering of a capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information via telecommunications . . . but does not include any use of any such capability for the management, control, or operation of a telecommunications system or the management of a telecommunications service."
" Cable service" is defined as " (A) the one-way transmission to subscribers of (i) video programming, or (ii) other programming service, and (B) subscriber interaction . . . which is required for the selection or use of such video programming or other programming service." The Act further defines " other programming service" as " information that a cable operator makes available to all subscribers generally."
When AT&T bought TCI (Telecommunications, Inc.), a large cable operator, in 1998, it acquired a 40% share in the @Home cable broadband ISP which subsequently merged with the Excite Internet portal. With the purchase of TCI, AT& T began to bundle Excite@Home with its cable broadband capacity, affiliating with a single ISP. The FCC allowed the merger, despite claims by interest groups and competitors that a merger without an open access requirement would " harm competition and reduce consumer choice." The FCC decided that an open access requirement was not necessary to ensure competition due to the emergence of competing methods of broadband Internet access and that " while the merger is unlikely to yield anticompetitive effects, we believe it may yield public interest benefits to consumers in the form of a quicker roll-out of high-speed Internet access services."
AT&T and TCI still faced the approval of local franchising authorities where required by local cable franchising agreements. TCI's franchise agreement with the City of Portland, Oregon, allowed Portland to condition the transfer subject to its own qualifications. The Mount Hood Cable Regulatory Commission, the agency overseeing cable matters in Portland, decided to subject the transfer of TCI's cable network to AT&T to an open access requirement. AT&T brought suit challenging the authority of the Mount Hood Commission to regulate cable Internet access.
In AT&T v. City of Portland, a three-judge panel of the Ninth Circuit held that not only is cable broadband Internet service not a "cable service" under the Telecommunications Act, but that it is both, in part, an "information service" and a "telecommunications service." The Court separated broadband Internet service into two parts: (1) the cable pipeline and (2) the Internet service transmitted through that pipeline. The court then labeled the transmission of data through the pipeline as a " telecommunications service" and the delivery of that information to the customer as an " information service."
Under this classification, an ISP standing alone would be just an "information service" and a cable operator standing alone would be just a "telecommunications service." The ISP in that case is a user of telecommunications, similar to any other customer who might purchase telecommunications, such as a home telephone user or a business with a T1 line.
The Court made two important rulings in coming to this decision: (1) it implicitly decided that the classifications of different services under the Act are not mutually exclusive and (2) it explicitly decided that there is no difference between " telecommunications" and " telecommunications service" under the Act – if a cable operator uses its own telecommunications (its pipeline) to its Internet service, it is a "telecommunications service" in addition to being an " information service." The " via telecommunications" found in the Act's definition of an information service is merely a recognition that an information service will often make use of a telecommunications service.
The Court went on to decide that because local regulatory agencies do not have the authority to regulate telecommunications services under the Act, the Mount Hood Regulatory Commission did not have the authority to restrict the transfer of TCI's network to AT&T.
In a similar case, the Eastern District of Virginia disagreed in part with the Ninth Circuit. Because of the proprietary content of the RoadRunner ISP affiliated with the MediaOne cable operator, the court in MediaOne Group, Inc. v. County of Henrico decided that in addition to falling under " telecommunications service" and " information service," broadband cable Internet service also includes an aspect of " cable service." Despite this holding, the court agreed with the Ninth Circuit that under 47 U.S.C. § 153(b)(3)(D), local regulatory agencies are not allowed to put restrictions on the transfer of telecommunications services, including cable networks.
The Eleventh Circuit, on the other hand, decided quite differently in Gulf Power v. FCC. There, the Court held that broadband Internet service is solely an " information service" and that " Internet service does not meet the definition of either a cable service or a telecommunications service."
While the FCC declined to submit an amicus brief staking a position on the classification of broadband Internet service for the AT& T case, the Ninth Circuit's decision to include such a classification in its holding spurred the FCC to issue its own ruling. Trying to make sense out of what broadband Internet service really is and to simplify regulations, the FCC made the decision to label all broadband Internet services as " information services" and further decided that the various classifications under the Act were mutually exclusive, in direct conflict with the AT&T decision.
In two related orders, the FCC issued declaratory rulings that both DSL and cable broadband Internet service are solely " information services." Relying on an earlier decision, the FCC " found that Internet access service is appropriately classified as information service, because the provider offers a single, integrated service, Internet access, to the user." As FCC Chairman Michael Powell remarked in a recent press release, " This is about ensuring that high-speed Internet connections aren't treated like what they're not: telephones... Applying taxes, regulations and concepts from a century ago to today's cutting-edge services will only stifle innovation and competition."
The FCC decided that these are not " telecommunications services" under the Act because they do not sell telecommunications directly to the public – what the public purchases is Internet access, an " information service." In contrast, the Ninth Circuit had argued that telecommunications are sold to the public, because when the public purchases Internet access, it purchases telecommunications service and information service. The Act does not require that the different components be priced or offered separately. The crux of this debate hinges on the interpretation of " via telecommunications," contained in the Act's definition of " information services," supra. The FCC ruled that Congress' intention was to differentiate between " telecommunications" and a " telecommunications service," so that the regulatory structure that comes with being a " telecommunications service" was never intended for an " information service" provider that merely makes use of telecommunications (as it must).
Many parties responded by bringing suit against the FCC declaratory ruling, and these suits were consolidated into Brand X Internet Services v. FCC, once again in front of the Ninth Circuit. The various plaintiffs wanted the FCC to declare that broadband Internet service was not only an " information service," but also either a " telecommunications service," a " cable service," or both.
In a strong showing of stare decisis, the Ninth Circuit declined to view the case de novo, holding that its previous AT& T ruling was binding and that the agency did not have the power to change the Court's classification of broadband Internet service as both a " telecommunications service" and an " information service."
At the same time, Judge Sidney Thomas, in his concurring opinion, made clear that he felt that even in a de novo proceeding, the FCC should lose because a court must only defer to an agency when there is a disagreement about interpreting ambiguity in a statute. He held that there was no ambiguity in the Telecommunications Act's classifications.
This past year, the Supreme Court overturned the Ninth Circuit in an opinion by Justice Clarence Thomas. The Court held that it would be inconsistent to only apply the Chevron doctrine of deference to agency decisions when the agency had made a decision prior to the courts, but not afterwards. Instead, the Court held that the correct holding was that as long as the statute which the agency is interpreting has ambiguity and room for agency discretion, Chevron applies. However, if the statute in question is unambiguous, then, as under the regular Chevron doctrine, no deference is given to the agency.
The Court then went on to hold that the definitions of the terms " information services," " telecommunications service" and " offering," contained in the Telecommunications Act are sufficiently ambiguous to allow for FCC construction and upheld the FCC's interpretation as a permissible reading and a reasonable policy choice. The Court saw this as only the " first step in an effort to reshape the way the Commission regulates information-service providers," and admitted that " [t]he questions the Commission resolved in the order under review involve a subject matter [that] is technical, complex, and dynamic. The Commission is in a far better position to address these questions than we are."
The argument about classification is really one about the authority granted to the FCC by the Telecommunications Act to regulate these services, and the structure in which it must do so. The FCC has the authority to promulgate regulations to effectuate the goals and provisions of the Act in the absence of explicit authority, as long as they are reasonably ancillary to existing FCC authority and are " necessary to ensure the achievement of the Commission's statutory responsibilities." The FCC extended its authority to regulate information services as early as 1980, but has rarely used it.
Both the Department of Justice and the Federal Trade Commission have concurrent jurisdiction in requiring open access, but only in the context of individual mergers out of antitrust concerns. The FTC notably required some open access in the AOL Time Warner merger. But only the FCC has the ability to promulgate regulations that impact broadly on the Internet services industry.
Classifying broadband Internet service as a " telecommunications service" would seemingly subject it to the same common carrier requirements that telephone companies are subjected to, such as not being able to refuse service or negotiate contracts without government permission. However, even when a service is classified as a " telecommunications service" under the Act, the FCC still has the authority to remove that service from regulation. This is exactly what the FCC decided to do with broadband Internet services in order to form a uniform national policy.
In the end, what classifying broadband Internet services as " information services" does is give the FCC a clean slate from which to regulate or forbear from regulation. The FCC could theoretically accomplish the same goals no matter the classificationregardless of the classification and local regulatory agencies would still have no authority to regulate in this area under the Act.
Despite the FCC's continued showing of a reluctance to regulate information services and its declaratory classifications under the Act, some members of Congress are still afraid of the threat of regulation. This might be a reaction to the FCC's continued inquiries into open access, despite its tentative ruling against it.
The Tauzin-Dingell Bill, the Internet Freedom and Broadband Deployment Act of 2001, would, among other things, have prohibited the FCC from regulating access to network elements to the extent that they are used to provide broadband services, further encouraging investment in " advanced telecommunications" as defined under the Act.
While Congress has in the past (and Tauzin-Dingell continued in this tradition) treated ILECs differently than cable companies despite their common history of government-granted monopoly, the FCC has shown that it wants to promote a single regulatory structure for all Internet services. To this end, the FCC has classified all broadband Internet services as " information services" and, even when it has not been allowed to do that by the courts, it has removed them from common carrier regulation. The only question the FCC still faces is whether any open access requirements will be necessary to ensure competition, and in this area again, the FCC treats all broadband Internet services alike in tentatively deciding no.
In an inquiry and request for comment, the FCC has brought up most of the issues that would speak against regulating open access. As discussed earlier, requiring open access under a negotiated market approach would avoid many of these problems, and if real problems with competition and the deployment of broadband Internet do occur, this would be the best approach to take.
If open access is required, there would be little incentive for broadband investment, as the cable operator would be unable to profit from its expenditures for improved Internet service and would merely be recouping its expenses. The system would tend to be either too complicated or simply unfair – lumping together companies with little market power and much competition with those that have much market power and little competition.
The technical aspects are also dauntingly complicated. Open access would require a different definition for each technology (cable, DSL, satellite, wireless) and the FCC would have to determine where interconnection must take place. A superior location for interconnection from the perspective of the network operator may be completely different from that of the ISP. Another tricky technical matter is how many ISPs would be allowed on one network. Truly open access would be an unlimited number, burdening the network provider. As the FCC put it, " We are struck by the complexity of the proposals for multiple ISP access advocated by some commenters."
One of the main fears open access proponents continue to cite is that when a network operator affiliates with an ISP, it can block access to competitor ISPs or slow down such access. But as the FCC noted:
We are unaware of any allegation that a cable operator has denied " click through" access to other ISPs[.] [sic] Moreover, although it is technically feasible for a cable operator to deny access to unaffiliated content, or to relegate unaffiliated content to the " slow lane" of its residential highspeed Internet access service, we are unaware of a single allegation that a cable operator has done so.
Finally, the FCC fears that regulation would lead to business making decisions based on regulatory classifications rather than being responsive to customers' preferences and innovative and sustainable business plans. The FCC called this " regulatory arbitrage," hindering a market still in its infancy.
To decide that regulation is warranted would be foolish given the fast-changing environment of the Internet, both from a technological and corporate standpoint. The FCC has shown admirable humility in limiting its own power and it appears that these trends will continue.
