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FCC likely to impose public utility regulation on the internet

After months of debate, the US Federal Communications Commission (FCC) appears likely to reclassify broadband as a "telecommunications service" subject to traditional public utility regulation. The FCC's likely action is in response to demands from Network Neutrality advocates that the agency prohibit Internet Service Providers (ISPs) from entering into "paid prioritization" agreements with "edge providers," such as Netflix and Google. Such agreements allow edge providers to purchase access to a "fast lane" between the ISP and its end-user customers. Rather than bringing the long-standing Net Neutrality debate to a conclusion, broadband reclassification is likely to create significant new uncertainty, while not eliminating the ability of well-funded edge providers to pay for faster access to end-users.

Reclassification of broadband as a telecommunications service would be a major reversal of the FCC's long-standing position. Under the US Communications Act, communications services are classified as either "telecommunications" or "information" services. Telecommunications services enable the delivery of user-provided information between points specified by the end-user "without change in the form or content of the information." By contrast, information services provide users with the "capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information." Telecommunications services are subject to traditional public utility regulations – referred to in the US as "Title II" or "common carrier" regulation – including the requirement that services be provided at prices, terms and conditions that are not unreasonably discriminatory. Information services, by contrast, are subject to "light touch" regulation. Indeed, the Communications Act expressly prohibits the FCC from imposing common carrier regulation on information services. Since 1998, the FCC has repeatedly taken the position that an entity that provides broadband Internet access is providing a single, integrated information service.

Proposals to reclassify broadband as a telecommunications service are intended to address last year's decision by the US Court of Appeals for the District of Columbia Circuit that struck down much of the FCC's previous "Open Internet" rules. Those rules included a prohibition against fixed broadband Internet providers (such as cable and DSL-based providers) unreasonably discriminating in transmitting lawful network traffic. This rule was intended to prohibit paid prioritization. In adopting the Open Internet rules, the FCC had relied on Section 706 of the Telecommunications Act of 1996, which provides that "the Commission . . . shall encourage the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans . . . by utilizing . . . regulating methods that remove barriers to infrastructure investment."

The Court of Appeals ruled that Section 706 provides the FCC with legal authority to regulate the commercial relationship between broadband ISPs and edge providers in order to remove barriers to investment in broadband network infrastructure. However, the court found that the FCC's "no unreasonable discrimination" rule contravened the statutory prohibition against imposing common carrier obligations on providers of information services. As the court observed, the rule did exactly what common carrier regulation does; it prohibited broadband ISPs from unreasonably discriminating against edge providers. Indeed, the rule went further. It required broadband ISPs to terminate all edge provider traffic on identical terms, that is to say, at the same speed and at no charge.

In response to the court's decision, the FCC proposed to adopt new rules, again pursuant to Section 706. In order to avoid running afoul of the prohibition on imposing common carrier regulation on information service providers, the agency proposed to replace the no unreasonable discrimination rule with a prohibition against ISPs engaging in "commercially unreasonable practices." Unlike the prior non-discrimination rule, the commercial reasonableness standard would have provided significant – but not unlimited – opportunities for broadband providers and edge providers to enter into paid prioritization agreements. For example, while the rule would have barred exclusive paid prioritization agreements between an ISP and an affiliated edge provider, it would have allowed most arm's-length, non-exclusive paid prioritization deals.

The FCC's proposal met with strong opposition from Net Neutrality advocates, including President Obama, who took the unusual step of publicly calling on the FCC to adopt the "strongest possible" rules to ban paid prioritization. In particular, the President and others called on the FCC to reclassify broadband as a telecommunications service, thereby allowing the agency to impose common carrier regulation, including a prohibition against unreasonable discrimination. The FCC appears likely to do just that.

Reclassifying broadband as a telecommunications service would raise significant legal questions. Since 1998, the FCC has classified the provision of broadband Internet access as a single, integrated information service. Thus, the FCC would have to identify a stand-alone "telecommunications component" provided to end-users that could be subject to common carrier regulation. This would require the agency to reverse its prior finding that broadband providers offer a single, integrated information service to end-users. Alternatively, the FCC could seek to impose common carrier regulation on the "termination" service that broadband providers offer to edge providers (that is to say, the delivery of information provided by the edge provider to specific end users). That service, arguably, meets the definition of a telecommunications service because it enables the delivery of information provided by the edge provider to an end-user specified by the edge-provider "without change in the form or content of the information."

Reclassification also would require difficult policy choices. The Communications Act imposes a large number of obligations on common carriers. For example, telecommunications providers are required to make payments to the Universal Service Fund. These charges currently equal about 18 percent of the provider's "end-user telecommunications revenues." Reclassification could thus result in a significant increase in the cost of Internet access service. The Communications Act does contain a provision that enables the FCC to "forebear" from imposing common carrier requirements on telecommunications providers. Before doing so, however, the FCC would have to make a number of highly fact-specific determinations.

Reclassification could complicate US policy positions internationally. In bilateral trade negotiations and multilateral organizations such as the International Telecommunication Union, the US has long opposed the application of traditional telecommunications regulation to the Internet. FCC reclassification of broadband Internet access as a telecommunications service could undercut the US negotiating position.

Ironically, reclassification might not achieve the result that Net Neutrality advocates seek: enabling the FCC to prohibit paid prioritization. Telecommunications common carriers have long provided multiple grades of service at varying prices that reflect the throughput being offered. Reclassification of broadband Internet access as a common carrier service would enable the FCC to require operators to permit any edge provider to purchase any level of access on reasonable and non-discriminatory prices, terms, and conditions. However, it probably would not provide a basis for prohibiting broadband providers from offering non-discriminatory access to an Internet "fast lane" to any edge provider willing and able to pay for it.

Even if the FCC were legally capable of banning paid prioritization, it would still not be able to satisfy Net Neutrality advocates' demand that "all Internet traffic be treated equally." ISPs have already begun to negotiate "direct interconnection" agreements with edge providers – such as the agreement between Comcast and Netflix – that enable edge providers to get their content to end-users more quickly by eliminating the need to transport traffic over third-party Internet backbone facilities. Similarly, Content Delivery Networks are allowing edge providers to host content in servers located closer to end-users, thereby resulting in faster delivery. An FCC ban on paid prioritization would have no effect on these content delivery arrangements.

Whatever the FCC does regarding Network Neutrality, one thing is certain. Any decision will be challenged in the Court of Appeals, resulting in continuing uncertainty for ISPs, edge providers, and end-users.