Title II Reclassification Is Rate Regulation

by

Daniel A. Lyons *

Like "Voldemort" to wizards, "rate regulation" is the name reclassification enthusiasts dare not speak when describing Title II. It conjures up images of government bureaucrats interfering in the market to decide which services providers can offer to customers and at what price-a politically unpopular image at odds with a dynamic Internet ecosystem. For this reason, since his eleventh-hour conversion under White House pressure, FCC Chairman Tom Wheeler has repeatedly insisted that "there will be no rate regulation" under his Title II reclassification plan.

But these fervent protests cannot change the fact that Title II reclassification is rate regulation-a fact that FSF President Randolph May has made repeatedly throughout the net neutrality debate. This truth is self-evident even from the handful of details that Chairman Wheeler has released before the Commission's fateful vote. More fundamentally, Title II, at its heart, is a rate regulation regime: Section 201(b) requires common carriers to charge only just and reasonable rates. And Section 202(a) makes it unlawful to make any unjust or unreasonable discrimination in charges. The Commission may avoid the most onerous forms of rate regulation such as tariffing and unbundling. But as the arbiter of Section 201 and 202 violations, the Commission will be forced into accepting the mantle of America's de facto regulator of broadband rates-and its recent ham-handed decisions about broadband competitiveness will dramatically limit its flexibility in this role.

As an initial matter, the Commission's own Open Internet fact sheet belies the claim that it will not regulate rates for broadband service. One of the three primary pillars of the proposed order is a prohibition on "paid prioritization," meaning that "broadband providers may not favor some lawful Internet traffic over other lawful traffic in exchange for consideration." While this prohibition is an essential tenet of most net neutrality proposals, its effect is to set a specific rate-namely $0-for priority delivery over last-mile broadband networks. The fact sheet also claims authority to review and, if necessary, enjoin terms of interconnection agreements between broadband providers and other parts of the Internet ecosystem, which would presumably include review of rates that ISPs charge for paid peering or transit service.

Chairman Wheeler may respond that he meant the Commission would not regulate retail broadband rates, the price that consumers pay for broadband service. This is a somewhat artificial distinction, as Title II has long governed interconnection rates between networks as well as retail rates to consumers. But even under this narrow consumer-focused definition of rates, reclassification will necessarily lead to rate regulation by the Commission, because Title II is fundamentally a rate regulation regime.

The heart of Title II common carriage is Sections 201 and 202. Section 201(b) mandates that "[a]ll charges, practices, classifications, and regulations for and in connection with [] communication service, shall be just and reasonable; and that any such charge, practice, classification, or regulation that is unjust or unreasonable is declared to be unlawful." Similarly, Section 202(a) makes it "unlawful for any common carrier to make any unjust or unreasonable discrimination in charges, practices, classifications, regulations, facilities, or services for or in connection with like service" or to "make or give any undue or unreasonable preference to any particular person, class of persons, or locality." Section 208 allows any aggrieved party to file a complaint alleging that a carrier violated a duty under the Act, including Sections 201 and 202. If the carrier fails to redress the complaint promptly, Section 208 declares that "it shall be the duty of the Commission to investigate the matters complained of." The statutory language simply does not allow the Commission to be a disinterested observer of communications rates as Chairman Wheeler suggests. Rather, it not only invites but demands that the Commission intervene in the market, at least upon request, to pass judgment regarding whether individual carrier rates are just and reasonable.

Admittedly, the Commission has proposed forbearing from the most aggressive forms of rate regulation that would otherwise be at its disposal, such as tariffing and mandatory unbundling of network elements. While these are welcome announcements, they should surprise no one. The Commission has aggressively opposed tariffing of most telecommunications services for several decades. And a multiyear litigation battle over pricing of unbundled network elements ultimately ended in regime widely considered a failure that no one should be eager to repeat.

But courts and the Commission have repeatedly emphasized that forbearing from tariffing does not mean the Commission has foresworn oversight of carrier rates. The D.C. Circuit Court of Appeals discussed the distinction in Orloff v. Federal Communications Commission, a case alleging that a Verizon Wireless rate constituted unreasonable discrimination. The court noted that historically, the Commission assessed whether a rate was just or reasonable "largely ... by reference to the carrier's tariff." Through forbearance, Congress and the Commission "dissolved what the Supreme Court described as the 'indissoluble unity' between § 203's tariff-filing requirement and the prohibition against rate discrimination in § 202." But even in an untariffed environment, carriers "still have duties," including compliance with Sections 201 and 202, meaning its rates were still subject to Commission review in the event of a complaint. The Commission "emphasize[d]" that it "is not forbearing from applying section 202(a)" and that even in a light-touch regulatory regime "section 202 continues to act as a powerful protection for...consumers." It vowed to that the Commission "will not hesitate to find that unreasonable discrimination violates section 202."

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* Daniel A. Lyons, a member of the Free State Foundation's Board of Academic Advisors, is an Associate Professor of Law at Boston College Law School.

The Free State Foundation is an independent, nonpartisan free market-oriented think tank located in Rockville, Maryland.

Read the complete Perspectives, with footnotes, here.