Friday, June 19, 2009

The Federal Internet Rate Regulation Commission

Rep. Eric Massa (D-NY) has introduced his so-called "Broadband Internet Fairness Act," or H.R. 2902. It is surely one of the more misguided pieces of legislation I've seen from this Congress. In the interest of truth-in-disclosure, it more appropriately should be named the "Broadband Internet Rate Regulation Act."

In essence, what the bill does, pure and simple, is require that the Federal Trade Commission conduct a full-blown rate case before broadband Internet providers are allowed to offer any "volume usage service plans." Peruse Sections 3 and 4 of the bill and you'll see that before a provider may offer any such capacity-based billing plan, it must submit cost data akin to that required in the days when Ma Bell's rates were established in months-long rate proceedings. When all the cost data is submitted, the FTC determines whether the rates proposed in the volume usage plan are "unjust, unreasonable, or discriminatory" -- the traditional public utility regulatory standard. The FTC would be empowered to enjoin the plan and issue civil penalties to enforce the prohibition against "unreasonable" plans.

All of this in reaction to Time Warner's very modest proposal in April to trial volume usage billing plans in four cities. As I explained in these two pieces at the time -- the "Free Lunch Free Press" and the "Common Carrier Free Press" -- in light of foreseeable Internet capacity constraints imposed by rapidly increasing peer-to-peer file-sharing applications, these pricing experiments should have been welcomed, not used as a basis for grandstanding. When network traffic reaches certain capacity levels, the only alternative is to build more capacity or reduce the level of traffic or service quality. If more capacity is built and operated, someone has to pay the costs, although Free Press refuses to acknowledge this. Hence the "Free Lunch" Free Press moniker.

The fact is that with 5% of Internet users generating almost half of all Internet traffic, tiered pricing plans based on the amount of usage might be the fairest pricing regime in that the larger number of low volume users would not be required to subsidize the infrastructure expansion costs caused by the smaller number of high volume users. This is not to say that consumers necessarily will accept such plans, or that they are the only way of addressing capacity constraints. But assessing consumer reactions in the real-world marketplace is what Time Warner's trials presumably were intended to do.

But here is the key. Free Press and Rep. Massa simply don't recognize, or won't acknowledge, that we no longer live in a marketplace environment that in any way resembles the monopolistic environment that prevailed when Ma Bell was subject to the very same type of cost-of-service rate case that Rep. Massa wants to impose on today's Internet providers. The broadband marketplace may not be the classical wheat market, but it is effectively competitive. And it is becoming more so every day. This marketplace competitiveness will protect consumers from any abuses far better than turning the FTC into the Federal Internet Rate Regulation Commission.

Indeed, it is more than a little ironic that Rep. Massa wants to put the FTC into the Internet rate regulation business. For it was the FTC staff that issued a comprehensive 160 page report on broadband policy in June 2007, with a particular focus on whether there was any justification for "net neutrality" regulation akin to that advocated by Rep. Massa and Free Press. That report, issued after public hearings and voluminous testimony, concluded it would be a mistake for the government to promulgate and enforce net neutrality-type regulations.

One wonders whether Rep. Massa has read the FTC report. If not, I commend the entire report to him. Below are a few of its conclusions. (Keep in mind the report was issued in June 2007. The broadband market certainly is even more competitive now than it was then, especially in light of the emergence of wireless as an increasingly robust broadband competitor and the rapid deployment of fiber and hybrid fiber networks.)

  • Page 100: "This market has quickly evolved from one in which consumers could get broadband only if they had access to cable systems offering it, to one in which many, if not most, consumers can get broadband from either a cable or telephone provider. In 2000, over 80 percent of broadband service was provided by cable modem. By the middle of 2006, broadband service by cable had fallen to 55.2 percent, while DSL's residential share had increased to 40.3 percent."

  • Page 101: "Broadband deployment and penetration have both increased dramatically since 2000. From June 2000 to June 2006, the number of high-speed Internet lines increased from 4.1 million to 64.6 million, with 52 percent growth from June 2005 to June 2006 alone. Penetration kept pace with deployment, as by 2006, broadband Internet access accounted for over 70 percent of all U.S. Internet access.

  • Page 155-156: "Specifically, there is evidence at least on a national scale that: (1) consumer demand for broadband is growing quickly; (2) access speeds are increasing; (3) prices (particularly speed-adjusted or quality-adjusted prices) are falling; and (4) new entrants, deploying Wi-Fi, Wi MAX, and other broadband technologies, are poised to challenge the incumbent cable and telephone companies…Such evidence challenges the claims by many proponents of network neutrality regulation that the broadband Internet access market is a cable-telephone duopoly that will exist for the foreseeable future and that the two primary broadband platforms do not compete meaningfully."

  • Page 157: "Policy makers should be wary of calls for network neutrality regulation simply because we do not know what the net effects of potential conduct by broadband providers will be on consumers, including, among other things, the prices that consumers may pay for Internet access, the quality of Internet access and other services that will be offered, and the choices of content and applications that may be available to consumers in the marketplace."

  • Page 157: "To date, the primary policy proposals in the area of broadband Internet access include imposing some form of network neutrality regulation. In evaluating such proposals, we recommend proceeding very cautiously."

  • Page 159: "Further reason for policy makers to proceed with caution in the area of broadband Internet access is the existence of several open questions that likely will be answered by either the operation of the current marketplace or the evolution of complicated technologies."

  • Page 160: "Two aspects of the broadband Internet access industry heighten the concerns raised by regulation generally. First, the broadband industry is a relatively young and evolving one. As discussed above, there are indications that it is moving in the direction of more – not less – competition. In particular, there is evidence that new entrants employing wireless and other technologies are beginning to challenge the incumbent wireline providers (i.e., the cable and telephone companies). Second, to date we are unaware of any significant market failure or demonstrated consumer harm from conduct by broadband providers. Policy makers should be wary of enacting regulation solely to prevent prospective harm to consumer welfare, particularly given the indeterminate effects on such welfare of potential conduct by broadband providers and the law enforcement structures that already exist."