Third Way Theory Meets Forbearance Reality

The clock will soon run out on the FCC's deadline for ruling on Qwest's forbearance petition regarding the Phoenix Metropolitan Statistical Area (MSA). There are recent hints that the FCC will deny the petition and set up a new kind of "market power" standard for applying the Section 10 forbearance provision. In other words, the FCC reportedly will issue an order establishing a new standard making it more difficult for petitioners to satisfy the statutory forbearance test, and in that same order deny the petition under consideration on that basis.

This new standard that is said to be forthcoming in the Qwest Phoenix MSA forbearance proceeding would, of course, impact pending and future forbearance proceedings. But any new "market power" standard governing grants of forbearance raises an interesting set of questions about its possible impact on Chairman Genachowski's so-called "Third Way" Internet regulation proposal. How will such a standard fit in with the FCC's "third way" plans to adopt net neutrality regulation that relies so heavily on regulatory forbearance? Could adding new requirements to the forbearance process complicate the agency's plans to successfully adopt new rules? Might a more stringent standard set by the FCC for granting forbearance give added ammunition to a future legal challenge if the FCC does decide to adopt the "Third Way" reclassification proposal which is tied so intimately to the exercise of the Commission's forbearance authority?

Recall that the FCC's "third way" plan for imposing net neutrality regulation on the Internet is premised on an agency declaration to change broadband Internet from a lightly regulated Title I "information service" to a heavily regulated common carrier Title II "telecommunications service." According to the FCC's "third way" theory, this reclassification will give the Commission the jurisdictional prerequisite to adopt network neutrality rules that the D.C. Circuit recently ruled the Commission lacked under the Title I ancillary jurisdiction theory and facts set out in the Comcast/BitTorrent Order.

But the FCC's "third way" simultaneously seeks to stave off some of the consequences that would come from burdening broadband Internet service with the full panoply of last-century monopoly-era regulations for telephone networks under Title II. The plan calls for the FCC to grant regulatory forbearance to reclassified broadband Internet from all but six statutory sections governing Title II telecommunications services (albeit these retained sections contain the heart of traditional common carrier regulation). More specific details will be revealed if the FCC decides to issue its anticipated Title II reclassification Notice of Inquiry at its upcoming June public meeting.

So given that the FCC's "third way" relies so heavily on a single act of "superforbearance" by agency declaration, what does a new "market power” standard governing forbearance mean for the "third way"? If reports are accurate that the FCC's new standard will rely on HHI market concentration criteria set out in the DOJ-FTC horizontal merger guidelines, wouldn't "third way" forbearance first require an HHI-like analysis of the nation's broadband market?

Perhaps the Commission might attempt to apply its new "market standard" for forbearance only to voice telecommunications services but not to reclassified broadband Internet telecommunications services. This approach would seem to require the FCC to give some kind of reasoned explanation for the disparate treatment of Title II services. At least, such an approach would require explanation if the FCC hopes to survive a prospective legal challenge to "third way" reclassification and forbearance for broadband Internet. But subjecting voice telecommunications services and broadband Internet telecommunications services to different standards would make reclassification of broadband look stranger and stranger still. After all, the need for disparate treatment of voice and broadband was precisely the point behind the FCC's classification of broadband as a Title I information service that should be free from outdated and burdensome regulation.

Then again, the FCC could insist on subjecting only forbearance petitions submitted by private parties to its new "market power" standard and thereby leave undisturbed agency sua sponte grants of forbearance. But nothing in the statute suggests that disparate treatment of agency grants of forbearance arising from petitions or sua sponte action could be justified. The FCC would have a difficult time justifying such a twisted approach in the courts on administrative procedural grounds.

Regulatory and legal complications of this kind are inevitable if the FCC insists on going forward with a "third way" plan for force-fitting antiquated monopoly-era regulations on a dynamic modern service like broadband Internet. In light of the crucial importance of implementing (some modest) regulatory forbearance to the FCC's plans for adopting net neutrality regulation through its "third way," one wonders whether the Commission's continued placement of obstacles in the path of forbearance could come back to haunt it. Or, more to the point, might such obstacles cause the FCC to rethink its current plans for Internet regulation without further direction from Congress?