FCC Releases Text of New Title II Order

On May 7, the FCC released the text of its Safeguarding and Securing the Open Internet Order – that is, the agency's new Title II Order. By a 3-2 vote on April 25, the Commission reclassified broadband Internet access services as "telecommunications services" under Title II of the Communications Act. It established a public utility regulatory regime for broadband. Under that regime, broadband Internet service providers are subject to bright-line restrictions on network management and a vague "catch-all" standard. Broadband providers will be subject to informal and formal complaint proceedings for alleged violations of the Commission's rules and "catch-all" standard.

The Free State Foundation filed comments and reply comments in the FCC's Safeguarding and Securing the Open Internet proceeding that opposed public utility regulation of broadband services. In the weeks and days leading up to the Commission's April 25 vote, Perspectives from FSF Scholars papers were published on the agency's empty national security and public safety rationales for Title II regulation, the legal problems with Title II reclassification under the Supreme Court's Major Questions Doctrine, and the harm to innovative 5G "network slicing" under Title II. Additionally, an April 25 Press Release by FSF President Randolph May and I provided a brief initial response to the Commission's vote to adopt its new Title II Order. 

My Federalist Society Blog post from May 3 analyzing the Second Circuit's decision in New York State Telecommunications Association, Inc. v. James, pointed to questions still needing to be directly sorted out regarding preemption and specific state-level rate regulation of interstate broadband Internet services. Now that the text of the new Title II Order has been publicly released, expect forthcoming analyses from FSF scholars about rate regulation as well as other law and policy issues and implications of the Order. 

Cable MVNOs Subscribership Continues to Climb in 2023

Cable wireless mobile virtual network operators (MVNOs) are effective intermodal competitors in today's communications marketplace. An article published in Fierce Wireless on October 27 of this year summarizes third quarter growth in cable MVNO services by the two largest services, Comcast's Xfinity Mobile and Charter's Spectrum Mobile:

Comcast yesterday reported the company added 294,000 wireless lines in Q3 2023. Comcast now has 6.2 million wireless lines in total. In contrast, Charter today reported it added 594,000 wireless lines in Q3, bringing its total wireless lines to 7.2 million.

My August 1 blog post observed that in the second quarter of 2023, Xfinity Mobile gained 316,000 lines and Spectrum Mobile gained 648,000 lines. 

 

Significant growth potential remains for both cable MVNO services within their respective geographic footprints. And as noted in the Fierce Wireless article, the cost-efficiency and competitiveness of those services is likely to improve in the near future as a result of buildouts of their own wireless infrastructure using small cells and licensed CBRS spectrum. Deployment of such networks as well as increased offloading of mobile traffic onto cable MVNO wi-fi networks, will make hybrid cable MVNOs less and less "virtual" and make their services less costly to provide by reducing their reliance on leasing wholesale access to mobile cellular networks. 

 

Importantly, the mobile broadband choices offered by cable MVNO services did not exist when the FCC imposed public utility regulation on mobile broadband Internet access services in the 2015 Title II Order. That order proffered "switching costs" for mobile broadband consumers and supposed incentives and ability by mobile providers to unreasonably discriminate against their own subscribers as supposed justifications for imposing public utility regulation. Commentsfiled with the FCC by the Free State Foundation in July 2017 explained that those rationales were not persuasive. In late 2023, competition from cable MVNOs further undermines those rationales for imposing public utility regulation. Any wireless provider that blocks or throttles their own subscribers' access to legal content via the Internet or otherwise unreasonably discriminates against their own subscribers risks massive loss of subscribership. Instead of foisting new regulatory restrictions on mobile broadband providers to address non-existent harms, the Commission should maintain the pro-market, pro-investment, and pro-innovation federal light-touch policy set forth in the 2018 Restoring Internet Freedom Order. 

A Reader on Net Neutrality and Restoring Internet Freedom: A Relevant Book for 2023

On September 28, the FCC released a draft proposed notice of rulemaking that would reclassify broadband Internet services as a "telecommunications service" under Title II of the Communications Act and reimpose every or near every aspect of the repealed 2015 Title II Order. At its upcoming October 19 public meeting, the full Commission will vote on whether to approve the draft and issue the proposed rulemaking for public comment. Free State Foundation President Randolph May offered his initial reaction to the anticipated release of the draft in a September 26 press release.  

In 2017, the Free State Foundation filed initial comments and reply comments in the Restoring Internet Freedom proceeding that led to the Commission's repeal of the Title II Order and return to broadband Internet access services as an "information service" under Title I of the Communications Act. (Additionally, FSF filed comments in April 2020 in the Restoring Internet Freedom Order remand proceeding.)

 

The draft proposed rulemaking in the new Safeguarding and Securing the Open Internet proceeding amounts to an effectively wholesale return to the Title II Order, premised largely upon the same premises upon which the Title II Order was adopted. The draft presents the same issues of serious concerns regarding rate regulation, vague general conduct standard, harm to innovation in paid prioritization agreements that could benefit consumers, and more that several Free State Foundation scholars addressed in the FSF Press's 2018 book A Reader on Net Neutrality and Restoring Internet Freedom, edited and with an introduction by FSF President Randolph May and I. The chapters in that book – which defend the market-oriented light-touch regulatory approach to broadband under the RIF Order and identify problems with public utility regulation of broadband Internet services under the Title II Order – remain extremely relevant in 2023. 

Copies of A Reader on Net Neutrality and Restoring Internet Freedom are still available for purchase at outlets such as Amazon and Barnes & Noble. The book is recommended reading for anyone who wants a refresher on the policy debate over net neutrality regulation or who are new to the debate and want to be brought up to speed.

Expect FSF scholars to say more in the days ahead about the Safeguarding and Securing the Open Internet proceeding and FCC Chairwoman Jessica Rosenworcel's draft proposal to reimpose public utility regulation on broadband services. 

Five Years After the FCC's Ill-Fated Title II Order, Broadband is Thriving

Five years ago today, the Wheeler/Obama FCC adopted its Title II Order, subjecting broadband Internet access services to public utility-like regulation. The Commission's imposition of Title II regulation was a heavy-handed reversal of the prior bipartisan consensus policy favoring a light-touch regulation of broadband Internet services. When the 2015 Title II Order was adopted, pro-regulatory Commissioners and advocates claimed that stringent new rules were absolutely necessary to save free speech on the Internet. And Title II regulation was touted as the only way to prevent the rise of broadband service "fast-lanes" that would divide the Internet between haves and have-nots. 

Thankfully, under Chairman Ajit Pai's leadership, the FCC changed course and repealed Title II regulation in the 2018 Restoring Internet Freedom Order. The RIFO concluded that Title II regulation actually harmed broadband investment and innovation, slowing deployment to all Americans. Now, five years after the Title II Order's adoption, none of the horror stories about broadband service provider speech suppression or fast lanes and slow lanes have materialized. 

Broadband subscribers are better off than they were five years ago, without Title II regulation. Since the repeal of the Title II Order, broadband investment has improved, wireless and wireline subscribers have risen, speeds have increased, data traffic has dramatically grown, and deployments of next-generation networks such as 5G wireless and gigabit wireline are underway. For more on this, see my September 2019 Perspectives from FSF Scholars paper, "Resurgence in Broadband Deployment Vindicates FCC's Pro-Investment Policies." And for a more recent look at the state of the broadband Internet services in this restored light-touch regulatory environment, see my Perspectives paper, "The Communications Market at 2020: The Competitiveness of Video, Mobile, and Fixed Broadband."

Professor Daniel Lyons Reflects on Antitrust Enforcement and Net Neutrality

Law Professor Daniel Lyons, a member of the Free State Foundation's Board of Academic Advisors, was a panel speaker featured at FSF's Eleventh Annual Conference. In "An antitrust-informed approach to net neutrality," a blog post published on April 1 at AEIdeas, Professor Lyons reviews the Conference's closing keynote address by FTC Chairman Joseph Simons. Professor Lyons makes the case for FTC enforcement over broadband Internet service provider practices is preferable to FCC enforcement according to the repealed Title II rules. 

Only House Republican On Net Neutrality CRA Petition Does Not Get Reelected

On Tuesday’s election night, Republican Representative Mike Coffman lost his bid for reelection in Colorado’s 6^th Congressional district by about 25,000 votes to Democrat challenger Jason Crow. Notably, Congressman Coffman was the only Republican member of the House to sign the Congressional Review Act (CRA) resolution discharge petition intended to negate the FCC’s Restoring Internet Freedom Order which repealed the Obama FCC’s Title II public utility-style regulations imposed on broadband Internet service providers. But Coffman’s pro-net neutrality efforts apparently did not help him get reelected.

When Coffman signed the CRA discharge petition in July 2018, he made multiple statements regarding his disappointment with the FCC’s Restoring Internet Freedom Order.

Interestingly, by signing the CRA discharge petition, Coffman indicated that he agreed with those who want to restore the Obama FCC's order imposing public utility-type regulation on Internet service providers.

In a just a few months, Mike Coffman will no longer be a member of Congress. Some have called his efforts to cross party lines to become the lone Republican to sign the CRA discharge petition a “bold” move. I'm sure there were other factors that played a role in Rep. Coffman's defeat, but taking a position in favor of repealing the Restoring Internet Freedom Order certainly didn't help him.

Aggregate Broadband Investment Increased from 2016 to 2017

This week, USTelecom released a new research brief titled "U.S. Broadband Investment Rebounded in 2017." In the report, Vice President of Industry Analysis Patrick Brogan provides evidence that broadband investment totaled $76.3 billion in 2017, an increase of $1.5 billion (or 2%) from 2016 to 2017.

This is significant news because it is the first time that annual aggregate broadband investment grew in three years. As FSF scholars have noted in past blogs and FCC filings, aggregate broadband investment declined each year from 2014 to 2016. (See here, here, and here.) This likely was due to the stringent regulations imposed in the FCC's February 2015 Title II Order, which raised costs for providers and crowded out network investment. Since the FCC repealed the Title II public utility-style regulations in its December 2017 Restoring Internet Freedom Order (RIF Order), the broadband industry has rebounded and aggregate capital investment is growing again.

In a May 2018 blog, I used data collected from broadband providers' 10-K forms to create a sample which found that broadband investment had increased significantly from 2016 to 2017. Although my sample's estimate of the industry's percentage increase was off by quite a bit, my prediction that broadband investment would grow for the first time in three years was correct:

[W]hile my estimate of a 14% increase in capital investment should be considered a fairly rough estimate of industry-wide broadband investment, I am very confident that from 2016 to 2017 broadband providers significantly increased capital investment. In fact, any increase in broadband capital investment from 2016 to 2017 is worth noting because investment declined in both 2015 and 2016.

When regulatory costs increase, as they did with the imposition of the Open Internet Order, broadband providers will invest less than they otherwise would have absent such regulatory costs because the additional costs reduce the return on investment. Although the RIF Order does not take full effect until June 2018, the mere prospect of the FCC returning to a light-touch regulatory regime, along with strong competition among many broadband providers and technologies, appears to have played an important role in encouraging additional capital investment throughout 2017.

Most importantly, this news is a win for consumers because an increase in broadband investment suggests that providers are competing to deploy new networks, upgrade old networks, and/or develop innovative services, all of which benefit consumers.

California Governor Jerry Brown Should Veto Net Neutrality Bill

California Governor Jerry Brown has until September 30^th to sign or veto SB 822, the “California Internet Consumer Protection and Net Neutrality Act,” which would impose even more burdensome net neutrality regulations on broadband ISPs than the FCC’s 2015 Title II Order. If he does not sign or veto SB 822 by September 30^th, the legislation becomes law.

As Randolph May and I stated in a recent Perspectives from FSF Scholars titled “California Net Neutrality Bill Would Stifle Network Investment,” SB 822 would prohibit or heavily restrict consumer-friendly innovations, like paid prioritization and zero-rated services. SB 822 also would contribute to the creation of a "patchwork" of differing state net neutrality regulations, hindering the delivery of interstate communications services for broadband providers and discouraging network investment throughout California.

In summary, Governor Brown should veto SB 822.

A Reader on Net Neutrality and Restoring Internet Freedom

The Free State Foundation is proud to announce our newest book: A Reader on Net Neutrality and Restoring Internet Freedom.

In the context of offering a convincing defense of the adoption of the FCC’s December 2017 Restoring Internet Freedom Order, this volume provides a wealth of information and key insights into the long-running debate surrounding “net neutrality” regulation. The selected writings in this Reader, most of which were previously published as Perspectives from FSF Scholars or FSF blogs, explore both legal and policy rationales that support the FCC’s action.

This book is a collection of papers put together by FSF President Randolph May and Senior Fellow Seth Cooper. The book explains why, in our view, the FCC’s pro-consumer, pro-investment, and pro-innovation approach to regulation of Internet service providers adopted in the Restoring Internet Freedom Order should be preserved. In addition to the contributions from the Free State Foundation's in-house scholars, there are contributions in the book from the following members of FSF's Board of Academic Advisors: Tim Brennan, Robert Crandall, Justin (Gus) Hurwitz, Daniel Lyons, James Prieger, Dennis Weisman, and Joshua Wright. And there is an easily digestible Introduction that puts the net neutrality debate in a proper historical context, provides the necessary background for understanding all sides of the controversy, and points to the way forward towards resolution.

A Reader on Net Neutrality and Restoring Internet Freedom is available from Amazon here in paperback for $9.95 or for your Kindle here for $2.99. And it is available here from Apple and other booksellers in various e-book formats for $2.99 or less.

Attempt to Turn Usage-Based Pricing into Net Neutrality Issue Is Non-Starter

Santa Clara County and its fire district are upset with slow speeds the fire district experienced after exceeding the monthly data allowance for a service plan with Verizon. The county is trying to make hay over the matter by wrongly trying to tie it to "net neutrality." 

In truth, the matter between the fire district and Verizon has to do with usage-based plans that benefit cost-conscious customers who only want to pay for the data they use. Even the now-repealed 2015 net neutrality rules adopted by the Obama Administration FCC permitted these types of plans.

Charging consumers based on the volume of a service they use is a common practice across businesses and industries in our economy. Broadband Internet service providers routinely offer customers usage-based pricing options. Usage-based plans may, for example, include monthly allowances of high-speed data, whereby a customer pays for 25GB or 100GB of data. Although such plans sometimes are subsumed under the term "data caps," this is somewhat of a misnomer. They don't halt connectivity when allowances are exceeded. Rather, customers may experience reduced speeds or incur additional charges when they use more than their data allowances. Usage-based plans often allow lower-volume customers to keep their costs down.

The Santa Clara County Central Fire Protection District depends on a high-speed connection in providing fire and other emergency services. Near the end of July, the fire district experienced slow connection speeds and contacted its provider, Verizon. Verizon has a policy of making an exception to its allowances or so-called "data caps" in emergency situations. Unfortunately, the customer service personnel involved did not execute the request for an exception when contacted by the fire district. After some delay that effectively prevented data-intensive communications for a time, the fire district upgraded its service plan and again received high-speed connectivity. Verizon has apologized for its error. 

From the standpoint of an emergency services provider and customer, the fire district's frustration may be understandable. But the misplaced attempt to inject "net neutrality" into the mix may have its own explanation. Santa Clara County is a party to the pending lawsuit challenging the 2017 Restoring Internet Freedom Order that repealed the Obama-Wheeler FCC's Title II public utility regulation of broadband Internet access services. Pro-regulatory advocates have therefore tried to make the fire district's data allowance episode into net neutrality theater. They have even mentioned the matter in a legal brief challenging the Restoring Internet Freedom Order. But this is wrong.

Santa Clara County's issue with Verizon involves a customer paying for the amount of service they want to use and a service provider's regrettable, but mistaken, lack of accommodation in a particular circumstance. It's about usage-based plans and customer service. It's not about net neutrality because Verizon's service plan for a monthly allowance of high-speed data with reduced speeds for extra usage would not have been prohibited under the FCC's old net neutrality rules.

Usage-based pricing with data allowances was affirmed under the now-repealed 2015 Obama FCC Title II Order. According to paragraph 122: "Because our no-throttling rule addresses instances in which a broadband provider targets particular content, applications, services, or non-harmful devices, it does not address a practice of slowing down an end user's connection to the Internet based on a choice made by the end user. For instance, a broadband provider may offer a data plan in which a subscriber receives a set amount of data at one speed tier and any remaining data at a lower tier."

Buried in footnote 13 of the legal brief challenging the 2017 Restoring Internet Freedom Order, Santa Clara County and other pro-regulatory advocates admit they are not attempting to argue that Verizon's usage-based pricing plan with the fire district would have violated the 2015 Title II Order. This makes the net neutrality theater act pretty obvious.

Importantly, the 2017 Restoring Internet Freedom Order also recognizes the upshot to usage-based pricing plans. According to paragraph 153: "Usage allowances may benefit consumers by offering them more choices over a greater range of service options, and, for mobile broadband networks, such plans are the industry norm today, in part reflecting the different capacity issues on mobile networks." 

Equally important, the Restoring Internet Freedom Order provides protections for aggrieved customers. All major broadband service providers promise not to block or throttle access to Internet content of their customers' choosing, or to prioritize Internet traffic in ways that are anticompetitive. Broadband service providers that fail to follow their own terms of service are subject to enforcement actions by the Federal Trade Commission under its authority to prohibit unfair and deceptive trade practices. 

One more thing: Under the Restoring Internet Freedom Order, broadband service providers can give favorable access to emergency first responders through paid prioritization arrangements. By repealing the Title II Order's ban on paid prioritization arrangement, the Restoring Internet Freedom Order provided needed legal certainty to providers interested in offering such preferred access to emergency services. 

Court Decision on FTC Authority Bolsters the Legal Basis of the Restoring Internet Freedom Order

On February 26, the U.S. Court of Appeals for the Ninth Circuit, sitting en banc, decided unanimously that common carriers are exempt from Federal Trade Commission jurisdiction under Section 5 of the FTC Act only with respect to common-carrier activities. The Ninth Circuit’s decision effectively vindicates the premise of the FCC’s Restoring Internet Freedom Order (2017) that the FTC has authority to pursue enforcement actions against broadband Internet access providers for deceptive or unfair trade practices. The FCC’s order reclassified broadband Internet access services as “information services” under Title I of the Communications Act, and repealed the Obama Administration’s common carrier classification of those services under Title II.

On behalf of the Ninth Circuit en banc panel, Judge M. Margaret McKeown observed that the FTC’s Section 5 authority over “unfair and deceptive trade practices exempts, among other things, “common carriers subject to the Acts to regulate commerce.” The introductory section to the en banc opinion succinctly frames the issue before the court and then announces its decision and underlying rationale:  

The question is whether the common-carrier exemption is activity-based, meaning that a common carrier is exempt from FTC jurisdiction only with respect to its common-carrier activities, or status-based, such that an entity engaged in common-carrier activities is entirely exempt from FTC jurisdiction.  

We affirm the district court's denial of AT&T's motion to dismiss. Looking to the FTC Act's text, the meaning of "common carrier" according to the courts around the time the statute was passed in 1914, decades of judicial interpretation, the expertise of the FTC and Federal Communications Commission ("FCC"), and legislative history, we conclude that the exemption is activity-based. The phrase "common carriers subject to the Acts to regulate commerce" thus provides immunity from FTC regulation only to the extent that a common carrier is engaging in common-carrier services.  

This statutory interpretation also accords with common sense. The FTC is the leading federal consumer protection agency and, for many decades, has been the chief federal agency on privacy policy and enforcement. Permitting the FTC to oversee unfair and deceptive non-common-carriage practices of telecommunications companies has practical ramifications. New technologies have spawned new regulatory challenges. A phone company is no longer just a phone company. The transformation of information services and the ubiquity of digital technology mean that telecommunications operators have expanded into website operation, video distribution, news and entertainment production, interactive entertainment services and devices, home security and more. Reaffirming FTC jurisdiction over activities that fall outside of common-carrier services avoids regulatory gaps and provides consistency and predictability in regulatory enforcement. 

Later, the Ninth Circuit’s en banc opinion effectively confirmed that the FCC’s Title II Order (2015) stripped the FTC of its Section 5 authority to address alleged unfair or deceptive trade practices involving mobile broadband Internet access service providers. In the course of discussing the alleged “data throttling” at issue in the case, the en banc opinion stated: 

The Reclassification Order's explicit text and the "generally applicable presumption against retroactivity" confirm that the FTC's Section 5 authority to bring cases concerning mobile data services has been curtailed only for services rendered after the order became effective… 

… 

The FTC's power to bring enforcement lawsuits in federal court derives from the FTC Act, which authorizes the agency to sue in any case involving "any provision of law enforced by" the FTC. Before the reclassification, the FTC had the authority to pursue this suit. The prospective reclassification can hardly be viewed to retrospectively strip the FTC of that enforcement authority.

But the Ninth Circuit’s en banc opinion noted: “In early 2018, the FCC reversed its 2015 Reclassification Order and once again classified broadband internet as a non-common-carrier service.” According to Paragraph 141 of the Restoring Internet Freedom Order: “Today’s reclassification of broadband Internet access service restores the FTC’s authority to enforce any commitments made by ISPs regarding their network management practices that are included in their advertising or terms and conditions.” In other words, under the FCC’s free market-oriented, light-touch Title I-based approach to broadband Internet access services, broadband Internet service providers that include promises not to block or degrade data traffic to and from their subscribers as well as promises not to engage in unfairly discriminatory or harmful forms of paid prioritization must keep to those promises or be subject to enforcement actions.

Restoration of FTC enforcement jurisdiction over broadband Internet access services is a critical premise of the FCC’s Restoring Internet Freedom Order. Indeed, restored FTC authority is a primary reason “Why Consumers Won’t Be Left Unprotected” – as FSF President Randolph May and I explained in a January op-ed in the Washington Times. By confirming that the FTC’s Section 5 common carrier exemption is activity-based and not status based, the Ninth Circuit’s unanimous en banc decision in FTC v. AT&T Mobility effectively supports the legal basis for consumer protection established by the Restoring Internet Freedom Order.

A Clear Defined Case for Classifying Broadband Internet Access as an Information Service

The question of whether the FCC has authority to impose public utility regulation on broadband Internet access services under Title II ultimately comes down to definitions of terms in the Communications Act. Based on a plain reading of the Communications Act as well as its structure, the FCC's Restoring Internet Freedom draft order presents a convincing, straightforward explanation for why broadband Internet access service is a Title I "information service" and not a Title II "telecommunications service." The draft order's restoration of Title I classification for both fixed and mobile broadband Internet access services is also strongly backed by pre-Title II Order agency precedents that the Supreme Court and lower courts previously upheld. 

If the Restoring Internet Freedom draft order is adopted and subject to appellate review, the order's reading of the statute and resulting conclusion that broadband Internet access services are information services should be upheld in court. And if a reviewing court applies the deferential Chevron standard of review for agency interpretation of federal statutes, the order's legal validity should be a foregone conclusion. Needless to say, if the reviewing court employs the ultra-deferential posture taken in USTelecom v. FCC, the order passes in a cakewalk.

The FCC is set to vote on its Restoring Internet Freedom draft order at its December 14 public meeting.

ISPs to SEC and FCC: Broadband Investment Has Declined

As the FCC has done for all proceedings since Chairman Ajit Pai took over in January 2017, the FCC released the Fact Sheet and Draft Order in the Restoring Internet Freedom proceeding three weeks in advance of its December 14 vote. In response to the release, Commissioner Mignon Clyburn published her own Fact Sheet and Glossary about the harms she believes the Order will create.

Here is her definition for “cost-benefit analysis:”

Cost-benefit analysis – Despite insufficient data and data to the contrary, the Chairman's Order draws conclusions by only accepting self-serving statements made by large broadband providers. It makes no effort to verify these claims against the statements these very same companies have made in filings before the Securities and Exchange Commission (SEC).

However, in the Draft Order, the FCC concluded that broadband investment declined by 5.6% since the adoption of the Title II Order. This figure, compiled by Hal Singer, uses data that comes directly from broadband ISP’s 10-Q and 10-K forms, which are required by the SEC. Even my blog estimating a $5.6 billion decline in broadband investment since the Title II Order, which also was cited in the Draft Order, uses data collected directly from these filings required by the SEC. Broadband ISPs are reporting figures to the SEC that are consistent with what they also are telling the FCC; broadband investment has declined since the Title II Order was adopted.

For a more accurate assessment of the FCC’s proposal to conduct a cost-benefit analysis, see this July 2017 Perspectives from FSF Scholars by FSF Senior Fellow Ted Bolema. 

Yes, Internet Regulation Negatively Impacts Wireless Broadband Investment

On September 26, 2017, the FCC adopted the Twentieth Wireless Competition Report, which found that the market for mobile wireless broadband is effectively competitive. Commissioner Mignon Clyburn issued a dissenting statement in which she claimed that the Report manipulated data to support the narrative that the Open Internet Order decreased investment. She also said that the Report did not include investment data that she specifically requested. Nevertheless, when considering the data Commissioner Clyburn cites in her dissenting statement, the evidence is clear that the Open Internet Order discouraged wireless providers from investing in broadband networks.

In her dissenting statement, Commissioner Clyburn said:

For one, the discussion of investment in the mobile wireless services industry is fundamentally flawed. By highlighting a decrease in investment between 2015 and 2016, this section was clearly written to support the false narrative that the 2015 Open Internet Order deterred wireless carriers from investing in their networks. Despite my office’s request, this Report does not include data from the 19th, 18th, and 16th Competition Reports, which showed investment from all commercial wireless companies declined from $33.1 billion in 2013 to $30.9 billion in 2015. In case you missed it, those reports predated the 2015 Order.

According to CTIA’s data, wireless investment grew substantially from $20.4 billion in 2009 to $33.1 billion in 2013. Commissioner Clyburn is correct; wireless investment dropped from $33.1 billion in 2013 to $32.1 billion in 2014. But keep in mind, the FCC’s Open Internet proceeding began in early 2014. In May 2014, the FCC adopted a Notice of Proposed Rulemaking inviting comments on bright line rules and the possible imposition of Title II regulation. And in November 2014, President Obama encouraged the FCC to reclassify broadband under Title II of the Communications Act.

Therefore, the writing was on the wall throughout most of 2014 that the FCC would impose some type of more stringent Internet regulation than the regulations then in place. The regulatory uncertainty hovering over broadband Internet service providers during this time discouraged them from investing in network infrastructure.

Also, Commissioner Clyburn undermines her argument when she says “investment from all commercial wireless companies declined from $33.1 billion in 2013 to $30.9 billion in 2015.” The Open Internet Order was adopted in February 2015 but investment data includes all of 2015, meaning wireless providers had almost a full year to decrease their planned investments due to the impending regulatory costs imposed by the Order. When you consider the regulatory uncertainty of 2014, along with the imposition of Title II regulation in early 2015, it is no surprise that wireless providers decreased investment by $2.2 billion from the end of 2013 to the end of 2015. (As you can see in the graph below, CTIA’s data shows a decline of $1.2 billion over this same period.)

As I stated in a May 2017 blog, overall broadband capital investment has declined by $5.6 billion since the adoption of the Open Internet Order. And as we illustrate in this infographic, the steep decline in wireless broadband investment is consistent with the adoption of the Open Internet Order, dropping by $6.7 billion from 2013 to 2016.

The data that Commissioner Clyburn requested to be included in the Twentieth Wireless Competition Report provides no evidence that the imposition of Title II regulation has not harmed broadband investment. The Commission will recognize the negative investment impact of Internet regulation when it considers Chairman Pai’s Restoring Internet Freedom proposal to return to a light-touch regulatory framework.

Opposing Cost-Benefit Analysis Raises a Red Flag

In its Notice of Proposed Rulemaking (NPRM) for the Federal Communication Commission’s Restoring Internet Freedom proceeding, Chairman Ajit Pai proposes that the Commission perform a cost-benefit analysis (CBA) of the FCC’s Title II regulation of Internet service providers. Free State Foundation scholars endorsed the FCC’s proposal in their filed comments as a welcome development for improving the quality of economic analysis at the FCC. However, in the initial round of comments, some pro-regulatory organizations were skeptical of the FCC’s proposal for performing a CBA. Notably, the comments from these groups appear to have been intended to discourage the FCC from performing any cost-benefit analysis.

Requiring regulatory agencies to conduct CBAs has a history of bipartisan support. A 1993 executive order issued by President Clinton and followed by every administration since requires that executive branch agencies perform CBAs before implementing economically significant regulations. The FCC is not required to perform CBAs because it is an independent agency. However, other independent agencies, including the Federal Trade Commission and the Securities and Exchange Commission, have adopted internal rules requiring CBAs to help inform their regulatory decisions.

There should be little support for a regulation when its costs outweigh its benefits because adoption of that regulation will usually slow economic activity, destroy jobs, and often harm the parties the regulation is claimed to help. Cost-benefit analysis is an important tool that helps regulatory agencies evaluate in a systematic way whether a course of action is worth pursuing. Shortly before joining the FCC as Chief Economist, Jerry Ellig documented how the quality of SEC rulemaking improved after the agency, in the middle of the Obama Administration, adopted a requirement for conducting cost-benefit analyses.

Performing a cost-benefit analysis of a regulation requires an agency to address several important questions that it might otherwise fail to consider. Does the regulation address a market failure or systemic problem? If it does, how does it correct the perceived market failure? Are there other less intrusive regulatory approaches that would solve this market failure? And finally, do the benefits of the regulatory solution outweigh the costs of imposing new regulatory requirements? Needless to say, the FCC did not ask these important questions when it adopted the Open Internet Order in February 2015, but Chairman Pai is proposing that the Commission perform a CBA before repealing Title II regulation. Regrettably, some groups that support Title II regulation are skeptical.

In the initial round of comments of the Restoring Internet Freedom proceeding, Free Press and INCOMPAS criticized the NRPM for a lack of guidance for how the CBA should be conducted. But as we responded in our reply comments, “paragraph 106 of the Notice is clear in proposing that the FCC follow the same guidance in Section E of OMB Circular A-4, which has been used by executive branch agencies since 2003, while inviting comments on whether that is appropriate or whether the Commission should modify its approach.” Moreover, we added:

Also significant is the fact that neither INCOMPAS nor Free Press provide any guidance whatsoever to the FCC on how to better perform a cost-benefit analysis. Thus, their comments can only be interpreted as opposing the Commission performing any cost-benefit analysis at all. The FCC should not be an “economics-free zone.” Instead the Commission should improve its use of economic analyses, including cost-benefit analysis, so that it can make better regulatory decisions.

Free State Foundation Senior Fellow Theodore Bolema published a July 2017 Perspectives from FSF Scholars entitled “An Assessment of the FCC’s Proposal to Conduct a Cost-Benefit Analysis,” which was attached to FSF’s initial comments as Appendix A. In that paper, Dr. Bolema addresses the important questions pertaining to a cost-benefit analysis of the FCC’s Open Internet Order.

Does the regulation address a market failure or systemic problem? If it does, how does it correct the perceived market failure? Dr. Bolema says:

Significantly, the Open Internet Order regulations can only pass a cost-benefit test if they are addressing a clear market failure than can only be resolved by the FCC regulation. If there is no market failure or other systemic problem, then government action will likely do more harm than good. The FCC justified the 2015 Open Internet Order in large part on conjectured harms that might occur in the future, but had not occurred to date under regulatory oversight that was considerably less heavy-handed.

Given the remarkable record of innovation, investment, and choice of new services offered to customers before the Open Internet Order regulation was imposed, it is highly unlikely that any such market failure can be found.

Are there other less intrusive regulatory approaches that would solve this market failure? Dr. Bolema contends:

If the FCC does identify a market failure, perhaps based on market power for some parties in some places at some times, then it must also consider whether less intrusive alternative approaches are sufficient to address the market failure before resorting to public utility regulation of a broadband market segment. These alternative approaches include increased antitrust enforcement, new consumer protection regulations, or minimum quality standards.

OMB Circular A-4 requires that executive branch agencies consider less intrusive regulatory approaches as part of their cost-benefit analysis. Even if the FCC concludes that a market failure exists in its baseline scenario, that does not mean that the only alternative is the full Title II regulation imposed by the Open Internet Order. Instead, the FCC must then consider other case-by-case regulatory approaches that are different from the pre-2015 regulatory environment.

Ted Bolema’s Perspectives also considers some of the regulatory uncertainty and costs imposed by the Open Internet Order, specifically opportunity costs. For example, Free Press claims in its comments that broadband investment has increased since the Open Internet Order, despite convincing evidence discussed in our initial comments and reply comments that investment has declined. But even assuming, hypothetically, that investment has increased, the relevant question is did it increase less than it otherwise would have absent the regulation? This is the premise of my May 2017 analysis which ultimately finds that broadband investment declined by $5.6 billion since the Open Internet Order was adopted.

Dr. Bolema performed an additional cost calculation in his Perspectives, following the methodology the FCC proposed in its NPRM:

Applying this multiplier to the Free State Foundation estimate by Michael Horney of a $5.6 billion reduction in broadband investment over 2015 and 2016 produces an estimate of $7.0 and $9.8 billion in lost economic activity attributable to the Open Internet Order, with a midrange estimated economic impact of negative $8.4 billion. Horney’s estimate showed that the gap between the baseline investment and actual investment was growing. If this trend continues, as is likely, the economic impact of the Open Internet Order will only become greater, in a negative direction, over time. 

It is important that the FCC perform this cost-benefit analysis, because agencies, independent or not, should analyze how new rules will impact innovation, investment, job creation, and economic activity. It is reasonable to question the methodology that an agency uses when assessing the costs and benefits of a regulation. However, if an interested party offers only criticism of an agency proposal to conduct a regulatory CBA, this is likely a signal that the interested party fears that the costs will outweigh the benefits, invalidating its policy position.

Given the persuasive evidence showing a large negative impact on broadband investment, it is likely the Open Internet Order is more costly than beneficial to consumers and entrepreneurs. For this and other reasons addressed at length in our initial and reply comments, the FCC should conduct the proposed cost-benefit analysis. And if the results from the CBA are as we expect, the FCC should repeal the Title II classification of broadband Internet service providers and return to a light-touch regulatory approach.