Title II Doesn’t Give FCC New Rate Regulation Powers — For One Thing, Section 706 Already Did That.

As we get closer to the Federal Communication Commission (FCC) historic vote on reclassifying broadband as Title II, we descend further into a phenomena I refer to as #broadbandghazi. Crazy conspiracy theories and wild allegations abound, with the faithful ever insisting that the latest revelation proves, PROVES I SAY, the nefariousness of the evil dictator and tyrant Obama. The very fact that there is no actual evidence only proves how NEFARIOUS and EVIL are his ObamaPlans ™, etc.


Case in point, the oft repeated meme by opponents of Title II that Section 201 — by its very nature — imposes “utility style rate regulation” on broadband. Commissioner Pai, who has come to exceed even his usual histrionics on this particular subject, dramatically and repeatedly pushed this meme at his recent press conference. “The American people are being misled by about President Obama’s plan to regulate the Internet,” dramatically declaimed Pai, not sounding in the least like a crazed-conspiracy theorist. (And no, I’m not exaggerating, that actually was his opening line. See his statement here.) ”the claim that President Obama’s Plan to regulate the Internet does not include rate regulation is flat out false.” (emphasis in original, *sigh*) When pressed to explain whether he accused Chairman Wheeler of being a liar, Pai demurred slightly, explaining that while everything Wheeler said about forbearing from the explicit price regulation statutes, Section 201(b) (47 U.S.C. 201(b)), by prohibiting all rates and practices that are “unjust and unreasonable,” by its very nature imposes “utility style price regulation” on broadband since it would allow people to bring complaints that the price charged is unjust and unreasonable. Q.E.D. Accordingly, no matter what the FCC Order actually forbears from or says, PRICE REGULATION IS COMING!! BE AFRAID AMERICA!! UTILITY! UTILITY! Pai in particular points out that the proposed Order will — *gasp* — allow consumers to file complaints and even use the courts if broadband providers rip them off with unjust or unreasonable rates and practices. “The plan repeatedly invites complaints from end users and edge providers alike,” warns Pai, apparently unaware that most people like the idea of a consumer protection agency like the FCC being authorized to take complaints when companies screw them over with unjust and unreasonable rates (as demonstrated by this delightful “Ode to Comcast (while waiting for the cable guy)”).


A few problems with this argument. First and foremost, Section 706 (47 U.S.C. 1302(a)) explicitly directs the FCC to use “price caps” to promote broadband deployment. In fact, if you go read the statute, price caps are the first explicit authority the FCC is already directed to use under Section 706. Keep in mind that Section 706 applies to broadband already under Title I. So to the extent the argument is based on the idea that language in 201 adds new authority, this argument fails. The explicit directive in Section 706 for the FCC to use price caps as direct rate regulation far exceeds any secret plan to regulate prices by implication from the language in Section 201 despite lots of forbearance to the contrary.


Indeed, given the explicit price cap language in Section 706, the FCC forbearance from future price regulation tied to reclassification actually reduces the likelihood of “utility style rate regulation” from the existing Section 706 authority (because, as I discussed back in this blog post on forbearance, the FCC can actually forbear from future obligations that don’t exist yet).


There are lots of other problems with this argument as well, as Politifact found when Ted Cruz first raised it back in November. So I elaborate on all the reasons the “Section 201 means utility style price regulation” is bogus #broadbandghazi conspiracy mongering below. . . .

Mostly, the argument that Section 201 automatically means rate regulation relies on what I like to call “Stupid Sophistry Games.” Law, like engineering and other specialized fields, have words and phrases that potentially have multiple meanings in plain English but a specialized and well understood meaning in the profession. For example, the term “resistance” means lots of things in English, but to an electrical engineer “resistance” has a specific meaning when applied to the conductivity of materials. Here, Section 201(b) requires that “all charges, practices, classifications and regulations for, and in connection with, such communications service shall be just and reasonable.” That plain language looks pretty broad, until you apply both the rest of the statute and the 80+ years of FCC precedent and case law taking those general phrases and giving them very specific meaning and limits.

The argument also rests on the common language difference between “utility style rate regulation” and the fact that, in plain English, anything which impacts what a provider can charge can be called “rate regulation.” So technically it’s not lying, even though the speaker is deliberately creating a false impression by invoking “utility style rate regulation” conjuring up all manner of government approved prices after lengthy hearings debating which costs, exactly, get to go into the cost-basis for the rate of return calculation. By contrast, most people don’t think saying something like ‘cable companies charging you thousands of dollars in “unreturned equipment fees” or “service charges” you don’t actually owe is unjust and unreasonable’ amounts to “utility style rate regulation,” even though — as Pai and others strenuously argue — this technically tells a provider not to make a particular charge, and is thus, but the common English meaning of the words, “rate regulation.”


But before we can even get to the Stupid Sophistry Games, the Section 201=utility style price regulation has an even bigger factual problem. This argument only works if the FCC does not have rate regulation  now, with broadband classified as Title I. If the FCC already has rate regulation authority under Title I, then reclassifying as Title II does not make the situation any worse and we don’t even reach the whole ‘Section 201=rate regulation by implication and Stupid Sophistry Games’ argument.


Section 706 Gives A Heck Of A Lot More Explicit Price Control Than Section 201.


Which brings me back to Section 706, 47 U.S.C. 1302(a). To quote the relevant language in full:


“The Commission and each State commission with regulatory jurisdiction over telecommunications services shall encourage the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans (including, in particular, elementary and secondary schools and classrooms) by utilizing, in a manner consistent with the public interest, convenience, and necessity, price cap regulation, regulatory forbearance, measures that promote competition in the local telecommunications market, or other regulating methods that remove barriers to infrastructure investment.” (Emphasis added)


For those unfamiliar with the term “price cap regulation,” it means setting an absolute limit on what a provider can charge. Thats not some rinky-dink price regulation by implication. That’s a full blooded actual price regulation. Additionally, because the statute uses the word “shall,” the direction to use price caps, “where consistent with the public interest,” is as mandatory as the requirement to ensure that charges and practices are “just and reasonable” under Section 201.


Furthermore, I note that this directive to use price caps is in Section 1302(a). It does not require a finding under Section 1302(b) that broadband is not being deployment in a timely manner. Since the Verizon v. FCC Court (and the 10th Circuit’s ICC/CAF decision), Section 1302(a) constitutes an independent source of authority for the FCC to do whatever it thinks necessary to “encourage” adoption of broadband. Since the statute actually directs the FCC — as the first thing to try no less! — is rate regulation via direct price caps, the current situation is at least as bad, if not worse, than that predicted by Commissioner Pai under Section 201.


Indeed, using Pai’s logic that statutory language referencing rates is the equivalent of rate regulation, the FCC’s proposed Order actually reduces the danger of “utility style rate regulation” by explicitly forbearing from broadband rate regulation. Absent the Order, the FCC is directed to use “price caps” under Section 1302(a). After the Order, the FCC will explicitly forbear from any future rate regulation. (And recall that, as I explained here, under AT&T v. FCCthe FCC can forbear against regulatory obligations that don’t even exist yet.)


This also addresses the “slippery slope” argument that even if the FCC forbears from rate regulation under Title II today, it may change its mind sometime in the future. We are already on the “slippery slope” in that if the FCC wants to change its mind about rate regulation for broadband, Section 706 already explicitly directs the FCC to use price caps if doing so is “consistent with the public interest.” So reclassifying to Title II plus forbearance actually makes the slope less slippery, because it imposes an additional barrier for the FCC of needing to reverse its forbearance decision as well as justifying rate regulation on a record. By contrast, doing nothing keeps us at the same level of slipperiness or worse, since Section 706 doesn’t just authorize the FCC to use price caps, it affirmatively directs the FCC to use price caps as the first thing to do to encourage broadband adoption and deployment.


So, to conclude step one of our counter-proof: Pai’s argument that reclassifying broadband as Title II would give the FCC new powers to impose “utility style” rate regulation on broadband fails because the FCC already has an even more explicit statutory directive to impose price caps even with broadband classified as Title I. Given Pai’s recent statements that the FCC is already engaged in a secret plan to regulate the Internet by raising the broadband speed benchmark from 4 mbps down/1 mbps up to 25/3, the exciting new  Obama Secret Plan To Regulate The Internet doesn’t really seem to add anything to last month’s Obama Secret Plan To Regulate The Internet.


Section 201 Does Not Provide “Utility Style Rate Regulation” Authority, That’s Why We Have Sections 203, 204 and 205.


Another problem with the “Section 201 Means Public Utility Rate Regulation” argument is that Section 201 doesn’t confer utility style rate regulation authority. The Communications Act has three specific provisions authorizing the FCC to do traditional rate making proceedings. Section 203 (47 U.S.C. 203) requires that any provider of an interstate telecommunications service file a tariff with the FCC, and authorizes the FCC to reject the tariff or to modify any of the charges and provisions included in the tariff. Section 204 (47 U.S.C. 204) authorizes and requires a hearing for challenging any tariff terms or changes in price, Section 205 (47 U.S.C. 205) authorizes the Commission to actually set a rate, but only after conducting a hearing and on a full evidentiary record.


This is what people generally think of as “utility style rate regulation.” As Pai freely acknowledges, the proposed Title II reclassification order permanently forbears from these provisions. But Pai claims the FCC still has authority to engage in this kind of “utility style rate regulation” through its general judgment on what constitutes an unjust and unreasonable rate. But does it?


The critical case on this is Orloff v. FCC, 352 F.3d 415 (D.C. Cir. 2003). Orloff dealt with Verizon offering to negotiate discount rates for new wireless customers to lure them away from competitors. Jaqueline Orloff complained to the FCC, arguing that because Verizon Wireless was a common carrier, Sections 201(b) and 202(a) required Verizon to offer her the same discount as other similarly situated Verizon customers. The FCC rejected the complaint, finding that because the FCC determination to forbear from Section 203 tariffing requirements did away with this kind of price regulation and that market practices would determine what constituted just and reasonable rates. The D.C. Circuit affirmed.


Pai’s staff argue that Orloff proves that Sections 201/202 mean utility style rate regulation, since the FCC had authority to hear the complaint — even though they rejected it. I argue just the opposite. Orloff establishes the precedent that, once the FCC forbears from Sections 203-205, it no longer has authority to engage in traditional rate regulation and that the language prohibiting “unjust and reasonable” charges, practices or discrimination governs only extreme behavior and explicitly does not include traditional rate making. After all, it is a well established cannon of statutory interpretation that Congress does not include surplus language. If Sections 201 and 202 granted the authority to do traditional utility style rate regulation, Congress would not have bothered to include Section 203-205.


The problem with arguing that the case which establishes the FCC doesn’t use Sections 201/202 for rate regulation proves the FCC could because they took the case in the first place fundamentally miscontrues the idea of precedent. Anyone can file a complaint (and sue) about anything. The question is whether it is likely or not to win. If the FCC tried to use Section 201/202 for utility style rate regulation, it would need to explain how that is consistent with (a) forbearing from the actual rate regulation statutes, and (b) its previous explanation that forbearing from Sections 203-05 eliminates traditional tariff and rate regulation.


Additionally, as noted above, AT&T v. FCC, 452 F.3d 830 (D.C. Cir 2006), allows the Commission to forbear not only from an existing regulation, but from any future obligation. So if the Commission says “we forbear from using our Section 201/202 powers from imposing specific rate regulation obligations which would replicate cost-based rate regulation as authorized under Section 203-05,” that acts to limit the Commission’s authority going forward. True, someday the Commission might “unforbear,” although no one knows if the Commission can unforbear (there is no “unforbearance” process in the statute). But the Commission doesn’t just get to do that in secret. It would require a public process and rulemaking similar to the net neutrality/Title II rulemaking, subject to judicial review and so forth.


Frankly, if things ever reach a point where rates were so outrageous that (a) the Commission actually went through an unforbearance process, and (b) it got sustained by the courts, things would have to be pretty awful. Additionally, refusing to reclassify (with forbearance) now would not save us from the evil, power-mad rate regulating Commission of the future. At the end of days, when the power mad rate regulating Commission appears, it can simply reclassify broadband as Title II without forbearance — or use Section 706 rate setting authority. So once again, the idea that reclassifying with forbearance is somehow tantamount to utility style rate regulation is demonstrably false. Reclassifying and forbearing creates additional barriers to a future FCC engaging in utility style rate regulation, as opposed to simply leaving broadband Title I, subject to reclassification without forbearance by some future power mad FCC with another secret agenda.


A Practical Consideration Against Such Foolishness


A predicate to the “Obama’s secret plan to impose utility style rate regulation” is that the FCC could actually have the resources to carry out such a plan. It doesn’t. Anyone who has worked through the Prison Phone Rate proceeding (ongoing for nearly 15 years) and the Special Access Reform proceeding (ongoing for nearly 10 years), can tell you that the FCC doesn’t have the resources to do full bore rate regulation like it did back in the 1950s with Ma Bell. Both these proceedings involve fully regulated Title II services subject to Section 203-05. But the combination of a hostile D.C. Circuit consistently raising the burden for the FCC to show that a price-regulated tariff is justified, with the general departure of staff actually trained in rate setting and the loss of institutional memory on the subject, makes the FCC avoid rate setting wherever possible.


I know traditional “public choice” theory holds that agencies seek to expand their authority precisely so they can get bigger budgets. To this I have to say “wake up University of Chicago dudes! It’s no longer the 1970s! Have you bothered to look at the last 20+ years of federal budgeting. Agencies that seek to regulate get their budgets cut as punishment, not expanded as a reward. I don’t see the IRS enjoying an expanded budget as a reward for being more aggressive as a regulator/enforcer, and the IRS is a revenue positive agency. Anyone who thinks the FCC would get “rewarded” with a bigger budget and more staff if it started trying to hold rate hearings for broadband providers is either smoking crack or subject to delusional theories about secret plans by Obama to regulate the Internet for the sheer evil pleasure of regulating. Oh right . . . .


So What Do Sections 201/202 Do?


Given how bloody important those of us on the net neutrality side consider Sections 201/202, it’s fair to ask what it actually does and what authority it actually provides with regard to “charges.”


My general answer on this is that it gives the FCC authority to make sure that charges and practices aren’t abusive and bear at least some rational relationship to something other than the carrier’s ability to extort such charges by deception or market power. So the FCC can go after specific things that seem really awful and anti-consumer. For example, when the FCC reclassified broadband as a Title I service in 2005, then-Chairman Kevin Martin made a big deal about how that reclassification would allow broadband providers to drop the USF contribution leveled at that time on DSL and everyone would get a drop in the price of broadband after the one-year phase out period. As we got to the end of the phase out, however, phone companies (surprise!) decided to simply rename the USF fee as an “administrative fee” and keep charging it. Kevin Martin sent a letter asking the telcos how this simply renaming the fee was consistent with the truth-in-billing regulations under Section 201 requiring just and reasonable practices, and the telcos dropped the charge.


That’s how Section 201 works. It can target a specific practice that is outrageous or deceptive. But nothing stopped the Bells from simply jacking up the price equal to the amount of the hidden fee. Here in the net neutrality debate, the FCC needs to use Section 201 to prohibit paid prioritization, blocking or throttling or otherwise degrading broadband traffic as inherently unjust and unreasonable.


This is where the Stupid Sophistry Games kick in. Pai and his fellow “Obama Secret Plan To Impose Utility Style Regulation” believers pounce on this and cry “Aha! You agree the FCC can use Section 201 to prohibit a provider from charging a specific fee or engaging in a specific billing practice! That’s rate regulation! See! See! Even net neutrality supporters say it will be utility style rate regulation and the “Department of the Internet!”


By that definition, the Federal Trade Commission engages in “utility style rate regulation” when it finds a specific charge or practice an “unfair practice” under the Federal Trade Commission Act, or when the Consumer Financial Protection Bureau finds a fee or practice to be “unfair, deceptive or abusive.” And while anti-regulatory conservatives have, in fact, made the argument that the FTC and the CFPB engage in “rate regulation,” ordinary people do not think of this as “rate regulation” but “consumer protection.” In particular, no one thinks of this as “utility style rate regulation.” Hence my designating this as a “Stupid Sophistry Game.” You can, if you are a conservative fresh water economist, construct a way in which the statement is technically not a lie (i.e., any authority to disallow a specific charge or practice is “rate regulation” in that it affects how a provider can bill a customer and what it can charge), but deliberately conveys the false impression that the FCC would be doing explicit, broad cost-based rate setting and would prohibit providers from offering new deals or discounts without first filing a tariff and getting regulatory approval.




FWIW, Wall St. analysts seem to understand the real meaning of what Wheeler proposes and have not bought into Pai’s “Secret Obama Plan To Regulate The Internet And Impose Utility Style Rate Regulation” rhetoric — at least to judge by how cable stock prices responded. While I don’t think stock prices are a good indicator of what constitutes good public policy, it is a good indicator of what investors are thinking — and they understand Wheeler’s proposal as meaning it what it says. While the FCC will use Section 201 to prohibit paid prioritization or other “Internet Tolls,” and will haev the authority to deal with abusive fees and practices going forward, real honest-to-God utility-style rate regulation just is not happening.


Hence the full on #broadbandghazi by Pai and other opponents, doing their best to muddle the issue with Stupid Sophistry Games. At the end of the day, if you strip away the sinister characterizations Pai tries to give it, the plan he describes in his press conference pretty much matches what Wheeler promised — bright line rules against paid prioritization or other “fast lanes” or “tolls,” forbearance from price regulation, and a consumer-friendly complaint process in the event we get a repeat of Comcast/BitTorrent. The Order also promises to provide some fundamental protections, such as consumer privacy under Section 222 to prevent abuses like Verizon’s “SuperCookie.”


It takes a rather crazy perspective to see something sinister in something so straightforward. It’s tempting to think that Pai and his allies are simply engaged in a cynical effort to use the tactics of dysfunctional hyper-partisan politics we’ve seen too often in the last 6 years in a last ditch effort to block the FCC from adopting real net neutrality rules.


Happily, I’m not prone to conspiracy theories.


Stay tuned . . . .

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