Tag Archives: rate regulation

Unpacking the Net Neutrality Order

Today’s blog provides a short summary of the FCC’s new Order that reinstates Title II authority and net neutrality. It’s a monster order of 434 pages and 2,921 comments.

Following are my key takeaways from the Order:

  • A large part of the Order reinstates nearly the same Title II rules back that were vacated by the Ajit Pai FCC that killed Title II authority.
  • For those of you who need a new acronym, the Order refers to broadband as BIAS (broadband Internet Access Service). ISPs are now BIAS providers, an unfortunate acronym.
  • The Order reinstated Title II authority over BIAS services – meaning broadband is considered to be a telecommunications service, not an information service.
  • The FCC granted itself new and expanded authority to defend national security. It notes that it has taken actions related to national security in recent years that would have been stronger if based on the new authority described in this Order.
  • The FCC also described its role in addressing cybersecurity issues.
  • The FCC says Title II authority gives it more tools to deal with network resiliency and reliability related to natural disasters or malicious interference. The Order gives it authority to make ISPs participate in the Mandatory Disaster Response Initiative (DIRS).
  • The Order reinstates privacy and data security rules under Section 222 rules that have only been applied to voice services.
  • The FCC thinks the Order gives it the authority to develop rules that apply to ISPs that serve multi-dwelling units – a topic being explored in a different FCC proceeding.
  • The FCC says the Order extends opportunities to ISPs who provide broadband-only and no other services that are under FCC jurisdiction. That should help such ISPs for issues like attaching to poles. It also allows such ISPs to participate in Universal Service Fund support plans.
  • The FCC thinks the order gives it the authority to require ISPs to provide better access for people with disabilities.
  • The Order clarifies that specialized services at the networks edge are not considered to be broadband, with examples like the networks built inside a large enterprise. Broadband edge services provided by premise operators, like broadband at coffee shops, universities, bookstores, and libraries are also not regulated. Content delivery services, VPNs, web hosting, and data storage services are also not regulated.
  • The FCC says that services like peering, traffic exchange, and interconnection fall under Title II authority.
  • The FCC took on expanded authority to preempt States that want to regulate broadband. For now, the FCC is not preempting the California net neutrality rules.
  • The FCC specifically decided not to expand contributions to the Universal Service Fund to include broadband. There has been a lot of lobbying to have the FCC pick up the expiring ACP program, and this shut that door.
  • The FCC went out of its way to say that it is not going to engage in rate regulation. This is the big bogeyman that giant ISPs have said would come with regulation – and for now, the FCC is not invoking any authority over rates, but admits that it has the authority to do so.
  • Of course, the Order is adopting all of the rules referred to as net neutrality. These are the rules that prohibit ISPs from blocking or throttling traffic or engaging in paid prioritization. This is not the main thrust of the Order and didn’t get discussed until page 264.
  • The FCC is reinstating the transparency rules for ISPs that were first put into place in 2015. Under these rules, ISPs must publicly disclose accurate information to customers involving network management practices, network performance, prices, and other information that customers rely on to buy broadband. The transparency requirements go significantly beyond what is required for the broadband labels. For now, these rules will only apply to ISPs with more than 100,000 customers.
  • The Order reinstates both the informal and formal complaint process where consumers can lodge complaints against ISP practices, and ISPs can ask the FCC to intervene in carrier disputes.
  • The Order reminds ISPs that it has the ability to enforce broadband regulations using fines or other tools at its disposal.

Rural Broadband Is Expensive Today

One of the trends that is a concern for ISPs is plans by State Broadband Offices to force BEAD winners to charge low rates for broadband. I understand some of the rationale behind these attempts.

One argument for lowering rates is that the government is paying a big portion of the cost of building the broadband networks, and it ought to be able to extract concessions from the ISPs for taking the grant funding. That sounds like a reasonable argument until you take a harder look at the places where BEAD funding is going to be used. In most places, BEAD will be used for the most sparsely populated places, which in many instances also have the toughest topography and construction challenges.

The other argument I’ve often heard is that ISPs can provide lower rates because ISPs make a lot of money and can afford it. This might be true for the large national ISPs that can average the revenues from BEAD areas across larger markets with higher margins. But big ISPs don’t want to take on markets that lose money, and they might pass on accepting BEAD in states that insist they charge low rates. Any assumption that smaller ISPs can afford to lose money on a property is badly misplaced – this is like expecting your favorite restaurant to provide low menu prices for a significant percentage of their customers. Such a restaurant won’t be in business for long.

BEAD grants are being offered to ISPs just to get them to consider building networks in places they would otherwise never consider. In many cases, the business case for coming to a BEAD area can barely reach profitability even with a large grant. This is not true of all BEAD places, and there are still some areas covered by BEAD with decent housing density. However, most BEAD areas are high cost to build and high cost to service and maintain after construction. I fully expect a bunch of ISPs who are wading into BEAD to wonder in five years why they ever went through the effort.

What the ISPs are providing as the quid pro quo for the grant funding is building a fast network that can bring a remote rural area into parity with urban broadband. There will be no excess margins in most BEAD business plans that can somehow cover low-cost broadband prices.

The other interesting point that most people are missing is that, for the most part, rural broadband rates are higher today than urban rates. Most areas that get a BEAD network will see lower rates along with a new faster broadband network. How can I say that? Consider the broadband alternatives that exist in rural areas that are BEAD-eligible.

  • Most people using Starlink are now paying $120 per month after shelling out for the receiver.
  • High-orbit satellite broadband is expensive. Consider Viasat. The base plans range from buying 40 gigabytes for $69.99 up to buying 300 gigabytes for $299.99. Extra usage after the data caps can be purchased in small bundles ranging from $9.99 for 5 extra gigabytes to $99.99 for 80 extra gigabytes.
  • Cellular hotspots can be incredibly expensive. The base fee for hotspots sounds reasonable, but the data caps are tiny. Consider AT&T. It sells a hotspot with either a 15-gigabyte data caps for $35 or a 100-gigabyte data cap for $55. The killer is that the overage fee for exceeding those data caps is $10 per gigabyte. Hotspots for T-Mobile, Verizon, and UScellular are similar. I still hear horror stories of families with school children who pay hundreds per month for a hotspot. The only way not to spend money with a hotpot is to greatly curtail broadband usage.
  • While not universally true, many rural fixed wireless providers have high rates. It’s not hard to find rates over $100.
  • The only ‘affordable’ rural broadband alternative is DSL. But it’s getting exceedingly difficult to find or sign up as a new DSL customer in most places, and in many cases the speeds are too slow to be usable. There are exceptions, of course, but most rural folks I’ve talked to tell me that DSL is no longer an option.

Many of the companies building BEAD networks will have rates significantly lower than the current rural rates cited above. BEAD networks will not have data caps, which eliminates the worry spending more than the basic rate. Most rural folks offered BEAD are going to be relieved if asked to pay a decent fixed rate for a connection that is far faster than what they had before. A huge percentage of rural households will see a significant monthly cost decrease just by paying the normal prices of the companies that build BEAD networks.

In saying this, I’m not ignoring the fact that there are households that can’t afford the normal prices charged by ISPs – but those folks also can’t afford the broadband prices available in rural areas today. Rural ISPs can’t shouldered with providing the low rates so that folks can afford broadband. ISPs can’t be forced to somehow fund the end of the ACP – particularly in rural areas. Anybody who has ever operated any business knows that operating with too-low rates is a road to eventual financial disaster.

Danger Of Forcing Low Rates

Some State Broadband Offices are taking a stab at social engineering by trying to force BEAD grant winners to offer low broadband rates. I understand the sentiment behind this because everybody in the industry involved with digital equity issues hears stories about homes that can’t afford broadband even when it is available. It’s a serious issue, and a Pew Research Center study in 2021 showed that only 57% of homes with household incomes less than $30,000 had broadband, compared to 92% of homes with household incomes over $75,000.

It’s natural for folks in a grant office to want to use the power of grant awards to do a little social engineering and force lower rates for ISPs that accept BEAD grants. I know this feels like a broadband office is doing something good, but there are a number of reasons why this is a terrible idea. The first is simple since Congress specifically prohibited the NTIA and States from regulating rates in the BEAD grants.

I’m guessing that States will argue that they are not regulating rates. States are instead tying the number of grant points that are awarded to broadband prices. I’m sure the rationale is that the State isn’t forcing low rates and that ISPs are voluntarily lowering rates. But that is clearly not true when low rates earn a lot of grant points, and any ISP that doesn’t lower rates can’t win a grant. No matter how you try to justify it, this is rate regulation.

The more important reason why rate regulation is dangerous with BEAD is that many rural business plans are highly stressed and will have a hard time just breaking even with normal rates. The BEAD grant process adds a lot of cost to an ISP by using prevailing wages, requiring a letter of credit, requiring expensive environmental studies, and mandating smothering reporting. BEAD is hitting the market at a time when interest rates are at the highest levels we’ve seen in well over a decade.

The operating costs after building networks are also high. A technician in a rural market might be able to visit only half as many customers in a day compared to a similar technician in an urban market – and the rural tech will expend a lot more vehicle resources during the day.

I don’t think that many of the folks in state broadband offices understand the rural business plan and that just breaking even is a decent goal. Even a slight change of rates can have a huge impact on cash over time. Consider the following graph. This is from a real business plan for an ISP considering a BEAD grant. The grant application would cover almost 5,000 rural passings. It’s in a relatively poor area, and the ISP hopes to eventually attract 60% of the residents to the new network.

The yellow line represents rates that range from 100 Mbps for $60 per month to a gigabit priced at $90. At those rates, this ISP will just barely keep its head above water for the next twenty years. Raising rates by $5 can add a comfortable margin over time, but a $5 decrease in rates would absolutely sink this ISP.

Some States have a grant point structure that rewards rate far lower than what is used in this example. I recently noticed a state where the maximum grant points are awarded for offering a $65 gigabit product. I didn’t even bother to show the impact of that rate since the losses are so large that the ISP would likely have to walk away from the market in few years.

I know that broadband offices want to do social good, and I applaud them for the sentiment. High rates are a problem. But it’s irresponsible to put the full burden on ISPs to solve the digital divide with low rates. It’s irresponsible to force low rates in rural areas where costs are high while the ISPs serving metropolitan areas can charge high rates with impunity.

Any State broadband office that thinks ISPs can easily absorb a big rate decrease does not understand the reality of operating a rural broadband network. They clearly believe that ISPs are secretly making obscene profits and can easily lower rates if pushed.

Driving down rates without understanding the consequences is a terrible idea. I think the best strategy for a grant office is to award BEAD funding to responsible ISPs who will commit to providing long-term great service. Forcing down rates will drive away the ISPs a State is hoping for. Grants will instead go to the giant ISPs that will pay lip service to low rates for a while but will raise rates over $100 per month as soon as possible.

Big ISP Fear of Rate Regulation

Policy fights often take bizarre directions. You might remember the furor seven years ago when the FCC under Chairman Tom Wheeler was contemplating imposing net neutrality. There were over 22 million public comments filed in the case. There was a big controversy when some of those against net neutrality filed bulk comments labeled as being from people who knew nothing about the comments, including several politicians.

I’m not entirely sure why the public got so stirred over the topic, because up until that time, there had been only a few blatant cases where ISPs had violated the net neutrality principles, with the most common being something the public largely favored – ISPS giving free access to a video service for buying broadband.

The big ISPs all lobbied hard against the net neutrality rules, but the CEO of every big ISP was on the record at least once saying that the net neutrality rules were not a big deal and that they could live with net neutrality. So why did the big carriers lobby so hard about what the FCC was doing?

The answer is that the carriers were far more worried about the FCC’s regulations that came along with FCC’s planned net neutrality rules. The FCC under Tom Wheeler was planning on strengthening the Title II regulatory policies that gave the FCC the right to regulate ISPs. The real fear that ISPs had was that the FCC would eventually use Title II authority to impose rate regulation on broadband. I think in hindsight that the big ISPs seven years ago already had long-term plans to migrate broadband rates as high as possible. Today we’re seeing the big cable companies starting to narrow in on basic broadband rates of $100 per month.

But the big ISPs couldn’t publicly lobby against rate regulation and Title II. The ISPs would have had a hard time convincing folks to file comments against controlling ISPs rates. The big ISPs would have had to argue that ISPs don’t need to be regulated – something the public would clearly and strongly disagree with. Most broadband customers of the big ISPs had at least one story of when they had an uncomfortable interaction with their ISP. The big ISPs were so unpopular at the time that they had the lowest ranking of all industries on surveys of how people rank U.S. corporations.

The big ISPs certainly could not have publicly told the truth and said that the only squabble with net neutrality rules was the risk of being told that rates are too expensive. That would be a public argument that even public allies of the big ISPs would have shied away from.

Seven years ago, the big ISPs pulled out all stops to lobby against net neutrality, although all they really cared about was the ability of some future FCC to tell them to stop raising rates. The big ISPs lost that battle in the Wheeler FCC, which everybody expected – because the FCC at the time had a Democrat majority.

The big ISPs didn’t have to wait long to get what they wanted after Donald Trump unexpectedly won the presidency. He promoted Ajit Pai to head the FCC, and his first order of business was to completely dismantle Title II regulation. This was again framed by the big ISPs as eliminating unneeded net neutrality rules – but the real issue that still was never said out loud was the goal of eliminating the threat of rate regulation.

Now that Democrats are back in charge of the White House, the whole issue has surfaced again. The big ISPs have been trying to derail or delay confirmation of Gigi Sohn as the fifth FCC Commissioner because they know that one of the first actions of the FCC under Chairman Jessica Rosenworcel will be to reintroduce Title II regulation.

I’ve seen a lot of pro-ISP articles lately talking about how net neutrality was an empty issue and how there have been no bad consequences from killing net neutrality. That may be largely true other than a few ugly examples like Verizon disconnecting firefighters battling forest fires.

But the lack of a threat of rate regulation has allowed big ISPs to raise rates with impunity. In the last five years, we’ve seen Comcast and Charter regularly raise broadband rates. Comcast rates are now north of $90, and after a series of $5 rate increases, Charter is not far behind. Other big cable companies like Cox and Atlantic Broadband charge even more than the big two. The public is currently complaining about inflation due to supply chain issues, but the cable companies have been busy raising broadband rates at a pace that far outstrips inflation.

In the recent confirmation hearing, Gigi Sohn said she was not in favor of rate regulation. I’m positive we’ll never hear the big ISPs publicly ask that question again because it will remind people about the impact of broadband on their pocketbooks. But I think we need to brace for another gigantic lobbying effort against rate regulation – disguised as arguments against net neutrality again.

Regulating Broadband Rates

FCC_New_LogoFCC Chairman Wheeler testified in front of the House Communications Subcommittee recently about the FCC’s authority to set broadband rates. He was testifying about a bill passed out of subcommittee a few weeks ago, introduced by Rep. Adam Kinzinger (R-Ill.) that would prohibit the FCC from regulating broadband rates.

Wheeler cautioned that he was concerned that any law that curtailed the FCC’s right to regulate rates might also inhibit the FCC’s ability to regulate the three basic tenets of network neutrality – preventing blocking, throttling, or paid prioritization of data.

Unless you are an FCC rule junkie it’s probably hard to understand why rates and net neutrality might be tied together. But the Chairman’s concern comes from the reliance of the FCC on using Title II as the basis for regulating net neutrality. Part and parcel with the Title II rules also comes the ability to regulate rates.

Back when the Chairman was talking about using Title II rules he said publicly that the FCC wasn’t intending to get into the rate regulation business for broadband. In these hearings the Chairman repeated this and said that the FCC would be glad to help craft language that limit the FCC’s ability to do traditional rate regulation while making sure not to undo the other aspects of Title II regulations.

As a consumer and one who tracks industry trends I’m not so sure that the FCC should be so quick to give up rate regulation of broadband. I believe that we are at the beginning of the time when we will see continuous annual price increases for broadband. The large cable companies and telcos are under huge pressure from Wall Street to increase earnings every quarter and a lot of their traditional revenue streams like cable TV and telephone service are in a decline. This is going to leave no alternative to the big ISPs but to raise broadband rates.

We’ve already seen the beginning of this. The recent Comcast data caps trials and the recent announcement from AT&T that customers could buy unlimited data for only $30 more than what they are already paying for broadband are both nothing more than big rate increases on the biggest data users of broadband. All of these companies understand how fast consumer use of broadband is growing. We have been a curve since the 1980s where home use of broadband has doubled about every three years and there is no sign of a slowdown. So the big ISPs set data caps knowing that they will get extra revenue today from perhaps 10% to 20% of their customers, but also knowing that each year it’s going to affect more and more people.

And rate caps are only the first place ISPs will raise rates. We’ve seen a number of the large ISPs raise rates a few bucks in the last few years, and as earnings pressure increases one can expect that we are not many years away from a time when data rates are going to be increased each year in the same manner that cable rates have increased. But there is a huge difference. Cable rate increases have been driven in large part by increases in programming costs (although cable companies usually tacked on a little extra to boost bottom line). But it’s already clear today that broadband has a huge margin and that, if anything, the cost of underlying Internet connectivity keeps dropping each year. If ISPs raise data rates it’s due to nothing more than wanting to make more money.

And there is fundamentally nothing wrong with any business wanting to make more money. Except that for most markets in the US there is only one dominant broadband provider in the form of a cable company. And even where there is a second provider, like Verizon FiOS, they will undoubtedly be raising rates in lockstep with the cable companies in a pure demonstration of duopoly competition.

So I hope that the FCC doesn’t give up rate setting abilities because the day is coming within a decade when it’s going to be badly needed. You can be sure that the ISPs understand this completely and that they are the authors of the bill that would stop the FCC from looking at rates. They know that the FCC isn’t likely to do this today, but they know that there is going to be a huge public outcry for the FCC to do this in the future and they are launching a preemptive strike now to win this battle before it starts.

What’s Wrong with Title II Regulation?

FCC_New_LogoI’ve read a lot of the comments of the big carriers and their associations that explain why Title II regulation is a terrible thing. Today’s blog will discuss some of their bigger complaints.

Rate Regulation. Many commenters say they fear rate regulation, meaning that the FCC could become involved in setting their rates. I can’t see any merit in this argument. The FCC and state commissions have relaxed regulation on telephone service over the years and in many states have deregulated rates. There has never been any rate regulation on competitive telephone companies (CLECs) or VoIP providers who are free to charge anything they want. The FCC also brought cellular voice under Title II in 2007 and there has been no regulation of those rates. Basically the FCC’s philosophy is to let the free market and competition set rates whenever possible and this has been true everywhere in the industry. The FCC only steps in when there is blatant abuse, such as when unscrupulous payphone providers were were billing people many dollars per minute.

I think the real fear of the carriers is having the FCC get involved in disputes of the charges between the large ISPs and companies like Netflix. On that count I think they are right, but that is the whole idea behind net neutrality – to not let carriers use their market power to pick winners and losers among web content providers. This is not exactly rate regulation in the historic sense, but its very likely that under Title II that the FCC will be asked to mediate differences between carriers.

Taxes. Several opponents of Title II have floated the idea that putting Internet service under regulation will mean a whole new host of taxes. At least in the short term that claim has no merit. Congress has been excluding the Internet from taxation for fifteen years and just recently renewed the law that stops states and localities from taxing Internet service. This is not to say that Internet service under Title II will never be taxed, because politicians everywhere are always looking for a new tax base. But the fact that Congress has felt the need to pass and renew this law means that taxing the Internet doesn’t require Title II regulation. States and localities have found ways to tax almost everything over the years and will tax the Internet if Congress allows it, with or without Title II.

There probably is a legitimate concern that Internet service would become subject to the Universal Service Charge. But since that FCC has frozen the size of the USF Fund, any new USF taxes on Internet service would mean lower taxes on other telecom services with no net change in tax to the public. Frankly, since the USF funding is now being used to expand broadband coverage, Internet users ought to help pay for it.

Increased Regulatory Burden. The big companies say that being under Title II will increase regulatory burden. It’s hard to say what exactly that might mean, but they are probably right because regulators like to regulate. Interestingly, the large ISPs make this argument on behalf of small ISPs and not for themselves. And here I thought they didn’t like the small ISPs that compete with them!

Pole Attachments. Cable companies fear that being under Title II will mean an increase in the rates they pay to attach to poles. Apparently today they often get cheaper attachment rates then some regulated companies. I have a hard time sympathizing with this. Cable companies love to raise the issue of level playing field when they have to compete with a municipality. But that same level playing field concept would say that every company that leases space on a pole ought to pay the same rate. They are arguing to maintain an un-level playing field that happens to be in their favor.

Tariffs. Regulated telephone companies, including the CLECs must file tariffs. These documents define the terms and conditions under which the companies will sell service to the public. In the tariff a company must define things like their policies for disconnecting a customer who doesn’t pay their bill. I suspect that many states would use Title II as a reason to impose tariffs on cable companies. And I suspect that cable companies would get dragged into some state laws that require certain levels of customer service. Considering how crappy the cable companies treat the public I suspect the public would be in favor of this.

Uncertainty. The large companies complain that requiring them to be under Title II means many years of uncertainty until all of the consequences of such a ruling are worked out. That is certainly true, but that is not a reason not to not impose net neutrality. There is a huge amount of uncertainty in the cable industry already. I am sure that Google introducing gigabit broadband into their markets, or Dish Networks launching of an OTT product that includes ESPN are causing a lot more uncertainty inside cable boardrooms than concerns about complying with regulatory rules. I really can’t picture cable company Boards spending a lot of time worrying about net neutrality.