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.