By ADAM L. REED, attorney and research faculty
The University of Colorado at Boulder
www.colorado.edu/
Wrestling with the idea of net neutrality is Tom Wheeler, who became the 31st Chairman of the Federal Communications Commission (FCC) on November 4, 2013
What do oil pipelines and the Internet have in common? More than you may think, or at least that’s what the Obama Administration has recently suggested to the independent Federal Communications Commission (FCC) in its efforts to effect the restoration of net neutrality into law. We’re going to examine that notion here, learn a bit about the legal history of “common carriers,” and examine why the Internet might be one of them. That’s useful, I think, because there’s a tendency in public debates about net neutrality to treat it as though it were a problem distinct to the Internet. This simply isn’t true. Though it goes by a different name, the core problem at the heart of the net neutrality debate has existed for hundreds of years and has arisen in a host of industries, from one-horse-carriages to railroads, oil pipelines, and electric wires. What the FCC will decide over the next year is whether the Internet will join that band of industries.
Net neutrality is a convoluted jumble of ideas and the only thing certain is that 2015 is shaping up to be a critical year for the future of the Internet.
Net neutrality is the principle that Internet data carriers should treat all traffic on their networks equally. This described the operation of the Internet’s large-data trunk lines until last year: content providers from Amazon or Google to your Uncle Ned’s online ammo store could transmit their content over a network owned by Comcast or Time-Warner at the same speed as all other content providers, and network operators could not discriminate in the data transmission rates they provided on the basis of the content. FCC rules enforcing that principle were invalidated by the Federal Court of Appeals for the D.C. Circuit last January, resulting in rapid attempts by telecommunications companies to dedicate priority service lines to their own content-providing subsidiaries over competitors, or to downgrade transmission rates to third-party content providers if those providers didn’t agree to pay for “more secure” delivery (as Comcast did to Netflix from October 2013 to February 2014, when Netflix finally caved). Telecommunications companies argue that the elimination of net neutrality allows them to invest more rapidly in faster networks, and that’s true in some contexts. The trouble is that it also allows them to decide what data travels over those networks, rather than consumers and content-providers themselves in the supply-and-demand market for content.
The Obama Administration has urged the FCC to reclassify the Internet as a “common carrier” under Title II of the Telecommunications Act of 1996, which would allow the FCC to reimpose net neutrality regulations without running afoul of the court’s ruling. But just what is a common carrier, and why would a classification have such a dramatic impact on the ability of the commission to regulate Internet service?
If you don’t work in the telephone, electricity, or gas delivery industries, you may be confused about what a “common carrier” is, exactly. Read any discussion about net neutrality and you might get a sense that the Internet is a special regulatory case. It is, but perhaps not so singular as we might believe. We’ve been dealing with this policy issues that arise in so-called “network industries” since the creation of the railroads, the electrical grid, gas and oil pipelines, and the like. In each case, a physical network — a broadband line, a gas pipeline, railroad tracks and trains, or high voltage wires — spans an enormous geographical area and serves as a carrier for various forms of content — data, natural gas, physical goods, or electricity — that are sourced from a variety of competing producers who all use the physical network in common. Thus we use the phrase “common carrier” to refer to network owners who provide transport to multiple competing suppliers of a good or service.
So what makes common carriers, as a class of industry, so special? Because large-scale networks are very expensive and long-lived, it is economically inefficient for companies to provide multiple competing carrier lines along the same route. The huge capital outlays required for building networks can be recouped only through massive economies of scale. And so while providers of goods and services using a network line may be fiercely competitive (think of gas producers, farmers, independent power plants, and online entertainment services), there is little to no competition in network service itself. This is because the activity is what philosopher John Stuart Mill coined “naturally monopolistic,” meaning that the physical structure and economic characteristics of the network predispose the industry to service by a single provider whose very presence precludes the entry of competitors.
Natural monopolies like those recognized by Mill pose two related but distinct risks to the health of a network industry, which we might define as the ability of the industry as a whole to provide the highest quality product or service at the lowest prices to end users through open competition. First, a monopolistic network provider may charge substantially more for the transportation of a good or service than it costs to provide that transportation, due to the lack of transport-oriented competitors, reaping large profits at the expense of producers and consumers who cannot turn to anyone else. Perhaps the best example of this is the much-maligned railroad industry of the late Eighteenth Century, which gave rise to populist folk heroes like Jesse James. Second, they may enter the product or service side of the business and use their control of the network to intimidate or eliminate competitors. In the electric power industry, for example, this was the state of affairs until the late Twentieth Century, and most electric power was generated, transmitted, and sold by enormous utility companies who had no competitors. Notably, the abuses of the electric monopolies toward their own customers led to widespread state-based regulation of retail electricity rates within just a few decades of the industry’s emergence at the tail end of the Nineteenth Century.
In the energy sector in particular, the nature of regulation has changed dramatically since the 1980s. Beginning in the 1970s, Congress passed laws requiring utilities to purchase power from independent generators at the same cost the utility would have expended to self-generate, essentially providing a path to market for the earliest commercial-scale wind turbines. By the 1990s, following further action by Congress and regulators, long-distance natural gas and electric transmission would be utterly transformed from vertically-integrated, price-controlled monopoly enterprises to open-access common carrier networks providing pathways to market for hundreds of competing suppliers and generators.
I bring up the energy sector to make an important point: that the dichotomy between regulation and competition that we use with respect to normal goods and services has no proper analogue in network industries; there is no such thing as a network industry that is both highly competitive in its products or services and entirely unregulated. What we learned from the energy sector is that absent regulation of common carriers, such carriers will use their market power over the transmission aspect of the industry to become the only companies providing products or services. This inexorably leads to the sort of nanny-state monopolistic regulation that still exists in many U.S. states to curb the profits of electric and gas utilities — hardly Adam Smith’s invisible hand at work. Counterintuitively, it is the very regulation of common carriers through open-access rules that has allowed competition to flourish in the energy sector, and the poster-child here is none other than market-lovin’ Texas, which has a highly competitive electricity market consisting of hundreds of competing, non-regulated generators coupled with a tightly regulated electric transmission system, known as the Electric Reliability Council of Texas (ERCOT).
Though nothing is simple in network industries, the reasoning here is still, I hope, straightforward enough. If you want competition and innovation in a network industry in the products or services it provides (and we generally do), it is necessary to ensure that network operators act in good faith with respect to all market actors who depend on them to move their products. The only other alternative is natural monopoly, which will invite even more intrusive regulation, the kind that stifles rather than promotes innovation. This straightforward truth, pulled from a century-and-a-half of empirical, cross-sectoral network industry experience in this country and abroad, has been largely lost in many policy discussions about net neutrality.
This is because advocates for the telecommunications industry have deliberately obscured the debate by promoting a false-equivalence between the open-access regulations that net neutrality would involve—which would increase competition among online content providers by allowing all content the same opportunity to reach consumers—and oppressive content-specific regulations that would limit the availability of lawful content and which essentially everyone in the country would oppose. Senator Ted Cruz was guilty of this when he called net neutrality “Obamacare for the Internet.” Cruz’s spokesperson Amanda Carpenter added to the argument that net neutrality would place the government “in charge of determining pricing, terms of service, and what products can be delivered. Sound like Obamacare much?” By not defining an object in her statement, Carpenter makes it sound like net neutrality regulations would determine pricing and terms of service for content itself, rather than for the delivery of that content by intermediaries. The distinction that Carpenter deliberately blurs is precisely the distinction we’ve been discussing here, and it’s critical to understanding the rationale for common-carrier regulation of any network industry from railroads to fiber-optics: that open-access regulation of product transportation over naturally-monopolistic infrastructures is necessary in order to promote competition in the availability of products themselves. To understand the argument, you must keep separate in your mind the thing being provided, which benefits from competition, and the means by which it reaches an end-user, which is naturally resistant to competition.
But this doesn’t close the issue. Even if we could all agree that net neutrality is a really good idea, there is still the question of whether the FCC can permissibly classify the Internet as a common carrier under the authority provided to it by the Telecommunications Act of 1996. This is a legal rather than a policy question. Part of the difficulty here is that the FCC’s lawyers argued strenuously to the D.C. Circuit in the case at hand that net neutrality did not impose common carrier obligations, and that its net neutrality regulations were permissible under the Commission’s Congressionally-granted authority to promote competition and infrastructure investment generally, along with a host of other justifications. Why did the FCC not classify the Internet as a common carrier and regulate it as such in the first place?
The answer is complex, dating back to the early 1980s, when the FCC made a distinction between “basic” and “enhanced” communications services in a decision known as Computer II. Basic services, subject to common carrier regulations, involved mere transmission of information rather than “processing” of that information. Enhanced services, which processed information and included early Internet service, were not subject to common carrier regulation. Congress preserved this distinction when it passed the Telecommunications Act, renaming the categories “telecommunications carriers” for basic services and “information-service providers” for enhanced services. By the language of the Act itself, information-service providers were not subject to the common-carrier regulations of the Act’s Title II. Then things got weird.
Following the passage of the Telecommunications Act, the FCC classified digital subscriber line (DSL) service, provided by telephone companies as broadband Internet access service, as a telecommunications carrier subject to common carrier regulations. But four years later, it classified cable broadband providers as information service providers, and entirely exempted them from common carrier regulations. The Supreme Court upheld that bizarre distinction in National Cable & Telecommunications Ass’n v. Brand X Internet Services (2005), citing the Act’s ambiguous language as a place for the Commission to exercise its expert judgment, to which the Court generally grants deference in the absence of clear congressional intent. After Brand X, the FCC reclassified DSL and wireless as well as information-service providers, again exempt from common carrier regulation.
If the FCC follows the advice of the Obama Administration and flips categories again, will it be afforded the same deference? That seems likely, absent a major reversal of the Court’s findings in Brand X that the statutory language was ambiguous. But FCC chairman Tom Wheeler has expressed reservations about such a shift, and has hinted at what he calls a “hybrid approach,” though it isn’t clear what that means yet. The only thing certain from here is that 2015 is shaping up to be a critical year for the future of the Internet.
Adam Reed is an attorney and a member of the research faculty at the University of Colorado at Boulder. He works on economic, legal, and technology issues related to energy, water, and other network services.
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