Dunstan on Genachowki’s Third Way & the Looming Broadband Tax

by on May 12, 2010 · 7 comments

My dear friend, fellow space/IT/priavcy/communications lawyer and now PFF Adjunct Fellow Jim Dunstan just published this PFF paper, which I thought I’d share with you (PDF)

______________________

The FCC’s Title II “Lite” (as a Lead Balloon!) & the Looming Broadband Tax

by James E. Dunstan, PFF Adjunct Fellow, Progress Snapshot 6.9

FCC Chairman Genachowski has set forth his vision—a “Third Way[1]—for overcoming the D.C. Circuit’s recent decision in the Comcast case concluding that the FCC lacked jurisdiction for sanctioning Comcast for allegedly blocking subscribers using peer-to-peer software or otherwise throttling bandwidth to heavy users.[2] The Court concluded that the FCC’s “ancillary jurisdiction” under Title I of the Communications Act was insufficient authority to step in and regulate Comcast’s broadband services.  Since then, all of the Washington telecommunications intelligentsia has speculated at the FCC’s next move.  Now we have it.

Chairman Genachowski’s “Third Way” is a form of Title II “lite,” where the FCC will reverse its prior decisions dating back decades that declare the Internet and broadband connections “information services,” and instead bifurcate the Internet into two segments: the “Internet” itself, and the “connections to” the Internet.  Under the “Third Way,” the FCC would continue to treat the “Internet” itself (whatever that actually means) as an “information service” (Title I) but declare all connections to the Internet to be “telecommunications services” (Title II).[3] Armed with a ten-page memo from his General Counsel,[4] the Chairman argues that this policy reversal is on sound legal ground and will instantly reverse the “problem” caused by the Comcast decision.

Setting aside the fundamental question of who caused this “problem” (a Federal Court of Appeals concluded that it was the FCC who violated the Communications Act, not Comcast), the Chairman’s “Third Way” may turn out to be a third rail, with the real potential for destroying the Internet as we know it.

Remember how Voice over Internet Protocol (VoIP) was going to revolutionize the telephone market by offering services for a fraction of the price of traditional telephone companies because it wasn’t saddled with traditional telephone infrastructure costs but instead rode along broadband connections?  Unfortunately, VoIP has all but died a slow and painful death on the FCC’s regulatory rack:  Over time, the FCC heaped more and more Title II regulation upon VoIP providers, increasing barriers to entry for new competitive services.  Without even formally branding VoIP a telecommunication service subject to Title II, the FCC first imposed 911 obligations,[5] then CALEA obligations,[6] and ultimately required interconnected VoIP providers to pay into the Universal Service Fund.[7] What was rolled out as a cheap additional voice alternative for the tech-savvy became just another service under the FCC’s heavy thumb, which drove most small VoIP providers out of business, unable to shoulder the huge regulatory costs of being de facto Title II carriers.  Even worse, as of May, 2009, a VoIP provider can’t even go out of business without first getting FCC permission to die, even if it had begun offering service in the era before the FCC stepped into regulate.[8]

While the Chairman asks us to trust him that he’ll handle broadband with a light regulatory touch (so-called “forbearance”), one look at how VoIP was treated must lead us to conclude that all manner of regulatory hell potentially faces each carrier providing an onramp to the Internet, if the FCC goes its “Third Way.”  But the part of this proposed regulatory course that’s most disturbing is the way in which this Commission is likely to both grant itself regulatory powers Congress never intended and in one fell swoop impose the largest single new tax in its history.  This is a side of the story that has somehow flown under the radar.

When the FCC recently issued its National Broadband Plan (NBP),[9] as required by Congress, the document was long on promise (“100 Mbps to 100 million Americans by 2020”), but short on ways to pay for broadband deployment to the 5-7% of Americans without real access to even slow broadband speeds (below 3 Mbps).  As it turns out, the Comcast case provides the FCC with the perfect vehicle to fund aggressive broadband deployment: the Universal Service Fund.  As with so much of government, if you want to understand policymaking, just follow the money.

FCC General Counsel Austin Schlick’s legal memorandum supporting the “Third Way” makes no mention of the Universal Service Fund.  In contrast, Chairman Genachowski’s statement talks about USF three times.  It is the goal of this FCC, he says, as part of the National Broadband Plan, to overhaul the USF and transform a $9 billion program subsidizing basic telephone service to homes and broadband connections to schools and libraries, into a program to subsidize deploying broadband to rural areas and subsidize subscriber fees in high cost areas and for those with low incomes.

Of course, this is the same USF with some of the largest percentages of waste, fraud, and abuse of any government program.  The GAO estimates that in 2008 alone, some $1.3 billion was improperly paid out, with some 23.3% of payments made under the High Cost program being made in error.[10] This is also the same fund where the “contribution factor” (a fancy word for tax, since all contributing carriers pass that amount right along to you and me in our monthly bills) has increased from around 5% in 1999 to a current contribution factor of 15.3%,[11] and that contribution factor would be far higher had not the FCC capped out-of-control payments from the High Cost program to avoid bankrupting the fund.  And this is going to be the funding mechanism for the National Broadband Plan?

Most likely, it will.  If the FCC gets its way and is able to grant itself new jurisdiction over broadband by declaring it a “telecommunications service” under Title II, with or without forbearance, all broadband connections will become subject to USF contributions.[12] According to the Organization for Economic Co-Operation and Development (OECD), the average subscription price for broadband in the United States in 2009 was $49.25 a month.[13] Applying the 15.3% contribution factor, the average broadband subscriber in the United States may soon have to pay $7.50/month more for service—a new $90 annual tax.  With approximately 80 million broadband connections in the United States, that’s a cool $7.2 billion in new funds available to USF—instantly nearly doubling its size to over $16 billion a year.  Eureka! The FCC has just figured out how to pay for its National Broadband Plan without having to go back to Congress (which, in theory, holds the sole power to tax).

As the somewhat esoteric legal debate rages over the FCC’s jurisdiction under Title I or Title II, this “Third Way” of Title II “lite,” or the legality of reclassification, keep a close eye out for any mention of “Universal Service Fund reform.”[14] That’s a clever code phrase for bringing broadband connections into the USF, and sticking you and me with the bill.

Related PFF Publications


Jim Dunstan (jdunstan@mobiuslegal.com) is an Adjunct Fellow at The Progress & Freedom Foundation, the founder of Mobius Legal Group, PLLC, and a 25-plus-year veteran practitioner of high technology, communications, and computer law.   The views expressed in this report are his own, and are not necessarily the views of the PFF board, fellows or staff.

[1] Julius Genachowski, Federal Communications Commission, The Third Way: A Narrowly Tailored Broadband Framework, May 6, 2010, www.broadband.gov/the-third-way-narrowly-tailored-broadband-framework-chairman-julius-genachowski.html.

[2] Comcast Corp. v. FCC, No. 08-1291 (D.C. Cir. 2010), http://pacer.cadc.uscourts.gov/common/opinions/201004/08-1291-1238302.pdf.

[3] The Internet has been defined as the ”international computer network of both Federal and non-Federal interoperable packet switched data networks,” 47 U.S.C § 230(f)(1) or “collectively the myriad of computer and telecommunications facilities, including equipment and operating software, which comprise the interconnected world-wide network of networks that employ the Transmission Control Protocol/ Internet Protocol, or any predecessor or successor protocols to such protocol, to communicate information of all kinds by wire or radio,” 15 U.S.C § 6501(6).  In essence, then, the Internet itself is nothing more than the sum of its connections.

[4] Austin Schlick, FCC General Counsel, A Third-Way Legal Framework for Addressing the Comcast Dilemma, www.broadband.gov/third-way-legal-framework-for-addressing-the-comcast-dilemma.html.

[5] E911 Requirements for IP-Enabled Service Providers, WC Docket Nos. 04-36, 05-196, First Report and Order and Notice of Proposed Rulemaking, 20 FCC Rcd 10245 (2005).

[6] In the Matter of Communications Assistance for Law Enforcement Act and Broadband Access and Services, Second Report and Order and Memorandum Opinion and Order, FCC 06-56 (released May 12, 2006).

[7] See infra note 12.

[8] In the Matter of IP-Enabled Services, FCC 09-40, ¶ 2 (rel. May 13, 2009)(“we extend to providers of interconnected VoIP service the discontinuance obligations that apply to domestic nondominant telecommunications carriers under section 214 of the Communications Act of 1934, as amended (the Act). Consequently, before an interconnected VoIP provider may discontinue service, it must comply with the streamlined discontinuance requirements under Part 63 of the Commission’s rules, including the requirements to provide written notice to all affected customers, notify relevant state authorities, and file an application for authorization of the planned discontinuance with the Commission”).

[9] http://www.broadband.gov/plan/

[10] See Testimony of Kay L. Daly, Director for Financial Management and Assurance, General Accounting Office, before the Subcommittee on Federal Financial Management, Government Information, Federal Services, and International Security, Committee on Homeland Security and Governmental Affairs, U.S. Senate, April 22, 2009 (available at www.gao.gov/new.items/d09628t.pdf).

[11] Since telecommunication rates themselves have increased over the past 10 years, the actual amount paid by consumers into the USF has increased close to four-fold.

[12] 47 U.S.C. § 254(d) requires that “Every telecommunications carrier that provides interstate telecommunications services shall contribute [to the USF].”  The FCC imposed this requirement on VoIP providers in 2006 after concluding that interconnected VoIP providers are “providers of interstate telecommunications” under this section, but without even finding it necessary to reach the issue of Title II classification.  Yet the FCC made clear that, “To the extent interconnected VoIP services are telecommunications services, they are of course subject to the mandatory contribution requirement of section 254(d).”  Report and Order & Notice of Proposed Rulemaking, Universal Service Contribution Methodology, ¶¶ 34-36, June 27, 2006, http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-06-94A1.pdf.

[13] www.oecd.org/dataoecd/22/42/39574970.xls.

[14] As John Steele Gordon noted recently in Commentary:

Roscoe Conkling, senator and Republican political boss of New York State in the 1870s and 1880s, once remarked that “when Dr. Johnson said that ‘patriotism is the last refuge of a scoundrel,’ he was obviously unaware of the possibilities inherent in the word ‘reform.’”

The Global Reform Dodge, Commentary Magazine Blog, May 3, 2010, www.commentarymagazine.com/blogs/index.php/gordon/288381.

  • Brett Glass

    What irks me, as a small, independent wireless broadband provider, is that if broadband were declared to be subject to USF contributions, I would be forced to charge all of my customers for the USF tax but would not be eligible to receive any of the funding! The rules for the USF restrict it to telephone companies. How is that fair?

  • MikeRT

    The FCC is one of those federal agencies that really needs to be abolished. Fire every FCC employee and turn their buildings into something more useful like… a rescue shelter for stray cats or something (as you can tell, I have a high regard for the work they do).

  • http://areasonedvoice.blogspot.com/ Peter Nayland Kust

    What's even more absurd is that the FCC's reaction to its loss in the Comcast case is to raise more barriers and make it harder for smaller ISPs to compete effectively overall. When 5 companies service more than 80% of the nation's broadband customers, those companies enjoy a level of market power that puts consumers at a disadvantage and retards innovation and technological advancement. The FCC SHOULD be encouraging more small independent providers to get in the market, to bleed away the market power of a Comcast or AT&T, and instead they are doing the exact opposite.

  • http://thirdinternet.wordpress.com/ TomCoseven

    Clearly, the “Third Way” is mostly about clarifying tax authority. There’s some other motivation, but Genachowski wouldn’t go through all the pain of reclassification without the need to bulk up USF to implement the National Broadband Plan. Net Neutrality just doesn’t have the base of support or urgency it once did. Even Google has backed off, as they realize the latency problems they face delivering real-time cloud apps like wireless voice command. They have begun to coach people to use “open network” rather than “net neutrality.”

    Jim's example of Title II “lite” killing the VOIP industry is unfortunate, because it isn’t really true. The broadband VOIP companies died, because of good old fashioned competition. MSO voice stole the mainstream market, mobile voice stole the singles market, and Skype and Google Voice stole the techie/early adopter market. The broadband VOIP companies had a time-to-market advantage, but they had massive software problems with their early SIP implementations. By the time their products were stable, the MSO’s had all the momentum, and were buying market share with bundling and very low introductory rates. Time Warner’s nationwide “all you can eat” introductory plan was $5/month cheaper than the equivalent Vonage plan. Today, Skype offers unlimited worldwide calling to landline and mobile for $13.99. Google Voice offers US and much of Europe for 1 cent/minute, which for an average family is less that $6/month. Considering that Skype claims a half a billion subscribers, you could say broadband VOIP is very much alive.

  • MikeRT

    The FCC is one of those federal agencies that really needs to be abolished. Fire every FCC employee and turn their buildings into something more useful like… a rescue shelter for stray cats or something (as you can tell, I have a high regard for the work they do).

  • http://areasonedvoice.blogspot.com/ Peter Nayland Kust

    What's even more absurd is that the FCC's reaction to its loss in the Comcast case is to raise more barriers and make it harder for smaller ISPs to compete effectively overall. When 5 companies service more than 80% of the nation's broadband customers, those companies enjoy a level of market power that puts consumers at a disadvantage and retards innovation and technological advancement. The FCC SHOULD be encouraging more small independent providers to get in the market, to bleed away the market power of a Comcast or AT&T, and instead they are doing the exact opposite.

  • http://thirdinternet.wordpress.com/ TomCoseven

    Clearly, the “Third Way” is mostly about clarifying tax authority. There’s some other motivation, but Genachowski wouldn’t go through all the pain of reclassification without the need to bulk up USF to implement the National Broadband Plan. Net Neutrality just doesn’t have the base of support or urgency it once did. Even Google has backed off, as they realize the latency problems they face delivering real-time cloud apps like wireless voice command. They have begun to coach people to use “open network” rather than “net neutrality.”

    Jim's example of Title II “lite” killing the VOIP industry is unfortunate, because it isn’t really true. The broadband VOIP companies died, because of good old fashioned competition. MSO voice stole the mainstream market, mobile voice stole the singles market, and Skype and Google Voice stole the techie/early adopter market. The broadband VOIP companies had a time-to-market advantage, but they had massive software problems with their early SIP implementations. By the time their products were stable, the MSO’s had all the momentum, and were buying market share with bundling and very low introductory rates. Time Warner’s nationwide “all you can eat” introductory plan was $5/month cheaper than the equivalent Vonage plan. Today, Skype offers unlimited worldwide calling to landline and mobile for $13.99. Google Voice offers US and much of Europe for 1 cent/minute, which for an average family is less that $6/month. Considering that Skype claims a half a billion subscribers, you could say broadband VOIP is very much alive.

Previous post:

Next post: