FCC Deregulation of Broadband Upheld

Tod Hunter
PHILADELPHIA — A federal appeals court has upheld a 2005 Federal Communications Commission ruling that had effectively deregulated high-speed Internet access service provided over traditional telephone lines.

In the September 2005 ruling that was upheld, the FCC overruled decades-old regulations that required telephone companies to grant "nondiscriminatory" access to their wirelines to competing Internet service providers in order to reach consumers.

A unanimous three-judge panel of the 3rd U.S. Circuit Court of Appeals has ruled that the FCC's decision simply extended the logic of the U.S. Supreme Court's 2005 ruling in National Cable & Telecommunications Association vs. Brand X Internet Services.

In the Brand X decision, the Supreme Court upheld a previous FCC ruling that said cable companies provide an "information service" rather than a "telecommunications service" and therefore should not be forced to share their infrastructure with Internet service providers.

Soon after, the FCC handed down its Wireline Broadband Order to extend the same rules to telephone companies, saying that "like cable modem service [which is usually provided over the provider's own facilities], wireline broadband Internet access service combines computer processing, information provision and data transport, enabling end users to run a variety of applications" such as email and surfing the Internet.

The FCC concluded that, due to the similarity between how end users perceive Internet access — whether provided by wireline or cable modem providers — its decision to classify wireline broadband Internet access service as an "information service" logically flowed from the Supreme Court's Brand X decision. This FCC order now allows telephone companies to enter into individually negotiated arrangements with companies that seek access to their broadband wireline facilities.

Independent Internet service providers, competing telecommunications service providers, cable modem providers and several public interest organizations had challenged the 2005 FCC ruling in the three consolidated appeals considered by the 3rd Circuit under the title Time Warner Telecom Inc. vs. FCC.

In the appeals, the independent providers argued that the FCC's order allows telephone companies to deny competitors access to the companies' wirelines, leading to decreased competition and decreased consumer choice in the market for broadband Internet service.

Time Warner's lawyer argued that if the dominant telephone companies were not required to make their transmission lines available to competitive providers of Internet access, the telephone companies could then target their investments in network upgrades that would be available only to their own Internet access services.

The result, Time Warner argued, would be a disparity in service between the broadband Internet access service offered by telephone companies and other ISPs, giving the telephone companies "the ability to raise prices unilaterally on their higher-quality services without fear of losing market share."

Lawyers for the FCC argued that the agency properly decided to abandon the regulations because they "imposed significant costs" on telephone companies, "thereby impeding innovation and investment in new broadband technologies and services," and the 3rd Circuit agreed, finding that the FCC's decision was entitled to deference.

"In our view, the record adequately supports the FCC's conclusion that, from the perspective of the end-user, wireline broadband service and cable modem service are functionally similar and, therefore, that they should be subject to the same regulatory classification under the Communications Act," U.S. Circuit Judge Julio M. Fuentes wrote.

Fuentes, in an opinion joined by 3rd Circuit Senior Judge Morton I. Greenberg and visiting Judge Alan D. Lourie of the federal circuit, also rejected the argument that the FCC's ruling was improper because it conflicted with past agency decisions.

Merely showing that an agency's ruling is in conflict with its prior decisions is not enough to invalidate it, Fuentes found, also rejecting the argument that the FCC's decision-making process was flawed because it failed to conduct a "full market analysis."

"The FCC candidly admitted in the Wireline Broadband Order that past agency statements concerning the regulatory treatment of wireline broadband Internet access service had not been 'entirely consistent,' but nevertheless found that there was ample basis in its prior rulings to support its classification of wireline broadband Internet access service as a functionally integrated information service," Fuentes wrote.

"To the extent that the FCC's current classification of wireline broadband Internet access service conflicts with past agency rulings, Brand X makes clear that an initial agency interpretation is not instantly carved in stone. On the contrary, the agency ... must consider varying interpretations and the wisdom of its policy on a continuing basis.'"

Attorney James M. Carr of the FCC's office of general counsel argued that the agency properly opted not to do a market analysis because it wanted to "avoid making highly dubious and premature conclusions about a nascent and dynamic market that is rapidly changing."

In its order, Carr said, the FCC explained that only 20 percent of consumers who have access to advanced telecommunications capability currently subscribe to services providing such capability, and that about 50 percent of U.S. households subscribe to either broadband or narrowband Internet access service.

Alternative broadband platforms are developing and emerging, Carr said, such as satellite, wireless and powerline, in both the residential and business markets. Carr added that by comparison, the FCC found that the market for telephone services has had a market penetration rate of roughly 90 percent for more than 20 years, so in the FCC's view, "snapshot data" of the broadband service market "may quickly and predictably be rendered obsolete as the market continues to evolve."

Fuentes agreed, and said the FCC had properly considered "how the market for broadband services is likely to develop" and had predicted that "market penetration of cable modem and wireline broadband service will grow dramatically in the future and that the two services will compete head-to-head."

The FCC also predicted that both cable and wireline services will continue to invest in and expand the reach of their services, Fuentes said, and that emerging broadband platforms will exert competitive pressure and gain market share.

As a result, Fuentes said, "We agree with the FCC that these reasons justified its decision to refrain from a traditional market analysis and to rely instead on larger trends and predictions concerning the future of the broadband services market."