"Time for the Supremes to Decide 'Net Neutrality'"

The FCC's dramatic 2015 pivot on Internet regulation sought to envelope advanced broadband networks in the shroud of telephone company rules rolled out in the Mann Elkins Act of 1910. These historic common carriage "Title II" regulations - originally the province of the Interstate Commerce Commission, long ago antiquated and finally abolished in 1995 - were cited as exemplars by the Commission in last year's Open Internet Order.

The Commission justified its regime switch on the grounds that it would protect the "virtuous cycle" of technological innovation and network growth that has characterized heretofore unregulated Internet markets. Legal challenge was immediate.

But now the DC Circuit, in a 2-1 decision, has ruled that the FCC's new "Title II" regulations on broadband Internet providers are legal. Giving regulators the benefit of "a highly deferential standard," the majority found that the reasons for the policy shift did not have to be compelling, only reasonable. Yet, a review of the actual evidence offered by the Commission seems to fail even that soft test. In each of the particular episodes advanced by the FCC to provide factual justification for its policy change, results were fudged.

Start with the FCC's (previously) long-standing conclusion that eliminating old common carrier rules encouraged the Internet. By 1999, this had forged a "thirty-year tradition of 'unregulating' the data services market," as a Commission paper put it. Letting networks and websites figure out how to cooperate under market incentives unleashed residential broadband and Voice over Internet, explicitly exempted from legacy telecoms rules. The "Commission has acted in numerous ways to ensure that this incredible network of networks continued to develop unregulated," noted the agency.

This history did not impress the current Commission, which thus created a new one. First, it asserted that its December 2010 Net Neutrality rules, overturned in early 2014, spurred Internet investment. From 2011 to 2013, broadband networks were claimed to have invested "more than in any three year period since 2002." But this supposed stimulus is entirely wiped away by inflation. In real dollars, capital expenditures for broadband fell to their lowest level since 1996-98, when dial-up - not broadband - was the rage. The Commission skipped this part of the analysis, as well as the serious empirical studies showing that net neutrality would adversely impact investment. These prompted an admonition of the Justice Department Antitrust Division, which warned the FCC (regarding the 2010 rules) that "care must be taken to avoid stifling the infrastructure needed to expand broadband access." That consideration went missing in the FCC's 2015 report.

Second, the Commission boasted that in the January 2015 mobile license auctions ("AWS-3"), a record-setting $41 billion was raised. It argued that were regulations - about to be imposed in February 2015 - to suppress investment, such bids would not be forthcoming. The claim is remarkable because it is so easily demolished. The FCC auction ended on January 29, 2015, when there were no Net Neutrality rules. Then, in a Wired article published online February 4, FCC Chairman Tom Wheeler announced that new, tougher common carrier rules. The plan was seen as a stunning policy reversal; "Wheeler Goes Nuclear with Title II Announcement," was how Wireless Week reported the event that day. Whatever the AWS-3 auction showed, it was not a referendum on a surprise announcement to come.

Third, the Commission touts wireless market experience, arguing that mobile networks have operated under "a similar light-touch Title II approach since 1994 - and investment and usage boomed." But the gimmick here is that the regimes are not identical and the change in 1994 pared back common carrier rules for mobile. Specifically, the law pre-empted state-level regulation of retail rates. That did, predictably, spur investment, and - with new spectrum (and licenses) released to the market - new competition hugely expanded use. The policy change was in the opposite direction from that crafted in 2015, and the new rules include no statute prohibiting rate regulation.

Fourth, the Commission argued that DSL services (digital subscriber lines offered by local telephone carriers) were long regulated under legacy Title II rules. The FCC posited that "wireline was regulated as a common-carrier service until 2005 - including a period in the late '90s and the first five years of this century that saw the highest levels of wireline broadband infrastructure to date." In fact, unregulated cable modem service drove residential broadband - and, in response, the FCC dropped DSL rules in 2005 to expand the success. Indeed, broadband deployments spurted. Similarly, fiber-to-the-home deployments went nowhere until (in 2004) the FCC eliminated network-sharing mandates.

The FCC has waxed triumphant in reviewing the "record" of broadband regulation. But its factual assertions are vapor. UC Berkeley's Michael Katz, a former FCC Chief Economist, found three of his papers footnoted to establish the proposition that broadband providers would stifle Internet growth by discriminating against "edge" innovators. In a recent paper, he called the FCC out: "they do not." The Commission's own Chief Economist while the 2015 Title II Order was being concocted, Tim Brennan, referred to the rulemaking process as an "economics-free zone."

Not even by cherry-picking the evidence and stretching the facts could the FCC make its case. That the agency has nonetheless danced past the legal backstop of court review is a plea for greater scrutiny. Perhaps the U.S. Supreme Court, or the U.S. Congress, might provide it.

Thomas Hazlett is the H.H. Macaulay Endowed Professor of Economics at Clemson University and former Chief Economist of the Federal Communications Commission. Joshua Wright is a Professor of Law and Economics at George Mason University School of Law, and former member of the Federal Trade Commission. Academic work of the authors was cited in USTA v. FCC (by Judge Stephen Williams' dissent).