Old rules make Internet more expensive

The Internet doesn't need to be regulated as a public utility to be fast and fair.

If the Federal Communications Commission (FCC) votes to "reclassify" the Internet as a public utility, U.S. consumers will have to dig deeper into their pockets to pay for access to the Internet.

How deep? By our estimates, broadband subscribers would have to pay about $70 annually in additional state and local fees. When you add it all up, reclassification could add a whopping $15 billion in new user fees to consumer bills.

At issue is whether Internet service providers (ISPs) — telco and cable companies — should be regulated as public utilities under Title II of the Communications Act of 1934. Activists pushing for this approach — echoed recently by President Obama — claim it is the only way to protect "net neutrality." Critics argue that there are better ways to ensure an open Internet without subjecting ISPs to archaic regulations designed for the old Ma Bell telephone monopoly.

Missing from this debate until now is any serious assessment of what Title II regulation would cost broadband consumers. So we ran the numbers and discovered there is nothing but bad news on this front. Once Internet access service is labeled a "telecommunications service" under Title II, consumer broadband services could become subject to a whole host of new taxes and fees.

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Although these fees are paid by broadband providers, history shows — and economic models of competitive markets predict — that these charges are passed along to customers, just as they are now on your phone bill.

The Internet Tax Freedom Act pending in Congress might limit the impact of some of these taxes and fees, but not all of them. And while the FCC has the power to limit the amount of the federal Universal Service Fee, recent history shows the FCC is more likely to increase USF than reduce it. Perhaps most telling — even the staunchest defenders of Title II acknowledge that various federal and state authorities could impose billions in new charges if broadband is reclassified as a utility.

Thus consumers' Internet bills could soon have new random charges tacked on at the end, much like consumers see on their phone bills today.

How did we come to such a pass? In early November, FCC Chairman Tom Wheeler floated a "hybrid" compromise that would have deemed Internet service providers (ISPs) — telcos and cable companies — as public utilities for purposes of their dealings with websites, such as Netflix.

But when it came to the rates and download speeds offered to broadband customers, ISPs would continue to be subject to "light touch" regulation under Section 706 of theTelecommunications Act of 1996, which directs the Commission to encouragebroadband deployment". This would allow them to give their customers choices: those who were willing to pay more for higher speeds could. Think of it as being willing to pay more to take the faster Acela train as opposed to the regular Amtrak line.

In an 11th hour intervention, President Obama last month urged the FCC to bring broadband access under Title II as well and regulate the Internet as a public utility, much the way your local electricity or gas-distribution monopolies are regulated. The president and some other net neutrality advocates want this reclassification to prohibit ISPs from charging content providers for priority delivery for fear that ISPs could shake down vulnerable websites with excessive charges.

But, reclassifying the Internet as a utility will not achieve the president's objective because an absolute ban on "pay for priority" arrangements is flatly inconsistent with the standard enshrined in Title II of prohibiting only "unreasonable discrimination." The only thing the agency could do under Title II is to require ISPs to make any paid priority offers available to all comers on the same terms.

Fortunately, it's not too late for the FCC to adopt a better, less costly way to preserve the open Internet. The agency could use its Section 706 authority to prevent ISPs from blocking access, throttling traffic or engaging in harmful paid priority. This course gives federal regulators all the power they need to protect upstart websites and consumers — without subjecting the Internet to outdated telephone rules that would undermine investment, slow innovation and hit U.S. consumers with stiff new broadband fees.

Robert Litan is a non-resident senior fellow at the Brookings Institution. Hal Singer is a senior fellow at the Progressive Policy Institute. Both are affiliated with Economists Incorporated which has both ISPs and content firms as clients.

by  Robert Litan