Insights on Future FCC Decision-making Gleaned From a Judicial Dissent

            As unorthodox as it might seem, Senior Circuit Judge Stephen F. Williams dissenting opinion in a major FCC case offers a likely roadmap on how the FCC will operate with Trump appointees and a Republican majority.  Judge Williams’ extensive opinion in U.S. Telecom v. FCC, available at: http://pdfserver.amlaw.com/nlj/6-14-16%20DC%20Circuit%20net%20neutrality%20opinion.pdf, has a flavor remarkably unlike a legal dissent.  At its best, his work identifies real defects in the logic used by the FCC to reclassify broadband Internet access as a telecommunications service.  Additionally, the Judge raises legitimate questions about the FCC’s rationales supporting a near total prohibition on paid prioritization of traffic. 

            I am not keen on ex ante regulation and can identify significant consumer benefits in having the option to receive “better than best efforts” traffic routing.  Judge Williams offers considerable evidence that consumers do not benefit and may be harmed by a prohibition on price and quality of service discrimination.

            At its worst, the Williams dissent misreads case precedent, misinterprets the statutory duty of the FCC to apply Title II common carriage regulation and shows a penchant for economic analysis regardless whether it is appropriate, helpful or sponsored by a stakeholder.   Additionally, the opinion offers copious sanctimony and snark at a high level even for dissenting jurists.

            Judge Williams believes the FCC failed to provide stakeholders adequate notice that the Commission had opted to use a new standard for assessing whether and how to apply Title II regulation.  He chides the FCC for not conducting a thorough assessment of market power to determine whether the broadband access marketplace operate competitively.  From his perspective, Judge Williams considers the Title II classification as lawful if and only if the broadband marketplace lacks competition. 

            There should be no dispute that common carriage regulation, established in Title II of the Communications Act, can apply even if a telecommunications market segment operates competitively.  For example, Congress ordered the FCC to treat Commercial Mobile Radio Service operators as common carriers (47 U.S.C. §322) regardless whether the wireless marketplace is, or will become competitive. 

            Even as I do not think the FCC should have imposed the common carrier classification, I have no doubt the FCC can lawfully make the call.  Judge Williams would prevent the FCC from applying Title II unless the Commission can prove market failure, an extraordinarily high  standard of proof no law requires.  Additionally, the Judge would deny the Commission any deference based on its expertise to interpret and apply ambiguous statutory language as the Supreme Court established in its Chevron Doctrine.

            Judge Williams appears so enamored with economic analysis, that a failure to showcase it constitutes reversible error.  Nothing in the Communications Act mandates economic analysis as the primary, “make or break” analytical tool the FCC must use.  The FCC has to assemble a complete evidentiary record based on facts, an empirical record, the advocacy documents of stakeholders and the Commission’s assessment of what would best serve the public interest.  Of course economic analysis can help the FCC meet its statutory duties, but it does not constitute a sine qua non. 

            Economic analysis, perhaps even more so than legal analysis, is rife with pitfalls.  Economists do not have to operate with the discipline and rigor of legal advocates, despite the strategic use of mathematics.  Economists can construct a theory, convert it into an unimpeachable rule and offer this rule in advocacy documents for adoption by the FCC. 

            Much of the so-called economics used in FCC proceedings by stakeholders is sponsored advocacy.  The vast majority of this advocacy attempts to legitimize and make scientific policy prescriptions that do not pass the smell test.  For example, any and all mergers promote competition and enhance consumer welfare, but set top box competition would harm competition and consumers.  Economic analysis has a legitimate role at the FCC, but Judge Williams would elevate its importance at the risk of bolstering the potential for sponsored research to provide scientific support for results-driven decision making.  In the words of a former Republican President, the FCC may be headed for a full embrace of Voodoo Economics if it provides the foundation for a desired policy outcome.  Judge Williams appears keen on replacing an “economics-free” FCC to one obsessed with anything masquerading as economics.

            In the snark and sanctimoniousness department, I sense Judge Williams takes great pride in analogizing the FCC’s Open Internet Order to a bicyclist shifting from sidewalk to roadway travel routes.  He chides the FCC for applying common carriage regulation and then abandoning most of the burdensome elements.  From my perspective the FCC evidences flexibility and a keen interest in calibrating the reach and scope of regulation to what tools are needed.

            I fear Judge Williams dissent foreshadows an FCC willing to misinterpret case law and statutory mandates to achieve a desired outcome.  I worry that an infatuation with economics will legitimize bogus rationales that the FCC will embrace hook, line and sinker.  Who needs a maverick wireless carrier like TMobile when economists prove that any and all markets work just fine with 3 competitors? 


            Lastly, I have concerns that FCC decision makers will overplay their hand.  I have seen ample and unjustified arrogance, hubris and political intrigue at the FCC.  It looks like the new management will continue—if not expand—the trend.

Likely and Behind the Scenes Changes at the FCC

            It should come as no surprise that the Federal Communications Commission will substantially change its regulatory approach, wingspan and philosophy under a Trump appointed Chairman.  One can readily predict that the new FCC will largely undo what has transpired in previous years.  However, that conclusion warrants greater calibration.

            As a threshold matter, the new senior managers at the FCC will have to establish new broad themes and missions.  They have several options, some of which will limit how deregulatory and libertarian the Commission can proceed.

            Several ways forward come to mind:

            1)         Channeling Trump Populism—the FCC can execute President Trump’s mission of standing up to cronyism and rent seeking, even when it harms traditional constituencies and stakeholders.

            2)         What’s Good for Incumbents is Good for America—the FCC can revert to the comfortable and typical bias in favor of incumbents like Comcast, Verizon, AT&T and the major broadcast networks.

            3)         A Libertarian Credo—the FCC can reduce its regulatory wingspan, budget and economic impact by concentrating on limited core statutory mandates, such as spectrum management.

            4)         Humility—without having the goal of draining the FCC’s pond, senior managers can temper their partisanship and snarkiness by refraining from mission creep.

            Each of the above scenarios hints at major and equally significant, but unpublicized changes at the agency.  A populist FCC equates the public interest with what the court of public opinion supports.  For example, most consumers like subsidies that make products and services appear free.  A populist FCC responds to consumers by interpreting network neutrality rules as allowing zero rating and sponsored data plans.

            However, a populist FCC risks overemphasis on public opinion that stakeholders can energize as occurred when companies like Netflix and Google used their web sites for 24/7 opposition to the Stop Online Piracy Act and when Jon Oliver motivated 4 million viewers to file informal comments favoring network neutrality on the overburdened FCC web site.

            On the other hand, a populist FCC can remind rural residents of how much they count in this new political environment.  The FCC can validate rural constituencies by refraining from modifying—if not eliminating--inefficient and poorly calibrated universal service cross-subsidies.  Most telephone subscribers in the U.S. do not realize that they are paying a 10%+ surcharge on their bills to support universal service funding, most of which flows to incumbent telephone companies.  Consumers would quickly contract compassion fatigue if knew about this sweetheart arrangement.

            The favoring incumbents scenario has a long and tawdry history at the FCC.  If the new FCC reverts to this model, the Commission will largely give up fining companies for regulatory violations.  Additionally, it might purport to reintroduce economic analysis to its decision making by adopting incumbent-advocated, but highly controversial templates.  For example, incumbents have touted the “Rule of 3” to support further industry consolidation.  This rule is nothing more than an advocacy viewpoint that markets with 3 competitors generate most of the consumer benefits accruing from markets with more than 3 competitors. Having only 3 competitors may work if 1 of them does not collude and match the terms, conditions and prices offered by the other 2.  But in many markets—think commercial aviation—having only 3 operators risks markets organized to extract maximum revenues from consumers with little incentive to innovate and compete.

           

            An incumbent friendly FCC likely will approve mergers and acquisitions with limited, if any, conditions and negotiated conditions.  This kind of FCC will approve AT&T’s acquisition of Time Warner despite President Trump’s disapproval.  The FCC probably also would have no problem with a wireless marketplace duopoly of AT&T and Verizon controlling 90+% of the national market, because the Commission will have largely abandoned the use of a specific market penetration caps and other indices (such as the Herfindahl-Hirschman index) to identify dangerously concentrated markets.

            Many press analysts assume the FCC will embark on a libertarian bent, possibly leading to the elimination of the agency.  I believe the press has misread advocacy items written by Trump Transition Team members who couldn’t easily pitch a short term gig at the FCC and who readily acknowledge the perennial need for core functions performed by the agency.  A libertarian FCC strictly limits its statutory interpretations and does not seek to expand its regulatory wingspan.  However, the national interest—surely including the corporate interests of incumbents—requires the FCC to participate in global standard setting, radio frequency allocation and Internet governance.  The national interests suffers if the FCC does not attend intergovernmental forums and does not forge alliances with other governments keen on reigning in the motivation of global forums to favor specific governments and expand its reach and significance.

            Last, but not least, the new FCC could emphasize humility and bipartisanship using its independence and expertise to determine what best serves the public interest.  This requires abandonment of results-driven decision making and creative statutory interpretation.  I really like this option.