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Letter


NTU's Message to the FCC on Network Neutrality

January 15, 2010
By Pete Sepp

The Honorable Julius Genachowski
Chairman, Federal Communications Commission
445 12th St., SW
Washington, DC 20554

GN Docket No. 09-191
WC Docket No. 07–52; FCC 09–93

Dear Chairman Genachowski and Members of the Commission:

On behalf of the 362,000 members of National Taxpayers Union (NTU), I write to provide comments in regard to the Proposed Rulemaking on Preserving the Open Internet and Broadband Industry Practices. NTU is a non-profit, non-partisan citizen group working for lower taxes, limited government, and economic freedom at all levels.

As you may know, for more than 15 years NTU has actively engaged Members of the Commission on a number of telecommunications issues affecting taxpayer rights and consumer freedom of choice – two concepts that our organization has been chartered to protect and expand. For example, NTU has long championed a competitive auction process for spectrum, and was a founding member of the Coalition for Fair Spectrum Auctions.

NTU has also asked the FCC to take a “hands-off” approach toward matters such as video services franchising, the XM-Sirius radio merger, and the emergence of Voice over Internet Protocol (VoIP) technology. Likewise, we have urged the FCC to avoid expansion of the Universal Service Fund, and have encouraged Commissioners to help in efforts aimed at reforming this troubled program.

In 2008, our members applauded the FCC’s vote for reasoned debate and careful deliberation over “Network Neutrality” regulations, which in our opinion amounted to a hostile government takeover of the Internet, and with it bureaucratic micromanagement.

It is the latter issue that most concerns NTU today. The FCC recently moved to begin the process of codifying its 2005 “open Internet” principles. Along with the intent to embed these precepts into formal administrative language, the FCC also added non-discrimination and transparency rules for governing wireless and broadband networks to its list. How such regulations are written has the potential to affect Internet service providers (ISPs) and consumers for many years to come.

Nearly two years after the FCC’s “go-slow” decision, we believe there is even less justification to proceed with rulemaking over “open Internet” access in particular, and more justification for the public sector to limit its role over Internet governance in general.

1. So-called “Network Neutrality” Rules Would Reverse the FCC’s Longstanding Policymaking Preferences and Introduce Huge Uncertainty into the Marketplace.

Since the de-monopolization of the Bell System, the FCC has been led by Chairmen and Commissioners with diverse views on the federal government’s role in the telecommunications sector. Yet, institutionally the FCC’s leaders have tended to agree that archaic, top-down regulatory structures are often economically and socially ill-suited to the evolution of a competitive telecom services market that best serves consumers. This proved to be true of wireless telephony, nascent Internet development, broadband, and Voice over Internet Protocol.

In each of these instances, the FCC, joined by policymakers in Congress and the Executive Branch, largely considered its function as one of oversight rather than structural regulation, citing the sheer size and complexity of these markets as one reason for doing so. Yet, none of these sectors approach the size and complexity of the rulemaking task that the FCC is considering now.

For example, H.R. 3458, the so-called Internet Freedom Preservation Act of 2009, requires the FCC to “promulgate rules to ensure that providers of Internet access service ... not operate Internet access services in an anticompetitive, unreasonable, unfair, discriminatory, or deceptive manner.” The latitude and magnitude of terms such as “unreasonable” and “unfair” would lead to a torrent of litigation by aggrieved parties under virtually any set of rules that any federal entity could possibly constitute. The costs imposed on the telecommunications sector and economic productivity as a whole would likely dwarf anything that critics of arbitrary antitrust enforcement have elucidated.

In our opinion, such regulatory mandates could only be enforced if the federal government simply monopolized the provision of access, effectively making the Internet a regulated public utility. This practical reality would, ironically, run headlong into one of H.R. 3458’s other precepts, “to promote consumer choice and competition among providers of lawful content, applications, and services.”

2. “Network Neutrality” Raises Serious Questions about Property Rights and Consumer Choice in the Free-Market Economy

“Network Neutrality” could threaten the Internet’s ability to thrive by forbidding network providers from setting limits on the access of Internet content, applications, and services on the expensive infrastructure they have built. The reality of the matter is that bandwidth is finite, and as a result Internet Service Providers currently must control traffic on the networks they own. This prerogative exists if for no other reason than to keep their customers happy by providing prompt and reliable delivery of the services for which they pay.

Another issue with these rules is not just about who will be prevented from managing access to networks – the firms that own them – but who will manage that access in place of the private sector: the federal government. If these proposed regulations go into effect, federal agencies would for all intents and purposes be controlling the management of networks that private companies own.

The potential detriments to consumers and network investment are severe and long-lasting. Internet users will likely experience slower access due to languishing investment in online infrastructure. In addition, there would be little relief for consumers, thanks to regulatory roadblocks for new companies seeking to build and operate broadband networks. A May 1, 2006 coalition letter signed by NTU and 12 other organizations against “Network Neutrality” legislation in Congress cited testimony from Senior Investment Analyst Craig Moffett of Bernstein Research, a highly respected Wall Street investment research firm, which bears directly on this point:

[T]he notion of ‘Net Neutrality’ as it is currently construed would, I believe, likely trigger a host of unintended consequences. Mandated ‘Net Neutrality’ would further sour Wall Street’s taste for broadband infrastructure investments, making it increasingly difficult to sustain the necessary capital investments.

It would also likely mean that consumers alone would be required to foot the bill for whatever future network investments that do get made. That would result in much higher end-user prices, much steeper subsidies of heavy users by occasional ones, and, in all likelihood, a much sharper ‘digital divide.’ . The United States as a whole would, in all likelihood, fall further behind other countries in broadband availability and reliability.

Reluctant investment is something that America’s already sluggish economy can ill afford. Even if “Network Neutrality” rules were somehow delayed until there were signs of a more robust economy, our nation would still be condemned to the “slow lane” while the rest of the world zoomed by on upgraded technology.

3. Historically, Broad Mandates for Government to “Manage Competition” and “Expand Service” in Telecom and Other Sectors Have Proven to be Mistakes

So many federal regulatory programs have begun with the best of intentions – “ensuring greater access” and “promoting more choices.” Yet, history tends to regard such ventures as underwhelming, and sometimes as outright failures.

Members of this body are doubtless quite familiar with the problems encountered over administering the Universal Service Fund (USF) for voice and Internet applications, but a few facts bear repeating. Mandated under the Telecommunications Act of 1996, the USF has suffered from repeated management challenges which, despite commendable attempts at reform, persist to this day. More than $40 billion in USF funds, extracted from mandatory assessments on telecom providers, have been expended from 1998 through 2005.

The lion’s share of this sum was poured into the “High Cost Program” component of USF, and led to revelations that some grants were helping to provide service to resorts and wealthy, rural landowners. Beyond sensational headlines, however, the rates of improper payment across all four areas of USF ranged from the considerable to the enormous. As the FCC’s own Inspector General reported in a late 2007 audit of 459 USF program participants (both beneficiaries and contributors):

[In] general the audits indicated compliance with the [FCC’s] rules, although erroneous payment rates exceeded 9% in most USF program segments. The audit resulted in the following erroneous payment rates: contributors payments, 5.5% ($385,000,000); Low Income, 9.5% ($75,500,000); Schools and Libraries, 12.9% ($210,000,000); High Cost, 16.6% ($618,000,000) and Rural Health Care, 20.6% ($4,450,000).

Few, if any, federal programs are error-free, but the fact that double-digit erroneous payment rates existed in the two biggest USF components is alarming. Nor have these problems disappeared over the past two years. According to a 2009 Government Accountability Office (GAO) report, which focused on the E-Rate initiative:

FCC does not have performance goals for the E-rate program, and its performance measures are inadequate. ... Without them, FCC is limited in its ability to efficiently identify and address problems with the E-rate program and better target funding to highest-priority uses. FCC’s piecemeal approach to performance goals and measures indicates a lack of a strategic vision for the program.

But GAO does not give a “pass” to the other components of USF. The agency lists USF on the “High Risk and Other Major Government Challenges” page on its website, noting that:

The USF faces a myriad of management challenges. USF disbursements operate outside of the annual appropriations process. ... In several reports, we have identified weaknesses with the management and oversight of the USF, including a lack of performance goals and measures and weak internal controls. ... The increasing burden imposed on American households to fund universal service, combined with these weaknesses, could undermine support for the program...

The latter observation is especially important for our discussion here. If a goal of “Network Neutrality” is, in the words of H.R. 3458, to require providers to “offer Internet access service to any person upon reasonable request therefor,” will even greater latitude for the USF and its mandated charges be the result? Will consumers and taxpayers be required to bear additional burdens, which could in GAO’s estimation erode public support and confidence for the venture?

In February of 1998, our late President John Berthoud offered numerous objections to the USF taxes (as we believe they should be called) during testimony before the House Judiciary Committee’s Subcommittee on Commercial and Administrative Law. Aside from raising constitutional questions over delegating the power to tax to unelected bodies, he cited a study by Jerry Hausman of the Massachusetts Institute of Technology. This study determined that FCC taxing policy is extremely economically inefficient and results in a loss to the U.S. economy of $1.25 for each dollar raised.

Berthoud also contended that because of the complex system of USF revenue collection, the total costs of the programs were hidden from consumers and taxpayers. NTU is greatly concerned that Network Neutrality will exacerbate this problem. As Berthoud observed, “While it may be politically appealing to hide taxes from the American public – and thereby lessen the apparent cost of government – by destroying a fair pricing mechanism, society fails to get an optimal balance between government and private spending.”

Yet, the late 20th and 21st centuries aren’t the only timelines providing cautionary parallels to “Network Neutrality” schemes. In late 2008, Timothy Lee of Insight Community noted that proposed “Network Neutrality” structures bear a striking (and alarming) resemblance to the Interstate Commerce Commission (ICC), an entity once tasked with regulating the railroad industry and widely regarded as having outlived its usefulness long before it was finally abolished:

Interstate Commerce Act declared it illegal to charge different prices to different customers for ‘the transportation of a like kind of traffic under substantially similar circumstances and conditions.’ It also said that railroads may not ‘make or give any undue or unreasonable preference or advantage to any particular person, company, firm, corporation, or locality, or any particular description of traffic.’

...Unfortunately, the story of the Interstate Commerce Commission does not have a happy ending. ... The ICC had the power to decide when new firms were allowed to enter the railroad industry, and by the 1920s, the ICC was actively working to discourage competition and push up railroad rates. In the 1930s, the ICC gained authority over the infant trucking industry, and used its authority to slow the growth of the trucking industry to protect the railroads from competition. By 1970, things had gotten so bad that a Ralph Nader report described the ICC as ‘predominantly a forum at which transportation interests divide up the national transportation market.’

Lee also echoed the point made earlier in these comments about the enormity of the FCC’s proposed task. He noted that:

[T]he ICC was relatively toothless in its early years [because] it was completely overwhelmed with paperwork, as dozens of railroads sent it information about thousands of routes. The railroad industry was simply too complex and dynamic for a few Washington bureaucrats to even understand, to say nothing of regulating them effectively.

The Internet may be a revolutionary technological and economic development, but the issues surrounding its interaction with government are timeless. The tracts outlined here are not mere historical anecdotes; they are prescient warnings against the “Network Neutrality” policies that self-proclaimed activists are pushing the FCC to pursue.

4. “Network Neutrality” Could Lead to Additional Future Burdens on Individual Taxpayers as well as Businesses

A great deal of perfectly justified concern has been raised over the cost impact that “Network Neutrality” could have on providers, who in turn would have little choice but to pass those expenses along to consumers. And as the section above indicates, the prospect of additional taxpayer and consumer subsidization of a USF-style regime looms large. Yet, little has been said about the potential that “Network Neutrality” has to facilitate a major increase in direct taxes on Internet users.

We remain skeptical over the ability of any regulatory body to enforce a set of “Network Neutrality” rules which, simultaneously, can somehow ensure all providers manage their networks in the same way while preserving competition and choice. Nonetheless, any such undertaking would require the FCC or another designated government entity to have deep access to the business practices of the regulated firms. This would include the ability to constantly monitor and draw data from network structures, content types, delivery modes and speeds, applications, user preferences, and usage activity.

Although to our knowledge neither the FCC nor “Network Neutrality” advocates have admitted to the fact, it is impossible to deny that such a vast body of information in government’s hands would better enable implementation of widespread Internet taxation schemes. Retail purchases, for example, represent a common online activity. The ability to know who is shopping, and where they go on the Internet to shop, could be more easily facilitated with the type of access government would have to network management practices.

Federal regulators would also have the “big picture” of all providers that would be necessary to levy new types of Internet access taxes, which currently exist only in a handful of states and localities that were “grandfathered” under the Internet Tax Freedom Act. If the federal government were to proceed in this direction, it would only be a matter of time before all state and local entities would clamor for similar powers, as well as a federal blessing for the Streamlined Sales and Use Tax Agreement (SSUTA).

Indeed, one of the arguments made against SSUTA is that it would impose undue compliance costs on small businesses, which would be required to remit sales taxes to thousands of jurisdictions. What if the federal government were simply to demand remittance of a single tax for online sales, whose proceeds could either be kept in Washington or distributed among the states? Taxpayers, who currently bear combined tax burdens of more than 15 percent on certain telecom services, may be forgiven for considering this “nightmare scenario.” In our view, “Network Neutrality” would build more of the infrastructure that could allow such scenarios to come true.

Conclusion

Ten years ago, NTU arranged for a videotaped interview with the late economist Milton Friedman on the topic of competition among technological innovators. With typical eloquence he stated:

Business, in general, has something of a suicidal instinct. It often proposes laws in its own self-interest which destroy the underlying basis of the whole private enterprise system. I believe that is what has been happening recently in the computer industry. The end result will be that an industry that up to now has been able to proceed at a marvelous pace ... is now going to have government all over it. It’s going to spend in legal fees over the next ten or twenty years, money which society would benefit from much more if it were spent in the kind of research and development that has brought us the many miracles in the area of Internet, in the area of home computers, industry computers, and all the rest.

Today, a handful of anti-competitive businesses possessed by this “suicidal instinct” have joined with a few misguided interest groups to foist a regulatory scheme on a sector without proof of industry failure or major customer dissatisfaction. While a few limited reports of ISPs throttling back on certain bandwidth-intensive entities have surfaced, those have been resolved mainly without the involvement of federal regulators.

No matter where one falls on the “Network Neutrality” debate, most will agree that the Internet has so far done exceedingly well without the intervention and taxation of the government. Regulators must avoid doing anything that would potentially jeopardize the investments and innovations that have molded the Internet to be as effective as it has become. They must also consider the terrible consequences for taxpayers that could result by enabling further government control over the Internet’s daily functioning. For the sake of those taxpayers, especially, NTU asks that you reject any further codification of “Network Neutrality” rules.

Sincerely,

Pete Sepp
Vice President for Policy and Communications