JSI News & Commentary: October 2017
Assessment: Risk and Uncertainty
Now that summer is over, it is time to reflect on the state of the rural telecom industry and imagine its future. It is not the time to relax. Instead, JSI has the sense that clients need to assess our economic and regulatory environment and take steps to ensure future successes as vital communications providers in their communities.
Two very important concepts are forefront in our minds this fall: risk and uncertainty. The seminal work of economist Frank Knight comes to mind when we think about these concepts. The year was 1921 and Frank Knight was exploring a new era after World War I where business opportunities were abundant. In the ebb and flow of business, Knight wrote a book entitled “Risk, Uncertainty, and Profit.” In it, Knight explained, “There is a fundamental distinction between the reward for taking a known risk and that for assuming a risk whose value itself is unknown.” In the former case Knight calls “risk,” one can account for the likelihood of success, assess value, and make a smart decision. For example, while it is risky to place fiber infrastructure in a new, competitive community outside a study area, with analysis and study, a manager can gauge the likelihood of an investment return given current and expected economic and demographic conditions. Information can be used to assess risk. However, when nothing is known, such as when regulations continually change or funding levels haven’t been set, analysis doesn’t help. In this case, decision makers are faced with “uncertainty.” A certain level of uncertainty can delay or freeze projects and leave needed infrastructure wanting.
In this edition of JSI News & Commentary, we explore the relationship of risk and uncertainty in a number of settings-ultimately concluding that regulatory uncertainty continues to be a strategy disrupter and that our current level of uncertainty is not abating. Even with the ever-present level of regulatory uncertainty that our rural providers are accustomed to, it is as paramount as ever to continue providing quality and affordable state-of-the-art services to customers, and to continue investing in next-generation networks. No matter how much risk and uncertainty the industry endures, customers won’t sympathize, because they just want quality and affordable communications solutions.
Federal High-Cost Support
Despite the possible objection that the interplay of risk and uncertainty is a distinction without a difference, we believe separating these terms are helpful when looking at the future. Specifically, risk and uncertainty come to mind when thinking about recent FCC actions.
Our first example of risk and uncertainty within the industry is federal high-cost universal service policy. The FCC’s attempted reform of high-cost support has created both risk and uncertainty for rural carriers. Last year’s election for A-CAM support and regulation was an example where carriers needed to assess as best they could both risks and uncertainties about their future and the viability of both A-CAM support and Legacy support programs. Since the A-CAM election, the rural industry has been working on obtaining additional funding for A-CAM and Legacy providers. Currently, JSI remains hopeful that some additional funds will be secured; regardless, unless there is sufficient and full funding of high-cost programs, Legacy providers will face more uncertainty about critical federal support for their networks. JSI supports the effort to fully fund all federal rural carrier programs designed to deliver modern networks capable of providing voice and broadband services to end users in rural areas of the nation. The FCC is primed to review the federal high-cost budget this year. We encourage all parties to push for full funding of the federal high-cost programs.
Without fully funding the current federal programs, JSI expects some end users will be unable to subscribe to communications networks of their choice. The inability of end users to connect to the incumbent carriers’ networks for modern network services is a failure of our nearly century-old federal universal service policy. Rural rate-of-return carriers have been submerged in uncertainty over federal funding for the better part of a decade now; but consumer demands for high-capacity, high-speed networks are constantly increasing. There is no doubt that the uncertainty surrounding the full funding needs of the federal Universal Service Fund will curtail sufficient broadband service in much of the rural rate-of-return service areas.
Now let’s consider, for example, the 20-year debate over how to ensure a prosperous Internet ecosystem where many businesses and individuals can thrive and add billions of dollars of value to the economy. Recently, FCC Chairman Pai concluded the comment round of a Notice of Proposed Rulemaking (NPRM) to return to the 1990 era of regulation hoping to ensure more investment in broadband networks. He stated, “Today we propose to reinstate the information service classification of broadband Internet access service and return to the light-touch regulatory framework first established on a bipartisan basis during the Clinton Administration” (NPRM at 24). JSI expects the FCC will remove the Title II treatment of Broadband Internet Access Service (BIAS) that was adopted in its 2015 Open Internet Order.
Readers of earlier JSI News & Commentary editions may recall that the Bush Administration established four freedoms in 2004 and a robust Internet Policy Statement in 2005. The Bush Administration attempted to enforce the principles in its Internet Policy Statement when it found Comcast had “contravened federal policy” by “significantly impeding consumers’ ability to access the content and use the applications of their choice.” Comcast appealed and a federal appellate court held that the FCC had not justified its actions. After another attempt to enforce basic principles of no-throttling, no-blocking, and non-discrimination through a new FCC Order, Verizon appealed. The Obama Administration was told by the same federal appellate court its new attempt at the no-blocking and no-unreasonable discrimination rules “impermissibly regulated providers as common carriers.” In response to the Verizon decision, the FCC ultimately adopted its 2015 Open Internet Order.
The 2015 Open Internet Order reclassified providers as common carriers under Title II of the Communications Act. This was done to ensure that no-blocking, no-throttling, and non-discrimination polices would have sufficient legal support to withstand the inevitable legal challenge-and a three-judge panel at the federal appellate court upheld the FCC’s 2015 reclassification.
The Trump Administration now proposes to revert to the policies of the 1990s when the nascent Internet was not a force in social and economic interaction in every modern society. Most commenters to the FCC’s NPRM suggest that no-blocking, no-throttling, and non-discrimination policies are vital to content and app suppliers, as well as to users. Exactly how the FCC will ensure adherence to these policies while undermining its Title II authority to require such behavior remains uncertain.
This Internet policy example provides a history of risk and uncertainty since 2005. Most providers abhor uncertainty. The knowledge that no-blocking, no-throttling, and non-discrimination polices were established and were enforceable by the FCC allowed providers to assess the risk of investments. However, the inability to quantify repeated uncertainty due to multiple carrier challenges in court has led to an environment where too much uncertainty affects investment in the industry. The degree to which investment is affected is subject to heated debate. Despite the outcome of this debate, it is clear that uncertainty on what will be the ultimate Washington, D.C., regulatory policy dampens investment.
When looking at the current state of the FCC’s NPRM, we are reminded of Shakespeare’s tragic play King Lear where upon seeing seeming chaos and confusion, the Duke of Albany says “Striving to better, oft we mar what’s well.” This guidance would benefit the FCC when it begins to address the issues outlined in its NPRM. This NPRM has generated considerable attention in the national press with millions of comments being filed in response to the FCC’s proposal.
Comcast and Verizon would have been much better off in 2017 if they had accepted the 2005 Internet Policy Statement and voluntarily abided by its principles instead of forcing the FCC to ratchet up its authority and enforcement of well-established Internet principles. Moreover, the trinity of consumer protections (no-blocking, no-throttling, and non-discrimination) now includes an ambiguous general conduct rule that has many interpretations and has increased uncertainty in the industry. JSI expects more uncertainty for Internet policy until Congress enacts legislation that establishes a rational framework for the policy trinity of no-blocking, no-throttling, and non-discrimination.
The FCC now proposes to adopt a three-part “light-touch regulatory framework” which (1) classifies BIAS as an information service inseparable from the retail Internet service purchased in the marketplace; (2) determines that mobile BIAS is not a “commercial mobile service”; and (3) tasks the Federal Trade Commission (FTC) with policing the privacy practices of ISPs. In addition, the FCC is exploring how to retain the four Internet Freedoms first expressed in 2004, which include the freedom to access lawful content, use applications, use devices, and obtain service plan information.
Many parties commenting in this proceeding have expressed doubt that the FCC can adopt a light-touch framework while at the same time ensuring that there is (1) no blocking of lawful content, (2) no throttling of network speeds accessing lawful content, and (3) no discrimination of providers’ content. Hence, the most straightforward and common-sense approach is to have Congress establish “bright-line rules” for ISPs under specifically tailored legislation. Let’s be clear: The proverbial “fitting a square peg in a round hole” approach is not working. Some commenters argue that the Title I light-touch approach fails to provide sufficient legal foundation for the four Internet Freedoms and the no blocking, no throttling, and no discrimination policies embraced at one time by the FCC and that are needed in today’s marketplace.
We believe that absent congressional action, the industry will experience continued uncertainty on how the FCC, the court, and the states wrestle these issues. Meanwhile, consumers are wary of ISPs because of all the press in recent years about “bad actors” violating net neutrality principles, even though much of the hype is hypothetical. Consumers have an expectation that their ISP will not block, throttle, or discriminate. So, uncertainty at the highest policy level will not keep consumers from demanding quality and affordable services that adhere to net neutrality rules.
In the meantime, reply comments filed by NTCA-The Rural Broadband Association and Home Telephone Company highlight an issue affecting rural carriers that is important to note and keep an eye on. That issue is rural carrier interconnection with larger ISPs and the Internet backbone providers. Under Title II regulation, the FCC expressed its intent to watch interconnection between networks and showed a willingness to resolve issues that arise. This authority is valuable for rural carriers that have or may have Internet interconnection issues with larger carriers. In the NPRM, the FCC warned that under Title I regulation it will not have the authority to intervene if a rural carrier has interconnection issues with larger providers. JSI agrees with NTCA and Home that preserving this backstop for interconnection is important. Given that the FCC admits that it won’t have authority if it moves to Title I light-touch regulation, JSI is concerned that this clear benefit will be lost as the FCC adopts its proposal. Again, the solution to this common-sense problem is for Congress to intervene and give the FCC clear and defined authority to address this issue if BIAS doesn’t remain under Title II regulation.
The FCC is reviewing comments and reply comments in this proceeding. We expect to see an Order from the FCC sometime in 2018. ISPs, carriers, and the nation await the FCC’s decision.
Turning to an overlay of the network neutrality issue, we address the chaos related to broadband privacy. Here, like with our other examples, uncertainty abounds. Since the FCC issued a stay on some of its 2016 rules shortly after Republican Chairman Ajit Pai replaced Democrat Tom Wheeler, the debate over who should be the “cop on the beat” for data privacy and security has reached a fever pitch over the course of 2017. Fuel has been added to the fire with an important 9th U.S. Circuit Court of Appeals case over the FTC’s rightful jurisdiction to regulate common carriers providing non-common carrier services.
The following is the simplest description of a complicated subject. Republican FCC commissioners believed that the FCC’s 2016 Broadband Privacy Order veered too far from the FTC’s long-established data privacy and security policies that apply to edge providers like Google and Facebook and did apply to Title I broadband providers prior to the implementation of the 2015 Open Internet Order. Chairman Pai and Commissioner O’Rielly believed that the FCC’s rules should more closely match the FTC’s rules, so that ISPs are not unfairly burdened with different and more stringent rules for data privacy and security in comparison to edge providers. At this same time, the Republican-controlled Congress enacted the “nuclear option,” or the Congressional Review Act, to completely undo the FCC’s Broadband Privacy Order. As a result, there are no specific CPNI data privacy and security rules that apply to broadband providers until the FCC drafts new privacy rules in this area (possibly in closer coordination with the FTC), or the “common carrier exemption” of FTC rules is lifted. Who knew that classifying broadband providers as common carriers could have such complicated implications to data privacy and security?
We will review the roles of the FCC, the FTC and Congress, and will describe how this ongoing uncertainty is impacting rural broadband providers.
Federal Communications Commission
Before 2015, the FTC oversaw data privacy and security for both ISPs and edge providers. But the FCC’s 2015 Open Internet Order which classified BIAS as a “Title II” common carrier service was the nexus of the FCC’s control over data privacy and security. This classification change limited the FTC’s authority because it cannot regulate common carrier services offered by common carriers. Once BIAS became a Title II service, it became the FCC’s issue, and former FCC Chairman Wheeler wasted no time in drafting and passing an Order to regulate data privacy and security. The rulemaking process for the Broadband Privacy Order stretched throughout 2016 and forced small rural BIAS providers to consider tough questions, such as:
- Do you have the technical ability to gather and store sensitive data about your consumers?
- Do you have an incentive to use or sell that data for any reason?
- Are your customers voicing concerns about how you protect their private online transactions, searches, and stored data?
- Have you considered how you would handle a breach and misuse of consumer data by an employee?
- What safeguards do you already have in place to protect your customers’ private data that transmits on your network?
- Have you conducted a thorough risk assessment to identify all the possible cybersecurity threats, and how to mitigate them?
The questions surrounding the broadband consumer privacy rules have the effect of Medusa for a small ISP, for the likely reaction is to turn to stone once you start thinking through the implications of costly, complicated and burdensome new regulations or consumer dissatisfaction and potential security risks related to privacy breaches.
The FCC’s data privacy and security rules arguably went too far and created unreasonably expensive and time-consuming compliance obligations and technical requirements that posed a problem for small ISPs, and a risk of higher-priced compliance. As such, small ISPs argued throughout the rulemaking process that they lack the incentive to use or sell consumer data and that they simply do not engage in the types of behaviors that would necessitate many of the rules, including that rule that consumers have to opt in to have ISPs use their data for targeted marketing purposes. The result of the now-stayed rules was uncertainty about how to comply and how much further the FCC would go to impose rules that were meant to protect consumers but inevitably created financial and technical burdens for ISPs.
Federal Trade Commission
With no way for the FCC to apply its regulatory touch to broadband privacy, the fate now rests with the FTC, except for the problem that the FTC is barred from regulating common carriers. The intersection of agency discretion and legislation may come to a head in the near future, because the FCC’s net neutrality repeal might undo the classification of broadband providers as common carriers, thereby allowing the FTC to take the reins again with uniform broadband privacy and data security rules (or not, if it chooses to maintain the status quo).
Congress is lurking on the sidelines with periodic murmurs about broadband privacy legislation. Its action on broadband privacy is linked inevitably to what happens with the FCC’s net neutrality rules, as well as if Congress decides to enact common-sense net neutrality legislation. Legislation has been proposed to pass broadband privacy laws that more closely align with the FTC’s rules, but it hasn’t gotten much traction. As you can see, this is all a tangled web of uncertainty at the moment.
The 9th Circuit Court
Meanwhile, eyes are on the 9th U.S. Circuit Court of Appeals which will rehear the pivotal case of FTC v. AT&T. In this case, the FTC alleged that AT&T illegally throttled mobile Internet speeds of unlimited data customers without warning. This case was dismissed last year because AT&T was deemed to be exempted from FTC jurisdiction as a common carrier. The FTC and consumer advocates are hoping to achieve a more favorable outcome in a rehearing. No one in the rural broadband industry argues that consumers don’t deserve the certainty of knowing that their data is private and secure, but the providers also do not want the risk of increased regulatory costs and burdens. The FTC and consumer activists do not believe that AT&T and other broadband providers should be able to escape culpability for violating rules that other companies would be held accountable to, just because they are considered common carriers.
Chairman Pai is pleased that the 9th Circuit is rehearing the case. He hopes that the FTC ends up with jurisdiction over broadband privacy and security practices, so that the entire Internet ecosystem is held to the same set of rules and oversight. Chairman Pai also believes that if the FTC’s jurisdiction over broadband providers is restored, it will strengthen the FCC’s case to reverse the 2015 net neutrality rules because broadband privacy and security will be handled by a different agency.
In assessing these current and pressing examples of risk and uncertainty, we restate the obvious: the rural carrier industry faces risk and uncertainty in the future. But the question isn’t whether we will face risk and uncertainty, instead, the question is how we will respond to the risks and uncertainties presented to us. JSI believes we need to fight to eliminate regulatory uncertainty plaguing BIAS and continue to press the FCC to adequately fund federal universal service support programs to allow rural providers to deploy 21st Century networks, because rural customers won’t accept anything less than quality, affordable, state-of-the-art services that enable them to partake in the broadband economy and ecosystem. JSI has long advocated these positions and will continue to work with the industry to support these efforts in order to make the future a bit more certain.