The Arrival of the Federal Computer Commission?

Jim Dunstan

Should “Big Tech” be required to contribute to the Universal Service Fund (USF) in order to support broadband deployment? Republican FCC Commissioner Brendan Carr has called for just that, and one bill introduced says they should. Should “Big Tech” pay regulatory fees because they “benefit” from the FCC’s regulation over spectrum and telecommunications services? Several commentators say yes. These two proposals, if adopted, would throw the door wide open to transforming the Federal Communications Commission into the Federal Computer Commission — something Congress specifically legislated against in the 1996 Telecommunications Act.

In 1996, Congress declared that the policy of the United States is “to preserve the vibrant and competitive free market that presently exists for the Internet and other interactive computer services, unfettered by Federal or State regulation.”147 U.S.C. § 230(b)(2). The legislative history of the 1996 Act makes the point even clearer: Rep. Chris Cox, the sponsor of that amendment, proclaimed that Congress did “not wish to have a Federal Computer Commission with an army of bureaucrats regulating the Internet because, frankly, the Internet has grown up to be what it is without that kind of help from the Government.”2See 141 Cong. Rec. H8470 (daily ed. Aug. 4, 1995) (statement of Rep. Cox).

For the FCC to pivot now and suddenly start sending bills to edge providers because they ride upon the privately built broadband infrastructure flatly contradicts this Congressional purpose. The pivot also contravenes decades of policy the FCC has maintained under both Republican and Democratic leadership.

The FCC created the Universal Service Fund to help make “available…to all the people of the United States…a rapid, efficient, Nation-wide, and world-wide wire and radio communication service with adequate facilities at reasonable charges.” The USF predates the 1996 Act, when FCC began assessing a surcharge on long-distance telephone carriers to subsidize telephone service to low-income households and high-cost areas. In adopting the 1996 Telecom Act, Congress made these contributions part of the statute in Section 254(d), but limited the contribution base to “telecommunications services.” Congress provided the FCC some leeway, but only so far as to allow the FCC to require contribution by providers of telecommunications services that weren’t technically “telecommunications carriers” — “if the public interest so requires.” “Information services” are outside the scope of both Section 254(d) and the list of services included in the FCC’s USF regulation.

As new technologies evolved that mimicked and competed with the Public Switched Telephone Network (PSTN), the FCC had to decide whether to impose USF obligations on these technologies. This inflection point was necessary as some of those technologies began to erode the contribution base, forcing the FCC to gradually increase the contribution factor from the original 5.7%. Today, that tax is now 31.8%. Applied equally regardless of income, USF obligations have become the single most regressive tax in America.

In 2006, the FCC extended USF contribution requirements to “interconnected VoIP” providers — for example, cable companies whose Voice Over Internet Protocol services allow users to make calls to and from anyone with a telephone. The FCC deemed VoIP the functional equivalent of telephone service, and the D.C. Circuit Court of Appeals agreed. Yet the Commission stopped short of concluding that interconnected VoIP is a “telecommunications service.” To date, that’s where the FCC has drawn the line. It has declared a number of other services that have some similarity to Plain Old Telephone Service (POTS) to be “information services,”3Declaratory Ruling, 33 FCC Rcd 12075 (2018) (classifying SMS and MMS wireless messaging services as an information service). such as SMS and MMS wireless messaging services, and WebEx video calling and document sharing services.4Order, 31 FCC Rcd 13220 (2016) (finding that PSTN minutes, when used in conjunction with Cisco WebEx desktop and document sharing applications, are integrated into a single information service that is not subject to universal service contribution). It hasn’t even extended USF contributions to so-called “one-way” VoIP services, even though the agency sought comments on the matter back in 2012.5Further Notice of Proposed Rulemaking, 27 FCC Rcd 5357, ¶ 38 (2012). The FCC has suggested the following definition of “one-way VoIP”: A service that (1) enables real-time, two-way voice communications; (2) requires a broadband connection from the user’s location; (3) requires Internet protocol-compatible customer premises equipment; and (4) permits users generally to receive calls that originate on the public switched telephone network or terminate calls to the public switched telephone network. Id. at ¶ 38. Even when the FCC’s 2015 Open Internet Order declared Broadband Internet Access Service (BIAS) a telecommunications service subject to Title II, the FCC didn’t require BIAS providers to contribute to the USF.6Protecting and Promoting the Open Internet, GN Docket No. 14-28, Report and Order on Remand, Declaratory Ruling, and Order, 30 FCC Rcd 5601, par. 58 (2015) (“We partially forbear from section 254(d) and associated rules insofar as they would immediately require mandatory universal service contributions associated with broadband Internet access service.”).

The “continuum” of those who pay into the USF looks something like this:

The only non-telecommunications service contributing to the USF is interconnected VoIP (and its status remains undecided). No “information services” are required to contribute to USF. One can imagine a world in which the FCC would conclude that one-way VoIP and some video conferencing services should be required to contribute. To move the dial further to the right on this continuum, however, the FCC would have to go back to Title II regulation of BIAS. Commissioner Carr was pivotal in stopping such a regime with the Restoring Internet Freedom Order in 2017. Is Commissioner Carr now willing to reverse himself on this fundamental approach to regulation of the Internet just to expand the contribution base for USF? Even Chairman Wheeler was unwilling to go this far in 2015, when the FCC decided to forebear from requiring BIAS providers to contribute to USF, even though BIAS had been reclassified as a telecommunications service?

Even if the Title II crowd gets its way, and the Democratic-led FCC recategorizes BIAS as a telecommunications service, there still is no statutory basis for concluding that streaming services such as Netflix should contribute to the USF. The FCC has rejected attempts in the past to regulate social media and other edge providers, even at the height of Title II Internet regulation. “Edge provider activities, conducted on the ‘edge’ of the internet—hence the name—are not regulated by the Federal Communications Commission (FCC).”7See, e.g., Clare Y. Cho, Competition on the Edge of the Internet, Congressional Research Service (Jan. 30, 2020), https://www.everycrsreport.com/files/20200130_R46207_aae4de15c44a3c957e7329b19ec513bd5d3a662. The FCC’s plenary powers under Section 201 do not reach edge providers.8See Howard v. Am. Online Inc., 208 F.3d 741, 746 (9th Cir. 2000) (class action suit against AOL dismissed after court rejects Section 201 claim, finding that AOL provided an “enhanced service,” was not a “common carrier,” and thus outside the purview of the FCC’s Section 201 regulations). Nor does the FCC’s overall “ancillary authority” give it the power to require edge providers to contribute to the USF. Courts have consistently held that to exercise Title I ancillary authority, those powers must be “ancillary” to some other authority clearly granted by Congress, something not present here.9FCC v. Midwest Video Corp., 440 U.S. 689 (1979) (Midwest Video II); Nat’l Ass’n of Regulatory Util. Comm’rs v. FCC, 533 F.2d 601 (D.C. Cir. 1976) (NARUC II); Comcast Corp. v. FCC, 600 F.3d 642, 655 (D.C. Cir. 2010) (“Were we to accept that theory of ancillary authority, we see no reason why the Commission would have to stop there, for we can think of few examples of regulations . . . that the Commission, relying on the broad policies articulated in section 230(b) and section 1, would be unable to impose upon Internet service providers.”). An attempt by the FCC to exercise “ancillary” authority here to apply USF contribution responsibilities to edge providers would suffer the same fate as its attempt to force television manufacturers to incorporate copyright protection technologies into digital televisions (the so-called “broadcast flag”). “There is no statutory foundation for the broadcast flag rules,” ruled the D.C. Circuit in 2005,” and consequently the rules are ancillary to nothing.”10American Library Ass’n v. FCC, 406 F.3d 689, 692 (D.C. Cir. 2005).

If the FCC lacks authority to impose USF contribution requirements on edge providers, could Congress impose such obligations? Technically, yes. Congress has broad authority to levy taxes and fees on pretty much anyone it sees fit.11See National Federation of Independent Business v. Sebelius, 567 U.S. 519 (2012) (Obamacare individual mandate upheld as a tax and within Congress’s taxing authority). One bill, H.R. 4905 attempts to do this by merely ignoring the rest of the Communications Act and ordering the FCC to adopt rules to require large social media companies to pay into the USF. But would Congress limit this new tax to just edge providers? And should it? All manner of communications “ride the backbone” of the Internet. Much of traditional television programming (both over-the-air and cable programming) is now distributed from program producers and networks via the Internet. If YouTube and Amazon should contribute to USF, then why shouldn’t these other entities also contribute? Besides, as the above continuum graph shows, at least the FCC has ancillary authority over these entities under Title III (broadcasting) and Title V (cable). I’m not suggesting that Congress do this, but only pointing out how far a stretch it is to jump from charging for “telecommunication services” to charging for edge provider content without inviting every other Internet usage into the contribution “tent.” Let’s not just single out edge providers to tax just because we don’t like Big Tech.

Moreover, moving more services, especially content providers, into the category of “telecommunication services” raises a whole series of issues related to interconnection and termination charges. These are the most arcane parts of Title II regulation that make even seasoned telecom lawyers’ eyes glaze over. If, after all, everything becomes a telecommunication service, then those services are subject to the FCC’s Title II regulations, which include tariffing requirements, termination rules, and interconnection rules. As George S. Ford and Lawrence J. Spiwak of the Phoenix Center for Advanced Legal & Economic Public Policy Studies noted in 2014:

Relying on the plain terms of the Commission’s governing statute, current case law, and the Commission’s own precedent, we show that reclassification turns edge providers into “customers” of Broadband Service Providers. This new “carrier-to-customer” relationship (as opposed to a “carrier-to-carrier” relationship) would then require all BSPs (i.e., telephone, cable, and wireless broadband providers) to create, and then tariff, a termination service for Internet content under Section 203 of the Communications Act. Critically, this termination service would be separate and apart from any carrier-to-carrier agreements to deliver traffic. Because a tariffed rate cannot be set arbitrarily, and since a service cannot be generally tariffed at a price of zero, reclassification would require all edge providers (not their carriers)—as customers of the BSP—to make direct payments to the BSPs for termination services. That is, all content providers, whether Netflix or a church website (or its host company), would be on the hook to pay every broadband service provider a positive termination fee.

In short, reclassifying edge providers as telecommunications services to obligate them to pay into the USF would completely upend the way the current Internet experience is delivered and priced to end users. Netflix would have to pay broadband providers to “terminate” programming at each subscriber’s home. Consequently, in addition to having to contribute to USF, edge providers would have to bear transport costs to get their programming to subscribers. Think your Netflix bill is too high now? Just imagine the cost when Netflix loses its “free ride” on the Internet. If broadband providers have to tariff those services and charge rates comparable to what they charge other users on a per-bit basis, the costs of streaming services instantly will increase to the point of putting the entire video streaming market in jeopardy of collapse.

Similarly, Google would have to pay broadband providers for delivering the 5 billion YouTube videos watched every day. Google could no longer afford to offer YouTube for free, and the nearly $20 billion it provides in advertising revenue would dry up and blow away. And of course, edge providers are not going to simply suck up the USF contributions, either. In the same way your wireless bill contains a line item flowing down the USF contribution to the end-user, so too will edge providers flow their USF contributions down to end-users. Ultimately, we will suffer the fate of which Rep. Wyden warned us in 1996: “If we regulate the Internet at the FCC, that will freeze or at least slow down technology. It will threaten the future of the Internet. That is why it is so important that we not have a Federal computer commission do that.”12See 141 Cong. Rec. H8471 (daily ed. Aug. 4, 1995) (statement of Rep. Wyden).

The other way some suggest the FCC lure edge providers (and others) into its clutches is to impose annual regulatory fees on an increasing universe based on the “benefits provided to the payor of the fee by the Commission’s activities.” Notably, the FCC is one of the very few federal independent agencies that is funded completely through licensing and regulatory fees. The agency’s FY-2022 budget request is $387,950,000. Traditionally, the FCC has assessed annual regulatory fees only on its licensees. Congress changed that structure slightly in 2018 with the RAY BAUM Act,13Ray Baum’s Act of 2018, Pub. L. No. 115-141, 132 Stat. 348 Division P, Title I, § 102 (2018) (codified at 47 U.S.C. § 159). when it amended Section 159 to eliminate the word “licensee,” leaving only the undefined term “units” as the measurement of who (and how much) should pay regulatory fees. The FCC seized upon this change to claim authority to collect regulatory fees from foreign-licensed satellite systems, since they must receive “market access” authority from the FCC before they can conduct business in the United States. The D.C. Circuit recently upheld the FCC’s ability to do this in Telesat Canada v. FCC.14Telesat Canada v. Federal Communications Commission, No. 20-1234 (D.C. Cir. 2021). This makes sense, since, while foreign satellite operators aren’t technically “licensed” by the FCC, they must receive market access “authorization” through a process that is similar to a licensing process. As the Telesat court concluded:

Foreign-licensed satellite operators must petition the FCC to access the U.S. market. The FCC explained that it devotes significant resources to processing the growing number of such petitions. Foreign-licensed satellites benefit from the Commission’s oversight and regulation in the same manner as U.S. licensed satellites. And processing a petition for market access, according to the Commission, “requires evaluation of the same legal and technical information as required of U.S. licensed applicants.”15Id. at 5-6.

Unfortunately, however, the Telesat court didn’t stop there: “This suggests benefits—not licenses—should be the touchstone for whether it is reasonable for the FCC to collect regulatory fees.”

Never missing an attempt to shift its “tax” burden to others, some commenters in the FCC’s current regulatory fee proceeding are now arguing that the FCC should cast a far wider net and begin assessing fees on all manner of companies that “benefit” from FCC regulations. This smacks of the old Russell B. Long adage: “Don’t tax you. Don’t tax me. Tax the guy behind the tree.” Traditional FCC licensees see an opportunity to reduce their own regulatory costs by shifting a share onto other Big Tech interests.

Broadcasters do have a point when they argue that they bear a large percentage of the FCC budget, and that the FCC probably spends more of its research on other aspects of regulation than broadcasting—a mature technology whose importance is waning. But this begs the question again: where is the FCC’s authority to extend the base for its regulatory fees to entities that are neither “licensed,” “authorized,” nor even “regulated” by the FCC? The argument that anyone who “benefits” from the FCC should pay regulatory fees leads to a slippery slope that becomes an instant cliff. I benefit from being able to post this article and have people access it across the Internet. Should I now send a dollar to the FCC in regulatory fees? You see how quickly the “benefits from the FCC” analysis breaks down. We can hardly imagine any business or individual that doesn’t benefit either directly or indirectly from what the FCC does.

There has to be some gating concept behind the “benefits” analysis. That takes us back to the ancillary authority question — over whom does the FCC have authority in the first place? Judge Tatel of the D.C. Circuit put it best in 2010.

[T]he Commission maintains that congressional policy by itself creates “statutorily mandated responsibilities” sufficient to support the exercise of section 4(i) ancillary authority. Not only is this argument flatly inconsistent with Southwestern Cable, Midwest Video I, Midwest Video II, and NARUC II, but if accepted it would virtually free the Commission from its congressional tether.16Comcast Corp. v. Federal Communications, 600 F.3d 642, 655 (D.C. Cir. 2010).

The “tether” here is what Congress told the FCC in 1996: to keep its hands off the Internet. The FCC should heed that warning and stop trying to punish Big Tech by applying fees and taxes to a disliked class. There is no doubt that we need fundamental reform of the way we fund further expansion of telecommunications and broadband infrastructure. But that discussion should focus on funding USF out of general revenues, collected through progressive income taxation, rather than targeting disfavored segments of the United States economy. And that needs to come from a Congress interested in solving the USF funding and FCC support problems, not in just punishing Big Tech. Otherwise, we’re on the fast track to get the Federal Computer Commission that Congress expressly prohibited.

Jim Dunstan

General Counsel

TechFreedom


Emerging Technology

The Federalist Society and Regulatory Transparency Project take no position on particular legal or public policy matters. All expressions of opinion are those of the author(s).

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