Federal Communications Commission member Ajit Pai today gave his assessment on where the FCC may go on broadband regulation should the United States Court of Appeals-DC Circuit decide to uphold the FCC’s net neutrality rules issued back in December 2010. Here is an excerpt from his opening remarks before the Phoenix Center :

“On a more serious note, I would like to spend a few minutes this morning previewing the
year ahead in broadband policy. I believe that 2013 will be a watershed year. And the most
important action probably will not occur either at the FCC or on Capitol Hill. Instead, it will
take place in the federal courthouse about a mile away on Constitution Avenue. At some point
next year, the D.C. Circuit likely will decide the fate of the Commission’s 2010 net neutrality
order. Whatever the court’s decision, the consequences are likely to be profound.

Should the D.C. Circuit uphold the FCC’s order, I would expect to see revitalized efforts
to expand the Commission’s regulation of the Internet. In particular, I would not be surprised if
the FCC looked into whether we should stiffen our oversight of the network management
practices of wireless broadband providers and whether we should begin to regulate usage-based
pricing. With a court victory under the Commission’s belt, I believe that the net neutrality order
would be the first step, not the last, on our regulatory path.

I expect that a court victory also would result in more calls to enforce the FCC’s net
neutrality rules. To date, we’ve received few complaints that these rules have been violated, and
we’ve done little with any that have been filed. But if the regulations are upheld, the agency
could well receive more complaints alleging violations and it could spring into action
adjudicating them. Uncertainty over how the FCC would resolve these complaints could persist
for some time.

Now let’s look at the opposite (and perhaps more likely) scenario. What would happen if
the D.C. Circuit decides that the FCC lacked the authority to adopt the net neutrality order? The
big question confronting the Commission would be this: whether to abandon the drive to regulate
network management practices or instead to sidestep the court’s decision by reclassifying
broadband as a Title II service.

For what it’s worth, I have already made my view on this matter clear. Under no
circumstance will I support Title II reclassification. I am convinced that grafting creaky,
burdensome common carrier regulations onto the Internet would dramatically slow broadband
deployment, reduce infrastructure investment, frustrate innovation, hamper job creation, and
diminish economic growth.”

Investors, naturally, should keep their fingers crossed that the court does not uphold net neutrality rules thus giving the FCC authority to apply common carrier treatment to broadband providers. The just and reasonable standard when it comes to pricing and to whom service can be provided a priori would see carrier costs of service increase with pressure from the FCC on pricing. Not only would grass roots advocates scream about justifiable price increases implemented to cover compliance the costs, advocates would press for additional hearings on network management practices.

Based on the court’s rejection in Comcast to treat broadband as a Title II service, I do believe that Verizon should be successful with its opposition before the DC Circuit to the FCC’s net neutrality rules. I would have to conduct a more thorough analysis to draw a definitive conclusion.

Yesterday the U.S. Court of Appeals for the District of Columbia Circuit held that the Federal Communications Commission was empowered under Title III of the Communications Act to promulgate its data roaming rule. The rule, however, does not impose any common carrier obligations on mobile Internet providers.

In 2007, the FCC mandated that mobile voice carriers offer roaming agreements to other carriers on a just, reasonable, and non-discriminatory basis. The FCC invoked Title II of the Communications Act reasoning that mobile voice providers have a common carrier obligation to provide roaming.

The 2007 mandate did not extend to mobile Internet or mobile data carriers that entered voluntarily into roaming agreements with other carriers for mobile data.

The FCC’s rationale for its rule was:

1. The mandate would promote access to seamless mobile data coverage nationwide;
2. The mandate balances incentives for new entrants and incumbents to deploy advanced networks across the country; and
3. The mandate would foster competition among multiple wireless providers

Verizon and AT&T opposed the rule, arguing that the rule was unnecessary given that carriers were already entering voluntary agreements for data roaming and that smaller carriers would have reduced incentive to build their own networks.

On the surface, investors in large carriers such as AT&T and Sprint should not see any additional losses from the ruling. The data roaming rule has been in place from 2007 and given that no new rules or divestitures resulted from the ruling, I see no additional costs of compliance to AT&T or Verizon due to this legal proceeding.

I don’t see how in the long run the ruling would benefit smaller carriers. If anything they may see increases in whatever charges they are assessed by the larger carriers as a result of negotiations in for future agreements, and they can thank the FCC’s competition posture for this.

As spectrum becomes harder to come by, larger carriers may feel compelled to pass on higher costs of handling additional traffic from smaller carriers. Delays by the FCC in releasing spectrum compounded by burdensome and lengthy scrutiny of license transfers will make a scarce resource more expensive. Smaller carriers will not be able to have their cake and eat it too.

For example, smaller carriers will argue that they do not have the capital to expand their networks on the one hand while on the other criticize any attempts by the FCC to ensure that spectrum goes to the carriers with the greatest economies of scale and the larger client base that would be negative impacted by a lack of sufficient spectrum. Either way, smaller carriers are going to have to absorb the costs of expanding traffic on the network either through sucking it up and deploying their own networks or paying increasing costs for roaming.

Smaller carriers may find themselves being more of a price taker in negotiations for roaming because all a larger carrier has to show is that the roaming charge being negotiated is commercially reasonable, a lower standard than the classic just and reasonable standard.

In the immediate term, the ruling may be deemed by Verizon and AT&T as a loss, but in the longer term, smaller carriers may have simply delayed the inevitable.

The Wireless Telecommunications Bureau of the Federal Communications Commission today announced that it would allow winners of its Mobility Fund Auction (Phase I) to obtain and submit to the FCC letters of credit issued by CoBank.

CoBank does not meet all of the FCC’s criteria for an eligible letter of credit issuer. Specifically, according to FCC rules, issuers of letters of credit must be insured by the Federal Deposit Insurance Corporation. CoBank is not a depository bank, but an agricultural credit bank and as such is insured as a part of the U.S. Farm Credit System. The FCC decided that the system under which CoBank is insured would suffice and that the public interest would not be negatively impacted by a waiver of its rules.

The Phase I auction is designed to provide high-cost support to carriers as incentive to deploy voice and broadband services into geographical areas carriers would otherwise not deploy facilities. The intent of the auction is to raise and target an additional $300 million in support to carriers, including Bell Operating Companies, other large carriers, and smaller mid-sized carriers so that hundreds of thousands of unserved potential customers would receive voice and broadband services.

Universal service is usually listed among risk factors that may impact a telecommunications carrier. Bell Operating Companies and other large carriers, such as Verizon and AT&T, are no exception. Changes in universal support mechanisms can have an impact on a company’s cost of doing business leading to impacts on company profits. Today’s ruling does not appear to cause any such threat.

I have some preliminary thoughts on additional transparency at the Federal Communications Commission. During my heyday at the Florida Public Service Commission, no major rule or other policy change was implemented without an evidentiary hearing. This type of openness provided both investors and consumers the ability to weigh in on an issue and helped ensure that the PSC met its duty to balance the interests of consumers and investors alike.

Not only did the PSC balance these interests by being open and transparent in their deliberations, but they also established a clearer record of precedent. This is the approach that the FCC needs to apply on a going forward basis in its decisions. Recent findings in the Commission’s special access ruling and the decision on the spectrum transaction between Verizon and SpectrumCo LLC provide examples on how a lack of an evidentiary hearing can send mixed signals about promotion of competition and free markets.

For example, the FCC concluded that it should suspend its special access rules that granted pricing flexibility to carriers facing competition. The FCC believes now that there is evidence the rules are not reflecting competition for special access.

However, in its review of the Verizon-SpectrumCo LLC license acquisition, the FCC concluded that the cable companies do not have the ability, at least in the near term, to cause anti-competitive harm in broadband services. In addition, a significant increase in backhaul rates is unlikely to impact subscribers.

So in special access, an important component of backhaul, the FCC doesn’t know whether there is competition, but in a spectrum docket, the FCC concludes in effect that there will be no anti competitive or anti consumer impact resulting from an increase in backhaul rates.

There has to be some reconciliation of the special access market with pricing impacts in the backhaul market and only a precedent setting evidentiary hearing can do this.

The Hillicon Valley reported last Thursday about Senator Al Franken’s displeasure with the settlement agreement between Verizon and the U.S. Department of Justice. The Minnesota Democrat reportedly believes that the Obama Administration via the DOJ has not gone far enough to ensure competition in the video distribution industry.

No wonder Democrats get accused of choosing winners and losers. Mr. Franken is advocating for government forcing companies to compete with each other.

It’s one thing to accuse a company of practices that keep another company out of a market, but just because Verizon knows how to provide video distribution services doesn’t mean it should be compelled to do so versus cross selling the services of another competitor.

If a third party wants to take advantage of the opening Verizon is providing by not providing video distribution services, let them step in and do so.