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INSIGHT: Net Neutrality Goes Back to Court, but Will the Economics Hold Up?

Jan. 31, 2019, 9:00 AM

On February 1, the U.S. Court of Appeals for the District of Columbia Circuit will be asked in Mozilla Corp. v. Federal Communications Commission to review the Trump Administration’s 2018 Restoring Internet Freedom Order. The FCC, led by Chairman Ajit Pai, reversed the Obama Administration’s 2015 decision to reclassify broadband internet access from a lightly-regulated “information service” under Title I of the Communications Act—an approach that had stood the test of time under both Democratic and Republican administrations for nearly 20 years—to a heavily-regulated common carrier telecommunications service under Title II of the Act.

As it is established law that an administrative agency may change policy directions so long as it provides a reasoned explanation for doing so, the question at bar is whether the current FCC has met this burden.

FCC’s Argument

The commission’s argument basically is as follows: under the U.S. Supreme Court’s 2005 ruling in National Cable & Telecommunications Ass’n v. Brand X Internet Services, reinforced by the D.C. Circuit’s 2016 ruling in US Telecom Ass’n v. FCC, the agency is legally entitled to define broadband internet access as an “information” service as it has in the past. To justify this return to the “light-touch” of Title I, the FCC contends that the economics “reinforce that conclusion.”

In particular, while the Obama Administration conjectured that reclassification would not harm broadband infrastructure investment, compelling new economic evidence based on modern statistical methods, along with statements by former FCC officials and company statements, indicates that Title II did, in fact, reduce investment. Consequently, argues the commission, bringing broadband Internet access back under Title I is justified.

But How to Measure the Effect of a Regulation on Investment?

Most of the debate in the record revolves around competing calculations from Free Press (which purport to show that investment rose post-reclassification) and economist Hal Singer (which purport to show that investment fell post-reclassification), both of which offer simplistic comparisons of capital expenditures by major Broadband Service Providers in the few years before and after the 2015 reclassification decision.

The FCC was unimpressed by such comparisons, and for good reason. As the commission recognized, simple comparisons of capital spending trends “can only be regarded as suggestive, since they fail to control for other factors that may affect investment ... .” For this reason, the commission also relegated to the “suggestive” bin the bulk of the record evidence on investment effects, including works by the Information Technology & Innovation Foundation (ITIF), the Georgetown Center for Business and Public Policy, the Free State Foundation, among others.

Thus rejecting simplistic comparisons of capital expenditures made by both sides of the dispute, the FCC instead properly focused on the “counterfactual”—that is, what would investment had been “but for” reclassification?

Empirical Analysis

In particular, the commission placed heavy reliance on the empirical analysis performed by Phoenix Center Chief Economist Dr. George Ford. According to Ford’s counterfactual analysis, between 2011 and 2015 (the last year data were available), telecommunications investment differed from the counterfactual by between 20 percent and 30 percent, or about $30 to $40 billion annually. Ford’s counterfactual analysis indicated that the U.S. was due an investment boom in telecommunications following the recession of 2008, but that was apparently foreclosed by the FCC’s proposals to impose Title II regulation on broadband services. Ford also found no decline in investment following the release of the FCC’s “Four Principles” to promote an Open Internet in 2005, suggesting it is reclassification—and not Net Neutrality principles—that reduced investment.

The commission was impressed. Dedicating a full two pages in the Restoring Internet Freedom Order to discussing Ford’s empirical analysis, the FCC took great pains both to examine Ford’s methodology and to consider numerous challenges to his findings. The commission found those critiques baseless and found Ford’s counterfactual analysis to be a “reliable indicator of the direction of the change in investment” and, “[a]t the very least, the study suggests that news of impending Title II regulation is associated with a reduction in ISP investment over a multi-year period.” If anything, noted the commission, “Ford’s negative result for investment was understated.”

Materially, unlike the simplistic comparisons of capital expenditures appropriately rejected by the commission, Ford’s sophisticated empirical analysis was subsequently published in a peer-reviewed economics journal, indicating that it satisfied modern professional standards.

Major Question on Appeal

The FCC’s heavy reliance on the Ford study is now a major question on appeal. Intervenors in support of the petitioners attempt to discredit the Ford study by citing to a critique authored by Christopher Hooton entitled An Empirical Investigation of the Impacts of Net Neutrality. But the commission found that Hooton’s estimation of the impact of events in both 2010 and 2015 relied “partially on forecast rather than actual data, which likely lessens the possibility of finding an effect of Title II on investment.”

Indeed, Hooton estimates the investment effects of Title II regulation using data through 2020, which included four years of data from time that has yet to even manifest (even today). Investment data extrapolated from historical trends does not and cannot change in response to regulatory action, and as the commission declared, “is unlikely to yield reliable results.”

So will the court buy the FCC’s policy justification that Title II deterred investment? If the court follows precedent, it should.

The same court deferred to the agency’s judgment when it upheld the 2015 Open Internet Order—a decision the commission’s own chief economist at the time both described as being crafted in an “economics-free zone” and conceded lacked a shred of empirical or theoretical support.

But what is good for the goose must also be good for the gander: if the flawed economic analysis contained in the FCC’s 2015 Open Internet Order is entitled to deference, then the commission’s Restoring Internet Freedom Order—which carefully parsed the empirical evidence on capital spending and properly referenced some 35 peer-reviewed journal articles from the economics literature—is entitled to the same, if not greater, deference. After all, a regulatory agency should face no hurdle in rectifying the poor decisions of its past.

Author Information

Lawrence J. Spiwak is the president of the Phoenix Center for Advanced Legal & Economic Public Policy Studies, a non-profit 501(c)(3) research organization that studies broad public-policy issues related to governance, social and economic conditions, with a particular emphasis on the law and economics of the digital age.