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Appeals court rubber stamps FCC's DSL (de)regulation

Hangs up on small ISPs

By Kevin Fayle, 24 Oct 2007

Living in America? If you get your access to the internet through an independent ISP over DSL, your service might become more expensive soon. Or slow. Or disappear entirely.

The Court of Appeals for the Third Circuit issued a ruling last week that approved the FCC's new order eliminating the requirement that large phone companies provide transmission services to independent ISPs at set, nondiscriminatory rates.

Instead, the independent ISPs will have to negotiate new individual contracts with Big Telco to use their pipes. But nothing guarantees that the telecoms will even agree to play ball with the little guys anymore.

Prior to this new order, the FCC required providers of "enhanced services" related to data storage, generation, transmission, etc. to provide competitors access to their wirelines. Access to telecommunications services (e.g., voice and fax) is mandatory under the Communications Act, but access for these enhanced services came through a separate FCC regulation issued back in 1975.

Cable ISPs did not fall under the 1975 rule, according to an FCC interpretation that was later upheld by the Supreme Court.

Access to grind

The new DSL order does two things: First, it declares that broadband Internet services over DSL are "information services" (a term introduced by the Telecommunications Act of 1996, but basically analogous to "enhanced services") with no telecommunications component. Thus, the mandatory access provisions of the Communications Act don't apply.

Next, the order eliminates the 1975 rule that required information service providers to give competitors access to their transmission systems. This opens the door for the large telecoms to hike up the rates that smaller ISPs pay to access the telecom's facilities, and it could also allow the telecoms to reject access for small ISPs altogether.

After the FCC issued the order, a number of independent ISPs and trade organizations petitioned the court for a review of the new deregulation.

In reviewing the regulation, the court's hands were largely tied by the legal standard that applies to administrative decisions. The court could only overturn the new order if it found that the FCC had acted in an arbitrary and capricious fashion when drafting it.

This is a highly deferential standard, and courts will usually only reject regulations if they find that an agency performed the equivalent of picking a rule out of a hat. If the agency can justify an order, even if the justification is based on bad policy, then courts will uphold it.

The petitioning ISPs argued that the provision of internet services contains a telecommunications component, and should thus fall under the mandatory access component of the Communications Act. In addition, the petitioners claimed that the FCC's elimination of the 1975 rule violated administrative rulemaking procedures and would harm the market for broadband services.

As to the first argument, the court pointed out that the Supreme Court had previously upheld the FCC's similar determination in regard to cable ISPs. The Supreme Court had declared that, since the end-user simply wanted internet access and didn't care about the equipment used to deliver it, there was no telecommunications portion of cable information services.

The 3rd Circuit then found that the evidence supported the FCC's conclusion that cable and DSL broadband services were similar enough to justify the application of the Supreme Court's reasoning to DSL services as well as cable.

For their argument against the revocation of the 1975 rule, the petitioners claimed that the FCC had failed to conduct a market survey to determine the effect the new order will have on market conditions and regional telecom consolidation. The FCC replied, and the court accepted, that it did not need to conduct such a study since the broadband service market was still in its nascent stages.

Overtaken by events

The FCC explained that, since market penetration of broadband services remains at low levels, any observations it could have made would quickly become obsolete as the market evolves.

The 3rd Circuit also agreed with the FCC's contention that the deregulation will lead to an increase in products and services by removing barriers to the adoption of new equipment. The FCC averred that telecoms companies had previously avoided upgrading their equipment because of the cost of offering independent ISPs nondiscriminatory access to that equipment.

The court rejected petitioners' additional arguments that the telecoms will block small ISPs from markets or relegate them to older, slower and less competitive equipment. Instead, the court again credited FCC findings that the telecoms have financial incentives to provide access to small ISPs at competitive rates, since by doing so they can spread the cost of their networks over as much traffic and as many users as possible.

Of course, they could also cement their regional monopolies, boot the smaller ISPs of the network entirely and finance their operations by raising the rates the end user pays. It's now entirely up to them, after all.®

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