Alerts and Updates

The FCC and Net Neutrality

January 23, 2007

The November elections have increased the likelihood that the new Congress will act on net neutrality legislation. (See our Nov. 30, 2006 Telecom Alert.) The chances for Congressional action received a major boost recently when the Federal Communications Commission ("FCC") agreed to accept certain conditions offered by AT&T and BellSouth to secure approval of their $85 billion merger, the largest telecom merger to date. While the text of the Order is not yet available, the terms of the parties' commitments regarding net neutrality and other issues have been released.

According to the FCC, net neutrality means that consumers should be allowed to access lawful Internet content of their choice, run applications of their choice, connect lawful devices of their choice that do not harm the network, and have a choice of providers. These four principles were adopted in a Policy Statement issued by the FCC in 2005.

Thereafter, efforts were made in Congress to adopt legislation that would prevent carriers from differentiating between and among service providers based on, for example, the data speed offered. These efforts foundered over concerns that net neutrality might be a solution in search of a problem. Opponents of net neutrality legislation felt that there was no pattern of marketplace problems which would justify imposition of common carrier-type regulatory requirements. There was also concern that imposing such requirements could reduce incentives to deploy new broadband facilities.

The AT&T/BellSouth merger afforded net neutrality proponents another opportunity to advance the issue, this time before a regulatory agency responsible for approving the merger. Under normal circumstances, the three-Commissioner Republican majority at the FCC could be expected to have approved the merger with perhaps only a limited net neutrality condition. However, one of the three, Robert McDowell, recused himself from the approval process on the ground of a perceived ethical conflict due to his prior employment with an association of competitive carriers, COMPTEL. That left the Commission evenly split and afforded the two Democratic Commissioners, Michael Copps and Jonathan Adelstein, much leverage over the fate of the merger.

After weeks of deadlock and a decision by Commissioner McDowell that he would not reconsider his recusal, Commissioners Copps and Adelstein obtained AT&T and BellSouth's agreement to numerous regulatory concessions, including price caps for special access service to enterprise customers, a buildout commitment for broadband facilities and a commitment to repatriate 3,000 jobs, among other conditions.

On net neutrality, the applicants agreed not to sell to any Internet content, application or service provider (including any of their affiliates) any service that privileges, degrades or prioritizes any packets transmitted over its broadband access service based on its source, ownership or distribution. This has been characterized as a fifth net neutrality principle by the Democratic Commissioners. It is considerably more detailed than the neutrality conditions agreed to in the Verizon/MCI and SBC/AT&T mergers. The commitment does not apply to AT&T's enterprise customers or to AT&T's Internet protocol television (IPTV). The commitment sunsets on the earlier of two years from the closing of the merger or the effective date of any similar legislation Congress might adopt.

While these commitments are not binding on the FCC, they represent a major boost for net neutrality proponents. Senators Snowe (R-Maine) and Dorgan (D-N.D.) have reintroduced net neutrality legislation. John Dingell (D-Mich.), once again Chairman of the House Energy and Commerce Committee, has stated that the FCC proceeding may warrant committee review.

While the fate of net neutrality in Congress remains unclear, one lesson emerges clearly: Regulatory agencies like the FCC, even a minority of Commissioners at such an agency, are in a position to wield great influence over transactions like this, even when other branches of government, such as the Department of Justice, have determined to allow the transaction to go forward. Such is the nature of the many-layered regulatory system that exists in the field of telecommunications.

Such is also the result of the fact that the FCC is empowered to review mergers under only the vaguest of standards, namely, whatever result the Commission determines to be in the public interest. The effect can also be to set standards for industry players other than the parties to the transaction itself (as has already been argued here in connection with certain of the merger conditions). This can effectively sidestep the customary notice and opportunity for public comment required in rulemakings of general applicability.

For Further Information

If you would like more information regarding the merger and the FCC's review, please contact William K. Keane in our Washington, D.C. office, or any of the members of our Information Technologies and Telecom Practice Group.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.