November 18, 2016 3:37 PM

Wheeler's FCC: Decisionmaking by Political Favoritism

An independent, "expert agency," like the FCC, is at its most effective when it is focused on keeping the industries it regulates running smoothly, in the interests of consumers, by filling policy "potholes."  On the other hand, nothing incites partisan rancor like addressing "problems" that look a lot more like ideological crusades, rather than good faith efforts to address genuine consumer grievances.  

Under Chairman Tom Wheeler, the FCC became a battlefield for "proxy wars" pitting business interests against each other in the name of ideology--that, itself, was a disguise for transparent political favoritism.  These battles were fought not by the traditional strength of evidence and argument, but instead through PR campaigns, produced social media outrage, and 3rd party Hessians claiming the "public" or "progressive" interest mantle. This approach has devalued the deliberative process and the role of  the majority and minority commissioners in driving consensus at the expert agency.

A Regulatory "Pothole"

A good example of a regulatory "pothole" is the agency's response to rapid adoption of VoIP technology by consumers in the early 2000's.  Though VoIP calls were a cheaper substitute for PSTN calls in most respects, because VoIP calls didn't use the PSTN, consumers could not access E911 service.  

After some well-publicized tragedies, the FCC quickly focused on this specific issue (out of a larger number of issues) in its already-pending 2004 VoIP NPRM.  Acting quickly, and unanimously, the FCC issued an Order in 2005, adopting some interim measures to: 1) better inform consumers of the limits of nomadic VoIP services, and 2) to ensure that "interconnected" VoIP providers quickly became able to offer E911 service to their customers by terminating calls through CLECs.  

But, if the VoIP 911 matter was an example of interested stakeholders (carriers and public safety/law enforcement) forthrightly putting their interests on the table, and the FCC balancing those interests to find the best solution for consumers, the FCC's recent Broadband Privacy Order provides a good illustration of the exact opposite type of proceeding. 

Broadband Privacy ≠ Internet Privacy

The Commission's classification of broadband Internet access service as a "telecommunications service," in its 2015 Open Internet Order, in turn, allowed the FCC to define what information, with respect to this service, it would define as "customer proprietary network information" ("CPNI") under Section 222 of the Act.  Section 222 defines CPNI as, essentially, information that the service provider knows by virtue of providing a telecom service to a customer, and requires the carrier to obtain customer permission before selling the customer's CPNI to a third party.  

The Interent Service Providers ("ISPs") argued that consumer Internet usage information is not information uniquely held by the ISP, in the way that CPNI was uniquely in possession of a telecommunications carrier in 1996 (when Congress wrote the law).  See, e.g., AT&T Comments pp.9-30.  Rather, the primary market for consumers' internet usage information is the online advertising market. , in which the ISPs do not possess sufficient unique, or valuable, consumer information to even possess a measurable share of the market.

Indeed, consumer Internet usage information is "monetized" in the online advertising market--a market in which almost 2/3's of all revenue, and 90% of growth since 1Q 2015, is controlled by Google and Facebook!  Significantly, the online advertising market is also one in which no ISP even possess a measurable share of the market.  Not surprisingly, according to Princeton University researchers, Google and Facebook account for all of the top 10 third party trackers on the Web

 The ISPs explained that, despite the FCC's rhetoric in its NPRM about consumer "privacy,"

[n]o matter what the Commission does in this proceeding, major actors in the Internet ecosystem will continue to track and use all of the same information the proposed rules would keep ISPs from efficiently tracking and using.

See, e.g., AT&T Comments at p. 35 (emphasis added).  Thus, they argued, the FCC's proposed rules would not enhance consumer privacy, but merely foreclose competition in the online advertising market.

Party Participation vs. Proxy Participation

Given the competitive significance of the FCC's proposed rules, you might think the record in this proceeding would pit edge providers and ISPs against each other, with each side trying to show why the ISPs do/don't possess some unique information about their customers that is worthy of rules protecting its disclosure.  If this was your guess, you'd be half right; the ISPs definitely showed up with their best information/arguments.  

On the other side, though, neither Google/Alphabet, nor Facebook appears in any search of this docket.  Yet, the FCC had no trouble finding support in the record for its contention  that it is the ISPs from whom consumers' information needed protection, and not the two dominant firms in the business of collecting and selling that information.  If you look through the Order, you'll see that a majority of the support the FCC cites is supplied by parties with ties to Google, Facebook, or other edge providers.

For example, the Electronic Frontier Foundation (cited 45 times in the Order) is a frequent advocate for, and recipient of funding from, both Google and Facebook.  We've discussed Public Knowledge (56 cites) here before, but it and other groups that the Commission cites frequently, like the Center for Democracy & Technology (61 cites),  and the New America Foundation Open Technology Institute (72 cites) are also supported by Google.  The Commission also cited a paper filed by Upturn, which is a legal/policy advocacy group, whose involvement was sponsored by the Media Democracy Fund (supported by edge providers Microsoft and Tumblr.) 

Even groups with names as innocuous as Consumer Federation of America/California, Consumer Watchdog, and National Consumers League are groups for which Google discloses support.  Academics, as well, may have more than an "academic" interest.

Princeton University Professor, Nick Feamster comments, but doesn't disclose that he has received $1.6  million from Google over the past 5 years.  Other Princeton faculty members filed comments similar to Feamster's.  And, in May, Princeton's Center for Information Technology Policy, of which Feamster is Acting Director, was a co-sponsor, along with Google-funded Center for Democracy and Technology, of a policy conference on the topic of "broadband privacy."  The Google Transparency Project notes that 5 of the 7 panelists at the event had received support from Google.   

You Need Not Be Present to Win

The reasons behind some parties' participation doesn't mean that their advocacy/arguments were wrong, but the FCC woud have benefited more from a direct exchange between both sides with first-hand knowledge of the consumer information they track.  And, why weren't Google and Facebook in the record, making these points, themselves? 

One reason could have been that more information about these firms' dominance in online advertising came out over the summer, including a paper by one of the Princeton academics in this proceeding, noting that Google and Facebook controlled all the top 10 third-party trackers.  Another reason for Google's absence may have been that it went back on its self-imposed ban on using consumers' personally-identifiable information in its web tracking, according to this ProPublica report

Would it have been embarrassing for the leading edge providers to ask the government for protection from competition?  Maybe, but consumers deserved the ability to transparently see which side--between two interested parties--the government was choosing, and why.  

   *    *    *

The FCC's leadership has been willing to undertake ideological crusades for the sole purpose of advantaging politically-favored firms.  The transparent nature of the FCC's actions ensure that they will quickly be undone by a subsequent Commission.  The legacy of such leadership leaves only acrimony among the majority of Commissioners trying to put consumers first.  Hopefully, the next FCC will  learn from history.


  

November 4, 2016 11:09 AM

Why Is DoJ Siding Against Consumers in its DirecTV Complaint?

On Wednesday of this week (11/02), the Antitrust Division of the U.S. Department of Justice ("DoJ") sued AT&T arguing that its DirecTV subsidiary was the "ringleader of information sharing agreements" among rivals that "corrupted" competition among rivals to carry the Dodgers' cable TV channel. Complaint at para 2.  According to the DoJ, this is the primary reason that Dodgers' fans in L.A.--living outside of Time Warner Cable's ("TWC") service area have not been able to watch Dodgers' games since the 2013 season.

Unfortunately, the DoJ seems dangerously unaware of findings by a federal court--in an antitrust case on the exact same subject matter being litigated during the same time frame as the facts in the DoJ complaint--that the exclusive sports distribution contracts (that raise consumer rates) may well be the more obvious Sherman Act violation. When we know what DirecTV knew--as a defendant to that litigation--we can better understand why the DoJ could not be more wrong in this case.

L.A. Regional Sports Networks ("RSNs")

Until 2011, Fox Sports was the leading RSN in the L.A. area.  It had two channels, one of which distributed games of the Lakers, Kings, and the Anaheim Angels, and the other of which distributed the games of the Clippers, Dodgers, and Anaheim Ducks. 

But, as Fox's contract with the Lakers was ending in 2011, TWC swooped in and paid $3 billion for the rights to broadcast the Lakers' non-national games for the next 20 years.  As DoJ recounts in its complaint, TWC raised the prices to carry the Lakers (as a standalone channel) well above any range of what any of the other pay TV distributors considered fair value. DoJ Complaint paras. 29-39.
 
In 2013, Guggenheim Partners paid an unheard of $2.15 billion for the Los Angeles Dodgers baseball team ("Dodgers").   The private equity investors then turned around and sold the exclusive rights to distribute Dodgers' games--in the form of a dedicated "Dodgers channel"--to TWC for an even-more-unheard-of price of $8.3 billion.

Reportedly, TWC never budged on its demands, that every pay TV distributor (i.e., competitors and other cable/satellite companies), would have to pay it--on a per-subscriber basis for the rights to broadcast Dodgers games--regardless of how many of these distributor's customers want to watch the games.  Until Wednesday, the narrative was that TWC's "unmitigated disaster" of a deal showed that perhaps there was some limit to the ever skyrocketing costs of sports programming.

DoJ to TWC's Rescue

The DoJ contends that DirecTV privately told other pay TV companies that it was not going to pay TWCs outrageous demands. The DoJ argues that, but for this exchange of information, TWC's competitors, and other pay TV distributors in the L.A. Dodgers home market, would have been happy to pay (and pass along to their consumers) the supra-monopoly prices being demanded by TWC.

Bizarrely, DoJ contrasts the "anticompetitive" situation of today with an earlier--presumably "competitive"--negotiation period, in which TWC (as the new RSN for the Lakers) extorts a price from Cox Communications' subscribers of "60% more" than Cox's internal analysis indicated the content was worth. Complaint at para. 36. No, the DoJ's thinking is that if cable companies aren't just spending their customers' money and passing through rate increases, then something illegal is afoot.

The fact, though, is that the vertical distribution contracts--which are responsible for the sports programming price increases (that  DoJ is incomprehensibly fighting for)--were under antitrust scrutiny, and coming up short, throughout the relevant time period covered by the DoJ suit.  After looking at these contracts in the light of antitrust precedent, we can truly appreciate just how wrong the DoJ was to go after the victim--and not the cause--of spiraling sports programming costs.

Consumers Fight Anticompetitive RSN Contracts

In 2012, consumers filed class action antitrust lawsuits against the MLB and the NHL in the Southern District of New York. See, e.g., Laumann v. NHL, et al. and Garber v. Office of the Commissioner of Baseball, et al., 907 F. Supp.2d. 462 (SDNY 2012).  These cases squarely attacked the contracts at the heart of the exclusive "home television territory" ("HTT") distribution model.  Specifically, consumers alleged that the contracts between the teams, MLB (and the NHL), and the RSNs of DirecTV and Comcast, illegally restricted competition in the broadcasting/streaming markets because these agreements also restrict the right of the "away" team--a non-party to these contracts--to sell its own broadcast feed to anyone in the HTT area of another RSN.
 
MLB fans can only watch games of their "home team" by purchasing a cable package from the RSN (or a distributor of the RSN, such as AT&T, Verizon FiOS, or a satellite or cable company).  Fans of other teams could only watch the games of out-of-market teams by purchasing an out-of-market package ("OMP") from the leagues (for streaming customers) or from the RSN (distributing on behalf of the leagues).

The plaintiffs' successfully argued (at every pre-trial stage) that the complicated web of contracts between the teams, the leagues, and DirecTV and Comcast (which prevented a non-party to the contract (i.e., any "away team") from selling its own independently-produced feed of the game to any fan in any part of the country) were "contracts . . . in restraint of trade" in violation of the Sherman Act.  The plaintiffs' contention was that, but for these contracts, fans could purchase the away-team feeds of games on an "a la carte" basis, even if they did not want to buy home team's cable package.

The Case History/Court Findings

Throughout the case, DirecTV and Comcast (in the same role as TWC in the DoJ case), vigorously argued at every possible stage that, as the RSNs, they were merely accepting terms set forth by the Leagues and that they did not benefit from the exclusivity--and the higher-than-competitive consumer prices--that this exclusivity produced.  The court rejected this argument in both the defendant's motions to dismiss in 2012 (opinion) and their motions for summary judgment in 2014 (opinion).

The court explained that,

evidence that the Television Defendants would not have entered the contracts at the prices prescribed but for the territorial restrictions, is sufficient evidence from which a fact finder could infer a tacit horizontal agreement among the RSNs and MVPDs

See, Opinion Denying Defendant's Motions for Summary Judgment, at 50 (emphasis added). Further, in rejecting the defendant's motions for summary judgment, the court found,

The clubs in each League have entered an express agreement to limit competition between the clubs - and their broadcaster affiliates - based on geographic territories. There is also evidence of a negative impact on the output, price, and perhaps even quality of sports programming.
See, Id. at 30/57.

In May of 2015, the court certified the plaintiff's class to go forward to trial in order to seek injunctive relief, but not money damages, because there was no common monetary impact among the class members. This decision pretty much guaranteed that the case would settle, which it did, on the eve of trial, earlier this year.  The settlement agreement, unfortunately, leaves intact the geographic market exclusivity, which, in turn, ensures that sports content costs will continue to spiral.

To What End?

In many ways, this is/was the perfect case for an antitrust enforcement agency to bring--meritorious, but without the profit potential to ensure the efficacy of private enforcement. However, there is no evidence the DoJ was even aware of this antitrust litigation.

So, instead of taking up the consumer's side, the DoJ chose to sue on behalf of conduct that a United States District Court has already characterized as "express agreement[s] to limit competition between the clubs - and their broadcaster affiliates - based on geographic territories" and their corresponding "evidence of a negative impact on the output, price, and perhaps even quality of sports programming." It is sad that the DoJ didn't follow antitrust developments in this field closely enough to know that agreements which result in distributors paying 60% premiums over value is the result of a "corruption of competition"--rather than competition itself.

Finally, it is interesting to consider that, until several months ago, DirecTV had every reason to believe that a court would be likely to find that its RSN contracts were an illegal restraint of trade.  How ironic that, having dodged a bullet with respect to its RSN agreements, DirecTV would find itself the target of another lawsuit for not agreeing to pay the most anti-consumer RSN contract in America!


September 28, 2016 5:26 PM

Public Bully

Last week, the word going around town--and in the "Twittersphere"--was that Gene Kimmelman, the president of advocacy group Public Knowledge, was threatening that if FCC Commissioner Rosenworcel didn't "get in line" behind Chairman Wheeler's set-top box proposal that he would oppose her re-nomination for another term as an FCC Commissioner.  This article in Fortune supports the rumor with a quote from Kimmelman that "[w]e'll hold everyone accountable . . .  [for not supporting the Chairman's set-top box plan]."  If you're anything like me, you're probably asking, "who does this?"

Who Does This?

In communications circles, perhaps no group has been as successful at converting political capital into the old-fashioned kind as Public Knowledge.  After the group's previous president, Gigi Sohn, became a senior adviser to FCC Chairman Tom Wheeler, Public Knowledge has carved out a lucrative niche for itself as a critical ally for commercial interests with regulatory goals, i.e., either seeking to escape scrutiny (e.g., Google), or to saddle their rivals with more regulation (e.g., Netflix and the CLECs).

Gene Kimmelman2.jpg

The group's current president, Gene Kimmelman, before taking over at Public Knowledge, was himself a political appointee for the first half of the Obama administration--as a Deputy Assistant Attorney General in the Antitrust Division of the Department of Justice.  Kimmelman, as his Wikipedia page will tell you, "is a consumer protection advocate who specializes in competition law and United States antitrust law."

What Kimmelman's Wikipedia page won't tell you, though, is that he wields a lot more power than the average consumer protection lawyer, because he has been playing the "consumer friendly" face of one corporate interest, or another, for pretty much his whole career.  In fact, almost 25 years ago, the New York Times wrote about Kimmelman's talent for winning political battles by playing one set of corporate interests against the other.

The NY Times article notes that Kimmelman's first big political victory was against the cable companies--his current set-top box issue enemies--on behalf of the broadcast networks.  In fact, if you're a cable consumer, you're still paying for Kimmelman's first big victory--in the form of the retransmission fees that subscription TV providers (cable, phone, and satellite companies) pay local broadcasters to carry their stations.  These rates--and not the set-top box rates Kimmelman is attacking on behalf of current corporate client Google--have been primarily responsible for raising your cable bill over the last 2 ½ decades, and they're projected to continue to rise faster than other programming costs for the near future. 

Thus, given Public Knowledge's affiliations with powerful corporate interests--including Google (set-top boxes), Netflix (Internet peering), and CLECs/Sprint (special access/business data services--it isn't that surprising that PK's president would feel like he's got the power to bully an FCC Commissioner.  After all, it's probably a safe bet that Google has enough powerful friends in the White House, and in the Senate, to make Commissioner Rosenworcel's life a little difficult, to say the least.  But why do it so . . . publicly?

Why Be a Public Bully?

If you've got the political power, I can kind of see--in a TV bad guy sort of way--why you might try to deliver a political threat to an FCC Commissioner; assuming you thought your victim believed you had the power to deliver on the threat, and the issue was so important to you that you didn't mind looking like a cliché and a jerk at the same time.  But still, why tell the world?

It seems to me that, if you go public with your threat, you make it harder for your threat to work.  After all, the smaller the group of people that knows about your threat, the easier it is to give your target a "face-saving" way out.  

On the other hand, once you tell everyone--including those that have expressed concerns about your plan--that you'll "hold them accountable" if they  don't support you, then you not only make it harder for them to support you, but also anyone new to support you.  Who wants to be known as someone that got pushed around?

Likewise, it also makes it difficult for those that you want to carry out your threats if you put them in the public spotlight, because--they too--now end up looking like they were just "in your pocket."  A public threat makes everything "all about you" and not the issue that you wanted everyone to think was so important to you, Google/the White House, etc.  
Finally, when you go public, it's important that the politicians/public servants that you're threatening--up and down the line--know that you can deliver on your threat.  In other words, if you are the NAACP, AARP, or even a commercial group like a labor union or the NRA, politicians know that you control/influence voters and that's what makes them accountable.  Seems that Public Knowledge, despite having money and connections, might not really be representing millions of voting consumers--and that's a bluff that any inside-the-beltway interest group has to worry about being called.

Congratulations!  You Played Yourself

The expression, "you played yourself," coined by Ice-T in 1990 refers to a situation--frequently brought on by hubris--in which someone ends up frustrating their own ends.  Earlier this year, on the internets, it became a wildly popular meme, featuring DJ Khaled.  



It's always possible that Gene Kimmelman's public political threat really will make him more powerful than the public servants he threatens, or the politicians he is relying on to carry out these threats.  Then again, it's also possible that in delivering a cliché of a threat, he made a cliché of an error.

June 30, 2016 4:45 PM

The FCC's Special Access Special Delivery

Earlier this week, I had a post explaining just how far afield the Tariff Investigations Order portion of the FCC's special access, now "business data services" ("BDS"), Tariff Investigations Order and Further Notice of Proposed Rulemaking ("FNPRM") strayed from rational decision-making.  Unfortunately, since Chairman Tom Wheeler has taken the helm of the FCC, irregular departures from reasoned--and, more importantly, fair--decision-making have become the norm for this proceeding.  

Procedurally Fair?

Yesterday, AT&T posted a statement on its public policy blog once again drawing attention to the lack of procedural due process with which AT&T believes the FCC has conducted its BDS inquiry.  AT&T's Senior Vice President--Federal Regulatory, Bob Quinn provided a detailed description of the Commission's latest procedural irregularity: the Commission's introduction into the record of this 228 page filing containing previously-unseen revisions/critiques/analyses of the work of the FCC's 3d party economic expert--on the same day that public comments were due. AT&T concludes that,  

the [FCC's] lack of due process only reinforces that this agency is driving to reach a pre-ordained outcome.

See, AT&T Public Policy Blog.  AT&T's statement was its second this year (previously here).

AT&T's charges deserve more attention than "ordinary" criticisms of adversely-affected parties, because not only do AT&T's complaints refer to procedural fairness (not whether the FCC agrees with AT&T), and its previous complaint about this issue came 2 months before the company suffered an adverse decision.  Finally, AT&T's concerns--that the Commission is driving toward a pre-ordained outcome--seem to be supported  by independent events (from those cited by AT&T) taking place in the FNPRM proceeding this week.

The INCOMPAS-Verizon Proposal Advances

As mentioned in a previous post, on April 7th, INCOMPAS (the CLEC trade association) and Verizon started combining their BDS regulatory advocacy.  Chairman Wheeler lauded the proposal immediately, as did the most politically influential lobbying/interest group here, and the FCC prominently mentioned the proposal in the first paragraph of its pending FNPRM. See Order/FNPRM at para. 159.
 
Earlier this week, on June 27th, INCOMPAS and Verizon sent in another joint letter  ("INCOMPAS-Verizon June 27th Letter")--elaborating on the parties' previous "compromise" proposal.  Chairman Wheeler seems unlikely to share Adam Smith's skepticism that,

[p]eople of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.
Thus, we can expect the Commission to take direction from this second, more specific, appeal for greater regulation.

Despite Contradicting the FCC's Own "Findings"

The INCOMPAS-Verizon proposal clearly has traction with the Chairman's Office, at a minimum.  This is in no way more apparent than in the fact that the principle point of the letter would require the Commission to immediately renounce one of the "key findings" in its FNPRM--yet, the parties feel no obligation to address, or explain, this apparent inconsistency with the market realities, as seen by the Commission.

In its FNPRM, the FCC lists as one of its "key geographic market findings" the observation that,

[p]otential competition is important, that is, nearby suppliers can constrain BDS prices. For example, we find that fiber-based competitive supply within at least half a mile generally has a material effect on prices of BDS with bandwidths of 50 Mbps or less, even in the presence of nearby UNE-based and HFC-based competition.

See Order/FNPRM at para 161.  In other words, the FCC observes that many areas of the country exhibit competitive characteristics, notwithstanding the number of actual competitors offering service in these census blocks.  Instead, the Commission observes, the presence of a potential competitor within a half mile of a building will constrain the prices of every other competitor actually serving the building--even for the smallest capacities of bandwidth (50 Mbps and below).

Compare, however, the "compromise" offered by INCOMPAS and Verizon that,

we agree that all Business Data Services at or below a specified threshold should be deemed non-competitive in all census blocks. We agree that the specified threshold should be no lower than 50 Mbps.
See, INCOMPAS-VZ June 27th Letter at p. 2 (point 2).  And, in case you're wondering what a "non-competitive" designation means, the parties "support ex ante price regulation for all Business Data Services deemed non-competitive." Id. (point 6).  

Thus, while the FCC makes a "key finding" that prices are constrained--even at the lowest capacity levels--without regulation in many parts of the country (notwithstanding the number of actual competitors selling service in these areas), INCOMPAS and Verizon urge the Commission to adopt a nationwide presumption that the opposite is true.  Given the apparent influence of these parties with this Commission (and the undisputed clout of those supporting this compromise), I'd be willing to bet that the Commission ends up believing the advocacy of INCOMPAS and Verizon over "its own lyin' eyes."

***

It's easy to dismiss the protestations of parties that don't prevail in a Commission matter as "sour grapes."  But, it's harder to ignore complaints--before a party has even lost--that they won't get a fair chance to be heard, then the integrity of the system is called into question and we should all be interested.  Finally, concerns about the FCC moving toward a pre-ordained outcome are worse still when any casual observer can notice that some parties have a map to that pre-ordained destination--and others, including the public, are just along for the ride.

June 27, 2016 10:53 AM

Inside the Looking Glass: the FCC's BDS Order

In his Dissenting Statement from the FCC's recent Business Data Services Order and Further Notice of Proposed Rulemaking ("BDS Order"), FCC Commissioner Ajit Pai compares the FCC's decision to expand its regulation of the "business data services" market to the world Alice encountered in  "Through the Looking Glass, and What Alice Found There."  In order to give you some idea of what Commissioner Pai was talking about, let's just look at some of the most obvious errors the FCC makes in its wholesale abandonment of rational decision-making.
 
Background

Business data services ("BDS") are dedicated circuits that transmit data at speeds of 1.5Mbps or 45Mbps between the customer's location and another point on the incumbent LEC ("ILEC") network.  After the break-up of AT&T in 1982, the FCC set prices for the competitive "long-distance" inputs (supplied by the ILECs) of switched and "special" access.  Almost 35 years later, in its BDS Order, the Commission renames "special access" as BDS, but continues price regulation.

In its BDS Order, the FCC makes a finding that certain provisions in the legacy incumbent telephone company discount tariffs for business data services are "unjust and unreasonable." Notably, the FCC made no finding as to the "just and reasonable" nature of the ILECs' basic "month-to-month" retail rates for BDS. 

The Commission found only that certain terms and conditions the ILECs required in order for a customer to qualify for the largest discounts off the retail rate were "unjust and unreasonable."  Moreover, the Commission also found that the some of the penalties (for the customer failing to meet purchase volume, or contract term, commitments) allowed the ILECs to recover more from a "breached" contract than the ILEC would have received if the customer had fully performed. 

The Threshold Fallacy

From the outset, we can readily see that the FCC has a bit of a logic problem that it needs to explain, before it can resolve the tariff complaints.  The "month-to-month" BDS rates have not been challenged as unjust/unreasonable, nor do these rates require a purchaser to agree to buy any specific number of circuits or hold the circuits for any period of time. 

Given that any customer can purchase BDS on "just and reasonable" rates, terms, and conditions, then wouldn't any rates below the "month-to-month" BDS rates--regardless of terms and conditions--have to be, by definition, just and reasonable rates?  The Commission never explains how it can rationally determine that any terms and conditions--which result in lower prices than the already-established-just-and-reasonable-prices--can be "unjust and unreasonable."

John_Tenniel_Alice_and_the_Knitting_Sheep_2.jpg
 
Where's the Law?

When you read the BDS Order, one of the first things you'll notice--as opposed to every other FCC Order--is that the Commission never explains the prevailing legal standard.  Of course, the FCC notes that Section 201(b) of the Communications Act requires that,

[a]ll charges . . . for and in connection with such communication service, shall be just and reasonable, and any such charge . . . that is unjust or unreasonable is declared to be unlawful . . .
See 47 U.S.C. Sec. 201, but this tells us nothing about what the "just and reasonable" requirement means

Moreover, because "just and reasonable" is an unambiguous, statutory term, the Commission will get no deference from the Court of Appeals.  So, why wouldn't the Commission at least get the precedent it wants to rely on in its Order?  

What the Law Says

In Verizon v. FCC, 535 U.S. 467 (2002), the Supreme Court's review of its Iowa Utilities Board remand to the 8th Circuit, Justice Souter, writing for the majority, offers a historical summary of the evolution of the "just and reasonable" standard with respect to rates between businesses (vs. rates between the utility and the public).

When commercial parties did avail themselves of rate agreements, the principal regulatory responsibility was not to relieve a contracting party of an unreasonable rate . . . but to protect against potential discrimination by favorable contract rates between allied businesses to the detriment of other wholesale customers.

See, Verizon, at p. 479 (internal citations omitted).  Justice Souter also notes that, with respect to rates/terms set by contract between two commercial providers, the Court has previously stated that,

the sole concern of the Commission would seem to be whether the rate is so low as to adversely affect the public interest--as where it might impair the financial ability of the public utility to continue its service, cast upon other consumers an excessive burden or be unduly discriminatory.

Id. at pp. 479-480 (citing FPC v. Sierra Pacific Power Co., 350 U. S. 348, 355 (1956)). 

Thus, Supreme Court precedent, with respect to "just and reasonable," would limit the Commission's ability to step in and void a contract tariff rate/term between two sophisticated entities to situations where the rate was too low, and reflected an improvident "giveaway" to a commercial customer, at the expense of other customers. 

Competition Cannot Be Harmed By Limitations on BDS Discount Availability

In its BDS Order, the FCC states that it has previously expressed concerns about the "potential anticompetitive nature" of the ILECs' term and volume discount plans. Order at para 92.  The latest expression of concern the FCC cites is from 1996--when Congress gave the FCC a much more effective tool for determining prices/terms between ILECs and their competitors--the Telecommunications Act of 1996, which allows the FCC to order ILECs to provide access to "unbundled network elements" ("UNEs"), at rates much lower than BDS tariff rates, if the FCC believes that competitors would be impaired in their ability to compete "but for" access to the UNEs. 

But, the Commission knows the CLECs/wireless carriers cannot credibly make such a claim.  In 2004, the D.C. Circuit pointed out,

[a]s we noted with respect to wireless carriers' UNE demands, competitors cannot generally be said to be impaired by having to purchase special access services from ILECs, rather than leasing the necessary facilities at UNE rates, where robust competition in the relevant markets belies any suggestion that the lack of unbundling makes entry uneconomic.
U.S. Telecom Ass'n. v. FCC, 359 F.3d 554, 591 (D.C. Cir. 2004) (emphasis added) .

***

The FCC and the ILECs' wholesale BDS customers have known for quite a while that the FCC couldn't credibly require ILECs to give them access to UNEs, because BDS availability has stimulated, not thwarted, competition in related markets.  But, the statutory term, "just and reasonable," sort of sounds like an unbounded grant of Goldilocks-level discretion.  The FCC, seeing saw no reason to reflect on logic, or precedent, moved ahead with its plans to help another privileged class of competitors. And that is how the FCC went Through the Looking Glass.