Net Neutrality Rules Harmed Investment, Pai Says a Year After Order Approved

A year after the FCC approved its net neutrality order in a contentious 3-2 vote, tensions remain high. Commissioner Ajit Pai, who voted against the order, said in a speech at the Heritage Foundation Friday that the order has led to a reduction in spending by ISPs on their networks, a result he said he had predicted. Small ISPs in particular have cut investments, he said.

Capital expenditures by larger ISPs have “flatlined” over the past year, Pai said. That’s happened only twice before on a year-over-year basis -- following 2001’s dot-com bust and during the 2008 recession, he said. “None of this was necessary,” Pai said. “For 20 years, America stood at the forefront of the digital economy. The Internet was born here. Its development over the past two decades has proven that it is the greatest free-market innovation in history.” Pai noted that Verizon decided to invest in AOL rather than its network and AT&T has significantly upped its investments in Mexico. Pai's remarks were also posted by the FCC Friday.

Consumers should be aware the FCC could soon impose USF fees on broadband, as a result of the reclassification provisions in the order, Pai said. The agency already has decided to boost E-rate spending by $1.5 billion per year, he said. “Read my lips -- the money to fund this spending spree will come from a broadband tax,” he said. “The only question is when. Thus far, all we’ve been told is that no decision on broadband taxes will be made until after the D.C. Circuit decides whether the FCC’s regulations are legal.”

Pai told us after the speech he isn't certain of the extent to which the agenda from now until November will be aimed at helping Democrats in the next election. “I’m not privy as to the decision as to what the agency might tee up and when,” he said. “What I do know, however, is that political calculations in the past have played into agency decisionmaking.” Prior to the 2014 elections, the agency promised special interest advocates a dramatic increase in E-rate funding, Pai said. “Sure enough, in December after the November election they did that.”

Pai also questioned whether the FCC should further involve itself in privacy rules. The chairman’s office has promised an NPRM is on its way (see 1602110054) since the fall and nothing has circulated to date, he said. “It’s been promised, repeatedly,” he said. “First, it was coming ‘in the fall.’ Once fall came, it was expected ‘in the coming months.’ And then it was due by the end of ‘football season.’”

Pai said he has been unable to get more information from Chairman Tom Wheeler on privacy, the USF fee or other critical issues and when they might be headed for a vote. “We ask the chairman’s office and the bureaus for information all the time and occasionally we may get it, but in a lot of cases we don’t,” he said. Pai said he has asked about basic information on all the open Enforcement Bureau investigations and the extent to which the FCC has actually collected on forfeiture actions. “We can’t get basic information like that,” he said.

Internet Tax Coming

The fee extension has to be seen as “a new tax” since Internet access has never been subject to USF charges, Pai said. Congress just approved (see 1602240069) the Permanent Internet Tax Freedom Act (HR-235) and it would be “supremely ironic” if the FCC now creates a new tax on the Internet, he told us. The idea that “Internet access is something that should remain as cheap as possible for American consumers” has “massive bipartisan support” on Capitol Hill, Pai said.

"Chairman Wheeler has long said that strong Open Internet rules using a light-touch Title II regime would promote innovation and investment from broadband providers and edge providers alike, benefiting consumers," an FCC spokesman emailed in response to Pai. "Wireline and wireless investment and deployment continues, consistent with our expectations. The Federal State Joint Board on Universal Service is currently looking broadly at the issue of contributions to the Universal Service Fund, but has not yet made a recommendation to the FCC on any changes to the current system."

Former Commissioner Robert McDowell, now at Wiley Rein, said he gets numerous questions from both early stage and secondary-market investors about the effects of the rules. “It has now become the first question that the business community asks when they want to do something in this space,” he said in an interview. “They have to consult the lawyers in order to figure out whether or not their new idea is something that could be launched. … It’s a system out of control. It’s a regulatory regime that has gone too far.”

But Free Press released a paper Friday that argued that the order didn't harm total capex by publicly traded ISPs as investments increased by nearly $3 billion in 2015. Investments by Verizon, Sprint and T-Mobile were up 12 percent, 42 percent and 9 percent, respectively, the paper said. “These more than offset AT&T’s decline in wireless capital expenditures, which was due only to its 2014 completion of its nationwide 4G LTE upgrade.” Comcast led U.S. cable operators with 14 percent growth in capital expenditures, Free Press said. “These increases offset smaller declines at Charter and Cablevision, whose spending returned to more normal levels after they completed deployment of new set-top boxes and digital upgrades in 2014.”

Free Press President Craig Aaron wished the world “Happy Net Neutrali-versary” in a blog post Friday. “The vote was the culmination of a 10-year fight over the rules that govern the Internet that saw more than 4 million people -- even the president -- weigh in on the once-obscure issue of Net Neutrality and led to serious charges by John Oliver [on Last Week Tonight] that the chairman of the FCC might be a dingo,” he said. “Well, they say every dingo has his day.”

"I'm not shocked that they're whistling past the graveyard," Pai said in response to the report. "But, unfortunately, the facts are the facts.'