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A woman holds a protest sign for net neutrality. New FCC rule making could affect internet freedom.

Net Neutrality Reclassification Could Add $15 Billion in New User Fees

Robert E. Litan and Hal Singer

Lost up to now in the intense debate over whether access to the Internet should be “reclassified” as a public utility as advocates of “strong net neutrality” want, is how much more consumers would have to pay for their residential and wireless broadband service.

Before revealing the answer, here is where things stand in the ongoing net neutrality soap opera. In early November, FCC Chairman Tom Wheeler floated a “hybrid” compromise that would have deemed Internet service providers (ISPs) – telcos and cable companies – as public utilities under Title II of the Telecommunications Act for purposes of their dealings with websites, such as Netflix. But when it came to the rates and download speeds offered to broadband customers, ISPs would continue to be subject to “light touch” regulation under Section 706 of the Act, which directs the Commission to promote broadband deployment. This would allow them to give their customers choices: those who were willing to pay more for higher speeds could. Think of it as being willing to pay more to take the faster Acela train as opposed to the regular Amtrak line.

President Obama was not satisfied with this approach, and urged in an unusual video released on November 10 that the Commission embrace a full-throated version of Title II for broadband access as well. What this means is that the Internet would be treated and regulated as a public utility, like your local electricity and gas distribution company, which is a monopoly. The President and other strong net neutrality advocates want this “reclassification” to prohibit ISPs from charging content providers for priority delivery for fear that ISPs could shake down vulnerable websites with excessive charges. Never mind the fact that Title II is not needed to protect against such harms: A simple prohibition of or a strong presumption against (1) exclusive dealing for priority, and (2) degrading an edge provider’s service for refusing to take priority would protect edge providers, and both remedies are available under current law (section 706).

We and others have pointed out that even this reclassification may not stop what the president wants: if ISPs are put under a Title II regulatory regime, the language of the Telecommunications Act only prohibits “unreasonable discrimination,” so that the FCC still could not ban pay-for-priority under Title II. The best they could do is to require ISPs to make any priority offers available to all comers at the same terms. While there are some remote circumstances (decades ago) in which the FCC has banned conduct that it deemed “inherently unjust,” those cases involved monopoly providers seeking to extend their power into closely related markets—a far cry from what a competitive broadband provider would be trying to accomplish with priority payments.

But until now we have not highlighted that once ISPs are labeled “telecommunications providers” under Title II, their services become subject to both federal and state fees that apply to those services. The two main federal charges are an excise tax and a state-collected fee for “universal service,” while state fees and charges vary from state to state, and within states by locality. Although broadband providers would pay into the FCC’s funds, history shows—and economic models of competitive markets predict—that the fees would quickly be passed along to customers, just as they are now on other telecommunication products. So consumers’ Internet bills will soon have all those random charges tacked on at the end, much like their phone bills are.

To calculate the percentage increase consumers can expect from reclassification, we have used the average prices for wireless residential broadband across U.S. cities ($44.75 per month for 15-20 Mbps) estimated in a recent study by the Open Technology Institute (which are roughly $5 higher per month than the U.S. average estimated in 2012 by the European Commission for 12-30 Mbps), and figures for average consumer mobile service bills from the CTIA. We then used data from Vertex and CCH Clearinghouse for the non-business federal, state and local charges (for 911 charges, universal-service-fund fees, utility fees, etc.), keeping a low and a high figure because the local tax rate often varies within a state. (In contrast, the fixed-dollar component of the fees does not vary.) Full state-by-state results are available in an Excel supplement here [Will be hyperlinked]..

The bottom line: Annual residential (wireline) broadband costs would likely go up by $8 in Delaware to almost $148 in certain parts of Alaska. The average fee for wireline households would range from $51 to $83 per year. Because the assumed monthly price of a mobile plan is not much different from the price of wireline broadband plan, and because wireless broadband services would also be reclassified, mobile broadband customers would experience an increase of similar magnitude.

For consumers that have both wireline and wireless broadband, the estimated increases are essentially double those of residential alone. And this will be on top of the FCC’s planned 16-cent-per-month (or $1.92 per year) increase in wireless fees to add $1.5 billion to the fund that finances Internet connections in schools.

The federal charges imposed on broadband providers under a Title II reclassification go into effect unless Congress were to explicitly exempt them. Likewise, it would take state or local legislative action to repeal the state charges.

So not only will Title II’s regulation of Internet prices discourage ISPs from investing in broadband infrastructure—leading to more congestion and higher access prices—but it will also mean higher taxes for U.S. broadband consumers. Barring a mass migration to Delaware, the (simple) average increase for all Americans for fixed and mobile combined will be between $106 and $171 of new fees per year. When the average annual fee increase for wireline ($67) and wireless ($72) broadband plans is multiplied across U.S. residential wireline (84 million) and wireless (131 million) broadband connections, respectively, the aggregate expenditures on the new fees could reach $15 billion per year. Enjoy!



Hal Singer

Managing Director and Principal - Navigant Economics

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