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New Leadership at the FCC

November 18, 2013

The Senate confirmed Tom Wheeler to be the new chairman of the Federal Communications Commission and Michael O’Rielly to fill the vacant Republican seat on the Commission on October 29, 2013 by unanimous consent. This gave the FCC a full slate of five commissioners (three Democrats, two Republicans) for last Thursday’s meeting for the first time in nearly six months.

“Keep an eye on the Wheeler-O’Rielly relationship. This could be interesting.” --Medley Global Advisors

Chairman Wheeler, who will be driving the regulatory agenda, has decades of experience in the telecommunications sector and has led two major trade associations: the National Cable and Telecommunications Association, and CTIA – the Wireless Association. Prior to his confirmation by the Senate, Wheeler served as managing director at the venture capital firm Core Capital Partners. Industry experience, however, does not guarantee he will apply a light touch to regulating America’s communications marketplace.

The commission will have to confront many critical issues over the next several years, and it will be important to watch how the commissioners interact with one another and work on these issues. The Senate, in its oversight capacity, should continue to make clear its views on commission actions to ensure that the FCC does not enact rules that inhibit innovation and competition.  

An Important Time to be Chairing the FCC

Created by an act of Congress in 1934 to be the primary regulator of the “Ma Bell” monopoly and the broadcasting industry, the commission now oversees a vastly different competitive landscape. Circuit switched voice telephony is no longer the only means of communication for Americans. Consumers can choose between a number of voice over Internet protocol (VoIP) services or wireless providers. Broadcasting is also now just one of many ways consumers can receive video content. Cable companies, satellite providers, traditional phone companies, and “over the top” services such as Hulu and Netflix are fiercely competing for viewers. The FCC must adapt to an environment that little resembles the monopoly marketplace it was created to regulate. 

The Internet – which has advanced rapidly in part due to a lack of regulation – has altered the communications sector so significantly that it is now widely believed the FCC’s governing statute is in need of a complete rewrite. Until Congress decides to revisit the Communications Act, the Commission must work within the legal framework of the current statute. The current statute heavily regulates some methods of communication, such as traditional phone service, but is silent when it comes to others, such as new over-the-top providers. 

It is estimated that the FCC has jurisdiction over one-sixth of the American economy. The cable and telecom industry was responsible for more than $50 billion in investments in the United States in 2012. An FCC chairman determined to pick winners and losers in the marketplace can have a detrimental effect on jobs, the economy, and innovation. Federal regulators and Congress will be debating how, and whether, to regulate highly innovative wired and wireless broadband communication services. Their approach will either stimulate further investment and innovation or hinder it with overly burdensome regulations. 

Chairman Wheeler must address several pressing issues facing the FCC today, including providing more spectrum for mobile broadband as required by the Middle Class Tax Relief Act; the regulatory treatment of broadband services; and the pending Internet protocol (IP) transition. These proceedings will raise important questions for the FCC and the decisions regulators make will have a lasting impact on investment and innovation. While the FCC must operate within the authority delegated by Congress, it has too often given novel interpretations to the Communications Act and has sought to broaden its jurisdiction to areas where Congress never intended the FCC to play a major role.   

Addressing the Spectrum Crunch

The United States is in the midst of a wireless revolution. For the first time, devices outnumber the population. Americans are using their wireless devices less for voice services and more for bandwidth intensive data and video services. Technological advances such as 4G LTE are providing wireless speeds on par with a wired broadband connection. The rapid growth in the number of wireless subscribers, combined with the transition from voice to data, is placing a strain on the available airwaves. The FCC stated in the 2010 National Broadband Plan that to keep up with demand, an additional 275 MHz is needed for mobile broadband by next year, and 500 MHz of spectrum is needed by 2020. 

Recognizing wireless consumers’ need for more spectrum, Congress included in Title VI of the Middle Class Tax Relief Act a number of provisions to free up more spectrum for mobile broadband. 

The law specifically directed the FCC to run a one-time incentive auction for television broadcasters to voluntarily sell their licenses back to the government. The vacated spectrum will be repurposed for mobile broadband and sold to wireless carriers. This will lead to higher capacity wireless networks that can compete with cable and other high-speed wired connections.  

In addition to the broadcast incentive auctions, the new spectrum law requires the Commission to auction and license 65 MHz of spectrum by February 2015. The FCC is on track to auction 10 MHz (1915-1920 MHz and 1995-2000 MHz) referred to as the H-Block early next year. And in March 2013, the FCC notified the National Telecommunications and Information Administration (NTIA) that it intends to auction spectrum in the 1695-1710 MHz and 1755-1780 MHz bands. It will be extremely important for Chairman Wheeler to be diligent in working with the Department of Defense and the NTIA to free up 1755-1780 MHz for auction by the 2015 deadline. This spectrum, if paired with 2155-2180 MHz, which must be auctioned by 2015, is not only ideal for mobile broadband, it is globally harmonized which will make it easier to deploy and will generate billions more at auction.   

In addition to 1755-1780 Mhz, there is a significant quantity of spectrum that is held by the federal government that could be moved to the private sector for more efficient use. The federal government needs spectrum for vital public safety and national security operations; however, much of the federal government’s spectrum is used inefficiently. Federally held spectrum is managed by the NTIA, an office within the Commerce Department. Congress should encourage the FCC and NTIA to coordinate and determine which additional spectrums bands could be available.

Spectrum is highly valued in the commercial marketplace. The most recent spectrum auction in 2008 generated nearly $19 billion for the U.S. Treasury. If the FCC opens the auction to all interested bidders, an incentive auction has the potential to raise even more money and to fund a new nationwide public safety licensee known as FirstNet. The FCC is expected to conduct the incentive auction in 2014. It should take care not to repeat mistakes made in the 2008 auction, such as conditions placed on some licenses that discouraged bidding.  

Congress specifically tried to avoid a repeat of this failure with language in the law authorizing a new auction. Section 6404 of Subtitle D of the Middle Class Tax Relief Act states: “[T]he Commission may not prevent a person from participating in a system of competitive bidding under this subsection if such person complies with all the auction procedures and other requirements to protect the auction process…meets the technical, financial, character, and citizenship qualifications … to hold a license[.]” Congress gave the FCC some flexibility by adding that this prohibition does not affect “any authority the Commission has to adopt and enforce rules of general applicability, including rules concerning spectrum aggregation that promote competition.” Congressional oversight will be very important as the FCC structures these auctions. 

A successful auction should be free of artificial restrictions and conditions and be open to all interested bidders to best allocate spectrum to the firms who value it most. Restrictions, such as preventing certain parties from participating, may benefit those who are allowed to participate but hurts consumers and taxpayers by artificially reducing the price the Treasury receives for this valuable public asset at auction and by preventing the spectrum from getting into the hands of those who value it most. This may result in long-term damage to innovation. 

Should Broadband Access Be Regulated Like 19th Century Railroads?

Because the Communications Act and later amendments to it were written before widespread adoption of the Internet, it does not directly speak to how broadband access should be regulated. But the FCC has long viewed broadband access as an “information service,” falling under Title I of the Communications Act. Title I grants the FCC minimal jurisdiction over these services and does not allow the commission to impose the far heavier burdens of Title II – rooted in the monopoly railroad regulations of the Interstate Commerce Act of 1887 – that historically applied to legacy telephone service providers.

Ignoring the successful history of light-touch Internet regulation, in December 2010 the Obama FCC reinterpreted a deregulatory provision of the 1996 Telecommunications Act and claimed that the provision granted the Commission the authority to impose Title II-like regulations on broadband access providers.

Verizon challenged, arguing that these are common carrier-like regulations and the FCC does not have the legal authority to impose them on broadband access. Oral arguments occurred on September 9, 2013 and the case should be decided in the coming months. If the court vacates the order, Chairman Wheeler could respond by trying to reclassify broadband access from a Title I “information service” to a Title II “telecommunications” service in order to impose these (and potentially many other much more burdensome) regulations. The FCC has a proceeding that has been pending since 2009 to do this, despite opposition from Congress.

Broadband has flourished in a light-touch regulatory environment. If the court finds that the FCC lacks the legal authority, the FCC should turn to Congress and ask for direction. Threatening this important sector of the economy with potentially very burdensome Title II regulatory uncertainty can only have negative consequences on investment and innovation. 

The Internet Protocol Transition

Wireline networks are undergoing a rapid analog to digital technological transformation. Most communications traffic – voice, video, and data – are now digital packets traveling to and from connected devices over networks. At the end of 2012, 38.3 percent of households were exclusively wireless, whereas only 34 percent had traditional telephone service at all. Traditional phone companies would like to upgrade to next generation networks. But current laws require local exchange carriers such as Verizon and AT&T to maintain the outdated copper wire network, hindering investment

As the move from legacy analog services to digital IP delivery continues, regulators will have to address when and how best to fully transition the legacy phone network that provided landline voice service. The transition also presents an opportunity to revisit many of the obsolete monopoly-era regulations that apply to landline voice communications.

But it also presents some challenges, such as ensuring a reliable, interconnected network so that customers of one provider can reach customers of another; keeping the network operational during emergencies and natural disasters; ensuring that rural customers and carriers aren’t left behind; and keeping important services that people take for granted, such as 911, functioning effectively. Twenty-first century regulations must recognize that more than half of all homes no longer have a traditional landline telephone. To ensure further innovation and investment in communications, the FCC should tread lightly and not impose monopoly-era public utility-like regulations on next generation networks.