California is quickly becoming the regulation capital of the world.
At a time when Washington is trying to rein in its quarter-million regulators, Sacramento is busy imposing new restrictions and mandates faster than ever.
Last month, Gov. Jerry Brown signed into law perhaps the costliest regulations of all; namely, network neutrality rules on California broadband providers.
Any celebrations were muted, however, when the federal Department of Justice immediately challenged the law, claiming that it conflicts with federal policy favoring minimal regulation of broadband communications.
The Justice Department has a strong case.
Web surfers both in and out of California should be hoping the lawsuit is successful, preserving both the web and constitutional principles of federalism.
While new to Sacramento, the debate over network neutrality has had a long history in Washington. The issue is deceptively straightforward: Should firms carrying internet traffic from content providers to consumers be required to do so at the same rate and manner for all users?
For almost two decades—extending over four presidential administrations and six Federal Communications Commission chairmanships—supporters and opponents of regulation fought a seesaw battle at the FCC over this question.
In 2015, many thought the long debate was over when the FCC voted 3-2—along party lines—to impose a set of strict neutrality rules. Those regulations banned internet service providers such as Comcast and Verizon from, among other things, blocking content, “throttling” (slowing) consumer uploads and downloads of data, or offering “paid prioritization” plans that offer better service at a higher rate (or less service at lower rates).
The new rules were on the books less than three years before a new Republican majority at the FCC, led by Chairman Ajit Pai, voted to repeal them, setting off a firestorm of protest never before seen at the commission.
Some 22 million comments were received by the commission, with protests held outside Pai’s home in the Virginia suburbs, as well as at FCC headquarters in Washington.
The pro-regulation argument was as simple as it was misplaced.
Without government-enforced rules requiring all content to be treated the same way, internet access providers would be able to strategically favor or disfavor internet content—blocking competing content, relegating providers to special “slow lanes,” and even blocking access to disfavored political candidates or ideas.
It would mean “the end of the internet as we know it,” net neutrality advocates claimed.
But those fears are wildly misplaced. Until 2015, the web did quite well without government rules to enforce neutrality. The internet became a hub of growth and innovation exceeding any other in human history.
It did not then—and does not now—need regulation to save it.
By far the larger threat to continued growth and innovation on the web is the continuation of regulation, not its absence. The differences in service and prices, which are banned under neutrality mandates, are not market failures to be stamped out by force of law.
Instead, marketplace variations—including the ability to offer premium and discount services—are a primary method by which innovations are adopted and small upstart firms can challenge entrenched market leaders. By limiting these beneficial variations, neutrality regulation limits innovation and choice.
The neutrality debate, however, did not end with the repeal of the 2015 rules. Supporters of regulation continued to pursue the debate in the courts, Congress, and state legislatures.
According to one recent count, 72 bills to adopt network neutrality rules have been introduced in 13 states. Four states—Oregon, Washington, Vermont, and now California—have enacted state-level net neutrality laws.
Of these, California is not only the largest state, but its law is the strictest, banning a number of practices that even the FCC hesitated to regulate.
For instance, peer-to-peer interconnection agreements between internet backbone operators are regulated, even though these networks have long negotiated terms on a relatively equal basis.
Digital cable networks—built specifically for the purpose of transporting a cable firm’s own programming—would also be subject to neutrality dictates and shared.
In addition, the new California law bans “zero-rating” plans, under which consumers receive selected content free of data fees and other charges from the broadband access provider. The zero-rating prohibition not only increases costs to consumers, but also limits competition with entrenched incumbent broadband providers.
While state laws should not be dismissed lightly, the Justice Department wasted no time in challenging the California law, filing its lawsuit the same day it was signed by Brown. Three days later, the lawsuit was joined by four trade associations representing fixed and mobile broadband providers.
The Justice Department should easily prevail. Federalism does not just mean states’ rights, but state limits as well. One of the most important limits concerns regulation of interstate commerce. Power to regulate in this area is expressly granted to the federal government by the Constitution.
That was no constitutional afterthought.
State-imposed burdens on interstate commerce were a primary concern among the drafters of the Constitution, who experienced firsthand the problems with conflicting regulation of commerce under the Articles of Confederation.
Moreover, the Interstate Commerce Clause has long been interpreted as more than a grant of power to Congress, but also as authority to pre-empt states from so regulating—forcing them to keep their paws off interstate commerce.
And that is exactly what happened here. In a clear expression of federal policy, the Telecommunications Act of 1996 sets forth the goal that the internet should remain “[u]nfettered by federal or state regulation.”
Pre-emption of the states was even clearer in the FCC’s order repealing the 2015 neutrality regulations. In its 2017 order, the FCC declared: “[R]egulation of broadband internet-access service should be governed principally by a uniform set of federal regulations, rather than by a patchwork that includes separate state and local requirements … . We therefore pre-empt any state or local measures that would effectively impose rules or requirements that we have repealed or decided to refrain from imposing.”
That conclusion was not based on a whim, but on evidence that a state-based neutrality scheme would interfere with the commission’s deregulatory approach to broadband, leaving web surfers in all states worse off.
Moreover, as the commission pointed out, imposing state rules in tandem with federal rules would be impossible to do in any meaningful way. The architecture of the World Wide Web is, well, worldwide. It’s not the California Wide Web, or the San Francisco Wide Web.
Servers, routers, and other bits of the network rarely stop at state lines. Regulatory orders cannot be issued just to California’s part of the web. It just doesn’t work that way.
Pre-emption in network industries in fact is not unusual at all. It is the rule, not the exception. States cannot regulate airline rates or service. Railroad regulation is almost entirely a federal affair, and state laws concerning power grids are limited. Closer to home, state communications rules are highly constrained by federal law. For instance, states cannot set cellphone prices or cap cable bills (unless the market is not competitive).
Even supporters of California’s new law are split, with some openly expressing doubt as to its legality.
Others, such as Harold Feld of the pro-regulation advocacy group Public Knowledge, maintain that the FCC surrendered its pre-emption authority when it ruled in its repeal order that it had no power to regulate broadband. That, says Feld, left the FCC with no authority in the matter at all.
That argument depends, however, on Congress being silent on pre-emption, which it has not been. Just last month, for instance, a federal appeals court ruled that regulation of “information” services—a category that now includes broadband—is pre-empted and cannot be regulated by the states.
California’s effort to impose its network neutrality law against the Justice Department’s legal challenge is unlikely to succeed.
That is good news for web surfers, who would be the losers were these rules upheld. The bad news is that this 20-year-old debate is not likely to end anytime soon, as advocates pursue the debate in courts and Congress with increasingly last-ditch efforts.
That’s terrible news for us all.
