Net neutrality: Lessons from energy regulation

The FCC’s “Net Neutrality” proposal to allow for Internet fast lanes has sparked a debate over how to ensure a free and open Internet while incentivizing continued innovation. One of the reasons this debate captures people’s imagination is it seems like a new problem we’ve never had to deal with before. It’s not, and we have.

The FCC can learn a lot from how the country has dealt with energy regulation.

{mosads}Since Congress passed the Public Utility Holding Company Act in 1935, electric power distribution has been subject to regulation by state utility commissions to ensure open, non-discriminatory access at reasonable rates – the prototypical example of a common carrier service now at the heart of the net neutrality debate.

Here’s the bad news: that regulation now threatens the long-term sustainability of the energy industry in the face of customer adoption of distributed generation and energy efficiency measures that, under the current regulatory structure, result in revenue loss to distribution operators. The result is fewer customers paying into the system, coupled with what essentially is a cost-plus utility revenue model, resulting in rate increases to cover the fixed costs of maintaining and operating the grid; some have dubiously termed this the utility death spiral. In short, the current system discourages the modernization and efficiency we should be seeking in our nation’s energy system.

Thus far, the response to Internet fast lanes has been markedly one-sided. The principle of net neutrality has overwhelming public support, and rightly so, considering the highly consolidated set of internet service providers, coupled with their increasing vertical integration across content generation, distribution, and broadband access. If such entities are able to operate without rules to ensure open and non-discriminatory broadband access to the Internet, they pose a fundamental threat to the continued innovation and growth of Internet services.

Our focus should be on a consumer’s ability to access any content, independent of its source (subject to certain obvious legal constraints). If we achieve that goal, that will drive the growth of Internet services. However, if the FCC allows so-called fast lanes, it will encouarge commercial discrimination amongst consumers or producers of content. For these reasons, it seems wholly imprudent for the FCC to allow for fast lanes, and indeed entirely contradictory to its previous actions.

We should treat broadband for what it is. Broadband service is merely the means of accessing Internet services, and thus now plays a supporting, albeit still important role in the ecosystem. Broadband access has become what plain old telephone service used to be – basic service, and the deregulation that was once beneficial to the proliferation of broadband access now threatens to undermine society’s basic need for unfettered and fair access to information.

Net neutrality proponents have suggested reclassifying broadband providers under Title II of the Telecommunicatoons Act, thereby reapplying common carrier requirements. Some have termed this the nuclear option, and indeed it is: broadband providers now offer far more than just broadband access, and subjecting all such services to common carrier requirements is undoubtedly counter to fostering innovation. Rather, the right approach is to reclassify just broadband access as a telecommunications service, irrespective of whether its corresponding provider also offers higher level services.

In addition, the FCC should consider evolving to a regulatory model based upon a tiered services structure consisting of basic service, subject to common-carrier regulation, and differentiated services, subject to competitive market forces. By the way, this same model could solve the energy death spiral mentioned earlier.

And here’s a radical idea: the FCC and Federal Energy Regulatory Commission should talk. They might be surprised by what they can learn from each other. Each sector is in need of structural change, but start from opposite ends of the regulatory spectrum. Electric power is subject to common carrier requirements but lacking in demand-driven innovation, while Internet services exhibit plenty of innovation, but without rules for ensuring open and non-discriminatory broadband access.

We know we don’t want the Internet, a vibrant and game-changing innovation, to be over regulated, but its continued growth is intimately tied to its ubiquitous and non-discriminatory accessibility through broadband access.

Patel is CEO of GridCo Systems and Taneja is managing partner at General Catalyst Partners.