At first blush, there would appear to be no connection between the regulation of electricity and gas services and the FCC’s most recent order[1] on what is commonly called “net neutrality.” But lurking just beneath the surface of that order are arguments and analogies that should be of concern to every lawyer with a connection to the netherworld of electric power and gas regulation. The FCC’s Net Neutrality Order, unless overturned in the inevitable court challenge, represents a precedent for open-ended informal rulemaking without meaningful notice and comment. It also represents the end of the Delegation Doctrine as known and practiced by generations of administrative lawyers because it embodies agency decision making untethered to any legislative determination of policy.

At nearly 500 pages of text based on literally millions of comments and involving complex technology that even the FCC concedes that it struggles to describe and understand, the Net Neutrality Order is not for the faint-of-heart. But what the Order does and how it came about can be briefly described. Essentially, the FCC, in reaction to concerns that Internet service providers[2]could favor some groups of customers over others in the speed or price of service, or could effectively block certain content, issued in 2010 certain rules of conduct for broadband providers. These rules were challenged in the D.C. Circuit in Verizon v. FCC[3] and were struck down by the court on grounds that they were inconsistent with the Commission’s prior determinations of its limited jurisdiction over the Internet. The court’s opinion said that the FCC’s prior determinations not to regulate the Internet pursuant to its common carrier authority under Title II of the Communications Act, precluded it from treating broadband providers effectively as common carriers in holding them to non-discrimination service requirements. On remand, the FCC issued a notice of informal rulemaking[4] in which it indicated that, although regulation under Title II was a possibility, nonetheless it was seeking to meet the court’s jurisdictional concerns in a manner that fell short of that. However, after public lobbying by the White House, in February of this year the FCC, on a 3-2 party-line vote of commissioners, adopted a substantially different proposal. What was adopted is a completely new regulatory regime that is grounded in a version of Title II common carrier regulation never before seen or discussed.

The Net Neutrality Order effectively custom creates for the Internet a version of Title II common carrier regulation with a jack-o-lantern smile – that is, with a few teeth missing. Relying upon 47 U.S.C. § 160, a provision enacted in 1996 that permits the FCC to forbear from applying any provision of Title II determined not to be discriminatory or otherwise injurious to the consumer, the FCC cherry-picks the parts of Title II that will be applicable to broadband providers and Internet services. For example, the Commission decided to forbear from the ratemaking regulations adopted under sections 201 and 202, but not any of its other authority under those statutory provisions or the related enforcement provisions of sections 206, 207, 209, 216 and 217, associated complaint procedures and FCC regulations thereunder. Thus, rates for service are required to be just and reasonable, but the only way that justness and reasonableness can be tested is through complaint procedures that (a) have never been tested in this context or scale in the post-ATT-break-up era; and (b) would require resources that the Commission clearly does not presently possess. The other parts of Title II to be implemented in the Internet context include section 222 (consumer privacy – of which there is little on the Internet in any event), section 224 (pole attachments), sections 225, 255 and 251(a)(2) (special provisions for those with disabilities) and section 254 and 214 (e) relating to broadband deployment. As noted, this reconfigured version of Title II was not described in the 2014 Open Internet NPRM, and thus could not have been the subject of meaningful comment. Nonetheless, the Commission concludes that application of this untested regime will promote Internet investment, innovation, competition, free expression and infrastructure deployment.

Why should electric and gas utilities be concerned about this regulatory development aimed, not at them, but at a different industry? There are a number of reasons.

One is that electric and gas companies and utilities depend upon the Internet in almost innumerable ways. Much of the control infrastructure for gas pipelines and electric transmission systems depends on the Internet, even if it is not directly connected in many cases. Electric and gas distribution systems use the Internet for everything from system surveillance to meter reading, and the emerging development of distributed generation for electric systems is likewise Internet-dependent. That being the case, the FCC’s gamble in the Net Neutrality Order that increased regulation of Internet providers will not degrade either incremental Internet investment or service as a whole, has to be of great concern.

Secondly, as noted above, if the Net Neutrality Order is sustained, it will be precedent for re-regulation in other industries. What does the concept of “notice and opportunity to be heard,” the legal basis for informal rulemaking in administrative law, mean if (a) the legally independent agency can be effectively directed to act in a certain way by the Executive Branch; and (b) what is ultimately adopted as a new rule bears little or no resemblance to what was proposed to and discussed by millions of commenters in the proceeding? Unlike many other controversial actions by administrative agencies, this one is not predicated on Chevron deference in interpreting an ambiguity in the statute. Rather, this is new policy, sprung full-grown in its initial appearance. What does the Delegation Doctrine – the concept that agencies use subject matter expertise to act under a statute to flesh out specific delegations of legislative authority – mean when the agency simply makes up the policy and choses among statutory authorities to implement it?

Finally, one of the most disturbing aspects of this action by the FCC is its retroactive assertion of regulatory authority over sunk investment. Some estimates of existing investment in Internet infrastructure are on the order of $400 billion. How much has the Net Neutrality Order altered the broadband carriers’ ability to earn on and ultimately recover that investment? There are brave words by the FCC in the Net Neutrality Order itself, but at best any estimate of the order’s effect on investment and earnings is speculative – there is no pretense that any attempt was made to quantify the impact of what was adopted. Although utility regulation is predicated upon ensuring adequate future investment, the historical record of regulation of sunk costs, particularly sunk costs that have outgrown economic usefulness (e.g. manufactured gas facilities), has been decidedly mixed. Whether the ultimate effects of the Net Neutrality Order will be similar is now an issue that must be considered.