Summer Interruptus: ISPs Obtain Stay of Title II Ruling

Plus, ACP Hopes Resurrected (?), Tax Bill Resurrected (?), Project 2025 (and Carr Ambitions?) plays dead, and FCC Confirms USF Status Quo

What’s new: We hate summer interruptions, but the Sixth Circuit just made a major ruling in the case involving the ISPs challenge to FCC Title II classification.  In this note we provide our key points for investors, including:

• The ISPs are likely to win the case, with the Sixth Circuit likely to formally overturn the FCC order in the first part of next year.
• We don’t think the decision is material as an economic matter to the ISPs. It does remove a cloud of potential problems down the road.
• The ruling does, however, reopen the door to state regulation as demonstrated in the Second Circuit opinion in the New York case.
• The ruling also makes it more difficult for FCC Chair Rosenworcel to achieve her objectives on other issues such as bulk billing and border gateway security.

And while we have you, we also analyze the potential resurrection of the ACP extension and the pro-telecom tax bill (neither of which are likely to pan out with an actual new life), the implications of reported death of Project 2025 (not as dead as reported, particularly in regards to telecom policy) and the FCC confirming that despite the Fifth Circuit ruling, there will be no interruptions in USF collections or spending.

6^th Circuit Panel Rules for ISPs on Title II/Net Neutrality Case. 

In a unanimous decision, the motions panel for the ISPs challenge of the recent FCC order classifying ISPs as Title II carriers granted the ISPs’ motion for a stay.  We think the key takeaways for investors are as follows:

The ISPs are likely to win the case, with the Sixth Circuit likely to formally overturn the FCC order in the first part of next year.

• The panel found that the ISPs were likely to succeed on the merits, specifically on the grounds that the classification question was a “major question” that only Congress can answer.[1]
• The court scheduled the hearing on the merits relatively quickly, in the last week of October.
• The conservative nature of the Sixth Circuit gave the ISPs good odds of winning from the start, with the decision increasing those odds even more.  Still, when we know the merits panel and hear the argument, we will revisit the issue then.[2]

We don’t think the decision is material as an economic matter to the ISPs.

• We have been skeptical that the FCC order presents a material economic challenge to the ISPs, nor do we think winning creates a material upside for them.[3]
• The court cited problematic product rollouts and compliance costs as the potential irreparable injury,[4] but again, we did not see those as material to investors.[5]

It does remove a cloud of potential problems down the road.

• To the extent that investors were concerned about a future FCC imposing rate regulation or mandatory unbundling, that threat is largely gone.
• By relying on the Major Question Doctrine, the Court is making it difficult for any FCC to adopt a Title II classification

The ruling does, however, reopen the door to state regulation as demonstrated in the Second Circuit opinion in the New York case.

• As we have discussed before, the Second Circuit upheld the New York law mandating a low-income program, finding that the Pai Commission Title I order could not preempt such state laws.
• The ISPS sought to argue that the Rosenworcel FCC Title II order, by forbearing from rate regulation, preempted such state laws.
• Now that the Title II order has been stayed, the Second Circuit opinion controls the situation in New York, though the ISPs will likely now take further action to have that opinion reversed.
• In addition, states can also adopt their own Net Neutrality rules, as California has done, and as other states, considering this ruling, may decide to do.

The decision makes it even more uphill for Rosenworcel to obtain what she wants to do on bulk billing.

• As we have discussed before, Rosenworcel has an uphill climb on her bulk billing proposal in terms of the weight of the filings in opposition (Link).[6]
• But now, it may be more difficult legally, as the stay indicates that the FCC may not have legal authority to regulate broadband in multiple tenant environments in the way the Chair wishes to do.

The decision also could affect Rosenworcel’s efforts related to border gateway security

• Rosenworcel is attempting to require large broadband providers to file confidential reports on Border Gateway Protocol security to enable the FCC and others with a mandate to protect national security to collect more up to-date information about internet routing intersection.
• This effort also relies on broadband being classified as a Title II service for its legal authority.[7]

Quick Hits

Have ACP Hopes Been Resurrected (?). A major question of this earnings season is how much the end of the Affordable Connectivity Program (ACP) has hurt the ISPs.  The results vary (see New Streets notes on CHTR, CMCSA, T, VZ and TMUS) but for all, it has had an impact. 

• But suddenly, after numerous failed attempts to extend the ACP, the Senate Commerce Committee passed an amendment to a broader broadband bill that would extend ACP with a $7 billion appropriation. 
• So that raises the question of whether the ISPs can expect to, in the near-term, make back the losses resulting from the end of ACP? 

We don’t think so.  To do so, the legislation would have to:

• Obtain Senate floor time (a precious commodity at this stage of the election season);
• Survive a likely Republican threat of a filibuster (a likely prospect at a time of maximum partisan motivation), and
• Have Speaker Johnson allow the House to take up the legislation (something he has shown no interest in).
• We think the likelihood of the legislation successfully passing through any of one of those challenges is less than 50%; passing through all three is an even lower likelihood.

In addition, the problems with ACP and now Universal Service (LINK) will lead to further problems with the roll-out of the BEAD program.

• As we have noted before, the disappearance of ACP makes the economics of the BEAD project more difficult, and the Fifth Circuit rejection of the USF framework adds to the difficulty of projecting what the ISPs will need to justify deploying in high-cost areas which often has a predominance of low-income populations.

Tax Bill Resurrected (?).  In another move that raised hopes for some telecom investors, the Senate took up a House tax bill that had some favorable provisions for telecom companies. (LINK).  It failed to overcome Republican opposition and while it could theoretically be brought up again, we don’t think passage is likely.

• The reason Major Leader Schumer brought up the bill for a vote, after waiting many months, related to Presidential politics and the Child Tax Credit.[8]

Project 2025 (and Carr Ambitions?) plays dead.  A question we’re often asked is what the FCC would do if Trump wins and the Republicans again have the majority.  We gave a preliminary answer last November,[9] as we analyzed the chapter in the now much better-known Heritage Project 2025 on telecom policy written by the person we thought was the leading candidate to be FCC Chair under Trump, Brendan Carr (LINK).[10] 

But now Trump has disavowed any knowledge of Project 2025, with his campaign leadership saying “Reports of Project 2025’s demise would be greatly welcomed and should serve as notice to anyone or any group trying to misrepresent their influence with President Trump and his campaign — it will not end well for you.” This raises two questions:[11]

• would a Trump agenda be materially different than what Carr laid out?; and
• is Carr still the front runner to be Chair?

As to the first, the answer is generally no.  Trump ditched Project 2025 not because he disagreed with its policies but because it was a political liability in terms of the details.[12]

• Further, none of the criticism that gained traction was directed at that chapter.
• To the extent the chapter criticized the Biden Administration and Rosenworcel FCC, we expect Trump would agree with the criticism.
• But as noted below, Trump’s views on TikTok are clearly at odds with the chapter.

As to the second, yes, but the odds have diminished.  That is, while Carr is still the front runner, the odds are somewhat less than they were a few months ago. 

• The association with the Heritage Project is something akin to a flesh wound.[13]
• The real challenge to Carr, we think, is that Trump has done a 180 on Carr’s most notable and in a way, successful, campaign; the campaign to ban TikTok.
• While Carr remains the front runner, we could see others with influence with Trump seeking their own person to fill that job.

FCC confirms USF status quo.  Finally, as we noted in our discussion of the Fifth Circuit overturning the USF framework, we did not think the decision would have an immediate effect on USF operations in terms of preventing the FCC from collecting or spending funds.  The court did not vacate the FCC order at issue but remanded the order to the FCC.

• As we also noted, our analysis did not reflect a unanimous view.
• The FCC has taken the position in line with our analysis and is not changing the program while it appeals.
• A party could challenge the FCC’s judgement but given the remand, we do not think they would be likely to get a court to force the FCC to immediately change what it is doing.[14]

Editorial note:  And now, get back to summer.  Hope you are having a good one.

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[1] In a key paragraph, the panel wrote “The petitioners (the ISPs) are likely to succeed on the merits because the final rule implicates a major question, and the Commission has failed to satisfy the high bar for imposing such regulations. Although the petitioners have raised other arguments in support of their position that the FCC exceeded its authority in promulgating the rule at issue, such as whether broadband can be classified as a telecommunications service under the Communications Act and the stare decisis effect of the Brand X decision, we decline to reach those arguments at this preliminary stage.”  In other words, even if the FCC were to succeed with those arguments, they would still lose the case.

[2] We expect to be revisiting many things in late October/Early November.

[3] While opinion writers (such as the Wall Street Journal) and Republican policy types (on the Hill and at the FCC) have predicted financial doom and gloom for the ISPs if the Title II rules go into effect, as far as we know, during the Biden Administration, the topic has never come up on a quarterly call and no ISP CFO talking to investors in a public forum has raised it has a material risk.  Meaning no disrespect to opinion writers and policy types, when it comes to gauging reality, we tend to give more weight to the clues provided by CFOs.

[4] The court wrote (citations omitted) that “The petitioners face delays in product rollouts and disadvantages in negotiating interconnection agreements, and such competitive injuries qualify as irreparable consequences. Plus, they will incur unrecoverable compliance costs in accommodating the rule.”

[5] See footnote 3 above.  Though we are curious about what product rollouts the court thinks have been delayed by the FCC action.  And if there is such a rollout now, what happens in California where the state net neutrality laws are in effect?

[6] While a larger coalition has just recently filed in favor of the proposal, the bulk of the filings have expressed opposition.

[7] In paragraphs 99 and 100 of the NPRM, the FCC cites Title II as its legal authority for the action.

[8] Senator Vance has asserted that “anti-family” Democrats, and specifically Vice-President Harris opposed the Child Tax Credit.  This is inaccurate and the vote was a way to demonstrate Republican opposition to the Child Tax Credit (as well as to point out that Vance did not show up for the vote). As Schumer noted in discussing the bill “Our 2024-ers (that is, Democrats running for the Senate in this cycle) were very excited about having a vote on this bill — win or lose.  They’d rather win, we’d all rather win. But even losing is a benefit.”  That suggests that no further action is likely.

[9] We will provide a more detailed answer to the question shortly after Labor Day when the political situation (maybe or maybe not) is somewhat clearer.

[10] We summarized our analysis this way: “A Trump FCC would be rhetorically different than a Biden FCC, but most of what Carr proposes is in the hands of other institutions of government.  In terms of what the FCC would actually do, we see a mild upside for ISPs in terms of deployment rules (mitigated by the likely end of the ACP program), an upside for local broadcast consolidators (mitigated by Trump’s willingness to punish broadcasters who do not support his agenda), and an upside for tech, as the rhetorical damage, if any, at the FCC would be more than overcome by the likely change in addressing issues of market dominance at the FTC.  Also notable is that neither party has staked out a clear position on the issues where the FCC has the greatest impact on markets, such as USF reform, spectrum, and the tech transition away from copper.”

[11] It also raises the non-investor relevant question of when did Presidential campaigns start hiring film noir script writers to do their press releases?

[12] The Harris campaign released an audio from the leader of the project characterizing Trump’s criticism as reflecting a “tactical political decision.”  We agree that is what drove the decision and find it noteworthy that Trump has not criticized any proposals in the document.

[13] And we mean that in its literal sense, not in the sense it was used in this Monty Phyton sketch.

[14] We would anticipate an amusing cat and mouse game in which any such suit would have the FCC say the action was premature considering the FCC had not yet completed its order responding to the remand.  And as to when the FCC would finish?  The answer lies in this classic New Yorker cartoon.