Yesterday, Federal Communications Commission Chairman Ajit Pai announced his intention to reverse Obama administration “net neutrality” rules governing the internet that were put in place in 2015. Some commentators are criticizing the announcement as a give-away to large telecom companies and an attack on consumers. But the Obama rules create some serious problems for consumers—problems that Pai says he wants to correct.


Under the Obama rules, internet service providers (ISPs) are subject to “rate-of-return” regulations, which the federal government previously applied to AT&T’s long-distance telephone service back when it was a monopoly more than 50 years ago. Ostensibly, rate-of-return regulation gives government officials the power to review and approve or reject ISP rates. In reality it basically guarantees ISPs government-enforced market protection and profitability, in exchange for regulators ensuring that ISPs won’t be too profitable.


As explained in this 2014 post, rate-of-return regulation involves more than just telecom. It is an attempt to settle fights between “producers” and “shippers”—whether those are farms, mines, and factories on one side and railroads and shipping lines on the other, or Netflix and Hulu on one side and ISPs on the other. In all those cases, the producers and shippers need each other to satisfy consumers, but they fight each other to capture the larger share of consumers’ payments. If shippers charge more, then farmers, factories, and Netflix must charge less in order to maintain the same level of sales.


The political resolution of the producer–shipper fights was the Interstate Commerce Act of 1887 and its rate-of-return regulations, which were initially written with railroads in mind. Similar efforts were later extended to trucking, air transportation, energy, and telecom. It took about 100 years for policymakers to accept that those efforts hurt consumers much more than it helped them, forcing on consumers too many bad providers with high prices and poor quality.

Since 2007 Regulation has published seven articles on traditional telephone regulation and why such regulation would be inappropriate for the internet:

• Bruce Owen explicitly makes the link between the concerns of traditional transportation common carrier regulation and the contemporary notion of “internet neutrality.”
• Hal Singer and Christopher Yoo argue that the one-size-fits-all architecture that policymakers envision of the internet has been a myth for some time. Network providers employ an array of business arrangements and prices to manage congestion and maintain quality of service, but that diversity will be weakened by net neutrality rules.
• In another article, Yoo notes that traditional rate-of-return telecom regulation assumes a monopoly service. The expansion of wireless high-speed internet has allowed multiple competitive providers to offer service to a large majority of American consumers while restraining capital costs.
• Gerald Faulhaber explains that service quality will suffer to the extent that internet access providers can’t charge more for streams that impose greater costs on the system.
• Dennis Weisman points out that internet regulation will likely protect competitors from competition rather than serve consumer interests, just like the old telephone regulatory scheme did.
• And Larry Downes argues that the movement to re-regulate telecom is propelled by some firms’ quest for rents under new regulation, and by the FCC wanting to regain its former political power and the benefits that come with it.

Hopefully, Pai’s efforts will mean that bad regulations on internet service will be thwarted before they have been allowed to take hold. However, the news isn’t entirely good. As this June 2016 post explains, an appeals court approved the Obama rate-of-return regulations despite previous court rejections of other attempts to regulate the internet under different provisions of the Telecommunications Act. The 2016 decision may complicate Pai’s attempt to reverse course.