Will California regulators overstep on the Comcast-Time Warner Cable merger?

Commentary: A 2012 law forbids the states' Public Utility Commission from regulating Internet services. But the pending merger of ISPs could allow the opportunity to do just that.

Larry Downes
Larry Downes is an author and project director at the Georgetown Center for Business and Public Policy. His new book, with Paul Nunes, is “Big Bang Disruption: Strategy in the Age of Devastating Innovation.” Previous books include the best-selling “Unleashing the Killer App: Digital Strategies for Market Dominance.”
Larry Downes
6 min read

The Internet at work behind the scenes.
The Internet at work behind the scenes. James Martin/CNET

After more than a year, the proposed merger between Comcast and Time Warner Cable continues to slog its way through state and federal regulatory proceedings, even as broadband industries -- including voice, video, and Internet access -- continue to evolve at breakneck speed.

But no matter. Regulators proceed on their own clock, one that apparently still requires regular winding.

In California, the merger is stalled at the state's Public Utilities Commission, which has been preoccupied with its continued micromanagement of ride sharing and other apps and an undue-influence scandal that led long-time CPUC President Michael Peevey to leave office late last year.

In the interim, however, the Commission has moved in a dangerous direction. In February, an administrative law judge issued a proposed decision (PDF) approving the merger. But the decision also included over two dozen extravagant conditions, largely at the request of self-styled consumer advocacy groups.

The full Commission has delayed a vote on the draft, and is now scheduled instead to hold another hearing, scheduled for April 14.

Many of the proposed conditions have utterly no relation to mitigating potentially anticompetitive impacts of the merger -- the only basis on which the Commission can act under California law. More to the point, they violate both the letter and the spirit of a law known as SB 1161, signed by Governor Jerry Brown in 2012, which prohibits the CPUC from exercising any "regulatory jurisdiction or control over Voice over Internet Protocol and Internet Protocol enabled services."

Instead, the proposed conditions would insert the CPUC deeply into overseeing all broadband services offered by the merged company -- potentially to regulate Internet prices, set speed and service levels, and specify network infrastructure design and buildout down to the smallest nodes.

No love for SB 1161?

That's an outcome that SB 1161, passed by an overwhelming bipartisan majority of California legislators and strongly endorsed by every leading Silicon Valley technology company trade group, was specifically enacted to avoid. And for good reason.

The statute -- and similar laws in place in at least 24 other states -- short-circuits state regulators tempted to employ their full regulatory toolbox, designed for monopoly-era telephone service in the early 20th century, to increasingly popular VoIP alternatives and other IP-based services.

Californians have over 125 choices of VoIP providers, including free or low-cost offerings from Vonage, Skype, Google, Apple and others. There is little need, the legislature concluded, for monopoly-style regulations, or for 50 sets of state-specific rules for services that offer little to no "local" differences.

Seeing their role diminished in an all-IP world, CPUC staff and some still-serving commissioners strongly resisted SB 1161's sensible call to leave the engineering-driven governance of the Internet free of interference by local regulators with no expertise or even understanding of its technical architecture.

Back in 2012, some CPUC advocates painted doomsday scenarios to accompany the bill's passage, none of which have proven remotely accurate. And at one point, the Commission's own legal division issued an opinion that audaciously claimed the law's prohibition against regulating the Internet would cost the agency an additional $1 billion to "implement." (The agency's full budget at the time was $1.4 billion.) The CPUC's general counsel later claimed that report had been issued without his prior review or approval, a "lapse in our internal system of controls," as he explained to a skeptical state Senate.

Another bite at the regulatory apple

But the proposed conditions in the Comcast-Time Warner Cable merger suggest something more than a "lapse" was behind the Commission's fierce opposition to SB 1161.

The 10-page list of new requirements would give the advocates nearly everything on their shopping list. Not coincidentally, they also would grant the Commission exactly the kind of day-to-day authority over Comcast's IP services that SB 1161 denied them.

For example, the judge wants the company to vastly expand its Internet Essentials program, which offers reduced-rate Internet access for low-income households with school-age children. So far, the program has connected nearly half a million new homes to the Internet (PDF) since 2010. But the proposed decision would require the company to expand eligibility to all low-income households.

It also would require Comcast to enroll at least 45 percent of newly eligible households within two years, with regular progress reports and oversight by the Commission.

While connecting all Californians to the Internet is certainly a laudable goal, it has nothing to do with mitigating the competitive impact of the proposed merger.

What's more, no ISP can force new customers to sign up, even at a greatly reduced price. Those who remain offline have proven hard to convince. As data from the Pew Research Center has consistently shown, non-adopting households have for several years cited a perceived lack of relevance as their principal reason not to use the Internet, well ahead of other factors including availability or price.

The CPUC may have higher aspirations for some California residents than they have for themselves, but an impossible condition attached to a merger review will do nothing to resolve the disconnect.

There's more. The proposed conditions would require Comcast to continue offering business and consumer services currently offered by Time Warner Cable without raising prices for five years. The company would also be mandated to upgrade every node of its network within five years to offer speeds of at least 25 MBPS (or higher if the FCC changes its definition of "broadband" as it did earlier this year.)

The company would be required to offer broadband Internet service to every household where the companies currently offer video, and do so within two years. (Just getting the needed permits from local regulators, ironically, would take longer than that.)

And the judge wants the company to build out high-speed connections to every public school and library in its service area within four years, based on goals of a state plan that has yet to be published.

Not only does this requirement overlap and likely conflict with the recently expanded federal E-Rate program -- which is funded by taxes on consumer phone bills collected and administered by the Federal Communications Commission -- it has no conceivable connection to the competitive impact of the merger.

A free-for-all -- and the end of SB 1161?

The invasive nature of many of these conditions contrasts sharply with the reality of the California broadband market. As the judge acknowledges, Comcast and Time Warner Cable don't actually compete in voice, video or Internet access anywhere in the state. (Nationwide, the combined company would service less than 30 percent of all US cable subscribers.)

So even without limits imposed by SB 1161, conditions properly focused on mitigating the impact of the merger on competition should be highly constrained. The Commission would be wise to scale back the excesses of the proposed conditions before voting. Otherwise, it may be inviting an unnecessary and distracting legal challenge, something it doesn't need right now.

The judge has already concluded that the merger satisfies the nebulous "public interest" standard set by state law. But the proposed decision would redefine California's broadband market and bring at least one major ISP under precisely the kind of regulatory overreach that doomed legacy phone providers.

And which the law prohibits.

In recommending passage of SB 1161, groups including TechAmerica, TechNet and the Silicon Valley Leadership Group wrote that passage of the bill was necessary "to ensure the California economy and the speed of innovation aren't imperiled by years of protracted regulatory proceedings that create delay and unnecessary expense."

That's precisely the kind of peril the CPUC is flirting with in the proposed decision, with its Christmas list of unrelated, broadband Internet-specific conditions.

In the long term, only the regulators themselves will benefit from that kind of intervention. But not consumers.