Obama's Net-Neutrality Plan Could Mean New Internet Fees

President Obama thrilled liberals and Internet activists last week by calling for the "strongest possible" net-neutrality regulations to ensure that all Internet traffic is treated equally.

But his plan, which is still under consideration by the Federal Communications Commission, has raised a host of thorny regulatory questions unrelated to net neutrality, such as whether to impose government fees on Internet service.

Just hours after the White House released Obama's statement, FCC Chairman Tom Wheeler met in a conference room in his agency's headquarters with public interest advocates. According to two people at the meeting, Wheeler warned that implementing Obama's plan would not be easy. The FCC would have to consider a range of issues, including whether to create a new fee on monthly Internet bills, Wheeler said.

An FCC official confirmed the agency is reviewing the issue and may ask for more input from the public.

The possibility of a new "Internet tax" is sure to enrage Republicans, who are already fiercely opposed to Obama's plan for stronger regulation of Internet service.

"The net result is that every single American broadband customer will have to pay a new tax or taxes to access the Internet," Ajit Pai, a Republican FCC commissioner, warned in a speech last week. "That translates into less broadband adoption, especially among the millions of families that still struggle to make ends meet in this lackluster economy."

Technically, the FCC does not have the authority to "tax." But the agency already collects about $8 billion every year from phone companies for its Universal Service Fund. The companies pass those costs on to consumers in the form of monthly fees on their phone bills. So far, the FCC has rejected calls to expand the fees to other services, such as broadband.

That could change under the president's net-neutrality plan.

In order to enact rules to bar Internet providers from blocking websites or favoring certain content, Obama said the FCC should invoke a controversial authority to essentially treat Internet service as a public utility.

"The time has come for the FCC to recognize that broadband service is of the same importance and must carry the same obligations as so many of the other vital services do," Obama said.

He urged the FCC to reclassify broadband Internet as a "telecommunications service" under Title II of the Communications Act, which would give the agency an array of new regulatory powers. Internet activists argue that the maneuver is the only way the FCC can enact net-neutrality rules that can survive legal challenges from industry groups. A federal court already struck down the FCC's previous attempt at net-neutrality rules earlier this year for not relying on the proper legal authority.

While Title II would give the FCC stronger authority for net neutrality, it also includes hundreds of pages of regulatory provisions that have nothing to do with protecting an open Internet. One of those requirements is that all "telecommunications services" have to pay into the Universal Service Fund.

"There is little dispute that classification under Title II will subject [Internet service providers] to payment of USF surcharges," said Randolph May, the president of the Free State Foundation, a conservative think tank. "I'm pretty sure that when this becomes more widely understood, it will be politically controversial."

As an independent agency, the FCC is not bound to enact the president's plan. Even if the commission does apply Title II to the Internet, it could still waive any of its regulatory requirements. In his statement, Obama said the FCC shouldn't implement price controls or "other provisions less relevant to broadband services." But he didn't mention whether the FCC should collect Universal Service fees from Internet providers.

Harold Feld, the senior vice president of Public Knowledge, a consumer advocacy group, argued it would be relatively easy for the FCC to pick and choose which provisions of Title II to enforce.

"It is simply not the case that the day after the FCC declares broadband Title II there will be a USF charge attached to your broadband bill," Feld said.

But he also argued that the FCC shouldn't dismiss the idea too quickly.

The Universal Service Fund subsidizes phone service for poor and rural consumers and pays for an education-technology program. In 2011, the FCC expanded the rural subsidy to cover high-speed Internet service. Just this week, Wheeler announced plans for a major expansion of the education-technology program to ensure students around the country have access to high-speed Internet.

While the size of the Universal Service Fund has been growing steadily, the amount consumers spend on phone service has been dropping. So the Universal Service fees have been becoming larger and larger portions of monthly bills.

Applying the fees to broadband could ensure the FCC has enough money to pay for its Universal Service programs without focusing all of the pain on telephone customers.

"Unless you want to get rid of USF, at some point you want to include broadband," Feld argued. "Pretty much everyone agrees that broadband is the essential communications service of the 21st century."

Derek Turner, the research director for advocacy group Free Press, is more cautious about imposing new fees on Internet service. He argued that the FCC should be careful to ensure that any new fees don't hurt "the marginal communities that have yet to adopt [broadband] at the same levels seen in the general population, such as the poor and elderly."

But he agreed that the FCC should remain open to the idea. The agency is already subsidizing the construction of broadband networks, Turner noted, so it would make sense for broadband customers to have to pay into the fund.

Nevertheless, the issue seems to have all the ingredients of a political powder keg. With Republicans about to take control of the Senate, it might be a difficult time for the FCC to push an Obama "tax" on the Internet.