President Barack Obama wants net neutrality -- the idea that all Internet traffic must be treated equally by Internet service providers -- to be the law of the land. That could ultimately cost consumers money.
To make that happen, Obama has asked the Federal Communications Commission to "implement the strongest possible rules to protect net neutrality" and to classify broadband service in the same way it does other utilities including telephone service. If adopted, these rules would provide clarity for an industry that's been in disarray since January when a Washington D.C. court struck down a 2010 FCC ruling order effectively ending net neutrality. That decision made it possible for so-called paid peering deals between Netflix and ISPs Comcast (NASDAQ:CMCSA) and Verizon (NYSE:VZ).
"To do that, I believe the FCC should reclassify consumer broadband service under Title II of the Telecommunications Act -- while at the same time forbearing from rate regulation and other provisions less relevant to broadband services," the President said in a press release. "This is a basic acknowledgment of the services ISPs provide to American homes and businesses, and the straightforward obligations necessary to ensure the network works for everyone -- not just one or two companies."
If Obama has his way and the FCC -- which is an independent body that does not have to agree with him -- passes the provisions that would classify broadband access as a utility, net neutrality would be the law of the land, but it will come with an unexpected price tag.
Why net neutrality will cost money
Economists Robert Litan and Hal Singer, both supporters of "less-aggressive net neutrality rules," according to The Washington Post, conducted a study for the Progressive Policy Institute that showed that classifying Internet service as a utility opens it up to more than $15 billion a year in new fees. The pair estimates that the fees, which would vary from state to state and even town to town, would cost the average household at least $84 a year.
The report said that once ISPs are labelled as telecommunications providers under Title II, their services become subject to a number of federal and state fees. Litan and Singer wrote in the report that they believe these charges will be passed on to consumers:
Although the state and federal government collect these fees from broadband providers, history shows -- and economic models of competitive markets predict -- that the fees are passed along to customers, just as they are now on telecommunications services. So consumers' Internet bills will soon have all those random charges tacked on at the end, much like they see on their phone bills.
The economists paint a fairly bleak picture where the public, which generally supports net neutrality, will have to pay up for a "free" Internet.
This is not a politically motivated study
While lots of Republicans have come out against the President's plan, the Progressive Policy Institute is not a right-wing organization. PPI describes itself as "an independent, innovative and high-impact D.C.-based think tank founded in 1989 as the original 'idea mill' for President Bill Clinton's New Democrats." And the researchers are not alone in raising this issue.
FCC Commissioner Mike O'Reilly spoke in November on the topic, and he addressed many of the points brought up by Litan and Singer. He explained that Title II requires telecommunications companies to pay into the FCC's Universal Service Fund. If ISPs were covered under that law, they would likely have to pay as well, which would mean passing costs off to their customers.
"Consumers of these services would face an immediate increase in their Internet bills," O'Reilly said in mid-November during a seminar held by the non-partisan Free State Foundation. "Let's accept a truism: Consumers pay [the fund], not companies."
Obama can stop this debate
If added cost to consumers is an unintended consequence and not a goal of the President's plan, then Obama and the FCC simply need to address the fees should the federal board decide to make this change.
It's very simple: If President Obama wants net neutrality at no additional cost to the public, then he must take the steps to make sure fees can't be passed on to the consumer. That almost certainly involves the Republican-controlled Congress which further complicates and politicizes the issue, but it may be the only way to deliver a free Internet without hidden costs.
Daniel Kline has no position in any stocks mentioned. He is an avid user of the Internet. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.