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NEW YORK (TheDeal) – Using authority granted to the agency by Congress during the era of telephone monopolies, the Federal Communications Commission on Thursday issued sweeping new regulations aimed at preventing owners of the physical wires and other infrastructure that make the Internet possible from hindering the free flow of content and data over the Web.

The highly controversial move was approved 3-2 along party lines with commissioners of each party taking verbal swipes at their counterparts.

The atmosphere during the vote, held during the commission's February open meeting at the FCC's Washington headquarters, had the feel of a choreographed celebration of the rule changes as supporters in the audience cheered the statements of agency chairman Tom Wheeler and other Democratic commissioners who supported the rules and by the anecdotal testimony of several Internet content providers who backed the roles. Rarely does the FCC entertain testimony from outside parties when voting on proposals before the commission.

In comments before the vote, Wheeler called the proceeding "a shining example of American democracy at work" because of the level of public engagement over the issue. "The stakes of the debate before the Commission have never been higher," he asserted.

The effects of the rule changes won't be immediately felt by Internet players and users but are likely to greatly influence the business relationship between the owners of Internet pipes such as Comcast (CMCSA) and other cable operators and those that rely on access to that infrastructure to deliver their products, including Google (GOOG) and Netflix (NFLX) .

Specifically, the rules ban outright three practices by broadband service providers: blocking access to legal content, applications, services, or non-harmful devices; "throttling" traffic by impairing or degrading lawful Internet traffic on the basis of content, applications, services, or devices; and accepting payment in return for prioritizing some Internet traffic relative to other traffic. The restriction on prioritization also bans ISPs from giving favorable treatment to content and services of their affiliates.

In order to prevent ISPs from discriminating against other content in unforeseen ways, the FCC also said they may not "unreasonably interfere with or unreasonably disadvantage" consumers' ability to access and use the content, applications, services, or devices of their choosing.

The new rules also require that broadband providers disclose promotional rates, fees and surcharges and data caps.

The FCC did say they broadband providers may engage in "reasonable" network management in ways other than paid prioritization. "This recognizes the need of broadband providers to manage the technical and engineering aspects of their networks," the FCC said. However, the network practices "must be primarily used for and tailored to achieving a legitimate network management-and not a business-purpose."

Despite years of calls from public advocacy groups for the imposition of this type of net neutrality regime, the FCC has resisted. But pressure from the Obama administration and previous court rulings striking down earlier incarnations of net neutrality rules forced the agency's hand.

Nevertheless, as Wheeler's plans became clearer over recent months, a crescendo of criticism rose from Republicans in Congress and from major telecommunications firms with investments in Internet infrastructure. They argue that the new restrictions will discourage firms from making the necessary investments to upgrade America's broadband network.

Republican Commissioner Ajit Pai said he was "sad to witness . . . the FCC's unprecedented attempts to replace freedom with government control." He accused Wheeler of caving in to the Obama administration, which the FCC as an ostensibly independent agency should not do, by dropping a compromise effort with FCC Republicans in favor of the rules issued Thursday. "So why is the FCC turning its back on Internet freedom?," he asked. "Is it because we now have evidence that the Internet is broken? No. We are flip-flopping for one reason only: President Obama told us to do so."

The direction the Democratically controlled FCC would take has been known since last spring, when under Wheeler's direction the commission proposed to prohibit Internet providers from discriminating against competitors' and third-parties' Internet content under telephone-style rules authorized by Title II of the Communications Act.

The switch to Title II-based rules was necessary Wheeler said because two previous incarnations of FCC net neutrality rules had been struck down in federal court.

How Internet traffic should be classified is central to the FCC's difficulty writing net neutrality rules the courts will accept. In 2010, the commission chose not to classify Internet service as a common carrier service akin to telephones and instead based rules on the commission's authority to promote the deployment of broadband services under Section 706 of the Telecommunications Act of 1996. As a result of the classification, when challenges to those net neutrality rules reached the appeals court, the court found them too close to telephone-style regulation authorized under Title II and ordered the FCC to rewrite them to fit under Section 706 or reclassify the Internet as a common carrier service.

Republican critics warned that Title II regulation, designed for 20th-century telephone service, would open Internet service to price regulation.

Pai warned that the provisions allowing parties to file rate complaints against ISPs would lead the FCC to supervise rates. "It's an overreach that will let a Washington bureaucracy and not the American people decide the future of the online world," he said. "For the first time the FCC will regulate the rates that ISPs may charge and will set a price of zero for certain commercial arrangements."

Also, "just as pernicious," he said, is a conduct standard the FCC is imposing that would gives the agency a "roving mandate" to review business models, alter pricing plans that benefit consumers such as usage-based pricing and sponsored data plans. Middle class and low income Americans are the biggest beneficiaries of these plans, he said, and the FCC "will have almost unfettered discretion to decide what business practices clear the bureaucratic bar."

Wheeler insisted that the changes will have minimal impact on business relationships that currently exist between Internet content providers and their service providers today. As proof he cited statements from companies such as Sprint (S) , T-Mobile USA (PCS) , Frontier Communications (FTR) and Google Fiber and "hundreds of smaller phone company ISPs" saying they are comfortable with the FCC's net neutrality approach. He also cited a story in Thursday's Wall Street Journal quoting Cablevision Systems (CVC) CEO James Dolan playing down any potential harm the rules might do to his company.

Wheeler said the FCC has no intention of regulating rates or imposing other fees on providers. "Rate regulation, tariffing and forced unbundling have been superseded by a modernized regulatory approach that has already demonstrated to work in encouraging investment in wireless voice networks.

President Obama praised the FCC and the "millions of Americans across the country" who petitioned the commission to impose the strict net neutrality rules. "Today's FCC decision will protect innovation and create a level playing field for the next generation of entrepreneurs-and it wouldn't have happened without Americans like you," he said in a prepared statement.

Smaller rivals to the big telecom firms and public advocates were beside themselves with glee after Thursday's vote. The rules "are an important step toward maintaining an open, competitive Internet, however this action alone will not prevent the many harms to consumers and competitors if Comcast and Time Warner Cable are permitted to merge," said Don't Comcast the Internet, a coalition of independent and rural telecom firms.

House and Senate Republican predicted that the rules will be overturned when private parties challenge them in court. In the meantime, they vowed to try replacing them with legislation that would prohibit many of the practices the new FCC rules cover, including paid prioritization of content, but won't give the FCC the broader authority over Internet service providers contained in the rule.

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