Comcast

(CMCSA) - Get Report

has filed an appeal against the Federal Communications Commission's decision to prevent the cable giant from limiting certain Internet traffic.

The move sets up a showdown over "net neutrality" that some say represents a new level of intervention by the FCC in the market.

In a filing to the U.S. Court of Appeals more than a week ago, Comcast said it will challenge the basis on which the FCC found that Comcast violated federal policy in the absence of pre-existing legally enforceable standards or rules.

In August, the commission ruled three to two that Comcast violated federal policy by willfully delaying Internet traffic for users of person-to-person applications, including the much-maligned BitTorrent service, which eats up an enormous amount of bandwidth and is typically used to illegally pirate movies and music.

"We continue to recognize that the commission has jurisdiction over Internet service providers and may regulate them in appropriate circumstances and in accordance with appropriate procedures," said David Cohen, Comcast's executive vice president, in a statement.

"However, we are compelled to appeal because we strongly believe that, in this particular case, the commission's action was legally inappropriate and its findings were not justified by the record."

The continued battle between the FCC and Comcast brings up questions over whether the FCC is micromanaging how an Internet service provider handles its traffic and whether there is a need for congressional action.

"The FCC has intervened here in a case that has fairly compelling facts for government intervention," says Jack Nadler, a partner in the Washington, D.C. office of Squire, Sanders & Dempsey. Nadler was actively involved in the legislative proceedings leading to the adoption of the Telecommunications Act of 1996, the major FCC implementation proceedings and numerous court of appeals cases growing out of the act before the U.S. Courts of Appeals.

"If we had a vibrantly competitive broadband Internet market, there'd be no need for government regulation," Nadler adds. "We clearly do not have such a market. The only thing that's worse than a regulated uncompetitive market is an unregulated uncompetitive market. However, this does represent a new level of FCC intervention in the market."

Historically, the FCC's policy has been one of "hands off the Internet," and Nadler says that clearly we've now seen the FCC impose some substantial direction on the way a major industry conducts its business. "That is a very significant change from what we've seen before," he says.

While Comcast did violate the FCC's policy that said users have a right to access any lawful application -- and BitTorrent has never been found to be an unlawful application -- it does create the conditions that ordinarily would be seen as justifying government intervention. The harder question, Nadler says, is whether the FCC does in fact, as it claims, have the legal authority to do so.

But the most important point is that the court battle between the FCC and Comcast shows that there has been a regulatory failure in terms of the Internet and maintaining "net neutrality," which says that all Internet traffic should be treated equally.

Without the ability to target high bandwidth users, observers say Internet service operators such as Comcast,

Time Warner Cable

(TWC)

, and

AT&T

(T) - Get Report

may introduce to usage-based pricing.

As broadband and high-speed Internet access has increased in the last decade, there has been a shift from the competitive but unregulated dial-up Internet market to one where customers are limited to only one or two residential broadband providers.

"In such a market, it becomes more appropriate for government to intervene to correct market failures," Nadler argues. "While the FCC is doing this, hopefully it will keep its eyes on the prize and remember that the best solution isn't a regulated uncompetitive Internet. It's a vibrantly competitive and unregulated Internet."

The problem is that the FCC may actually end up pushing Comcast and other Internet providers towards usage-based pricing or monthly caps on data transfers.

In its memorandum opinion and order piece from late August, the FCC said that "Comcast has several available options it could use to manage network traffic without discriminating as it does. Comcast could cap the average users' capacity and then charge the most aggressive users overage fees."

In fact, Comcast has started to employ a data usage cap of 250 gigabytes for its broadband customers in order to keep high-data users off its network. The new monthly data usage threshold, which goes into effect starting next month, is being used to target so-called "excessive users." Anyone found to be an excessive user twice in six month's time will have their service terminated.

"Internet users and investors alike are somewhat alarmed by Comcast's recent introduction of usage 250 GB caps for its broadband customers. The policy could well quickly be copied by the other cable

multi-system operators, or MSOs, and telcos," writes Jeffrey Lindsay, senior analyst with Sanford Bernstein, in a research note from earlier this month. "Like metered dial-up before it, many Internet investors see metered broadband as unnecessary, anti-consumer and anti-Internet.

Lindsay agrees with Nadler's point that Comcast's adaption of monthly caps is a clear indicator that there is insufficient competition in last mile connectivity. "Arguably, the real problem for the cable MSOs is that their technology has become a little bit too good for comfort," he adds.