FCC Reveals the Details of Its Preemption of Municipal Broadband Restrictions

As we posted earlier, the FCC voted at its February meeting to preempt state laws in Tennessee and North Carolina restricting municipalities from providing broadband service. The FCC has now released the text of its Order, and it reveals the expanse of the FCC’s concerns, filling in the details as to the types of state law provisions the FCC considers to be barriers to broadband competition and therefore subject to preemption. The Order furnishes critical guidance to other municipalities considering a challenge of laws in their own states. It also informs state legislators as to how they can modify existing state laws to avoid a future confrontation with the FCC.

In the Order, the FCC preempted a Tennessee law prohibiting municipal electric utilities from providing broadband service outside their service areas, and certain restrictions and requirements of a North Carolina law. The FCC did so under its asserted authority pursuant to Section 706 of the Telecommunications Act of 1996 to remove barriers to broadband investment and promote broadband competition. The specific restrictions the FCC found to constitute or contribute to such barriers are summarized below, and the breadth of the FCC’s preemption of these restrictions is substantial. As a result, no one should be surprised to see more preemption requests arriving at the FCC.

Tennessee Law

The Tennessee law was fairly straightforward. It prohibited a municipally-owned electric power system from offering internet or video services anywhere outside the geographic footprint in which it provides electric service. The FCC found that this territorial restriction was an explicit barrier to broadband investment and competition, and used its authority under Section 706 to preempt the restriction. This portion of the FCC’s decision offers no real surprises, and relies on a fairly basic view of what constitutes a barrier to growth in municipal broadband.

North Carolina Law

Far more interesting is the portion of the Order relating to North Carolina. The North Carolina law was more complex, containing a variety of restrictions and requirements for municipalities wishing to deploy broadband service. The FCC found that, taken in the aggregate, these portions of the law created a barrier to broadband investment and competition, leading the FCC to preempt them. While acknowledging that some of the preempted provisions in the North Carolina law might have been allowed to stand individually, the FCC concluded that the aggregate effect required their preemption. In taking this approach, the FCC left some uncertainly as to which provisions it would have preempted on even a stand-alone basis, but provided very helpful guidance as to both the nature and scope of the FCC’s concerns. As the list of provisions preempted by the FCC set forth below indicates, the FCC’s view of barriers to municipal broadband growth is quite expansive.

• Territorial Restriction. The law limited a municipality to providing broadband service only within its city limits. As with the Tennessee law, the FCC found that this was a barrier to broadband deployment and competition.
• Pricing Restriction. The law prohibited municipalities from pricing their broadband services below cost. In determining such costs, municipalities were required to impute what the FCC referred to as “phantom private sector costs;” i.e., costs that the municipality does not actually incur but which would be incurred by a similarly situated private sector broadband provider, such as the cost of capital and taxes. The FCC found that this restriction artificially limited a municipality’s ability to compete with privately-owned providers on the basis of price.
• Taxes. The law required municipal broadband systems to pay taxes equal to what a similarly situated private provider would have to pay.
• Provisions Imposing Asymmetric Burdens. The FCC found that a number of provisions in the North Carolina law worked to impose asymmetric burdens on municipalities in comparison to their privately-owned counterparts. For example, the law required municipal providers to comply with all laws and regulations which would apply to a private system, as well as all laws and regulations that apply only to municipal systems, while private systems must comply only with those laws applicable to private sector entities. In addition, municipal broadband providers were brought under PUC authority while private providers remained exempt. Municipalities were also prohibited from subsidizing broadband service with funds from other municipally-provided services such as gas or electric, which, according to the FCC, prevented municipalities from cost sharing or subsidizing operations across multiple lines of business, a restriction which does not apply to private companies. The FCC determined that these asymmetric impacts hamper investment and competition in broadband by subjecting municipal providers to costs and burdens beyond those borne by the private sector.
• Provisions Imposing Delay. The FCC found that a number of obligations in the North Carolina law resulted in considerable delay in municipalities being able to launch broadband systems. For example, municipalities were required to engage in a public notice and hearing process, and to solicit proposals from private-sector providers, before commencing construction of a system. Municipalities were also required to hold a special election and submit their financing plans for additional state review before financing a system. According to the FCC, these rules imposed significant delays on the launch of a municipal broadband project, making planning for such a system more difficult and adversely impacting competition by delaying entry of a new competitor.

In preempting the provisions above, the FCC found that several other provisions of the North Carolina law did not constitute barriers to investment and competition and therefore did not preempt them. These included requiring municipal systems to publish an annual report on financial matters and prohibiting municipalities from requiring any person to subscribe to their services.

While the FCC found the territorial restriction in Tennessee law to be a barrier to investment and competition all by itself, it analyzed the North Carolina law holistically, finding that the law taken in its entirety constituted a barrier to investment and competition. The common thread is that the FCC found the effect of the challenged provisions was to impede the launch or expansion of broadband networks by municipalities.

The FCC’s action was roundly criticized by Commissioners Pai and O’Rielly, and a bill has been introduced in Congress to amend Section 706 of the Telecommunications Act of 1996 to prevent it from being used to preempt state laws governing municipal broadband. The Attorney General for the State of Tennessee has challenged the FCC’s action in federal court, and we expect that the State of North Carolina will do the same. It is also worth noting that the FCC indicated in the Order that states do have the power to impose a flat ban on municipal broadband service, and that the FCC’s authority to review state laws arises only where a state authorizes municipalities to provide service but then subjects that authority to restrictions. As a result, some states may elect to sidestep the legal controversy altogether and attempt to ban municipal provision of broadband services. While the FCC’s action will be far from the last word, we expect that many municipalities are looking closely at the Order and planning their own next steps.