The FCC Should Not Preempt State Restrictions on Municipal Broadband

In the wake of the D.C. Circuit’s Verizon v. FCC decision, Federal Communications Commission Chairman Tom Wheeler laid out plans for the Commission’s approach to broadband. Those plans included a proposal to potentially preempt state restrictions on the ability of cities and towns to offer broadband services to their communities. At the Consumer Federation of America’s Assembly on March 21, Chairman Wheeler reiterated his plans to address state restrictions preventing state localities from building out municipal broadband services.

Chairman Wheeler should not move forward with these plans. First, Section 706 most likely does not provide FCC authority to preempt state laws. Second, government-funded networks do not bring real competition to localities and, most often, eventually cause more harm than good. Finally, the widespread failure of government-owned broadband projects proves that it would be unwise for Chairman Wheeler to push municipalities to pursue these often harmful ventures.

Nearly twenty states restrict local governments from entering into the business of providing broadband Internet service. These restrictions are sound policy, as they prevent local government conflicts of interest with the private sector, and they protect other local government programs and local taxpayers from the potential financial losses stemming from risky municipal broadband projects.

FSF scholars have discussed the problems stemming from government-owned broadband systems at length. In his February 26 Perspectives, Senior Adjunct Fellow Seth Cooper recently analyzed the legal implications of the FCC’s tentative plan to potentially preempt state-level restrictions on municipal broadband projects. Mr. Cooper found that “preemption would undermine local government accountability to state governments and to taxpayers” and “any attempt to interfere with the relationship between states and their local governments will run up against basic free market and federalism principles.” 

Federal law contains no clear statement authorizing preemption of state restrictions on their cities and counties going into the telecommunications or broadband Internet business. The U.S. Supreme Court has previously rejected federal preemption of state prohibitions on telecommunications services in Nixon v. Missouri Municipal League (2004). The Supreme Court expressly rejected claims that Section 253(a) of the Communications Act preempted a state statute prohibiting its cities and counties from offering telecommunications services. The Court based its decision on the "clear statement" rule and constitutional federalism problems posed by preemption of fundamental state sovereign functions. Also, a 1997 order by the FCC rejecting the preemption of a Texas restriction on local governments providing telecommunications services is an agency precedent that weighs against preemption.

Additionally, the principles of cooperative federalism dictate that a federal agency should not grant counties or cities powers that their respective states did not delegate to them. Chairman Wheeler’s February 19 statement, which included a proposal to examine “legal restrictions on the ability of cities and towns to offer broadband services to consumers in their communities,” has been characterized and reported as an effort to bring broadband to the citizens of municipalities. Municipalities are purely creations of the state. Municipal residents are citizens of the state. These citizens, as voters, indicate their political views, including whether they support legislation restricting municipal broadband initiatives, by electing certain state officials, from members of the state legislature all the way up to governor. FCC preemption of state-imposed restrictions on municipal broadband would impose on state citizens policies they do not support and would deprive them of recourse through their elected representatives.

While the D.C. Circuit arguably may have broadly construed the authority granted to the FCC under Section 706 in its recent Verizon decision, this authority is not likely to be as broad as the Commission's regulatory ambitions. And it most likely does not allow the FCC to interfere with state control over cities and counties to encourage broadband deployment absent a clear statement of intent by Congress. Constitutional principles, as well as Supreme Court and agency precedent, weigh against the legal support for FCC preemption of state restrictions.

There are also many fact-based reasons why preempting state restrictions on municipal broadband initiatives is unwise. In his March 7 Washington Times article, “FCC, Broadband and Fallacy of Government Competition,” FSF President Randolph May discussed how government systems thwart competition rather than enhance it, despite what Chairman Wheeler may believe. Mr. May concluded that “government systems pose inherent conflicts of interest with private-sector companies” by competing with them for rights-of-way, financing, and subscribers. And, these networks are generally subsidized directly by taxpayers or by government bonds carrying below market interest rates. Because building and managing broadband networks is not within the “traditional bailiwick and presumed competence” of local governments, these systems most often fail, and leave taxpayers and government bondholders “holding the bag."

I discussed the many examples of failed local government communications networks in a recent blog, including the recently publicized failure of Burlington, Vermont’s broadband network, Burlington Telecom (BT). For the past two years, BT has been fighting the claims of Citibank, its primary creditor, that BT owes it $33.5 million; the proposed settlement is for $10.5 million, which will be funded “largely” through non-taxpayer resources. Not surprisingly, the city has had to look to the private sector to help in funding the settlement.

Unfortunately, BT is only the latest failure in a longstanding pattern of money-losing municipal broadband projects. The towns of Mooresville and Davidson, North Carolina, faced multi-million dollar debts after acquiring the MI-Connection Communications System from the bankrupt Adelphia Communications cable systems. Utah’s UTOPIA network operated at a loss from 2003–2012, which caused “serious damage to the agency’s financial position” and resulted in total net assets of negative $120 million by 2011. Chattanooga, Tennessee’s Electric Power Board (EPB) network was built almost entirely at taxpayer expense. And last February, the Iowa state government sought to sell off its Iowa Communications Network. The Iowa network is one of the oldest government telecom systems in existence, but the debt it accrued over its history rendered the system unsustainable. Other municipal “broadband busts” include Provo, Utah, Lafayette, Louisiana, and the N.C. Eastern Municipal Power Agency.  Citizens Against Government Waste’s recent publication discusses these and other examples of poorly managed broadband networks, and CAGW urges the FCC not to push municipalities into competition with the private sector.  

In sum, Chairman Wheeler should not pursue his proposal attempting to “enhance competition” by encouraging governments to compete with private sector companies. There is plenty of evidence, both legal and factual, supporting the conclusion that preempting state restrictions on government-owned broadband systems is unsound and unwise. Instead, as Mr. May stated in his Washington Times article, “The proper way to encourage competition is to remove existing, costly regulations that no longer are necessary in today’s competitive communications environment and to refrain from adopting or threatening to adopt new ones.”