The FCC’s Privacy Proposal Would Still Harm Consumers

In March 2016 the FCC adopted a Notice of Proposed Rulemaking (NPRM) purporting to protect “the privacy of customers of broadband and other telecommunications services.” The Commission is scheduled to vote on this item at the open meeting on October 26, 2016. FSF scholars submitted comments to the FCC in May 2016 explaining the reasons why the proposal would adversely impact consumers.

On October 6, 2016, FCC Chairman Tom Wheeler circulated a new proposal supposedly narrowing the regulatory reach of the opt-in requirement for only sensitive information. However, the definition of “sensitive information” in the FCC’s Fact Sheet is far too broad, including even all web browsing and app usage history. As Free State Foundation President Randolph May said regarding the Chairman’s new proposal in a Communications Daily report:

The latest revision to the privacy proposal seemingly may be a step in the right direction on a purely conceptual level, but it is not very helpful as a matter of reality. The categories of information requiring opt-in are much broader than necessary to protect consumer choice and, as importantly, broader than the framework the [Federal Trade Commission] FTC applies. This will lead to inequitable regulation and consumer confusion. And, to boot, the FCC lacks authority to go as far as it proposes.

Thus, the FCC’s proposed privacy regulation remains fatally flawed.

This proceeding originates, in an oddly circuitous way, out of the FCC’s Open Internet Order. The FCC reclassified broadband as a telecommunication service, imposing public utility-like regulation on Internet service providers (ISPs). The FCC failed to find evidence of a market failure, other than claiming that ISPs are “gatekeepers.” And although the Commission makes this unsupported “gatekeeper” claim when proposing regulations, it recently found in its Nineteenth Mobile Wireless Competition Report that competition in the mobile wireless industry has led to “lower prices and higher quality for American consumers, and [is] producing innovation and investment in wireless networks, devices, and services.” But as I suggested in a February 2016 blog, the FCC likely will continue to use its “gatekeeper theory” to impose additional regulations on ISPs.

FSF scholars went into further detail in their May 2016 comments to the FCC:

The Commission mistakenly relies on a factually unsupportable “gatekeeper theory” of competition and incentives in the broadband market as a basis for its proposed privacy regulations. The Commission now apparently relies on a “gatekeeper” claim as a regulatory prop of last resort when traditional market power analysis fails to support its expansive regulatory designs. The switching costs rationale upon which the Commission bases its proposed regulations is undermined by data demonstrating pro-competitive, pro-choice marketplace trends – documented in the Eighteenth Wireless Competition Report – favoring easier ability and incentives to switch providers.

The FCC’s privacy proposal would severely restrict the manner in which ISPs can collect and use consumer information. But as FSF scholars stated in their May 2016 comments, ISPs’ data collection practices do not pose a consequential threat to consumer privacy, and certainly not on the order of the large Internet content companies:

[A]s Peter Swire and his colleagues estimate in their paper, “Online Privacy and ISPs: ISP Access to Consumer Data is Limited and Often Less than Access by Others,” 70% of Internet traffic will be encrypted by the end of 2016. That means ISPs will, at best, only have access to roughly 30% of consumer data. Leading operating systems, web browsers, and video applications will have primary access to consumer personal information.

By subjecting ISPs to privacy regulations in the way it has proposed to do, the FCC is creating disparate regulations in the Internet ecosystem, confusing consumers as to the relevant applicable privacy policies because consumers do not distinguish between the two different categories of providers based on regulatory classifications, especially newly-adopted ones. Moreover, many large Internet companies have access to more information and a wider range of user information than ISPs. (See this FSF infographic.) For example, Google has access to 64% of online searches and holds over 61% of the mobile operating system market, allowing it to collect data on subscribers' location and app use.

FSF scholars explained further in their May 2016 comments:

By proposing to subject only broadband ISPs to its new privacy regulations, the Commission runs afoul of the rule of law principle that laws should be applied equally to all. Service providers that collect consumer personal information should be subject to the same rules unless clear reasons exist for treating them differently. The Commission fails to offer any reasons to justify the disparate treatment of ISPs embodied in its proposed regulations. The Commission should not adopt any privacy policy reflecting that degree of regulatory favoritism.

The Federal Trade Commission, the expert agency with jurisdiction over privacy violations within the entire Internet ecosystem, addresses consumer complaints on a case-by-case basis and focuses “on whether the collection and use of information is consistent with the context of a consumer’s interaction with a company and the consumer’s reasonable expectations.” Therefore, it should be no surprise that the former FTC Chairman Jon Leibowitz opposes the FCC’s NPRM. Additionally, it should be acknowledged that consumers have different preferences regarding how and if they want their data collected, and ISPs often update their settings to adjust to consumer trends. At the 2016 Advertising and Privacy Law Summit in June, FTC Commissioner Maureen Ohlhausen said:

Beneficial uses of consumer data go far beyond targeted advertising, of course. In the ISP context, such benefits could include lower prices and improved security and services. Regulatory restrictions on use of consumer data may foreclose these benefits, imposing significant costs on consumers – a fact often overlooked by advocates who may have different privacy preferences than average consumers.

Despite the fact that ISPs do not have access to the amount of data to which non-ISPs have access, ISPs still can use consumer data to offer targeted benefits. (See my August 2016 Perspectives from FSF Scholars entitled “FCC Privacy Rules Would Harm Consumers by Creating Barriers for Advertising.”) Many ISPs and edge providers incorporate advertising into their business model. Instead of consumers paying subscription fees for access to online information, consumers send personal non-sensitive information, which the ISP or edge provider then uses to sell targeted advertisements. If the FCC’s proposal is adopted, ISPs would be restricted with regard to the manner in which they use the advertising business model. This potentially could stifle the implementation of “free” data programs or other innovative services which use consumer information to develop such targeted offerings.

As the FSF scholars’ May 2016 comments explained:

If imposed, the nearly ubiquitous “opt-in” requirements regarding PII risk would discourage ISPs from offering consumers targeted marketing deals, selling advertisements to personally design consumer experiences, or offering sponsored data as well as free data or zero-rated plans – all of which potentially could benefit them. The Commission’s contemplation of a ban on certain ‘financial inducement practices, such as offering discounts for use of PII, would deprive consumers of their choice to enjoy free or inexpensive services. Consumers are competent to decide for themselves what form of ‘payment – whether in the form of the exchange of personal information or money – that they are willing to make for services.

An alternative approach to privacy that would benefit consumers was proposed:

Instead of imposing uneven, sector-specific, choice-limiting regulations, the better policy approach to protecting consumer privacy on the Internet is to establish common standards under the jurisdiction of a common enforcer. The digital privacy framework proposed by the White House in 2012 offers a realistic means of establishing a set of common rules with a common enforcer. Under this approach, privacy codes of conduct are to be established through a voluntary multi-stakeholder process. The Federal Trade Commission (FTC) would have authority to enforce those codes against providers who agree to abide by them but fail to do so in practice. Significant efforts have already been expended in that process. Obviously, the proposed regulations effectively would doom the prospects of the multi-stakeholder process for establishing consumer privacy protections for ISP subscribers. The far better approach for protecting consumer privacy is to refocus resources and attention on the multi-stakeholder process in order to forge a common set of rules and a common enforcer to protect consumer privacy on the Internet.

With a vote now scheduled for the October open meeting, it is important that the Commission recognizes how the FCC’s proposal would harm and confuse consumers by creating disparate – and overly restrictive – regulations within the Internet ecosystem. 

The FCC's Attempt to Make Choices for Consumers Will End up Harming Them

In February 2016, the Federal Communications Commission (FCC) adopted a Notice of Proposed Rulemaking (NPRM) purporting to “unlock the box,” mandating requirements for video navigation devices. Including the time the FCC spent writing the NPRM, this proceeding has lasted roughly ten months. After heavy criticism from inside and outside the FCC, the Commission is now apparently proposing an entirely new set of regulations which would require pay-TV providers to deliver video service through an application (as opposed to a set-top box) that can be used on “widely deployed platforms.” The draft Report and Order (unseen by the public) is scheduled to be voted on during an Open Meeting on September 29, 2016.  
If the technological innovation of the video marketplace has changed so much in the last ten months that the Commission has revised its proposal, what makes the FCC so sure that “apps” will be the technology consumers want in the future? And shouldn’t the FCC let the public comment on such a dramatic revision before the Commission casts its votes?

In FSF’s recent comments to the FCC regarding the status of competition in the video market, FSF scholars explained that consumers have more choices for video access than ever before. Our comments also discussed how the FCC’s original and new proposals would violate copyright terms, disincentivizing creators from producing additional content. (In addition to our comments, see my August 2016 blog and Senior Fellow Seth Cooper’s February 2016 blog for more on the copyright violations that the FCC’s proposal would enable.) Regardless of these very important issues, the FCC has misunderstood what should be a pretty simple concept: consumers like having choices in the video market. The fundamental mistake the FCC made in its original proposal was not the type of technological mandate; it was the mandate itself!

The video market has experienced tremendous innovation in the last five to ten years as online video distributors (Netflix, Amazon, Hulu) have emerged to become competitors with facilities-based pay-TV providers (Comcast, Verizon, Time Warner Cable). In fact, Netflix, Amazon, and Hulu combined have more than twice as many subscribers as all cable providers combined. The video market has been transitioning from set-top boxes to applications, so this mandate simply creates unnecessary uncertainty and removes the traditional options for consumers who are less likely to adopt to the latest market trends. (See here, here, and here for examples of the innovative transition that is occurring in the video market.)

If adopted, the mandate proposed by the FCC will raise costs for pay-TV providers. In fact, the FCC’s fact sheet acknowledges this because the proposal exempts providers with fewer than 400,000 subscribers in an attempt to “limit burdens on smaller providers.” Ultimately, consumers will end up paying for this technological mandate with an increase in the price of their pay-TV service.

Consumers likely will be able to see the increase in their provider’s costs on their monthly bills, but there will also be hidden costs. The FCC’s mandate could disable pay-TV providers from differentiating their application’s interface and usability. This would discourage providers from developing new ways to deliver their service. Such a requirement could force video distribution, which recently has been at the forefront of innovation, onto the back burner of technological development. Consumers would enjoy less innovation in the video market than they otherwise would, absent the FCC’s proposed regulations.

On September 16, 2016, Jason Furman, Chairman of the Council of Economic Advisers for President Obama, praised FCC Chairman Tom Wheeler for his efforts to “improve the proposal.” But neither President Obama and his closest advisers nor Chairman Wheeler and his FCC colleagues are knowledgeable enough to predict the future and mandate efficient outcomes in the video marketplace. Consumers, collectively, are the only group of people who can dictate what technologies provide value and which do not. While applications (as opposed to set-top boxes) might be closer to where the video market is moving right now, technology changes so rapidly that it may be only be a matter of weeks or months before the mandated technology is out-of-date.

Over the period of ten months, the FCC changed its mind about what technology to mandate for pay-TV providers and consumers. Who is to say that the FCC will not mandate a new technology a year or so down the road? The FCC should shut down this proceeding and allow consumers in the competitive marketplace to choose the technologies and platforms they prefer when accessing video content. If not, at the very least, the FCC should issue a new NPRM, instead of a Report and Order, so the public can comment on its quick switch from set-top boxes to applications. 

Former FTC Chairman Leibowitz Opposes FCC Privacy Rules

Former FTC Chairman Jon Leibowitz submitted comments to the FCC on May 23, 2016 advising the Commission to reject new privacy rules for Internet service providers (ISPs). Mr. Leibowitz states:

The Privacy NPRM, if adopted as proposed, would result in a detailed set of burdensome data privacy rules with no precedent in the FTC or other U.S. privacy regimes, and is inconsistent with the privacy obligations applied to the rest of the economy. Moreover, the NPRM does not identify any harms that necessitate rules that are different from the FTC framework. This divergence merits additional study and consideration.

It is interesting to see two President Obama appointees, Jon Leibowitz and FCC Chairman Tom Wheeler, hold opposing views on this proposal. The FTC is the expert agency with regard to consumer privacy disputes. Mr. Leibowitz outlines in his comments how the FCC’s proposed rules would harm consumers by creating disparate regulations between ISPs and the rest of the Internet ecosystem.

The FCC Should NOT Impose New Video Device Mandates!

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Is the FCC Unlawful? – A Reprise

This Thursday, February 26, will be a fateful day for the future of the Internet. As I wrote recently in a Washington Times op-ed, “The FCC’s Coming Internet Regulations,” “in the nearly 40 years that I have been involved in communications law and policy, including serving as FCC Associate General Counsel, this action, without doubt, is one of the agency’s most misguided.”

As the vote approaches, I don’t have any second thoughts regarding that statement. Reduced to its essence, the way I put it at the beginning of the Washington Times piece gets to the nub of the matter: “Regulating Internet providers as public utilities in order to enforce net neutrality mandates will discourage private sector investment and innovation – and lead to even more special interest pleading at the FCC for favored treatment, and heightened litigation for years to come.”

For those interested in learning more about the forthcoming decision of the FCC’s Democrat majority to regulate Internet providers, even wireless companies, there are literally dozens, if not hundreds, of publications on the Free State Foundation’s website and its blog. And in a moment, I want to call your attention especially to three pieces published just within the past two weeks that are worthy of your attention.

But first this: The initial essay I published this year, on January 2, was titled, “A Question for 2015: Is the FCC Unlawful?” The piece bears revisiting as the FCC is poised to expand its control over the Internet in ways that threaten its future without any present justification – that is, without a justification that is not trumped up. The reality is that there is no evidence of present market failure and consumer harm that justifies the Commission asserting more control over the Internet – regardless of which theory of law the Commission relies upon.

But here’s an important point I wish to make regarding the FCC “lawfulness” in advance of Thursday’s vote. As Philip Hamburger discusses in his new book, “Is Administrative Law Unlawful?”, one of the objectives of our Founders was to control, if not eliminate, what in England was known as the “dispensing” power. Simply put, the “dispensing” power – and this power is much discussed in English constitutional history – was a form of exercise of royal prerogative under which the King could avoid, or dispense with, complying with particular laws, including those enacted by Parliament. As Professor Hamburger discusses at some length, today’s administrative agencies, in essence, have resurrected the “dispensing” power by the way they often use waivers to award favored treatment.

Here is the way Professor Hamburger puts it:

“After administrators adopt a burdensome rule, they sometimes write letters to favored persons telling them that, notwithstanding the rule, they need not comply. In other words, the return of extralegal legislation has been accompanied by the return of the dispensing power, this time under the rubric of ‘waivers.’”

And then he goes to the heart of the matter:

“Like dispensations, waivers go far beyond the usual administrative usurpation of legislative or judicial power, for they do not involve lawmaking or adjudication, let alone executive force. On the contrary, they are a fourth power – one carefully not recognized by the Constitution.”

Now, I understand that seeking and receiving “waivers” of the FCC’s rules (regardless of the precise name applied to such dispensations) is an established part of FCC practice. And in some instances, such waivers, in light of unique circumstances or hardships, are no doubt justified. But I am convinced that under the new set of Internet regulations about to be adopted by the Commission, we are likely to witness the exercise of the agency’s “dispensing” power – this power which the Founders wished to eliminate – in ways, and to such an extent, that rule of law norms at the FCC will be called into further question.

This is what I meant when I said above that the new regulations are likely to raise pleading for special treatment and favors to new heights at the FCC. As the agency gains even more control over various participants in the Internet and communications marketplace, it will be subject to increasing pressures to use its dispensing power to grant this or that company (or market segment) favored treatment. For example, despite FCC protestations to the contrary, which protestations, by the way, do violence to the ordinary usage of the English language, the FCC will regulate the rates of some firms but not others, by holding unlawful the usage plans, sponsored data, or zero-rating plans, of some firms and not others. Or, to be sure, under its new inherently vague “good conduct” rule, the agency will be granting dispensations to some firms and not others, based on the exercise of discretion untethered to any standard in any law duly enacted by Congress.

This is part of what I mean by asking the question: “Is the FCC Unlawful?”

Now, for further readings in advance of the FCC’s February 26 vote (if you haven’t had a chance to read them already, I commend to you these excellent Perspectives from FSF Scholars published in the past two weeks: 

• Dennis L. Weisman, “Regulating Under the Influence: The FCC’s Title II Initiative for Broadband,” February 13, 2015.

• Justin (Gus) Hurwitz, “Regulating the Most Powerful Network Ever,” February 19, 2015.

• Robert W. Crandall, “Regulation Won’t Preserve a Dynamic and ‘Open’ Internet,” February 20, 2015.

Each of them alone makes a convincing case that the course upon which the agency is about to embark – imposing Title II public utility regulation on Internet providers – will be harmful to consumers and to the future development of the Internet by thwarting investment, innovation, and consumer choice. Taken together, the case is devastating.

Now the act of imposing public utility regulation on Internet providers that I decried this past September in “Thinking the Unthinkable” is about to become reality. In the aftermath of the significant extension of government control over the Internet that, absent intervention by the courts or Congress, will ensue, I am convinced the question I posed at the beginning of the year – “Is the FCC Unlawful?” – will be asked with increasing frequency and seriousness of purpose.  

Despite What FCC Chairman Wheeler Says, His Proposal Will Increase Taxes

The common perception among Title II opponents is that reclassification of broadband as a telecommunications service would levy a massive amount of new taxes and fees on Internet users. Robert Litan and Hal Singer of the Progressive Policy Institute estimated in a December 2014 policy brief that Title II regulations will add about $11 billion in new taxes.

Free Press claims that the extension of the Internet Tax Freedom Act (ITFA) by Congress eliminates the possibility of Title II reclassification resulting in any new taxes or fees. Now that FCC Chairman Tom Wheeler released a synopsis of his proposal (he has not released full proposal to the public), it is important that we get a straight answer.

Although Chairman Wheeler did not mention anything about new taxes or fees in his Wired blog post on his proposal on February 4th, the FCC Fact Sheet on the proposal clearly states:

The Order will not impose, suggest or authorize any new taxes or fees – there will be no automatic Universal Service fees applied and the congressional moratorium on Internet taxation applies to broadband.

So it is clear? Chairman Wheeler’s proposal to reclassify broadband under Title II will not add any new taxes or fees, right? Wrong!

FCC Commissioner Ajit Pai released a February 6th statement on the 332 page proposal stating:

The plan explicitly opens the door to billions of dollars in new taxes on broadband. Indeed, states have already begun discussions on how they will spend the extra money. These new taxes will mean higher prices for consumers and more hidden fees that they have to pay.

Okay, so which statement is true?

Mr. Litan and Mr. Singer clarified the results of their paper in a blog post after Free Press claimed the findings were inaccurate due to the extension of the ITFA. Despite the passing of ITFA which generally bans Internet sales and access taxes, the Litan and Singer policy brief takes into account state-based telecom related fees for which there is no federal preemption.

Additionally, Hal Singer wrote a Forbes article after Chairman Wheeler released his blog. He said that even if the proposal does not include any new federal taxes, “state and local fees that apply to the ‘obligations of a telecommunications carrier’ could easily be extended to Internet service after reclassification.” Mr. Litan and Mr. Singer estimated in their policy brief that Title II regulations will cause annual state and local fees levied on wireline and wireless broadband subscribers to increase by $67 and $72, respectively.

Here is what seems to be going on. Chairman Wheeler is promising forbearance from the imposition of new taxes and fees, but he has no control over the actions of state and local governments which levy taxes on telecommunications providers. Additionally, the forbearance process likely will take months to years to complete and Chairman Wheeler has no authority to overrule the decisions of current or future commissioners. In other words, the proposal promises no new taxes, not because Title II regulations do not levy them, but because Chairman Wheeler hopes that future commissioners will vote to take federal taxes off the table and that state and local governments will not levy existing tax laws on Internet service providers. At least, this is the political agenda Chairman Wheeler is promoting at the moment.

When it comes to the forbearance of new taxes and fees under Title II, we should expect the worst and hope for the best. Unfortunately, the uncertainty of the forbearance process is enough to ensure that not all taxes and fees, if any, will be eliminated from Title II regulations.

Time to "Pan" Proposals for More Internet Regulation

by Deborah Taylor Tate 

Consumer advocacy groups and even the media are causing quite a racket over the net neutrality debate. Some may think that banging pots and pans and shouting arguments to reclassify broadband as a telecommunications service is a sound policymaking approach. But the old saying “the empty vessel makes the loudest sound” comes to mind. Distractions may abound, but it is important for Chairman Wheeler’s reasoning to remain grounded in the law, exercise regulatory humility, and resist calls to impose burdensome “Open Internet” rules or Title II regulations on broadband services.   

In writing to my state PUC colleagues in my 2010 piece, Don't Stifle Internet Services With More Regulation, I noted that deregulatory Internet policy is not new; it still the law of the land. Congress ably crafted the 1996 Telecommunications Act and declared that the policy of the United States was "to preserve the vibrant and competitive free market that presently exists for the Internet and other interactive computer services, unfettered by federal or state regulation." Over 240 members of Congress from both sides of the aisle reiterated that policy, when the House voted to reject the FCC’s proposed Internet “neutrality” rules regulating Internet providers in early 2011.

In May 2012, I wrote that the FCC had no business, and no legal authority for, regulating the economic side of network management. Indeed, special access—paying more for certain specific services for a negotiated price—was an acceptable principle even in the highly regulated Title II wireline telephone regime. Thus, companies should be able to differentiate their products, service lines, marketing techniques and yes, even pricing, without interference by the pricing police. 

In another piece from July 2009, I also recognized that it was not fair for a grandmother who might send a few emails or look at some baby pictures online every few days to pay the same as a 24/7 gamer who uses many times the amount of broadband. What is fair is to pay for what you use.

However, even after two D.C. Circuit decisions, and a Democrat FCC Chairman recognizing that indeed traditional public utility-style regulation is not warranted, there is still a renewed call to bring out the "pots and pans” in favor of Title II reclassification. Free State Foundation President Randolph May offered two of the many reasons why adoption of net neutrality or Title II reclassification is unwarranted in his May 9 blog. We have long moved past the plain old telephone service, or "POTS," regime and should "pan" this suggestion.                                               

With today's continued explosion of innovation, over a trillion dollars of investment in the digital economy, and more competition occurring across multiple platforms everyday, why would we even consider a different direction?

Conditioning the Incentive Auction Unlikely to Increase Mobile-Broadband Competition in Rural America

On May 1, the Georgetown Center for Business and Public Policy released a new economic policy study by Anna-Maria Kovacs titled, “Regulation in Financial Translation: Will the Incentive Auction Increase Mobile-Broadband Competition in Rural America.” Ms. Kovacs finds that even if the Federal Communications Commission imposes restrictions on large providers, namely AT&T and Verizon, rural communities will mostly likely not benefit from the incentive auction.

Chairman Wheeler has stated that because AT&T and Verizon control a majority of low-band spectrum, which can travel greater distances than high-band spectrum supposedly for less cost, limiting those large providers will induce smaller wireless competitors to bring service to and compete in rural areas. However, even if Sprint, T-Mobile and other smaller competitors are given access to low-band spectrum at below-market prices, the lack or revenue potential in those targeted rural markets will remain a great disincentive. And, neither provider has indicated a willingness or plan to serve rural areas. If limited in the incentive auctions, AT&T and Verizon, who often provide the only service available in rural areas, will lack the capacity to meet rural subscribers’ demands.

The full study is available here and is worth a read.   

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.”

Another One Bites the Dust: Burlington Telecom’s Failure Shows, Again, That Government-Operated Broadband Networks Are Not The Solution

In a public statement on February 19, Chairman Tom Wheeler laid out his plans for the Federal Communications Commission’s approach to broadband in reaction to the D.C. Circuit’s Verizon v. FCC decision. Many of the proposed Internet regulations and policies Chairman Wheeler announced amount to “solutions in search of a problem,” as House Subcommittee Chairman Greg Walden stated.

Among those problematic “solutions” is Chairman Wheeler’s idea to potentially preempt state restrictions on the ability of cities and towns to offer broadband services to their communities. The idea to encourage localities to build their own networks was introduced as a way to “enhance competition.” Chairman Wheeler elaborated after the FCC’s open meeting on February 20 that “the operating hypothesis” regarding municipal networks “is that if local communities say they want more competition and want to work through their locally elected officials” to accomplish that, they should be allowed to do so.

The goal of increasing consumer choice in Internet access is a worthy one. However, the Commission’s “hypothesis” that local entities can achieve that goal has been proven wrong repeatedly. Government-owned systems have experienced widespread failure nationwide, and the localities have passed the cost of those shortcomings onto taxpayers. In contrast, the private sector has been the central source of impressive investment and efficient broadband deployment for years, and the Commission should not interfere with the healthy growth and evolution of technology and business models by favoring localities over private investors.

The most recent government-owned network that is in the news for falling short of expectations is Burlington, Vermont’s network, Burlington Telecom (BT). On February 3, Burlington Mayer Miro Weinberger said the city had reached a settlement with Citibank in its lawsuit over its loans on the financially ailing BT cable system. The BT system has been deteriorating for years. In 2011, the New Rules Project released a report, which found that “in little more than a year, Burlington Telecom went from being a hopeful star of the community fiber network movement to an albatross around its neck.” The report found that BT’s debt to the city’s cash pool reached $17 million by 2009, and BT’s management “grossly overspent even their own estimates,” with over half of all expenditures allocated to a nebulous “other charges” line item. These findings imply a lack of transparency, irresponsible spending, and potentially fraudulent use of funds.

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. 

Many local governments have encountered the same fate after investing heavily on money-losing municipal broadband projects. For example, 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. Starting in 2011, the towns owed over $7 million in annual debt payments for five years, which constituted one-fourth of the town’s operating budget each year. Utah’s UTOPIA network was built with the goal of achieving a positive cash flow in five years. Instead, the 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. According to a 2012 National Taxpayers’ Union report, EPB’s electric customers were responsible for financing a $160 million loan, its new Internet and cable television customers financing $29 million, and federal taxpayers financing another $111 million via the 2009 “stimulus” bill to build the network. By 2010, the network had incurred a combined $176.5 million in cumulative debt and experienced a downgrade in credit rating due to the “high degree of business risk and operating margins that are less predictable than the EPB’s traditional electric operations.” 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.

FSF President Randolph May concluded in a blog last year that the “common denominator” among these and other government-owned systems is this: “Because of almost universal cost overruns and less than projected demand for the services offered, taxpayers typically are left to bear the burden of the ensuing financial distress, either by providing direct subsidies from government coffers or by providing indirect subsidies through premium guarantees for bond offerings used to finance the projects.” Running a telecom network is a complicated, capital-intensive, and risk-laden venture that should be left to the private sector, unless private operators have not shown a willingness to provide service.

FSF scholar Seth Cooper also highlighted the problems with empowering local governments to directly compete with private broadband Internet providers in a February 26 Perspectives. He found that in addition to exposing local taxpayers to financial risk and wasting community resources, allowing governments to assume “a dual role as public authority and as competing business proprietor poses inherent conflicts-of-interest for local governments. Such conflicts lend themselves to abuses of government power.” He also found that FCC preemption of state safeguards on government-owned broadband projects to prevent such abuses may exceed FCC authority and violate constitutional federalism principles. As such, both legal and policy-driven analyses support leaving broadband network ownership and management to the private sector.

Luckily for Burlington, Mayor Weinberger seems to have chosen to divest the city from the telecom business. He stated that private investors have a better chance of competing successfully in the “highly competitive, quickly evolving and capital intensive” telecommunications business, and he is right.

Chairman Wheeler recognized in his recent statement that since 2009, nearly $250 billion in private capital has been invested in U.S. wired and wireless broadband networks. Telecommunications companies are leaders in domestic capital investments. AT&T and Verizon ranked in the top five “U.S. Investment Heroes of 2013,” together investing $34.5 billion last year. The telecommunications and cable sector was responsible for $50.5 billion of investment in 2013, comprising more than one-third of total capital investments in the U.S. economy. And since 1996, cable operators have invested over $200 billion into broadband infrastructure. Additionally, private sector investors — and not local taxpaying residents — bear the financial risks should private systems falter.

As Free State Foundation scholars have frequently discussed, broadband investment will continue to come from the private sector if the proper policies are promoted. The FCC should focus on policies to incentivize private investment and remove barriers to broadband build-out. However, government-operated networks are not the solution to promoting broadband deployment, as the widespread failure of these systems continues to prove.