FCC Preemption of State Municipal Broadband Restrictions is Legally Problematic and Bad for Taxpayers and Competition

Alden Abbott —  9 April 2015

By a 3-2 vote, the Federal Communications Commission (FCC) decided on February 26 to preempt state laws in North Carolina and Tennessee that bar municipally-owned broadband providers from providing services beyond their geographic boundaries.  This decision raises substantial legal issues and threatens economic harm to state taxpayers and consumers.

The narrow FCC majority rested its decision on its authority to remove broadband investment barriers, citing Section 706 of the Telecommunications Act of 1996.  Section 706 requires the FCC to encourage the deployment of broadband to all Americans by using “measures that promote competition in the local telecommunications market, or other regulating methods that remove barriers to infrastructure investment.”  As dissenting Commissioner Ajit Pai pointed out, however, Section 706 contains no specific language empowering it to preempt state laws, and the FCC’s action trenches upon the sovereign power of the states to control their subordinate governmental entities.  Moreover, it is far from clear that authorizing government-owned broadband companies to expand into new territories promotes competition or eliminates broadband investment barriers.  Indeed, the opposite is more likely to be the case.

Simply put, government-owned networks artificially displace market forces and are an affront to a reliance on free competition to provide the goods and services consumers demand – including broadband communications.  Government-owned networks use local taxpayer monies and federal grants (also taxpayer funded, of course) to compete unfairly with existing private sector providers.  Those taxpayer subsidies put privately funded networks at a competitive disadvantage, creating barriers to new private sector entry or expansion, as private businesses decide they cannot fairly compete against government-backed enterprises.  In turn, reduced private sector investment tends to diminish quality and effective consumer choice.

These conclusions are based on hard facts, not mere theory.  There is no evidence that municipal broadband is needed because “market failure” has deterred private sector provision of broadband – indeed, firms such as Verizon, AT&T, and Comcast spend many billions of dollars annually to maintain, upgrade, and expand their broadband networks.  Indeed, far more serious is the risk of “government failure.”  Municipal corporations, free from market discipline and accountability due to their public funding, may be expected to be bureaucratic, inefficient, and slow to react to changing market conditions.  Consistent with this observation, an economic study of government-operated municipal broadband networks reveals failures to achieve universal service in areas that they serve; lack of cost-benefit analysis that has caused costs to outweigh benefits; the inefficient use of scarce resources; the inability to cover costs; anticompetitive behavior fueled by unfair competitive advantages; the inefficient allocation of limited tax revenues that are denied to more essential public services; and the stifling of private firm innovation.  In a time of tight budget constraints, the waste of taxpayer funds and competitive harm stemming from municipal broadband activities is particularly unfortunate.  In short, real world evidence demonstrates that “[i]n a dynamic market such as broadband services, government ownership has proven to be an abject failure.”  What is required is not more government involvement, but, rather, fewer governmental constraints on private sector broadband activities.

Finally, what’s worse, the FCC’s decision has harmful constitutional overtones.  The Chattanooga, Tennessee and Wilson, North Carolina municipal broadband networks that requested FCC preemption impose troublesome speech limitations as conditions of service.  The utility that operates the Chattanooga network may “reject or remove any material residing on or transmitted to or through” the network that violates its “Accepted Use Policy.”  That Policy, among other things, prohibits using the network to send materials that are “threatening, abusive or hateful” or that offend “the privacy, publicity, or other personal rights of others.”  It also bars the posting of messages that are “intended to annoy or harass others.”  In a similar vein, the Wilson network bars transmission of materials that are “harassing, abusive, libelous or obscene” and “activities or actions intended to withhold or cloak any user’s identity or contact information.”  Content-based prohibitions of this type broadly restrict carriage of constitutionally protected speech and, thus, raise serious First Amendment questions.  Other municipal broadband systems may, of course, elect to adopt similarly questionable censorship-based policies.

In short, the FCC’s broadband preemption decision is likely to harm economic welfare and is highly problematic on legal grounds to boot.  The FCC should rescind that decision.  If it fails to do so, and if the courts do not strike the decision down, Congress should consider legislation to bar the FCC from meddling in state oversight of municipal broadband.

Alden Abbott

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I am a Senior Legal Fellow at the Heritage Foundation. I write on antitrust, domestic and international regulatory policy, and law and economics. I am an Adjunct Faculty Member at George Mason Law School.

One response to FCC Preemption of State Municipal Broadband Restrictions is Legally Problematic and Bad for Taxpayers and Competition

  1. 

    Mr. Abbott, I fear that, once again, there are deep flaws at the core of your argument. And I say that as a cable guy, myself, who fundamentally agrees that US ISPs have generally performed well — including having posted last year a detailed analysis demonstrating that US ISPs, in fact, have performed quite well in comparison to their foreign counterparts — as well as fundamentally sharing a skepticism that municipal ISPs are likely to do a substantially better job than private ISPs.

    On the other hand, I recognize the indisputable fact that there is, in most markets, a profound lack of effective competition. Competition in these markets (whether in the US, or elsewhere) is unquestionably sub-optimal, and anybody who fundamentally believes in the power of competition would expect that, however good US ISP services may be, they would probably significantly better still, if there were effective competition.

    I won’t address your assertion that the FCC overstepped its authority by superceding state laws restricting municipal ISPs. I don’t possess sufficient knowledge in this area to have an opinion one way or the other as to the legality of that action.

    However, the underlying arguments you make to argue that this action was bad policy, have some serious problems.

    First, you incorrectly distinguish that which is actually a fact-based argument, vs. that which is theoretically-driven (or ideologically-driven) argument. A non-theoretical, fact-based argument about the market effect of municipal broadband would look at multiple past examples of municipal broadband offerings (and preferably, a statistically significant number of examples), and use actual, observed data as to the performance of competing private ISPs, in comparison to the performance of private ISPs absent such competition, to draw empirical conclusions about the actual, observed effects of such competition.

    This is most certainly not what you are offering in your argument. Rather, you are offering a theoretically- and ideologically-based argument, with no empirical observations or data at all, to argue that municipal competition should be expected to have a deleterious on private ISP investment and performance. Stating that there is no evidence that there has been market failure that demands municipal broadband competition may be a factual claim, but it doesn’t render your argument that municipal broadband will harm the market factual. So far as what you have presented goes, that remains a theoretical assertion, supported only by what appears to be your ideological belief.

    And there is good reason to question the soundness of that theoretical assertion. For even while the risks of mismanagement you cite are probably reasonable, they are certainly not limited to public actors. Here in the US, we’ve had at least two private parties that have engaged in what would appear to be management decision-making similarly divorced/insulated from purely rational economic concerns, and effectively subsidizing service.

    For example, when Verizon decided to deploy FiOS, analysts and business school professors alike characterized it as a fundamentally uneconomic decision. It was the kind of decision management makes to protect management interests, vs. to act in the best interest of shareholders. Similarly, when Google embarked upon its Google Fiber project, it did so seemingly without concern for the potential of direct economic returns. Rather — and much like many municipal projects — Google seemed primarily concerned with creating pressure on existing ISPs in order to improve incumbent service levels, which they believed would ultimately benefit their other business ventures.

    From a competition standpoint, each of these would appear to behave much like the way you fear municipal ISPs will behave: competing on a basis that doesn’t conform to normal, rational, unsubsidized, purely-economic decision-making, so that they substantially undercut the economics of existing providers who compete with them.

    So what has the actual effect been in those markets where Verizon and Google compete? Have we seen incumbent ISPs shrink from investment, as you propose we should expect?

    Certainly not. In fact, quite the opposite. In these competitive areas — even under circumstances where one competitor is, arguably, competing “unfairly” because they are not driving their decision-making by purely economic decision-making and are effectively subsidizing service — we see more investment from incumbents, not less, with price and performance offered to consumers significantly better than in non-competitive areas.

    And conceptually, one might expect that an incumbent provider who anticipates new competition — perhaps especially such “unfair” competition — will actually be motivated to invest aggressively and improve performance, in order to cement its position and try to foreclose competition: precisely the opposite of what you suggest.

    Regardless, the bottom line is that your argument, as presented, is in fact absolutely a theoretical argument, based on your own set of beliefs. It is most-assuredly not a fact-based argument, derived of actual empirical observations of market behaviors in the face of municipal broadband competition.

    The final part of your argument, on the other hand, is simply fear-mongering. The suggestion that the FCC action raises constitutional concerns related to free speech rights, because some (or even all) municipal broadband providers have problematic acceptable use policies, makes as much sense as suggesting that the existence of public universities raises constitutional concerns, because many have codes of conduct that restrict expression in problematic ways.

    There may be a problem with such policies, but that problem is not existentially connected to either kind of public entity, and the fundamental problem (assuming we all agree, at least for the sake of argument, that it is a problem) would not be solved by eliminating these public institutions.

    In fact, anybody who is concerned about such issues knows that the problem is only worse with private institutions, for there is much less recourse. When a public university oversteps constitutional bounds in limiting expression, there is direct legal recourse. When a private university does the same thing, there’s very little recourse, because the same constitutional prohibitions simply don’t apply to private institutions.

    The same is true for ISPs. Virtually all private ISPs have potentially problematic, vague and overbroad acceptable use policies, very similar to those you cite for your municipal provider examples. For example, Comcast’s policy prohibits “posting, storing, transmitting or disseminating information, data or material which is libelous, obscene, unlawful, threatening or defamatory…” and specifies the standard for determining unlawfulness as merely that which “a reasonable person could deem to be unlawful.” Time Warner Cable prohibits the use of its service “to upload, post, transmit or otherwise make available any materials or content that violate or infringe on the rights or dignity of others” including “the ability to maintain…personal information as private; the ability to avoid hate speech; … harassing conduct; sexually oriented material that is offensive or inappropriate…”

    Run afoul of these private ISP use policies, and a consumer can expect to have little or no recourse.

    A subscriber to a municipal ISP, on the other hand, would have considerable potential recourse as a matter of law. Furthermore, as a practical matter, they will probably have a competing private alternative, to which they can switch.

    So while it may technically be correct that constitutional liberties are not threatened by private ISPs, since constitutional prohibitions don’t pertain to them, in practice, consumers are likely to enjoy much less protection for expression when they are serviced (solely) by private ISPs than they would be likely to enjoy with a municipal alternative.

    To suggest otherwise is simply misleading, and this is certainly not a reasonable basis on which to criticize the FCC action.