On March 12, 2015, the Federal Communications Commission released the text of its order preempting provisions of North Carolina and Tennessee law that allow municipalities to provide broadband service but otherwise limit the geographic area they may serve and impose other conditions on their operations. As previously explained in our summary of the Commission’s press release and statements announcing the decision, the Commission relied on Section 706 of the Communications Act in holding that once a state authorizes municipalities to provide broadband, the state cannot limit their service areas. Although the decision is technically limited to preemption of the challenged laws in these two states, the Commission’s broad analysis calls into question similar or related provisions in 17 other states.

Legal Justification

Twice before the Commission has concluded that it does not have power under Section 253 of the Act to preempt state laws imposing outright bans on municipal telecommunications systems. In each instance, the reasoning was the same – Section 253 does not contain a “clear statement” of Congressional intent to disrupt the state’s inherent power to determine the extent of local governmental powers. Unlike Section 706, Section 253 explicitly allows federal preemption of both state and local laws that prohibit telecommunications competition, but in the earlier cases, both the Commission and the Supreme Court found that Section 253 is not a “clear statement” of congressional intent to interfere with a state’s control of its political subdivisions.

In affirming the Commission’s rationale in Missouri Municipal League v. Nixon, the Supreme Court confirmed the legal “assumption that federal legislation threatening to trench on the States’ arrangements for conducting their own governments should be treated with great skepticism, and read in a way that preserves a State’s chosen disposition of its own power.” Notably, three of the former FCC Commissioners who voted against preemption of the Missouri law voiced their strong opinion that municipal broadband would be good as a policy matter, but they had no power to preempt it under the prevailing Supreme Court standards. The current Commission spends much of the order explaining how important municipal provision of broadband is to further the goals of Section 706 of advanced telecommunications infrastructure investment and competition.

The only vestige of these prior decisions that survives in the Commission’s new order is the principle that the FCC may not preempt a state law that completely bans municipal provision of telecommunications or broadband service – the precise situation in the earlier cases that rejected preemption. But now, once a state allows municipal provision of telecommunications or broadband service, the Commission deems that municipality’s activities to be part of interstate commerce. As a consequence, the Commission concludes, the “clear statement” rule simply does not apply because “the issue before us concerns federal oversight of interstate commerce . . . not the inherent structure of state government itself.”

The Commission finds it has the power to preempt these state laws because it considers them to be “communications policy regulations, as opposed to a core state function in controlling political subdivisions.” Thus, if state law limits on the power of local governments can be characterized as “communications policy regulations” which interfere with investment in telecommunications infrastructure or competition, the FCC finds that it is free to preempt those laws under Section 706.

The Commission’s reasoning goes beyond known precedent on the authority of a federal agency to preempt state laws. Given the implications of the Commission’s decision, it is sure to be challenged in court.

Specific Laws Preempted

Although the Commission emphasizes that its order preempts only the provisions of these two state laws, it seems likely that similar laws in other states would be preempted absent some strong differentiating factor. 

The Chattanooga petition asked the FCC to preempt only a phrase in Tennessee law that authorized municipal broadband operation only “within its service area.” The Tennessee legislature has considered and rejected a series of bills in recent sessions that would have removed the geographic service limitation. The Commission took the issue out of the state’s hands, and granted Chattanooga’s request on grounds that the limitation stood as a barrier to the Chattanooga system’s further investment in the provision of broadband outside of its existing electric service area and as an obstacle to competition. 

In contrast, Wilson, North Carolina asked the FCC to preempt every section of a North Carolina law that allows municipal provision of broadband service subject to a number of conditions. The Commission did not strike down the entire statute, but preempted various subsections which it found to constitute barriers to infrastructure investment and broadband competition.

Among the provisions it preempted were a group the Commission referred to as “measures that raise economic costs.” These included a limit on the territory the municipality could serve; payments required “in lieu of taxes” to approximate those paid by private operators; and the imputation of capital costs, taxes, and other government fees a private company would incur in the same locality. The Commission also preempted a provision that prohibits municipalities from pricing service below cost – a concept well established in antitrust law governing private parties.

Within this category, the FCC further preempted a provision of North Carolina law that required the municipal system to impute to its own financial accounts the same pole attachment fees it charges to private operators for access to municipal utility poles. The Commission also preempted a second set of provisions of North Carolina law that it categorized as “level playing field” obligations. These included a prohibition on municipal cross-subsidization of the service with revenue from other sources – a common element in similar laws in other states. The Commission similarly struck down a provision giving private competitors nondiscriminatory access to utility poles, conduits and rights of way owned or used by the municipal utility, and a provision that gave the state public utility commission oversight of the municipal system’s operations.

Finally, the FCC preempted a set of measures in the North Carolina law it labelled “measures to impose delay.” This set of provisions addressed the processes required by the state for municipal entry into the broadband market, such as making public any feasibility study, business plan, or public survey of the proposal. Also preempted was a provision that required public hearings to assess whether the municipality should enter the business. The Commission even struck down a requirement for voter approval – one of the most fundamental tools of democracy – before the municipality can obtain new debt to pay for construction of a municipal communications system. The Commission concluded all of these provisions of North Carolina law constituted barriers to broadband investment and competition, and preempted them under Section 706.

If the decision survives, municipal broadband systems in North Carolina will appear to enjoy numerous cost advantages by virtue of their electric utility and government status, have the power to drive up the costs of private competitors, and be free to undercut private competitors with subsidized, below cost rates. Indeed, according to the Commission, municipal systems may not be held to nondiscrimination requirements or PUC oversight as a condition of state authority to provide competitive broadband service.

The Commission’s approach to municipal broadband also diverges from its decision in the Open Internet Order , where it encouraged private investment in broadband by extending pole attachment rights under Section 224 of the Communications Act to entities that provide broadband services only (e.g. Google Fiber), which previously were not “telecommunications carriers” qualified for protection under the Act. Those federal pole attachment rights do not cover municipal broadband systems. Yet the FCC ruled that North Carolina’s effort to address the federal gap by assuring private service providers nondiscriminatory access to municipal utility poles creates a barrier to investment and competition.

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The provisions in Tennessee and North Carolina law that the FCC preempted are not unique to those states: similar provisions exist in the laws of many other states. The Commission’s willingness to characterize these state law limits on municipal broadband systems, including requirements for public participation and voter approval, as “communications policy” rather than core government functions poses a threat to any number of state laws regulating municipal communications activities. Indeed, taken to its logical conclusion, the Commission’s Order may present grounds for private companies to use Section 706 to challenge state and local laws imposing fees or other “measures that raise economic costs” and thereby impede investment in infrastructure and competition. We will advise of key future developments and the ensuing litigation.