Preempting State Law Is a Slippery Path

On February 2, 2015, Federal Communications Commission (FCC) Chairman Tom Wheeler released a statement supporting the petitions from Chattanooga, Tennessee and Wilson, North Carolina requesting federal preemption of state laws that restrict municipal broadband networks.

The Chairman’s statement should come as no surprise for those who have been following his misadventures in expanding federal control over the telecommunications industry.  His support for preempting state laws is part of a grand plan to turn broadband into a heavily regulated public utility, which will increase costs to taxpayers and create disincentives for private-sector investments.  

Nineteen states have enacted laws to protect the legal subdivisions within their state borders from making costly mistakes by building broadband networks that they are often ill-equipped to either manage or maintain.  The laws include requiring taxpayer referendums or mandates, evidence that the system can be self-sustaining, and complete prohibitions on telecommunications services if a private company or companies already provides broadband services.

Municipal broadband networks often fall short of their objectives and leave taxpayers holding the bag for large amounts of debt.  For instance, in July 2004, Provo, Utah, began a build-out of its fiber-optic network, known as iProvo, to be operated as a publicly-run utility.  The city borrowed $39 million to build iProvo, with plans to repay the debt through a $5.35 tax, known as a “telcom debt charge,” on the monthly utility bills of city residents.  By 2008, iProvo had already posted $8 million in losses, not including the money borrowed to launch the project.

On April 18, 2013, the city announced an agreement to sell iProvo to Google as part of an agreement to bring Google Fiber to the city.  Google paid $1 for iProvo in addition to the costs for further fiber build-out to the community.  Google Fiber is expanding the existing network and in October 2013, began accepting early registrations from residential subscribers already on the iProvo network.  In January 2014, Google Fiber became available to former subscribers to iProvo, yet the debt owed by the city for the initial iProvo build-out remains. 

As noted by Tom Schatz and Utah Taxpayer Association Vice President Royce Van Tassell, a consortium of 11 municipalities in Utah decided to finance the build-out of another fiber optic network called Utopia, in 2004, using a $185 million bond.  In 2006, the system received a $66 million loan from the Rural Utilities Service (RUS).  Within two years, all but $21 million of the RUS loan was suspended by the Department of Agriculture based on the need for the consortium to improve its financial situation and develop a new business plan.  As noted by Schatz and Van Tassell, “Its failure to attract the anticipated number of customers has caused a spectacular financial failure.  Utopia has lost at least $3 million and as much as $13 million annually.”

While these projects may have seemed like good ideas at the time, they stand as examples of the high cost taxpayers must bear when governments decide to get into the business of providing broadband service.  In fact, Utah is one of the states that impose some restrictions on municipal broadband networks, yet even with the restrictions imposed by the state law, these municipal broadband systems were still built.

Chattanooga, Tennessee, one of the two cities petitioning to have their state restrictions lifted by the federal government, was among the first cities to offer one Gbps broadband service, as well as instituting “smart metering” services for businesses.  However, the city required a one-time federal infusion of $110 million in order to build its fiber system, with debt for the system not expected to be repaid until 2020.

As noted by an August 6, 2014 review by Phoenix Center for Advanced Legal and Economic Policy Studies President Lawrence Spiwak, the FCC likely does not have the statutory authority to preempt these state laws.  The Supreme Court held in Nixon v. Missouri Municipal League (541 U.S. 125) that the Telecommunications Act of 1996 does not permit the FCC to overrule state laws regulating how municipal governments engage in telecommunications services.  Indeed, the court held that “The class of entities contemplated by §253 does not include the State’s own subdivisions, so as to effect the power of States and localities to restrict their own (or their political inferiors’) delivery of telecommunications services.”

Chairman Wheeler’s usurpation of state law will lead the federal government down a very slippery path.  The decision to engage in municipal broadband expenditures is something each state should decide in concert with its localities, without interference from the FCC or anyone else in Washington, D.C.