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By Ellie Smith
Aug. 1 — Many residents of Chattanooga, Tenn., a city of about 175,000 nestled in the Appalachian Mountain foothills, lacked a signature feature of modern American life just eight years ago: high-speed internet in their homes and businesses.
City authorities decided that if Chattanooga was going to have a solid high-speed network, it would have to build one itself.
Today, city residents have a municipal network that offers some of the fastest broadband internet service in the country for 80,000 homes and businesses within a 600-mile radius. But along the way, the city faced lawsuits. When it moved to expand its network in 2014, Chattanooga ran up against a Tennessee state law that does not let municipal electric utilities extend broadband services outside the footprint of their electricity serving areas.
A municipal broadband network in Wilson, N.C. ran into similar issues under its state law. Chattanooga and Wilson sought preemption of portions of their laws from the FCC, arguing the statutes were barriers to local demand for broadband. The agency agreed, and issued a 2015 order preempting portions of the two state statutes. Tennessee and North Carolina challenged the order in court and the matter is now before the U.S. Court of Appeals for the Sixth Circuit.
The winners and losers will come into sharper focus when the Sixth Circuit weighs in on whether the FCC has the authority to preempt Tennessee and North Carolina laws limiting municipal broadband networks. The court heard oral argument March 17.
The fight over the two broadband networks is just one front in a nation-wide policy war over whether local governments should be able to provide internet connectivity, or leave it for commercial internet service providers to do.
According to the FCC, 10 percent of Americans don't have access to fixed high-speed networks for internet service, mostly delivered via cable, fiber-optic or digital subscriber telephone lines. That number jumps to 39 percent of Americans in rural areas.
Local governments, supported by the FCC, say they should be able to build out broadband networks, especially in rural areas where commercial service is slow or non-existent.
About 490 cities offer some sort of public broadband, according to the Institute for Local Self-Reliance, a non-profit advocacy group that promotes community development.
Internet service providers have fought against local government efforts. Nineteen states, including Tennessee, have laws on the books limiting municipal broadband networks, according to the Institute for Local Self-Reliance. The question before the Sixth Circuit: How much authority do Tennessee and North Carolina have to restrict local broadband networks, and does the FCC have the power to overrule them?
“There’s considerable legal precedent around the ability of states to have unfettered authority on laws impacting municipalities,” Michael Santorelli, a director of the Advanced Communications Law and Policy Institute at New York Law School, told Bloomberg BNA.
Chattanooga’s municipally owned power provider, the Electric Power Board, in 2007 proposed installing smart meters in every home and business it served and connecting them via a fiber network. The city applied for a federal stimulus grant to help build the “smart grid.” Smart grids use sensors, advanced meters and other automation to improve electric service reliability and efficiency.
The EPB also proposed using excess capacity on the fiber network to provide broadband internet access service to each of those connected homes and businesses. Between 2009 and 2010, using utility capital funds and a $111.6 million federal stimulus grant, Chattanooga built out its smart grid and the underlying fiber network, and issued bonds to fund additional infrastructure needed to deploy broadband services over the network. The city spent a total of $330 million to prepare the networks.
EPB launched a bundle of television, high-speed data, and telephone service in 2010 in competition with Comcast Corp. and AT&T, Inc. and has increased the top speed of its data service from 150 megabits per second at launch to 10 gigabits per second today.
Then-mayor Ron Littlefield thought that his town was only the first to provide what would soon be seen as another expected local utility service, like electricity or water.
“I felt like the mayor of the first city to have fire,” Littlefield told Bloomberg BNA.
But Chattanooga faced legal challenges along the way. The Tennessee Cable and Telecommunications Association (TCTA), a trade organization of cable TV system operators throughout the state, challenged EPB’s plan in a complaint that alleged that the EPB unlawfully used municipal funds to subsidize its cable/internet network. Comcast followed with an essentially identical suit soon after.
“The prohibition on cross-subsidization and the requirement of cost allocation promote fair competition and also protect electric rate-paying customers,” Comcast said in its complaint against EPB in the Chancery Court of Tennessee, Hamilton County in 2008.
Because Comcast's suit was so similar, however, the court dismissed it pending resolution of TCTA's complaint ( Comcast of South v. Electric Power Bd., No. 08-0291 (Tenn. Ct. App. 2009)).
The trial court dismissed the TCTA case in 2008 for lack of jurisdiction because, among other things, the alleged violation didn’t occur in the county where the suit was filed. TCTA appealed, and in August 2009, the Tennessee Court of Appeals upheld the trial court's dismissal of the TCTA case ( Tenn. Cable Telecomms. Ass'n v. Electric Power Bd., 2009 BL 184590 (Tenn. Ct. App. 2009)).
Chattanooga isn't the only city that has successfully built a municipal broadband network. Hundreds of other municipalities have as well, including Lafayette, La., where LUSFiber, the city's broadband service, was officially installed in homes in 2009 and is now passes homes and businesses with more than 800 miles of fiber-optic cable, according to the network's website.
But local government broadband efforts have sometimes failed because funding a network is too expensive or operations proved too complicated for a city agency to handle. Local governments have suffered when they push forward with plans for community broadband networks without considering ways to finance them, Santorelli told Bloomberg BNA. State lawmakers use examples of such failures as reason to block city-owned networks.
“What we’ve seen in our research is that municipalities go in looking at only potential benefits and not considering costs, so they don’t have enough scenarios in mind of things that may not go well,” Santorelli said.
Some states’ laws are meant to protect municipalities from financial risks: Florida enacted a law that requires municipalities to create budget plans before installing municipal networks, so they “go in eyes wide open,” Santorelli said.
Some cities, such as Chattanooga, have extended broadband to their citizens without hurting city finances. Other towns have joined with utility cooperatives to distribute broadband. Kevin Short, the general manager of Anza Electric Cooperative in southern California, told Bloomberg BNA that his electric cooperative is part of a larger network of electric cooperatives, the Golden State Power Cooperative, which has given Anza a support system for community broadband in rural areas, including help in obtaining grants.
The Anza cooperative received a California advanced service fund grant from the public utilities commission for 60 percent of the cost to build a public network, Short said.
Some states have passed laws to limit the ability of local governments to extend broadband services outside of their prescribed electric footprints or to guarantee their ability to invest.
In Tennessee, a municipality can only offer broadband within its electrical service area. Under North Carolina's law, utilities are only allowed to sell broadband to other communities within the same county.
Other states have enacted laws requiring cities to fulfill certain requirements before installing a municipally owned network. Many of them require public involvement to demonstrate the community's interest in a publicly owned network. For example, Minnesota requires a super majority referendum to own or operate a network, according to the state's statute. In Florida, municipalities must achieve broadband services profitability within four years.
Only a few states, including Nebraska, have laws that outright ban municipalities from creating broadband networks.
The U.S. Court of Appeals for the Sixth Circuit will soon weigh in on how much clout the FCC has in this fight.
The FCC's 2015 order preempted portions of a Tennessee law forbidding municipalities from providing broadband service to territories not within their municipal electric utility territory and portions of a North Carolina law preventing cities from going into debt to build and operate broadband networks (2015 TLN 20, 4/1/15).
“Communities across the nation, including these two petitioners, understand that access to fast, fair and open broadband networks is key to their economic future,” FCC Chairman Tom Wheeler said in a press release when the commission issued its order.
The FCC relied on its authority under Section 706 of the Telecommunications Act of 1996 to support its reasoning in the order. That section directs the commission to promote the deployment of advanced telecommunications capabilities in a reasonable and timely fashion. The commission has often relied on that section as a broad grant of authority by Congress to achieve its broadband policy goals.
Before the FCC acted, it heard from hundreds of people, nonprofit organizations, companies and government organizations across the country that filed comments with the agency on both sides of the debate.
South Carolina Gov. Nikki Haley (R) filed a comment “reminding” the FCC of South Carolina's law limiting municipal broadband, and said it would be improper for the commission to “strike down or usurp” states' laws.
Other governments and government officials from across the country filed comments on the other side: Paul Kronberger, the chief information officer for the City of Madison, Wisc., filed a comment that said the city “strongly supports” the FCC's order to preempt state laws, because community-owned broadband networks provide “countless benefits to their communities.”
AT&T filed a comment arguing that allowing municipal broadband networks would “discourage private sector investment because of understandable concerns by private sector entities of a non-level playing field.”
Tennessee filed suit seeking to block the FCC in March 2015 ( Tennessee v. FCC, 6th Cir., No. 15-03291, oral argument heard 3/17/16 ). North Carolina followed soon after with a lawsuit of its own ( North Carolina v. FCC, 6th Cir., No. 15-03555, oral argument heard 3/17/16 ). The cases were consolidated in the Sixth Circuit.
The FCC's brief in the case said that the internet “is the dominant communications medium of our time, as well as an infrastructure vital for the success of both urban and rural communities.” It is also a “channel of interstate commerce,” and in Section 706, “Congress directed the Federal Communications Commission to ensure that `all' Americans have access to broadband Internet communications by removing barriers to broadband infrastructure investment and competition,” the agency argued.
The two state statutes at issue “implement state preferences regarding the competitive market in broadband—an area in which federal policy may preempt state law—rather than acting as traditional state control over political subdivisions,” according to the FCC.
The FCC's intervention in the relationship between states and municipalities is “unprecedented” and remains hotly contested, Santorelli said.
“It is a very unique animal, given that the FCC is trying to come in and undo what a state has already done,” Santorelli said. “In my view, it’s more of a constitutional issue than a regulatory issue.”
The impending court decision on the FCC's ability to preempt state laws will not make or break communities’ plans to build and operate municipal broadband networks, but it is a test of the commission’s reach in influencing communications policy debates under existing law, legal analysts told Bloomberg BNA.
The states argued that the FCC’s move violates state sovereignty, but the FCC said it has authority under Section 706 to preempt state laws related to broadband deployment. Section 706 gives the FCC the ability to regulate broadband networks.
That argument doesn't sit well with state regulators: The FCC cannot come between a state legislature and municipalities within that state, not only on matters related to broadband, but on any other issues, Chris Nelson, the chairman of the telecommunications committee for the National Association of Regulatory Utility Commissioners, which intervened in the case on the side of Tennessee, told Bloomberg BNA.
“A municipality is a clearly defined subdivision of a state, and the state legislature should be able to craft the rules that the municipalities will operate under,” Nelson said. “In the states where municipal broadband is a concern, it needs to be a political issue for the voters.”
“The FCC has unlawfully inserted itself between the State of Tennessee and the State’s own political subdivisions,” Tennessee argued in its petition.
Regardless of what the Sixth Circuit decides, legal analysts say the cases could wind up before the U.S. Supreme Court.
“This legal case is a federalist issue,” Lawrence J. Spiwak, the President of the Phoenix Center for Advanced Legal & Economic Public Policy Studies, told Bloomberg BNA. “Depending on what the Sixth Circuit says, it could go to the Supreme Court.”
Some states are trying to find a middle ground on the issue, including by fostering private-public partnerships to build broadband networks.
Maine and Rhode Island, which do not have laws limiting municipalities' abilities to launch broadband networks, have come out with plans for supporting broadband throughout their states.
North Carolina is trying to spur partnerships between municipalities and internet service providers to extend broadband to underserved areas in the state.
State lawmakers asked the North Carolina Department of Information Technology to create broadband guidelines after backlash from citizens opposed to the state law limiting municipal broadband.
North Carolina Gov. Pat McCrory (R) and the state’s Department of Information Technology released a plan June 21 to ensure all households in the state have access to broadband by 2021. The plan, which includes a set of recommendations, does not advocate for municipal broadband networks but points out that a majority of respondents in a survey about broadband said the state law was their main barrier in broadband deployment.
Tennessee released a similar plan July 19 that sets up a recommended broadband strategy framework.
The North Carolina plan includes a one-touch policy for utility poles to make it easier to attach equipment owned by other companies and a dig-once policy. One-touch policies allow a single construction crew to complete all the work to make a pole ready for broadband attachments, which reduces costs for companies to attach wires to poles. Dig-once policies require the state's transportation department to speed up installation of fiber along states' rights of way.
Republican FCC commissioners have said they support North Carolina’s plans for a one-touch pole policy, something the commission has generally supported.
“That way you get a lot more broadband bang for the buck when it comes to consumer experience,” Commissioner Ajit Pai said.
The plan also recommends that the state create a small grant program for technology companies to experiment with solutions to low rates of broadband adoption, and that all public schools have Wi-Fi access by 2021.
Jeff Sural, the director of North Carolina’s broadband infrastructure office, told Bloomberg BNA that the plan does not prevent municipalities from developing community-owned broadband networks, but does recommend they partner with private sector ISPs.
“Those types of internet services know how to run an internet business better,” Sural said. “Municipalities or communities that have an interest in enhanced deployment for their citizens could reduce risk on the business side and leave it to someone in the market of providing internet service.”
As the debate continues, Chattanooga residents still have a municipal network that offers some of the fastest broadband in the U.S. The Chattanooga municipal network reaches 80,000 homes and businesses within a 600-mile radius.
Danna Bailey, the Electric Power Board’s Vice President of Corporate Communications, said access to broadband is as important as access to electricity was in the 1930’s — a necessary utility service for the city.
Because the Tennessee law keeps municipalities from extending broadband networks outside of their electric territories, some residents in rural areas surrounding Chattanooga still don’t have access to broadband. Bailey said that the city and the EPB will fight to extend access to its network into those areas.
“We think we should be able to do whatever it takes for Tennesseans and Americans to have access to 21st century infrastructure,” Bailey said.
— With assistance from Lydia Beyoud, Alexis Kramer, Tim McElgunn and Tommy Shen
To contact the reporter on this story: Ellie Smith in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Keith Perine at email@example.com
Text of the FCC order is available here: http://src.bna.com/hc3.
The FCC's brief is available at http://www.bloomberglaw.com/public/document/State_of_TN_v_FCC_et_al_Docket_No_1503291_6th_Cir_Mar_20_2015_Cou/4
Tennessee's petition is available at http://www.bloomberglaw.com/public/document/State_of_TN_v_FCC_et_al_Docket_No_1503291_6th_Cir_Mar_20_2015_Cou/3
An interactive North Carolina map is at https://gimperion.github.io/ecfs_munibb/proc14-115.html.
An interactive Tennessee map is at https://gimperion.github.io/ecfs_munibb/proc14-116.html.
A description of the map methodology is at https://gimperion.github.io/ecfs_munibb/.
Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.
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