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Explaining the FCC Muni Order Removing State Barriers - Community Broadband Bits Episode 143
After anticipating this moment for many months, we have a ruling from the FCC that has restored local authority to build and expand networks in North Carolina and Tennessee. Though we have already pulled out the key passages for readers, we wanted to discuss the decision with Jim Baller of Baller, Herbst, Stokes, & Lide.
Jim worked with Wilson and Chattanooga in crafting their petitions and sat down with me last week at the Iowa Association of Municipal Utilities Broadband Conference in Des Moines last week. We went over the key issues in the ruling, including why the FCC had authority to take action, how the state laws limited investment in advanced Internet networks, the impact of the ruling, and what comes next. See our other podcasts with Jim as well as articles that we tagged him in here.
Read the FCC's Memorandum and Order here [pdf].
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Thanks to Persson for the music, licensed using Creative Commons. The song is "Blues walk."
Jim Baller: So, this record, in and of itself, is the most comprehensive statement on the state of municipal broadband that I've ever seen.
Lisa Gonzalez: Hello. This is the Community Broadband Bits Podcast, from the Institute for Local Self-Reliance. I'm Lisa Gonzalez.
On February 26th, the FCC, headed up by Chairman Tom Wheeler, made history. They struck down some provisions by Tennessee and North Carolina law that restrict municipal broadband efforts. Attorney Jim Baller has been working on telecom issues for over 20 years. He and his firm worked with Chattanooga and Wilson to file their petitions that eventually led to this pivotal moment. Jim has been with us before. And this time, he and Chris dig deep into the laws that were in place, the barriers they created, and the way the FCC analyzed the situation. Consider this a companion to the opinion and order. You can -- and should -- read the opinion and order yourself. But this conversation will help provide an extra dimension that you can't get elsewhere.
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Now, here's Chris, interviewing Jim Baller, from Baller, Herbst, Stokes, & Lide.
Chris Mitchell: Welcome to another edition of the Community Broadband Bits Podcast, live edition, coming to you from Des Moines, with Jim Baller. Welcome to the show.
Jim Baller: Thank you, Chris. I'm glad to be here.
Chris: You've been on with us previously, addressing the history of municipal networks. And here we are today. We're at the Iowa Association of Municipal Utilities. And since we're in the same room, I wanted to interview you about how you have just made history.
Jim: Well, lots of people contributed to that -- including yourself. You've made a yeoman contribution to get us to where we are today.
Chris: Thanks. You know, anyone who's listening to this show, if it's their first show, welcome. Otherwise, they already know what's going on. But maybe you can just refresh us. We're going to talk about the FCC petitions from Chattanooga and Wilson. You worked with them as their attorney on the matter. What was the reason that they brought these petitions forward to the FCC?
Jim: Both Chattanooga and Wilson, like many other communities across the country, are very interested in providing their citizens and businesses and institutions the very best broadband connectivity to the Internet that they can. In the case of both Wilson and EPB, of Chattanooga, state laws prevented them from serving businesses and residents very near to their current communications footprint. They brought these petitions to ask the Commission to remove the state barriers that prevented them from meeting demand right outside their current territories.
Chris: One of the things that I think is just really important to note on the outset is that, when it comes to expanding Internet access, it's really great to see cities like Wilson and Chattanooga saying, we want to share this with the world, rather than saying, hey, screw you, neighbors, if you want to have good jobs, you're going to have to come and move across the city borders and into our city. And I just -- I think it's worth noting -- I mean, we're not going to dwell on it, but -- cities that are willing to cooperate in this way really should be rewarded and thanked, for having a broader vision for how we can all succeed as a country, rather than narrowly, as just a little region. So, the question for you is, now, how did it go? We just had this great vote at the FCC. And we're going to dig into it. But tell us what the FCC said, in brief.
Jim: Well, the FCC agreed with us. And it preempted the state laws in question. So, there are now no more constraints on EPB in Tennessee, and other municipal utilities in Tennessee, and on Wilson, North Carolina, and other municipalities in North Carolina, on going forward. Communities can now evaluate their opportunities and decide what to do, without the artificial constraints imposed by these barriers.
Chris: And when you say, "now," you mean now! We're not waiting on anything.
Jim: The orders were effective on issuance. So, as of last Thursday, the laws in North Carolina and Tennessee are preempted. Now, there may well be appeals of these decisions by the FCC. But, at the moment, the orders are in effect, and the state laws are preempted.
Chris: Right. I just wanted to make sure that people were aware that we're not waiting on the Federal Register. One of the biggest questions that people have been asking is, why does the FCC have the authority to do this? And I'm wondering what you learned from the opinion, in terms of they see their authority.
Jim: Well, in the opinion, the FCC confirmed that Section 706 of the Telecommunications Act of 1996 authorizes them to remove barriers to broadband investment. In fact, Section 706 REQUIRES them to remove barriers to broadband investment and competition. It says that the FCC must be proactive in identifying where such barriers exist. And if they ever find that there are impediments to the reasonable and timely deployment of advanced communications capabilities, they MUST remove those barriers. The FCC found that that was clear authority for them to remove the Tennessee and North Carolina laws in question.
Chris: Now, I think, if people really want to dig into this, they can do it on their own. And maybe we'll come back to it in a future show. But there's a question that people often have. Which is, what about Nixon v. Missouri? What about these other issues? I'm just -- I'm curious if, in brief, you can address how the FCC has that authority, when, in other cases in the past -- in other sections of the Act -- it may not have.
Jim: This case is different from other cases in many different ways. But one of the most important is that the FCC dived very deeply into what these laws actually do, what they say, whose benefit they were written for, how they were enacted. And they decided that, first of all, that these laws were plain, ordinary commercial measures, designed to protect the markets of communications carriers. To that extent, it decided that the high standards of judicial review for matters that are geared toward addressing the relationship between states and their local governments don't apply. So, the FCC made that distinction, to begin with.
Second, the FCC said that it was clear from the face of Section 706 that the FCC had authority, and, in fact, was required to remove these barriers. I read that as, the FCC saying that, even if the standards that were applied in the Nixon case, and other cases on which it relied, were applied here, the same result would obtain.
Chris: So, when the FCC took this deep dive -- let's start with Tennessee -- what did it find with regard to how the Tennessee law -- which you can start by describing -- how did that slow broadband deployment?
Jim: The provision that we challenged were four words in the law, that allowed the municipalities to provide cable and broadband Internet service. The words were that they could do so only "in their service territory." The law had previously recognized the right of municipalities to provide telecommunications services throughout the state. So this is effectively a restriction that only addressed broadband Internet service and cable service.
Chris: So, the state law literally allowed these cities to build telephone networks anywhere. The same fiber infrastructure. But it did not allow them to expand Internet access or cable services anywhere.
Jim: I'd say that it recognized their existing rights. Now, Chattanooga had home-rule authority, which meant that it could provide any services that it wanted, anywhere, before -- and it had that authority long before these laws were enacted. And so, what the laws effectively did was to restrict laws that Chattanooga would have had in the absence of these laws. So, what the laws did was recognize that municipalities have a right to provide telecommunications services throughout the state. It then recognized that they have a right to provide broadband and cable service. But then it restricted that right to the current service territory.
Chris: Um hum.
Jim: And so, what EBP did was to say, remove the restriction on the current service territory, so that they could evaluate the opportunity to offer service outside of their current electric footprint.
Chris: And in Wilson, it was as significantly different approach. Wilson had a series of laws that was passed. There was bill HB 129, how people still recognize it from 2011. And -- what I really enjoyed -- I think the word "thicket" came up a number of times, in terms of how these laws interrelated. Maybe you can unpack that for us.
Jim: Now, Wilson operates a municipal electric utility in six counties in North Carolina. And under the law, as passed in 2011, it was constrained to provide service only in Wilson County, and not in the other five counties in which it already has municipal plant. Now, the law enacted in 2011 is a law that deceptively was described as advancing fair competition and a level playing field for the private sector. Significantly, the FCC took a look at every line and word of the law, and found that the law is, in fact, prohibitive. Certainly with all of the provisions working together, they create a massive wall, over which no public entity could get over, and no private entity, in fact, was complying with. The FCC repeatedly found that the constraints that were in this law operated in a one-way fashion, and achieved an asymmetrically heavy burden on municipalities, that the private sector did not have to meet.
Chris: One of the things that I found interesting was that the FCC looked a that and said, North Carolina, you have expressly authorized municipalities to build and operate these networks. But then you've decided to go further, and decide the conditions under which public entities and private entities can offer these -- can offer this interstate service -- which means it's an issue that brings up the Commerce Act explicitly. And the FCC -- the way I read it -- said, you don't get to regulate interstate commerce. That's our job.
Jim: That's exactly right, Chris. And there's good precedent for that kind of determination. There are years of cases saying that when there is local authority to provide certain services, or do certain things, a state cannot impose restrictions that are contrary to federal law or policy on those, once those rights are granted.
Chris: The result is that in North Carolina, every city is no longer burdened by the HB 129 provisions. And in Tennessee, the electric cities are able to offer services anywhere in the state. But the FCC has chosen not to answer the question of whether it could force Tennessee to allow EVERY community to be able to offer Internet access.
Jim: Two points in response to that. First of all, the FCC did not remove the legislation of 2011 in its entirety. It did find that there are some measures there that were not barriers, and it upheld those. So, a community would have to meet those specific provisions. In addition, as we showed in the proceeding, in the absence of the legislation of 2011, municipalities would have to comply with the whole range of existing laws. They would still have to do that. Nothing is changed in that respect.
The Commission did not say that it does not have authority to preempt complete barriers. It said that that was not before it in this matter. And so, that's a carol for another Christmas. If and when a petition arises that is based on the assertion that the state has completely prohibited communications projects by municipalities, the FCC will analyze that case. That was not this case, because both petitioners did have authority before the restrictions were imposed on it. So, with those qualifications, yes, communities can move forward without having to comply with the rest of the provisions of the 2011 legislation that the FCC removed.
Chris: One of the things that I found really interesting was that the FCC seems to provide a roadmap for other states, in this opinion -- in a variety of ways. What did you find in reading it?
Jim: Well, first of all, the FCC specifically, in one of its paragraphs, invited entities in other states that believe that they were constrained by state laws to petition the FCC for a review of those laws. The FCC is very much interested in looking at other state laws that might be posing similar constraints.
Second, this is a very carefully thought out decision. The FCC looked at lots of things, and one who reads the opinion very carefully can see in there a framework for analysis. And that framework will help others to look at their state laws and see what the impact of those laws are.
The North Carolina law, in particular, in this regard, is important, because the FCC -- as I've said a few moments ago -- looked at it very carefully. In fact, there are significant elements in the laws of a number of other states that are similar to the provisions of the North Carolina law. And for anyone who has those similar provisions, they should read the opinion very carefully.
Chris: And they should not be at all intimidated. The opinion is very readable. There's all kinds of places that, if you're interested in what they have to say, they have footnotes. It's -- I've read a number of these documents over the years, and I felt like this one was particularly accessible, for anyone who really wants to get a sense of why each individual aspect of the North Carolina law failed, with regard to the FCC's tests, in terms of being an appropriate tool. So, I would just -- I would give a heavy pitch to people to check it out. It looks long. But that's because there's a ton of footnotes. It's very readable. Check it out.
Jim: Let me also add, it's long in another respect, as well. This was a conversation, so to speak, in which hundreds of comments were filed by all sorts of interested parties, ranging from those who focused on the Constitutional issues, to those who criticized municipalities that provide services, for philosophical reasons, that alleged that municipalities have unfair advantages, that they either do too good a job or do too bad a job ...
Chris: Or both at the same time!
Jim: Right. All of this was aired in this proceeding. And there were hundreds of comments filed on those issues. And the FCC looked at each and every one of those claims, and found that they were not supported by substantial evidence, or were irrelevant in some respects. So this record, in and of itself, is the most comprehensive statement on the state of municipal broadband that I've ever seen written. And I hope that our conversation about the value of municipal broadband and local choice to America withstands whatever happens in the court process. That people are actually looking realistically to the great benefits to some communities that projects of this kind can offer, and what the public and private sectors can do working together, if we ever get over quarreling with one another, and turn to how the public and private sectors can work together successfully. I hope this record will be part of the process that gets us to that point of cooperation.
Chris: One of the particulars in that, I found interesting, was that, there's long been this allegation that local governments have this unfair ability to regulate and punish their rivals in the market. And the FCC wrestled with that and said, we found no evidence in the record. And it's one of those issues where it's really easy for someone to say, well, it's just not fair for cities to do this. But, given months -- and even, previously, years -- of time to compile ANY evidence, there was NO party that was able to enter into the record any evidence that a local government has engaged in those behaviors.
Jim: Let's step back from that a minute and ask how that regulation would happen. First of all, telecommunications services are regulated at the federal and state level, not at the local level. Broadband Internet is pretty much not regulated anywhere -- at the federal, state, or local level. Cable franchising is, in many states, done at the state level. Where it is done at the local level, it's tightly constrained by federal and state requirements. Right-of-way access is subject to non-discrimination requirements. So, where's the regulation? Even if there were a desire to regulate, there's no authority to regulate, in most instances.
Chris: Right. And, actually, I made a comment recently at a city council meeting, in front of the city attorney, in which I said, cities tend not to do things that are illegal. [laughs] To which he said, yes, because of me. And it's just worth noting that -- I must want to bring that up. But, fundamentally, what you were saying is that if we ever deal with this again -- if you're in California and you hear someone making this accusation, you can say, look, the FCC examined this. It went through this process. And there's no record that they could find of this being an issue anywhere.
Jim: Right. Let me add that one of the most satisfying parts of this decision, for me, is how the FCC dealt with the issue of phantom costs, or imputed costs, ...
Chris: Um hum.
Jim: ... as we refer to it. There's typically a requirement, in laws like the North Carolina law that public entities impute to themselves the same taxes and other kinds of obligations that a private-sector entity would incur in similar circumstances. But let's take a look at that. You know, to a person who's not informed, including some state legislators, that might sound reasonable on its face. But let's think about that. The private sector claims that it won't make investment in particular areas because the costs are too high. OK? So the idea behind imputed costs is to raise the cost for the municipality to the level where they can't make the investment either. OK? And so that's the whole purpose of requiring -- pretending that costs are incurred that in fact are not.
Let's drill this down into income taxes, for example. OK? So, when you think about it, if a private entity needs to get 30-40 percent profit, which would be subject to tax, in order to invest in a project, it would go ahead and do it, if it thought it could get it in the project. They don't make the investment because, for their own purposes, that kind of investment opportunity won't "pay off." I'm not saying it's a bad decision. It's a rational corporate decision not to invest in those circumstances.
But then, when the law says you -- a community has to impute to itself what a private-sector experience would be, think about how you would do that. OK? First of all, a community would make an investment of that kind because it could treat the investment as a long-term capital investment, and they don't need to get the kinds of profit that the private sector requires.
Chris: Um hum.
Jim: So income tax on that kind of investment would, presumably, be zero.
Jim: OK? But, is that what the law says? No. Arguably, it says, you have to ASSUME you're going to make 30-40 percent profit. Then, you have to assume a certain tax rate. Now, who do you use as a comparable? Do you use Verizon? Do you use Comcast? Do you use some nonprofit? Whatever choice you make, you're going to subject yourself to criticism and litigation and lengthy delays and so on and so forth. And what investor is going to invest in a project, knowing that there's so many uncertainties and opportunities for the project to be derailed?
So, we start with the principle that to some may sound reasonable, but when you actually apply it in reality, this becomes a huge burden and a huge problem. And the FCC basically analyzed each and every section -- every provision of the law, and said they ALL contribute to this sort of thing happening. So, that's what the problem is with these laws. It could very well be that some legislators thought that they were, in fact, contributing to a level playing field and fair competition. But the fact of the matter is, now we know, because we have this decision, that those fine concepts in reality are not borne out. And, in fact, laws of this kind, advanced by the incumbent carriers, has the effect of being barriers. And, frankly, that's what their intent is.
Chris: Was there anything in the opinion that you just found interesting, and maybe put a smile on your face, or something where you're just kind of like, oh, I didn't think of it that way?
Jim: It wasn't any one thing. I could barely read three or four paragraphs without pausing to smile, and to want to applaud the FCC for actually doing the hard work and heavy lifting of looking into all of these claims carefully, and addressing them. One example that was particularly pleasing is that, we've been arguing for years that broadband can be constrained not only by laws that directly focus on broadband but on related laws. For example, constraints on the provision of cable services. Because cable services are often bundled with broadband Internet services, and you can't view a project looking only at broadband. The economics of the entire project are important. So, if you impair the ability to provide voice or cable services, you make it much more difficult for a broadband project to survive on its own. The FCC has been saying much the same thing in other contexts. And in the opinion, it put two and two together and arrived at four.
Jim: And that was very gratifying. Paragraph after paragraph contains very gratifying analysis, from our perspective.
Chris: I think it's worth noting that you've been working in this field for 20 years, ...
Chris: ... more than 20 years.
Chris: It's worth noting -- you've been working in this field for more than 20 years. Would this have happened without the individual personalities at the Commission right now? I mean, it came down to a party-line vote. But I don't know that that vote would even have happened if it was just three other Democrats, for instance, that had been appointed.
Jim: Well, in the two decades that I've been involved in this area, we've seen many good commissioners on the FCC. But we've never seen a chairman of the FCC who is more active, and committed to creating competition, and in building as strong a base of broadband connectivity, as Chairman Tom Wheeler. He has -- whether you love him or you hate him, you have to recognize that he is a man of his word. He has a vision for America that I share, I know you share, and many of our colleagues share. And it is very much the commission -- the Chairman's drive to put these issues squarely in front of us, and to deal with them in a way that he believes will serve our country well. And I'm very thankful to him for doing that.
Chris: If you're in a state that is thinking about petitioning, let me just suggest that you talk with Jim. Because, Jim, you've been incredibly important throughout this. And, I think, if any city is thinking about moving forward with a petition, they're going to want to craft it in the strongest way. And I just think, given your experience, and your work on this, a city would be foolish not to talk with you before moving too far down the path.
Jim: Chris, that's a very generous statement, and I appreciate it. And -- we're in this together -- we, and the cities around the country. And anything that we can do to get more cities free to exercise their local choice on whether to proceed by developing their own networks, or working with willing incumbents, or entering into public-private partnerships, is something that we strongly support. And we'll do everything can to help move forward.
Chris: And you and Joanne Hovis are working on the Coalition for Local Internet Choice. That is not over. People should still be joining, right?
Jim: Not only is it not over, but I believe our challenges increase along with our successes. This is not a time when we can sit back and clap ourselves on the back. Across the country, there are members of legislatures that are, for political reasons, opposed to anything that the current White House supports. We have seen battles in the states every year for the last 20 years. It's important for us to target the right issue. The right issue is local choice, the ability of communities to participate significantly in the decisions that affect their economic well-being, their educational opportunities, their public safety, their access to healthcare, transportation, energy, environmental protection. That's what's at stake here. These are traditional interests of local governments. They always have been. They always will be. We're talking about creating platforms and drivers that enable success simultaneously in all of those areas. We have to enable local governments to contribute to the well-being of their communities and our country. That's what we're doing at the Coalition for Local Internet Choice. That's what other organizations, like Next Century Cities, are trying to advance. We need an activist country. This is such an important issue, and the stakes are so high, for every one of us.
Chris: Thank you for coming on the show.
Jim: Thank you, Chris. I appreciate the opportunity. And I very much appreciate all you do. Keep it up and keep expanding.
Lisa: As you can imagine, there are quite a few stories on the FCC decision at muninetworks.org , including a post that pinpoints some important quotes from the opinion. We encourage you to look those over.
We also encourage you to send us your ideas for the show. E-mail us at email@example.com . Remember to like us on Facebook. And follow us on Twitter. We are @communitynets . Thank you to Persson for the song, "Blues walk," license through Creative Commons. And thank you for listening. Have a great day.