Regulatory Reform

A Number That Does Not Compute – 706: FCC Preemption Will Cost Taxpayers Millions

ALEC commends former FCC Commissioner and Tennessee regulatory official Deborah Taylor Tate for her principled and reasoned criticisms of current proposals to federally preempting state laws restricting muni broadband networks. The following appeared at the Free State Foundation Blog on September 4, 2014.

Most Americans probably do not associate anything in particular with the number “706.” However, Section 706 of the Telecommunications Act has recently taken the national spotlight after a pointed message from the present Federal Communications Commission Chairman, Tom Wheeler: “I believe the FCC has the power – and I intend to exercise that power – to preempt state laws that ban competition from community broadband.”

Interestingly, the Electric Power Board of Chattanooga in my home state of Tennessee has filed a petition before the FCC requesting the agency to do just that: preempt long-standing Tennessee state law which limits expansion of city services into another city’s boundaries.

Why? Because the publicly-owned Electric Power Board (EPB) decided to enter the broadband/cable TV arena not just in Chattanooga, but in other surrounding municipalities as well. The EPB isn’t the first “muni” government to venture into the broadband business, and if the FCC Chairman gets his way, it certainly won’t be the last.

EPB first hit the national news when it announced its ultra-high-speed fiber optic network, capable of providing Internet speeds up to one gigabit per second, along with a cable TV offering. Adding competition and choice for consumers is typically a good thing. In the case of EPB, however, electric customers, rather than private investment, were responsible for financing EPB’s $160 million loan to its new telecom arm. In addition, EPB received approximately $111 million dollars from President Obama’s “stimulus” bill – so we, the taxpayers, funded that next chunk of funding. And the remaining approximately $29 million is to be paid by the new customers of this broadband/cable offering.

In essence, if you are an EPB customer, you might be surprised to discover that of an approximately $300 million dollar cost for your new government broadband provider, users of the system will be paying only about 10 percent directly, with another 53 percent financed through loans. Taxpayers will be left to foot the balance.

While many blithely tout the benefits of government-owned broadband networks, very few have seriously analyzed the cost to taxpayers. As Andrew Moylan and Brent Mead of the National Taxpayers Union rightly asked in 2012: “How much debt is associated with these projects? How high is the risk of a project failing? If it does fail, how much will taxpayers be on the hook for? Can government officials ever hope to run a business when many of them can’t even balance a budget or restrain spending?”

EPB could have easily looked across our state to a similar muni project, Memphis Networx, to garner some useful economic perspectives – and some lessons learned. While at one time that muni broadband network actually had a revenue stream of $5 million, it never once turned a profit, and the entire network was sold in 2007 for $11.5 million – a loss of more than $28 million.

And when questioned about how many subscribers were being served by EPB’s supposedly fabulous new “gig” service, EPB spokeswoman Danna Bailey said, “We have a handful of residential gigabit-per-second subscribers and nearly two dozen businesses.” I wonder whether the thousands of other Chattanooga taxpayers would consider that a good use of their $270 million in taxpayer dollars or whether they have figured out the per capita cost of this platinum-plated “gig” service.

Whether in Philadelphia, PA, or Burlington, VT, sadly, local municipal broadband across the country has often ended up costing the taxpayers – rather than benefitting them.

Being both a public entity and a private business at the same time creates an inherent conflict of interest and potential for abuse of power not allowed with regard to other types of municipal services. (For a complete review of the abuse of power issues, see the Free State Foundation’s comments, recently filed with the FCC.)

As compelling as these public policy reasons are for generally eschewing the promotion of government-owned broadband systems, they are above and beyond the real crux of the matter, which is that the FCC lacks legal authority to preempt state bans in the first place. And, that could not be clearer than in the EPB case.

There actually is a provision in the Communications Act which does provide narrow and limited legal authority to preempt some state laws. This provision was specifically and narrowly crafted and has been upheld by courts. Early on, proponents of muni broadband attempted to use that same section to override state laws restricting municipal telecom networks. However, the U.S. Supreme Court rejected this claim, clearly siding with state legislative authority. Further, in looking at the legislative history surrounding the specific language of Section 706, while Congress contemplated giving the FCC preemption authority in an early draft, it expressly chose not to include that language in the final version.

I am one of the very few FCC Commissioners who previously served as a “state official,” and I spoke often about the need to be a “humble regulator,” especially as such humility relates to unauthorized federal action and overreach. Preemption is not only wrong from a fiscal and legal perspective, but, also, more importantly, it is short-sighted public policy. We need to continue to fuel the incredible innovation and expansion of the Internet and its progeny, the productive engine of our intellectual economy and the sheer explosion of consumer tech usage in our daily lives. Section 706 needs to be used as a carrot and not a stick.

We all want every American – especially our children – to have access to the vast opportunities that the Internet and broadband can provide. We want to insure that the full breadth of educational advantages are available to everyone – along with the opportunity to participate in this vibrant, multi-sector technological economy. And we certainly want to keep our nation’s competitiveness strong in what is a global economy. So, we welcome Chairman Wheeler’s efforts to promote the expansion and adoption of broadband.

But Chairman Wheeler, like President Obama, should understand that there are very real, legal limitations on just how far “a pen and a phone” can go in a constitutional democracy. As a historian, Chairman Wheeler should appreciate the federalist structure that our forefathers established in the Constitution. As James Madison put the matter in Federalist Paper 45: “The powers delegated by the proposed Constitution to the federal government are few and defined. Those which are to remain in the State governments are numerous and indefinite.”

Deborah Taylor Tate is a Distinguished Adjunct Senior Fellow at The Free State Foundation. She served as a member of the Federal Communications Commission from January 2006 – January 2009. At the FCC, Ms. Tate served as Chair of both the Federal-State Joint Board on Universal Service and the Federal-State Joint Board on Jurisdictional Separations. Previously, Ms. Tate served as a Chairman and Director of the Tennessee Regulatory Authority, overseeing state regulation of telecommunications, gas, electricity and water. The foregoing post originally appeared at the Free State Foundation Blog on September 4, 2014.

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