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Quick note on the Federal Communications Commission’s inconsistency on rate regulation

I just finished delivering a presentation before the National League of Cities infrormation technology committee.  Cities and towns are taking an interest in how the Federal Communication Commission’s reclassification of broadband may impact their decision to deploy commercial broadband facilities.  It’s one thing for the FCC to say that it will preempt state laws that prohibit a city from expanding broadband services from beyond its electric utility’s boundaries.  It is quite another to run the risk of having those services regulated by Tom Wheeler and Associates.

I pointed out to attendees that there is an inconsistency stemming from two sources.  First is the FCC’s proclamation that it will not apply public utility style rate regulation to broadband providers and that it will forbear from applying tariffing requirements to broadband carriers.  The problem is that the FCC is ready to apply “core requirements” of Title II.  Those core requirements, as found in sections 201 and 202 of the Communications Act, require that the rates charged by telecommunications firms be just and reasonable.  How will the FCC ensure just and reasonableness without a rate review?  In addition, “rate regulation” need not take the form of the traditional methodology where a regulatory body determines what the appropriate rate base is i.e. the assets needed for providing a service and, after applying a government-determined rate of return, calculating revenue and rates.

Rate regulation, as I shared with the committee, may take the form of determining rate bands, implementing price caps, or some other form of incentive regulation.  Also, while traditional tariff requirements might be foreborne, simple price schedules, as required for cable companies, may also be an option for making rates transparent and publicly on file with the FCC.  Simply sayng there will be no “public utility-style” rate regulation does not mean that broadband operator rates will not be regulated.

Second, the FCC and its net neutrality proponent allies sold consumers a level of expectation, a bill of goods, by arguing that need for regulating the internet was imperative to maintaining an open internet that would facilitate consumers’ abilities to freeluy express themselves on the printing press of the 21st century.  Notwithstanding a lack of any threat to the consumers’ ability to express themselves, the FCC, Free Press, Public Knowledge, and other groups insisted on Title II as a ready source of necessary consumer protections.  To the consumer, protection takes the form of rate and services regulation.  If the FCC is going to forbear from rate regulation, then what was the point of the net neutrality exercise?

As I relayed to the atendees, net neutrality was never about consumers and their rights to rant, vent, and watch videos.  Net neutrality is and always be a battle about content providers attempting to push their costs for transmitting content to a zero rate.  Uncertainty has been created by the FCC with its reclassification of broadband as a Title II, common carrier service.  That’s a quagmire that municipalities should stay out of.

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Today’s data markets require data that brings value

Today’s data markets require that there be valuable data to trade but the Federal Communications Commission doesn’t quite see it that way.  Last week the Commission voted to accept a report that concludes that 17% of the American population or approximately 55 million people, do not have access to advanced broadband.  The Commission’s determination is based on new speed standards based on the speeds that approximately 70% of broadband customers are purchasing today.

From my view of the world here in Atlanta I can’t say that the Commission has much of a case when it argues that there is no choice among competing broadband providers even when you take income into account.  Here in the West End where median income in the 30310 area code is approximately $24,606, we have seven wireline and wireless providers of internet access.  They are Comcast (100 Mbps to 1 Gbps); AT&T (10 Mbps to 25 Mbps); Verizon (10 Mbps to 25 Mbps); T-Mobile (10 Mbps to 25 Mbps); Platinum Equity (6 Mbps to 10 Mbps); Sprint Nextel (6 Mbps to 10 Mbps); and MetroPCS (768 kbps to 1.5 Mbps).

The 30331 area code has a median income of $36,349 and the same choices in internet access carriers, with the only difference being the decrease in speed provided by Platinum Equity (3Mbps to 6 Mbps).

Our more affluent neoghbors to the north in Buckhead enjoy median incomes of $65,642.  Sprint is not available as a service choice for the residents of Buckhead, but no worries.  Platinum Equity provides service speeds of 25 Mbps to 50 Mbps while Level 3 provides 1 Gbps speeds.

You can see these speeds yourself using a nifty broadband-by-zip code calculator provided by the National Broadband Plan Map.

Not to completely dis my neighborhood but the West End is not the epicenter of finance and industry.  While we have a couple grocery stores, a community and arts center, too many churches, a middle school, and a few banks, we are not generating the income that puts us on the list of high value data providers, not at an income of $24,606.  You find that action up in Buckhead.  There are enough banks, law firms, and high tech firms for you yto throw a cat at.  These are the sources of high value data.

Three of the Commission’s members would no doubt nake the argument that with higher speed broadband, the high value data economic activity I allude to would exist in the West End or even Camp Creek.  I would argue with them.  The SnapChats of the world are being bought and sold for billions while only having a staff no larger than the numerous fast food joints that pepper the West End.  These firms are not generating high value data that is made available for trade via data markets that consumers and producers access via broadband links.  The data comes from high income consumers who may not be necessarily employed in tech.

No. Raising speed standards out of sense of duty to equate everyone with everyone is not the approach our progressive friends on the Commission should be taken in order to promote broadband deployment.  Also, trying to preempt state law in order to encourage the deployment of municipal broadband is not the answer especially in neighborhoods like mine.  Half of us simply can’t afford broadband.

Links to the internet should grow organically with broadband providers meeting demand for their services when consumers signal they are ready to purchase them.  We will need to see a turnaround in economic development and incomes to see the broadband speed equality that progressives on the Commission desire.


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The FCC has no reason to pre-empt state laws banning municipal broadband

I just filed the following comments in WCB Docket Numbers 14-115 and 14-116.

The Electric Power Board of Chattanooga, Tennessee and the City of Wilson, North Carolina have asked the Federal Communications Commission to pre-empt statutes that ban or restrict the provision of broadband services by municipalities to the public.  The parties seek pre-emption pursuant to section 1302 of the Communications Act of 1934 as amended by the Telecommunications Act of 1996.  Pursuant to the reasons I lay out below, I ask the Commission to deny their petitions.

The Supremacy Clause of the United States Constitution gives Congress the authority to pre-empt state laws that conflict with the exercise of federal power [Schwartz 2010].  Congress may express its intent to preempt conflicting state law by saying so in the text of a statute or imply the intent to pre-empt state law based on the structure or purpose of the federal law.  In addition, where Congress intended to occupy an entire regulatory field or there is a conflict between federal and state law, the federal law would trump state law.  The courts may provide federal agencies considerable deference where the federal agency finds that state law conflicts with the federal law an agency is authorized to administer. [Schwartz, 2010]

Although the Commission is an independent agency, it should be able to find guidance on preemption from a May 2009 memorandum issued by President Obama on the issue of preemption.   Here is an excerpt from that memorandum:

“An understanding of the important role of State governments in our Federal system is reflected in longstanding practices by executive departments and agencies, which have shown respect for the traditional prerogatives of the States. In recent years, however, notwithstanding Executive Order 13132 of August 4, 1999 (Federalism), executive departments and agencies have sometimes announced that their regulations preempt State law, including State common law, without explicit preemption by the Congress or an otherwise sufficient basis under applicable legal principles.

The purpose of this memorandum is to state the general policy of my Administration that preemption of State law by executive departments and agencies should be undertaken only with full consideration of the legitimate prerogatives of the States and with a sufficient legal basis for preemption. Executive departments and agencies should be mindful that in our Federal system, the citizens of the several States have distinctive circumstances and values, and that in many instances it is appropriate for them to apply to themselves rules and principles that reflect these circumstances and values. As Justice Brandeis explained more than 70 years ago, ‘[i]t is one of the happy incidents of the federal system that a single courageous state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.’”

It appears that the President wants the federal government to recognize that federal and state governments are not only partners in serving the public interest, but that the specific circumstances of each state should be taking into account before the federal government risks exercising unnecessary overreach.  Using section 1302 as basis for preempting state law would constitute such overreach.  Section 1302 (b) reads as follows:

“The Commission and each State commission with regulatory jurisdiction over telecommunications services shall encourage the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans (including, in particular, elementary and secondary schools and classrooms) by utilizing, in a manner consistent with the public interest, convenience, and necessity, price cap regulation, regulatory forbearance, measures that promote competition in the local telecommunications market, or other regulating methods that remove barriers to infrastructure investment.”

The Petitioners argue that state legislation banning or restricting municipal broadband somehow lessens competition or works against deploying broadband and by preempting state legislation the Commission would in essence put in place a policy that encourages the deploying high-speed broadband.  I argue that it was never the intent of the Telecommunications Act of 1996 to see municipalities deploy broadband or telecommunications.  The Telecommunications Act of 1996 was primarily designed to open the telecommunications markets to more competition between private sector players.  Section 1302 was an attempt to recognize the importance of this thing called the Internet and allow the commercialized Internet to grow and flourish with private sector players deploying broadband in a least restrictive regulatory setting.

Ironically over that 18 year period we have gone from the thing called the Internet to an Internet of Things.  This is a testament to how a private sector subject to light touch regulation has been able to innovate both broadband and edge services for the benefit of consumers.

Going back to the legislation, there is no language in section 1302 that expressly preempts the states from implementing legislation that bans municipal deployment of broadband.  Also, there is nothing in the structure or intent of the Telecommunications Act that implies preemption.

States have been encouraging private sector innovation through deregulation.  In Florida where I served on the Florida Public Service Commission’s staff, I witnessed Florida’s attempts in 1994 and 1995 to deregulate Florida’s communications market.  We were not encouraging cities and towns to provide Internet access or local phone services.  We recognized that the emerging technology at the time allowed for cable companies and resellers to enter the market and sell local and long distance services.  The Telecommunications Act continued and built on what the states were doing to encourage competition via a light touch regime, a regime that the Petitioners want to attack by encouraging preemption.

In sum, the structure of federal communications law does not imply preemption but cooperation with and deference to the states and recognizes that the private sector, given its scale and access to capital was best suited to build a nationwide broadband network.  The states that ban or restrict municipal broadband deployment also recognize that capital will turn away from a market where a “competitor” is heavily subsidized with free money from tax payers.  The private sector, even at today’s low rates of interest, cannot compete with free money or a competitor who may not be subject to the same, onerous net neutrality principles or other rules that a private sector provider has to or may have to abide by.

For the reasons I shared above, the Federal Communications Commission should deny the Electric Board of Chattanooga and the City of Wilson’s petition.