Wheeler’s UTOPIA: This Emperor Has No Case

By William Christian, Special for USDR

In his April 30 remarks at the National Cable & Telecommunications Association’s conference in Los Angeles, Federal Communications Commission (FCC) Chairman Tom Wheeler imperiously decreed:  “I believe the FCC has the power – and I intend to exercise that power – to preempt state laws that ban competition from community broadband.”

While he cleverly uses free-market rhetoric (purporting to fight against obstacles to competition), “Emperor” Wheeler is instead asserting that the central government knows best.  In Los Angeles, he cloaked his premise in the vernacular of freedom:  “…if municipal governments… want to pursue it [government-owned broadband], they shouldn’t be inhibited by state laws.”  Of course, he ignores the fact that municipalities are state creations, not wards of the federal government, regardless of how loathe he and his fellow central planners are to recognize that such authority rests at the state, not federal, level.

Chairman Wheeler then channeled “Captain Obvious” with the following observation:  “As I said at the beginning, when it comes to broadband, the cable industry has important technical advantages, a leading market position, and very limited regulation.  It is, to engage in understatement, an unusual situation.  The only way to maintain this situation is to uphold your responsibilities. If you do, it will benefit not only your industry, but it will also contribute to the prosperity, security, and values of our nation.”  In this high-handed lecture, Wheeler expresses his doubt that private companies can simultaneously respond to consumer demand and act in their own best interests by providing customers with the latest innovative products.

Wheeler further opined that, “…for many parts of the communications sector, there hasn’t been as much competition as consumers and innovation deserve.  Given the high fixed costs and consequent scale economies, this isn’t especially surprising.  But that makes it all the more important that we knock down public and private barriers to competition and avoid erecting new ones.  It is equally important that we encourage competition wherever it is possible.”  His free-market code words and assertions are betrayed by the facts.  He almost seems oblivious that, since 2000, in an environment of minimal Internet regulation, the number of companies providing broadband Internet access has risen from 130 companies to more than 1,600.  Such growth would not naturally occur absent higher demand from consumers and the profits to providers that have been reinvested into better products.

Citizens Against Government Waste (CAGW) has been very vocal in its opposition to municipal broadband, well before Chairman Wheeler’s edict from on high.  The perils of this model were highlighted in CAGW’s 2014 publication Telecom Unplugged:  Ushering in a New Digital Era.  In the second chapter, authors Deborah Collier and Tom Schatz pointed out the following:

Municipal broadband networks, also known as government-owned networks (GONs), are funded at taxpayer expense and often compete against private sector broadband investments.  The building of municipal broadband in communities across the country is driven by the purported desire to ‘plug gaps’ in broadband access; inject competition into the local and national marketplace; spur local economic development; achieve ubiquitous gigabit connectivity; and, provide local self-reliance and self-determination in the broadband space.  Proponents of these initiatives argue that localities should be allowed to ‘partner’ either ‘directly or indirectly’ with the public or private sector to provide broadband services.  However, opening the door to publicly-funded telecommunication services also puts municipalities into competition with existing businesses.

Enter UTOPIA, the ironic acronym for the Utah Telecommunications Open Infrastructure Agency, a municipal broadband consortium made up of 11 municipalities.  There is nothing blissful for the taxpayers of Brigham City, Centerville, Layton, Lindon, Midvale, Murray, Orem, Payson, Perry, Tremonton, and West Valley City, who will be left holding the bag for a less-than-ideal service.

UTOPIA presents a cautionary tale as one of the most egregious examples of wasteful municipal broadband.  Formed with the objective of building a fiber-optic network as a public utility that would provide broadband connectivity to their communities, UTOPIA began in 2002 with a $135 million bond.  The system was supposed to have been completed in three years and have a positive cash flow in five years.

In 2006, UTOPIA received a $66 million loan from the Rural Utilities Service (RUS).  Although $21 million of that amount was distributed, in 2008 RUS suspended the rest of the funding until UTOPIA “improved its financial condition and developed a new business plan.”

In April 2012, there were only 9,340 subscribers, less 20 percent of the anticipated number of 49,350 projected by network administrators to have been on board by September 2007.  Taxpayers in member cities were left with the bill to pay for a failed experiment in the development of a fiber-optic network as a public utility.

In November 2013, residents of Orem decisively rejected a property tax referendum that, if successful, would have paid some of the city’s costs for participation in UTOPIA.  In June, 2014, Orem’s city council, and those of seven other UTOPIA municipalities, will vote on whether to accept or reject a proposal to allow an Australian firm, Macquarie Capital, to salvage the municipal broadband consortium.

In a campaign targeted to Orem voters, critics of the deal cite the following concerns:  the deal constitutes a taxpayer-funded liability of $1.8 billion over 30 years; a new tax will be imposed on all citizens of the participating communities, regardless of whether or not they want the service or can afford to pay for it; and UTOPIA will be granted the power to cut off water service to those who do not pay in full and on time every month.  Calling it “the worst government boondoggle in the history of Utah and imposing the largest municipal tax increase ever in the Beehive State,” opponents claim that the proposed UTOPIA fee is four times greater than the property tax referendum rejected by voters last November.

Putting it in terms that anyone can understand, Utah Sen. Howard Stephenson (R-Darby) said, “UTOPIA is the local equivalent of Obamacare.  Government shouldn’t force us to purchase a product we don’t want at a price we can’t afford.”

So much for Chairman Wheeler’s “utopian” ideals regarding municipal broadband.

Indeed, the search is on for the legal source of the FCC’s ability to preempt state law.  Earlier this year, then-acting FCC Commissioner Mignon Clyburn expressed support for an FCC review of state laws prohibiting municipal broadband development.  Chairman Wheeler subsequently included that study as part of his response to the U.S. Court of Appeals for the District of Columbia ruling in Verizon v. FCC on net neutrality, under the heading of “enhanced competition.”

In March, 2014, in response to questions about the FCC’s role in municipal communications services at the Free State Foundation’s Sixth Annual Telecom Policy Conference, AT&T Senior Executive Vice President for External and Legal Affairs Jim Cicconi said that municipalities are creations of state law, and for the FCC to preempt those laws in order to allow municipalities to engage in these services is a matter of “dubious constitutionality.”  Indeed, 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.

In a June 5, 2014 letter to Chairman Wheeler, Sen. Deb Fischer (R-Neb.) and 10 of her Senate colleagues wrote that:

State governments across the country offer a stark contrast to the heavy hand of the federal government, especially in terms of the states’ superior capability to protect taxpayers from unnecessary debt, spending, and waste.  States are much closer to their citizens and can meet their needs better than an unelected bureaucracy in Washington, D.C. …  The last thing the Commission should do in these trying fiscal times, with so many other important priorities, is usurp state policy with respect to municipal broadband.  State political leaders are accountable to the voters who elect them, and the Commission would be well-advised to respect state sovereignty.

While the basis for Wheeler’s assumption of preemptive power remains a mystery, speculation has centered on section 706, Advanced Telecommunications Incentives, of the 1996 Telecommunications Act.  That section specifically grants the FCC authority to “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).”  That “capability” is further defined as broadband.

In January, 2014, the D.C. Circuit Court of Appeals decision in Verizon v. FCC was described by many as the death knell to net neutrality.  In truth, the court upheld certain FCC prerogatives, including provisions requiring transparency from industry partners and an affirmation of FCC’s authority to regulate internet service providers (ISPs), including broadband.  Chairman Wheeler appears to have taken a broad view of the decision and interpreted section 706 to justify his expansionist view of FCC power, including the agency’s authority to preempt state laws.  Others are more leery of Wheeler’s philosophy.  In his dissent to the Verizon decision, Senior Circuit Judge Laurence Silberman wrote the following, with specific emphasis on section 706:

Nevertheless, the Commission justifies its aggressive, prophylactic regulation by asserting that the negative consequences of regulation (preserving the status quo) are likely to be minor, while the consequences of allowing the broadband market to evolve without regulation could be drastic and permanent… I think this is quite wrong, but in any event, the agency’s judgment about the propriety of leaping before looking cannot displace the judgment of Congress which, in enacting section 706, did not so broadly empower the Commission.  Rather, Congress required the agency to identify an actual barrier to infrastructure investment or a threat to competition, and the agency must have evidence that the barrier or threat exists.

On May 15, 2014, Chairman Wheeler issued his response to the Verizon decision as a Notice of Proposed Rulemaking (NPRM), “Protecting and Promoting the Open Internet.”  While Chairman Wheeler asserts that the circuit court decision grants the agency wide authority to regulate the Internet, the FCC’s Republican commissioners, Michael O’Rielly and Ajit Pai, disagree.  In their dissenting statements regarding the NPRM, they echoed Judge Silberman in challenging the majority’s reliance on section 706 in such matters.

According to Commissioner O’Rielly, “I have already expressed my views that Congress never intended section 706 to be an affirmative grant of authority to the Commission to regulate the Internet.  At most, it could be used to trigger deregulation.”  Commissioner Pai directly counters Chairman Wheeler’s proposition that FCC’s expansion of broadband regulation, and with it the idea the promotion of municipal broadband, is necessary to improve competition:  “…pursuing net-neutrality regulations under section 706 or Title II places in jeopardy every other goal of this Commission in the communications marketplace… threatening the $60 billion a year that private companies invest in their broadband networks…  This brave new world will deter new entrants and reduce competition in the broadband market.”

Judge Silberman and Commissioners O’Rielly and  Pai seem to have the law on their side, while Chairman Wheeler has not stated a single statutory basis his effort to pre-empt state laws.  The 1996 Telecommunications Act (and, more specifically, section 706) presumed minimal intrusion into the market by the FCC.

It will nonetheless require a nonstop effort to prove that “Emperor” Wheeler has no case.

All opinions expressed on USDR are those of the author and not necessarily those of US Daily Review.

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