Who's Who in Telecommunications Preemption

            In the not too distant future the FCC will preempt state laws that prevent municipalities from offering Wi-Fi services.  About 19 states have done so largely because private carriers and their trade associations have asserted that public ventures cannot operate efficiently, preempt private enterprise, unfairly have lower costs of capital and tap taxpayers to sustain deficit operations.  In my home state, Bell of Pennsylvania secured legislation that explicitly granted it veto power over any municipal operation outside Philadelphia.

            My initial instinct supports private options in lieu of state or municipal efforts.  However, at some point it becomes fruitless to wait for the marketplace to support private carrier market entry, especially in rural areas.  Incumbent carriers cannot have it both ways: 1) expressing righteous indignation at municipal initiatives, but also 2) refraining from making the investment themselves. Most municipalities install Wi-Fi, because private carriers will not do it and city officials assume wireless broadband access will enhance the welfare of citizens and establish a comparative advantage vis a vis other localities lacking such access. 

           Arguably Wi-Fi constitutes an essential service (maybe not a public utility) that consumers increasingly assume to be available everywhere.  As towns developed in the United States, municipal governments created water and sewage authorities rather than await private ventures that might consider such sunk investment as prudent.

            I do not seeing muni wi-fi as evidence of governmental mission creep where market failure exists.  Municipalities become the carrier of last—and only—resort.

            A different and more complex issue lies in the lawfulness of federal preemption.  Case precedent supports preemption when interstate service becomes so integrated with intrastate service that the two types of service are not separable.  In effect the interstate service “contaminates” and prevails so that the FCC can lawfully assert jurisdiction.  Additionally case law supports FCC preemption when a service evidences basic long-haul, interstate characteristics.   Internet access typically involves traffic routing that crosses state borders.  Lastly the FCC can prempt a service that constitutes a functional equivalent to, or interconnects with a federally regulated service.  A federal court affirmed the FCC’s preemption of state Voice over the Internet Protocol regulation (the Vonage case, Minn. PSC v. FCC, 394 F.3d 568 (8th Cir. 2004) based on the fact that most services interconnect with federally regulated long distance telephone service.  Additionally courts are receptive to arguments that different regulation by 50+ jurisdictions would “balkanize” and unnecessarily complicate the regulatory process.

            So why all the agitation by incumbent carriers?  I cannot see municipal networks becoming a major service alternative, particularly for larger cities where some attempts already have failed.  Likewise I don’t see incumbents hell-bent to offer “free” wi-fi service, although they may execute a strategy to use wi-fi for back-haul and video delivery to off-load traffic from 3G and 4G cellular networks.

            Perhaps incumbents simply shoot first and ask questions later on any initiative that does not include them and their approval. Maybe incumbents want to foreclose any unlicensed alternative to licensed operations, particularly ones that cost billions to acquire in spectrum auctions.

            Unlike the network neutrality debate, I believe incumbents will have a harder time convincing an appellate court to overturn the FCC.  This court would have to ignore ample case precedent, but who knows maybe the Supreme Court will ultimately hear the case and change course so that federalism and states’ rights trumps common sense.