The Law and Economics of Municipal Broadband

[Music]

Dean Reuter:  Welcome to Teleforum, a podcast of The Federalist Society's Practice Groups. I’m Dean Reuter, Vice President, General Counsel, and Director of Practice Groups at The Federalist Society. For exclusive access to live recordings of Practice Group Teleforum calls, become a Federalist Society member today at fedsoc.org.

Nick Marr:  Welcome to The Federalist Society's Teleforum Conference call as today, September 17, 2020, we discuss "The Law and Economics of Municipal Broadband," an increasingly important issue as the pandemic wears on. My name is Nick Marr. I am Assistant Director of Practice Groups at The Federalist Society.

      As always, please note that expressions of opinion on today's call are those of the experts.

And today, we're fortunate to have with us George Ford, who's the Chief Economist at the Phoenix Center for Advanced Legal and Economic Public Policy Studies, and Larry Spiwak, President of the Phoenix Center for Advanced Legal and Economic Public Policy Studies. They are two of the authors of a recent piece published in the Federal Communications Law Journal on this topic, "Law and Economics of Municipal Broadband."

Our discussion today will be moderated by Danielle Thumann, an Associate at Wilkinson Barker Knauer and member of our Telecommunications Practice Group.

After our speakers give their remarks and we have some moderated discussion, we'll leave a little bit of time at the end for audience questions, so be thinking of those as we go along and have those in mind for when we get to that portion of the call.

All right. Now, with that, Danielle, the floor is yours.  

Danielle K. Thumann:  Thank you, Nick. As Nick mentioned, today we have for discussion Dr. George Ford and Larry Spiwak of the Phoenix Center. George and Larry, along with co-authors Randy Beard and Michael Stern, recently published a lengthy paper on municipal broadband in the Federal Communications Law Journal.    

The paper's title is, "The Law and Economics of Municipal Broadband." This paper covers the underlying economics and law of municipal broadband, often in great detail. The authors do not, importantly, attack municipal broadband but offer an analysis of how to think about the law and economics of these government-run networks.

That said, municipal broadband that over bills private investment is shown to be problematic in several ways. It's an important topic right now with legislation being proposed to massively subsidize broadband, including possibly municipal networks. Thank you, George and Larry, for joining me today. First, I'm going to turn the mic over to George.

Dr. George S. Ford:  Hi. Yes, Danielle. Thanks for hosting this event for us and reading the paper if you did. It's a massive 100-page single space paper. Proud of it, we've been working on this for many, many years now, I think, and in fact, my interest in this topic began probably back 15 years or more ago when I was working on municipal broadband for Municipal Electric Association.

      Larry, you got --

Danielle K. Thumann:  Wonderful. Oh.

Lawrence J. Spiwak:  Oh, yeah. I said thanks. I'm excited.

Dr. George S. Ford:  Yeah. Yeah.

Danielle K. Thumann:  Well, I think it would be good to go ahead and kick off the discussion with talking about the motivation behind municipal broadband. Private investment has gone a long way to providing ubiquitous deployment. Eighty-six percent of U.S. homes now subscribe to service as you mentioned in the paper. So why are governments taking on this risk? Tell us a little bit about the economics here.

Dr. George S. Ford:  Well, I think that's a good question and, really, forms the basis of the analysis. If you look at what is typically said about one of these networks get billed and certainly in my experience with working in the area, a general answer is that nobody else will build it. And when you start there, the natural next question is why won't anybody else build it? And pretty much all the economics stems from that point.

      You have two scenarios, I think, that are significant. One is are you billing a government network in an area that is entirely unserved? And then second, are you billing a network in an area that is served but you, for some reason or another, are unhappy with the level of service? And that could either relate to the capabilities of the private investment networks or potentially the coverage of the private networks. Both are relevant in the history of municipal broadband.

      But when you build these networks and you build them because nobody else will, that means that there's no money in the network. If there was a return on investment available in a given area, then the private sector would build a network. The private networks are already built somewhere above 90 percent of homes in the U.S.

Also, the investment is significant. The networks are pretty much everywhere and then to extend these networks into new areas or to build in areas that may be adjacent to an area is not a particularly difficult challenge, at least technically, for existing broadband providers.

      But for some reason, they're not doing it. And they don't do it because there's no money there. And if there's no money there for a return on private investment, then it must be the case that somebody who did build a network there would lose money. And that is typically what we see with the municipal networks is they build these networks in areas and maybe hire some consultants to tell them they're going to make a lot of money doing it.

But in the end, it almost, in every case, and I've never seen a successful case really, financially successful case, that the city is going to lose money doing this. And from that stems a number of problems related to a subsidized -- government-subsidized, government-run network, a symmetrically subsidized network, that competes with private investment. And the paper basically goes through those scenarios.

      It's quite different when there's no network there and you're just subsidizing it to areas that are unserved. We do, as a matter of policy in this country, subsidize networks to areas that are unprofitable. And generally, I don't see a problem if a city wants to subsidize a network in an unserved market. We do that with private firms, so it's not terribly problematic there. Most of this analysis that we discuss in this paper is related to municipal networks that overbilled private networks.

Lawrence J. Spiwak:  Yeah, and I think adding to that, obviously, I'm the lawyer and George is the economist, but George and I've been doing this for a long time and I think one of the contributions of the paper is that it happens a lot, I think, the broadband debate that people forget about the basic economics of deployment.

      We went through this. We tried to do this national broadband plan, the thing, how do we expand? And one of the problems—and George can certainly get into the economics of this—is that we keep coming back to one of the arguments we have about municipal broadband is either A) we need to bring competition in terms of increasing the equilibrium or supposedly, it's going to bring lower prices or jobs. And regardless of whether there's municipal broadband, I think one of the useful things about this paper, and we've written a lot about this over the years, but people have to remember the fundamental economics of deployment, that this is a very expensive business to be in.

An equilibrium is an economic outcome. It is not a policy determinant, that you just can't pick a number. And when you have the government coming in, again, as George said a moment ago, the real focus of the paper isn't I live out in East Function Junction, somewhere nobody else will serve. That's one issue. But really, where a lot of this comes into and where a lot of the legal issues also come into is when the government ends up competing against the private sector.

      And so you’re competing against -- the private sector's having to compete. And the real comes down to, and I think the paper goes into this a lot, about really the cross-subsidization element of it. And that really, I think, and George can go off on that because we did a lot of work on this in the paper, the real issue and where all the laws that people are upset about are laws that prevent -- very often a lot of municipal broadband networks are not what one would consider a greenfield where we're just going to build a network, although some are.

      Most of them tend to be an offshoot of an electric utility, municipal electric utility, where you end up having the real risk of captive electric utility ratepayers subsidizing the entry. And that comes up a little in terms of how that affects private sector investment and the reaction of that.

      So I'll let George talk about the economics of entry, which we go into, and municipal broadband and the cross-subsidy and what that means. And then I'll pick up the law from there.

Dr. George S. Ford:  Sure, yeah. And we go into this in detail with some economic models, but I think the logic is fairly simple. You lose money and you -- when you build a network and you lose money, this means the money has to come from someplace else and these municipal networks have been subsidized in a variety of ways through property taxes in some cases.

      Most of the -- probably most of the networks being built in the last, probably, five maybe ten years are connected to a municipal electric operation. And the electricity operation, of course, is a monopoly service and those networks provide a steady stream of profits that can be used to cross-subsidize a broadband network.

      A lot of times what'll happen is they'll claim the network is used to provide enhanced electricity service, things like that, but you don't need a fiber optic connection for that. There have been some studies on how much of the network could be attributed to the electric utility, and I think that number was short of five percent.

      And we've also had municipal providers of service admit that they don't need a fiber optic connection to the home to provide smart meters and things like that. And it's almost certainly true, but by loading much of the debt, if not all of the debt, for building the broadband network into the electric utility, you've got electric utility customers subsidizing through their electric rates. The broadband network, of course, the private sector providers in these markets don't have electric networks in that market to cross-subsidize their broadband business.

      So you have a pretty serious problem, nor can they levy property taxes or any other sort of subsidy generating program. So they're basically losing money, hiding a lot of that in other businesses that the city might run. And when you do that, you, of course, run into the problem of you are competing with a private entity as a government entity and also as a regulator of the private sector.

      With services that are subsidized from elsewhere, and if you need the subsidies from elsewhere, it means you're basically losing money and charging a price below your cost, which is a predatory price. And the predatory pricing gets a bad rap, I think, for private companies and antitrust cases. There's some economic literature that shows that a government entity would be much more willing to cross-subsidize and predate in the provision of services than would a private company because you don't have the same requirements for recoupment, things like that.

      So that's a pretty serious problem and I think could be a legal problem for these networks. It hasn't been challenged in that way. Municipal broadband has not been challenged on grounds of predation. But I think there could be a pretty good case. We've got a number of legal proceedings that have demonstrated -- and audits, that have demonstrated the heavy cross-subsidization. Most recently, in Lafayette, as Larry mentioned. And we've also seen that in Bristol. We've seen it in Burlington, Vermont, for example.

      So that opens up that problem of a predatory competitor. I think if -- people often call municipal probing competition. I think it's really probably more anti-competitive than it is competitive, at least according to law.

      You got the other problem, of course, that Larry can speak to in more detail where you've got the municipality who regulates broadband providers' rights of way and through franchise agreements. And that can create a problem with due process. Larry, do you want to touch on that for a minute?

Lawrence J. Spiwak:  I'll get to that. Let's -- I know that I have a couple more questions about the economics. What about the benefits of it, George? We go through that. For their supposedly employment benefits, lower prices, again, going back to that competition, competition, competition point that everybody tries to make about municipal broadband.

Dr. George S. Ford:  Well, there've been attempts to demonstrate that municipal networks charge lower prices. All those studies are flawed, easily fatally flawed. The biggest problem with those comparisons is normally what they would do is compare the prices within a market saying well, the municipal charge is one price in Chattanooga and the private networks charge another price. But that's not sensible in economics because by the law of one price, all firms have to sell their services at the same price, the equality adjusted price at least.

      So you can't have sustained differential pricing otherwise the high price firm will lose all its customers. So it's really not the comparison that's relevant. The comparison that's relevant is to look at markets with municipal systems versus markets without municipal systems. And usually, the surveys don't provide enough data to do such a comparison. But there was a recent one by OTI that provided a sample of markets with and without municipal networks. And they conclude that municipal system prices were lower, but they did that making an incorrect comparison.

      If you actually take their data and throw out one observation, which was blatantly incorrect, then what you find in comparing prices across markets is that the prices in municipal markets tend to be a little bit higher than they are in markets without municipal providers. So there's really no evidence that I'm aware of that would suggest that prices -- that municipal networks lead to lower prices in markets. But even the data in the OTI report had some problems. But if anything, the evidence more consistently shows, I think, that the prices are a bit higher, if anything.

      And you also have to contemplate what's the point of a price comparison when large chunks of the broadband bill are being paid for by electric bills? In Opelika, Alabama, for example, the city raised the average price by five dollars a month on electric utility customers. Only 30 percent of the city had subscribed to that network, so you've got 100 percent of the homes in a city including lower income homes paying $60 more a year to subsidize a broadband network.

      So if the prices were lower, it'd be kind of surprising. But even then, what you see in the data is that the prices are, if anything, higher than they are in markets without municipal networks. What was your other question, Larry?

Danielle K. Thumann:  I think on the -- oh.

Lawrence J. Spiwak:  Oh, I'm sorry. Go ahead, Danielle.

Danielle K. Thumann:  Oh, no. I was just going to say I think on the labor market, if --

Dr. George S. Ford:  Oh, yeah.

Danielle K. Thumann:  -- pricing isn't being impacted, what about jobs? Are jobs being created?

Dr. George S. Ford:  Well, you might think that -- a lot of times, these municipal networks, because they're built now, are fiber optic networks and have higher speeds, at least historically, are capable of higher speeds than private networks. I think now Comcast and Charter are fully able to offer gigabit connections. But no resident needs a gigabit connection. That's just gross overkill.

So you don't -- you wouldn't expect that to have significant impacts. But there's two ways to approach it. One is empirically, do you observe that the labor markets improve when these networks get built? And we recently did a study on Chattanooga looking at 18-19 labor market outcomes wages and employment different sectors and labor force participation, things like that, and did a difference in difference analysis there, and we didn't find any labor market effect in the city from broadband network.

      But we did find significant effects in automotive employment in the city because an automotive plant was built there. So the statistical model is perfectly capable of detecting labor market impacts. In fact, the method produced almost exactly the number of employees that the automobile plant hired. So we don't really see any, empirically, see a big effect, if any effects, of these networks on the labor market, which is often a claim that's made in support of these networks.

      The other thing is is that although it's less true now, if you were an early adopter of very high-speed broadband, then you might expect to get some businesses that rely heavily on broadband. But that effect is really more of a business dealing effect or economic migration than it is economic development. If a business moves from one city to another, whatever the municipal broadband city gets in economic gain is economic loss in some other place.

      And there's been some economic analysis of such economic migration. And the results generally show that that's not advantageous for the nation as a whole because its cost of moving and things like that that the private firm may not absorb all of. And so it's generally not a great thing. Of course, cities and states do all sorts of economic development like that trying to attract business, which is great for them but bad for somebody else.

      The problem with that -- one of the problems with that I see is like, say, in Chattanooga, for example, and many of these other networks are receiving federal money and subsidies to build these networks. And it's not clear to me why the federal government would pay to move a business from a city in one state to a city in another state. That seems a bit squirrely to me. If the state wants to do it or the city want to do it, that's one thing. But for the federal government to subsidize business migration is kind of a strange concept.

      And, of course, now, with these networks being highly capable gigabit networks, being available in a lot of places, there's just hardly any attraction for anybody that would build one of those networks today. I don't have to go anywhere to get that kind of service. I can get it pretty much where I'm at or in 1,000 other cities.

      So I think that the economic migration effect, even if it's beneficial to the city, is no longer really a sound motivator for attracting business because there's lots of places you could go. That cover it, Larry?

Lawrence J. Spiwak:  Sounds good to me. I guess the only other question I have, I mean, so, again. Going back to the competition point, is it more likely if municipal broadband, you're likely to increase equilibrium or you're more likely to shrink the equilibrium? I think that's the big question that's out there, or maybe it depends.

But people thinking, again, like competition, competition, competition, that's one more firm. but if you're cross-subsidizing and -- maybe the equilibrium will actually shrink or -- nobody quite goes out of business these days, but they don't make these investments in network and slowly whittle away their facility so to speak.

Dr. George S. Ford:  Yeah, well, the economics --

Lawrence J. Spiwak:  The important --

Dr. George S. Ford:  Yeah, I mean, I think you're talking about the equilibrium over at firms in a market. 

Lawrence J. Spiwak:  Yeah.

Dr. George S. Ford:  And I think that's a point here that is stressed in the paper and we've stressed in other of our works that the number of firms that serve a market is driven primarily by economic considerations. There's no law prohibiting the construction of municipal broadband generally. That was true back before the '96 Act. But now, you can build a network.

      So we would expect that these, for the most part, I mean, there can be economic errors, I guess, but they're pretty special cases, where the number of firms in a market is less than what should be there given the economic conditions. But it's economic conditions that determine that, and if the economic conditions say that their two firms can viably compete in a market, maintain their networks, pay their bills, then adding a third is a problem because you've basically had to many firms in a market.

      And so you've got to think about how that's going to play out in the long run. A lot of times what happens is these municipal networks go out of business, okay, for that very reason. And they have to subsidized for that very reason because if the equilibrium is two firms, then adding a third is problematic. The third firm is not going to make money, and it may be very well the case that the firms that are already in the market may start losing money as the market gets divided among more and more providers so that the market shares are small.

      A lot of the studies that are done on municipal broadband, for example, financial studies, tell the cities that they need 40-50 percent market share to be viable. Well, if you need 40-50 percent of the market to be viable, then really only two firms can compete in that market.

      Now, a lot of the network cost are sunk for income that providers and so they can weather the price cuts or loss of market share for longer periods of time. But at some point, it's got to play out. The networks, they may slow down investment in those markets. They may choose not to expand in those markets. They may choose not to maybe market as heavily or whatever it is. So there are going to be short term impacts, but really, the long-term impact is that if the market can only sustain a couple firms, then that's all that's going to survive.

      Now, whether or not injecting cash from outside the market helps sustain a three-firm situation in a two-firm equilibrium is another question. But in general, I would suspect that the subsidy dollars are going to have to keep flowing, and the private sector may very well think about abandoning the market.

      So, yeah, it's a problem to accept this belief, which I think is quite common, that I can decide how many competitors are going to be in a market because you really don't get to decide that. That's an economic question. And we've got a lot of the policy, I think, that's in municipal broadband that we can just throw another one in there and all is going to be well.

But that's generally not what the economics would tell you and that's certainly not what the history of municipal broadband has shown us. It's usually the municipal entrant that has to abandon ship because they don't have the resources that the private sector does or the expertise the private sector does. And in many cases, the constituents in the city just grow tired of having to subsidize the networks through taxes and high electric bills, things like that.

Lawrence J. Spiwak:  Danielle, you want me to talk about the legal stuff now?

Dr. George S. Ford:  Oh, I do --

Danielle K. Thumann:  Yeah, Larry, let's --

Dr. George S. Ford:  -- want to make another point, too, Larry. I do want to make another point, which is something that --

Lawrence J. Spiwak:  Oh, please do.

Dr. George S. Ford:  -- we addressed in the paper, is that in general, the economic models show, not always, but in general, the economic models suggest that if there's anything, there's too much entry in markets. And that's because the -- what may be privately sensible for a firm entering a market may not be socially sensible because to build a network, a private firm is thinking about oh, well, I've got to make money when I build it. But a lot of that money comes from stealing business from somebody else. And so the true gain of the additional entry is not completely born by the entrant. Okay? The entrant's concerned about his business, not his competitor's business or society's business generally.

      So what we had is a downward sloping welfare function that the equilibrium number of firms, and that basically means that if you have an equilibrium number of firms of two, then adding a third reduces overall welfare. In fact, adding the second may have reduced overall welfare as well in the fact that broadband may provide some social premium doesn’t really change that result at all.

      So I think that when we have naïve or childish competition, competition, competition arguments that would miss the point, those aren't economic arguments. The economics would suggest most likely, I think, that cramming an additional firm in a market that's not profitable on its own is almost certainly welfare reducing because even if there was sufficient product differentiation or whatever to support welfare increase in some sort of private sense, when you have to start subsidizing things to exist, then you've got significant welfare consequences, economic welfare consequences of that additional entry.

Danielle K. Thumann:  Thank you, George.

Dr. George S. Ford:  Want to talk about the law, Larry?

Lawrence J. Spiwak:  Sure. Why not? Thanks, George. Thanks, Danielle.

      Well, everything that George says then brings back to the legal questions, which is notwithstanding the economic analysis that George presented, municipal broadband is inherently political. And so what -- I would say there's three legs of the legal stool dealing with municipal broadband.

      I think the first most notable is the issue of preemption. Having lost before, I'd say about maybe a third of the states, the number keeps changing, have some sort of laws -- states have some sort of laws dealing with municipal broadband. The vast majority of these laws go to issues of making sure that you don't engage in improper cross-subsidization. Some territorial restrictions, that you stay within your municipality.

      And as George just went through, these laws do have economic support for a wide variety of reasons. They may constrain municipal broadband, but they are based in sound logic. But that's not to say that people would like to -- municipalities would like to expand sometimes beyond their own municipal boundaries, maybe into a neighboring city or neighboring county, whatever it is or they just don't like the restrictions that are put on.

      So one of the big issues is that having lost at the state level, is that probably for almost 20 years, they had been trying to find some sort of preemptive relief at the federal level. The most direct way -- the first episode was using the statutory authority, Section 253 of the Telecommunications Act of 1996, prior to -- what makes the '96 Act so unique is that it actually has a very specific preemption authority contained in there.

      And there was a municipality who came in out of Missouri, and they came into the FCC. And their argument was under the terms of 253, it said any entity may petition. And they claimed that the municipality was an entity. What's interesting is that a Democrat-controlled FCC at the time looked at the existing case law and said look, I don't think that it's going to pass constitutional muster for the federal government to intervene into the relationship between the state and its municipal subdivision.

      Significantly, the FCC, albeit reluctantly, voted to deny the preemption. This actually went all the way up to the Supreme Court and in a case called Nixon, not Nixon the President but Nixon who was the attorney general of wee little state of Missouri, versus Missouri Municipal League. The Supreme Court held that as a constitutional matter, the federal government cannot intervene in the relationship of the state and its municipal subdivision.

      Preemption has a wide variety of issues, but they said look, this isn't an interstate commerce issue. This is whether or not the federal government can intervene in this very specific relationship.

      And so ever since that case, for about 10 years, advocates of municipal broadband have been trying to find ways to get federal relief. When the D.C. Circuit's part of the net neutrality line of cases in Verizon said that 706 could be an affirmative source of regulatory authority, Tom Wheeler, who was the chairman at the time, said I believe now I found that authority, and under Section 706, I can engage in preemption.

      Here's the problem with that argument, putting aside whether or not 706 is hortatory or not, which now back to being hortatory, and we don't really go into this. I have long believed and argued, and I've written multiple law reviews on this and I've also included in this paper, that 706 was never an affirmative grant of authority but was more of a super grant -- a grant of super ancillary authority. And I've got cases that'll back that up.

      In other words, you got to have subject matter jurisdiction. So you've got to tie it to something. And the problem with 706 is that while it talks about forbearance, there is not a word about preemption in that statute. All there is are other methods of regulation. And they view that as a way of saying well, this gives us preemption authority.

      But the problem is is that if you follow that logic, if it is truly, you've got to tie it back to an affirmative grant of authority in Section 2, Title II, Title III, or Title VI in the Telecommunications Act, that if your preemption authority is in 253, then you're back to a Nixon problem.

      So the FCC did the very unique argument, this North Carolina -- municipality of North Carolina filed for, in 2015, for preemption. The FCC had a rather clever, or I thought it was sort of keep by half, and they argued that well, unassuming we have a Nixon problem, we're not intervening in the relationship between a state and its municipal subdivision. What we're saying is once a state grants authority to participate, aha, now you're engaged in interstate commerce via the Supremacy Clause. We're in charge, so therefore, we're preempting those laws that restrict your ability as a barrier to entry.

      The Sixth Circuit ended up striking that down but did so on a very, very narrow ground. They went for the clear state rollout. Sometimes in preemption cases, a lot people just go well, is there a clear statement by Congress? And I don’t think that the Sixth Circuit really got into the issue that the Supreme Court got into in Nixon which was, again, can the federal government intervene in a relationship between a state and its municipal subdivision, but very narrowly but they shot the FCC down.

      What's interesting about this, and you can read the full analysis in the law review, is -- but this issue that the federal government, well, maybe we can pass a law and that would be a clear statement. The Democrat-controlled House of Representatives of a couple months ago, they just passed a bill, which has a very expansive preemption clause. They just ban all municipal state laws altogether.

I don’t think that's going to pass constitutional muster, but the point is, you're going to have to litigate that. And whether somebody litigates or not is another question. So this could be years to be resolved. But that is an interesting point in terms of preemption. It's a very, very thorny issues, and I'm not sure it's going to go away.

      The second leg of the stool is what we talked about in terms of the realization that we came to in the paper that municipal entry, more often than not, is not just subsidized entry but its predatory entry. And I think usually, it's kind of hard to have evidence that there's predatory conduct because as George can tell you, a lot of these municipalities, they bury their financials really deep. But occasionally, you get a public audit and it's not pretty.

      And so not that predatory pricing claims are easy to prove under Section II of the Sherman Act regardless, but it would seem as a -- at least as a mitigation measure that maybe somebody should at least file a suit and just keep municipalities on their toes. What's interesting is that 15-20 years ago, somebody sued an electric utility and the electric utility said oh no, you can't sue us because we have sovereign immunity.

      And that went up to the Supreme Court in a case called City of Lafayette, and the Supreme Court -- this is a very interesting case. They said no, you don't have immunity under the Parker B. Brown doctrine because you are not just doing this as a state actor and doing it to -- and I love this quote by the Court, "to promote the public weal," W-E-A-L, said no, you're in the business of competing against the private sector.

      So could there be an antitrust case? In the case where it's really shown that some malfeasance is going on, there could be. Whether or not somebody brings it or not, I don't know. But that's always -- this is a political problem and that's the problem with city hall because it's not like you can engage in a lawsuit and then they go away. You've got to deal with these guys every single day. They control your easements. They impose taxes on you. It's a very dysfunctional relationship, but that's the nature of Telecom's, you know, two tin cans and a piece of string.

      But then that brings me to the third case which I think is a really interesting case about this. The whole discussion about municipal broadband for a lot of folks is that it's inherently unfair to fight city hall. I would actually say it's actually slightly worse than that. It's not just unfair to fight because you can't fight city hall, it's really unfair to fight city hall when city hall controls all of your inputs of production that you need for entry.

      You want to get a tower siting? You got to go to city hall. You want a franchise? Go to city hall. You want do dig up the streets, go to city hall. City hall controls everything. There are fees for telecommunication services. There are fees for franchise services. In the case of Oregon, it's actually both. It's nonstop.

And I guess about four years ago, a case came out of the D.C. Circuit which I thought was really relevant to the muni broadband debate. And it was -- the case is called The Association of American Railroads. What happened was Congress passed a law that gave Amtrak, which is a government-owned, publicly chartered company, the ability both to be regulator and a competitor.

And to the Association of American Railroads Trade Association's credit, they sued in the D.C. Circuit and said this violates the Fifth Amendment of due process provision, the Fifth Amendment of the Constitution. And surprise, the D.C. Circuit ruled yes, we agree. You cannot be both regulator and competitor. This violates -- this isn't just anti-competitive. This violates due process of the Constitution.

And when I read that I said my goodness, this is exactly the case in municipal broadband. Again, nobody has brought the case under this theory. It may very well prevail, but it's a really interesting point that nobody's really talked about. When you have to compete and be regulated by city hall, it raises some real issues.

So those are, I think, the three main legal issues that are going on in the municipal broadbands here. And based on where Congress seems to be wanting to pass laws, we still could be litigating them.

Dr. George S. Ford:  Larry, I got a question there that --

Lawrence J. Spiwak:  Sure.

Dr. George S. Ford:  -- I think is probably relevant. Is the argument that -- I mean, it's one thing for the FCC to challenge these state laws but is it feasible for Congress to pass a bill that says okay, here's the -- you can't have these laws. Can Congress preempt these state laws?

Lawrence J. Spiwak:  Well, that's the legal question. There's two sides to that argument. If Congress passes a law as the House did two months ago, banning municipal broadband, one school of thought will say well, here's a clear statement by Congress saying yes.

      For example, in the Sixth Circuit case upholding these -- so while there was no clear statement by Congress that said you could preempt, if you have a clear statement, for some that might be enough. I don't think that it is. I think if you read the Nixon case, that even if there's a clear statement by Congress -- because you're not dealing with interstate commerce per say.

Again, you're intervening in the relationship between the state and its municipal subdivision. In other words, that's outside the realm of Congress's purview to pass legislation about. And it would clearly -- that's a serious legal question would go up. I think if the Court followed Nixon, there would be a strong chance that that law would be struck down.

But as you like to say, George, courts are a black box and we don't know. But that is the effort. They're going to go look, if you can't proceed, we're just going to pass a law by clear statement by Congress. And I believe they tried doing that in 2005 with the Co-Pact when they were doing cable -- they were trying to do franchise reform, but that law didn't go anywhere.

But I think there's a real constitutional issue there if Congress tries to do that. It'll be years 'til it makes it to the Court, but if you follow the logic of the Nixon case, it would probably be struck down. But, again, we don't know.

Dr. George S. Ford:  Yeah, I think too that --

Danielle K. Thumann:  Larry, I --

Dr. George S. Ford:  -- it's interesting about these laws, they go back to economics from the laws. Most of these state laws are prohibitions on cross-subsidies. And the proponents of municipal broadband describe these laws as being entry barriers, precisely because they prohibit cross-subsidization, which is essentially an admission that these networks can't enter without subsidies and that their pricing below their costs. So I think that's an interesting little twist on the combination of the law and economics of the issue.

Lawrence J. Spiwak:  I'm sorry, Danielle. You had a question?

Danielle K. Thumann:  Oh, yes. If we could just go back to that final case you were talking about, the Association of American Railroads. I noted in the article, proponents of municipal broadband would likely try to distinguish that case on the grounds that Amtrak is charged with making a profit whereas municipal broadband systems are generally organized as not-for-profit entities. How would you respond to potential arguments that municipal networks are not actually interested in a profit at all? 

Lawrence J. Spiwak:  Well, I go into that in the Law Review. If you go back -- there's language actually in the Nixon case where the court -- and also in the City of Lafayette, that just says that doesn’t hold water. Again, the City of Lafayette case, they said don't tell me that you're not -- that you're doing this for what George would like to say what would Jesus do, right? You're not the social planter. You're not out there for the good of all. You're out there to try and steal customers. You're not out to use the Supreme Court's language to promote the public weal.

      So I think that's number one, and then Nixon really goes into -- and I don't have the dicta in front of me, but really talks about this is your -- the fact that you might be working for the city is you're still engaged in -- so I think that argument just doesn’t hold water.

Danielle K. Thumann:  Okay, thank you. So I want to make sure that we save time for Q&A. So if it's okay with you both, I'll go ahead and turn it back to Nick to open it up for questions.

Nick Marr:  Looks like we don't have any questions yet. Danielle, I'll send it back to you and if we get a question that pops up, I'll let you know.

Danielle K. Thumann:  Okay, wonderful. Thank you. 

Nick Marr:  Oh, we do have one actually.

Danielle K. Thumann:  Oh, okay. Nick, back to you.

Lawrence J. Spiwak:  Hooray.

Caller 1:  That was fantastic. Could you just give a little bit of legislative history of 706 please?

Lawrence J. Spiwak:  706, sure. Let me give you the very short because it's very controversial. 706 originally wasn't part of the Act, It was sort of passed with the Act and then they later codified it. But the notion of 706 was -- and I think an altruistic goal was that the FCC were to take a look around and see if advanced broadband was being deployed and to do a report on a "reasonably timely basis to all Americans." And if not, they were to take all steps.

      So it was hortatory. In other words, it was a statement of policy -- take a look around and the FCC had to do their 706 report, is broadband being deployed on a reasonable timely basis? Of course, over the years, I think George and I did a paper years ago. The question's how do you define reasonable and how do you define timely? If it costs you $50,000 to pass a home, is that reasonable? And then timely, it's not an end, it's a journey.

So anyway, so it was there, and it was never designed to be an affirmative source of authority. And then during the Obama administration, it was the first term, they said this might be -- because part of the problem was is that as you move from part of the net neutrality debate and you were trying to get out of the umbrage of Title II, Common Carrier Legislation, and move to an information service, 706 could have, I think, if properly applied, provided a back stop as an affirmative source of -- it's been argued by many that it was never designed to be an affirmative source of authority.

      Still, what the FCC did during Chairman Julius Genachowski's tenure was the first thing he did in the first 706 report, he said aha, broadband is not being deployed on a reasonable, timely basis, which allowed him the factual predicate to use to take the part of Section 706 that the FCC shall take regulatory steps to promote broadband, including regulations or other deregulatory measures, sort of what was hortatory somehow give a sense of authority.

      What's interesting is that the D.C. Circuit in the case called Verizon bought that argument. So all of a sudden, 706, which many had thought was just sort of a statement of policy, has now become an affirmative source of authority.

      And then there's been a lot of debate over the Court's case. It hit its peak of statutory independent authority in the D.C. Circuit's case in U.S. Telecom. Again, I think had they kept it as a source of super ancillary authority, it would've been one thing. But if you read the 2015 Open Internet Order, it indicates the U.S. Telecom, it's as if 706 which was never intended to be an affirmative grant of authority all of a sudden became even more potent than Section 201 and 202 of Title II in the Communications Act.

      As part of the Restoring Internet Freedom Order, the Commission made the decision that they were going to return 706 not as any form of authority but simply as just, again, statement of policy, and the D.C. Circuit upheld that. So that's the long and very short tortured history of Section 706.

Dr. George S. Ford:  Larry, it seems that to me that the latest case, the Mozilla case, I guess it was, basically says that whether or not 706 has juice or doesn't depends on what the FCC says.

Lawrence J. Spiwak:  That's correct.

Dr. George S. Ford:  It could go either way.

Lawrence J. Spiwak:  That's correct because the statute was ambiguous and that's why when, again, going back to the Verizon case, originally, the FCC did not view it as a source of authority. And then they changed their mind and I forget the exact quote from the D.C. Circuit. It was something along the lines of I guess even a regulatory agency has to have some dignity. They really twist the knife a little bit.

      But it was there, and it was the FCC to do it. So could Section 706 come back under a Democrat administration? Yes. And I think the problem is that there was never really any sort of discussion over it but what it clear about -- and I make this argument in the paper, that even if you assume that 706 does, again, my view of it was that it could be a view of super ancillary authority, you still had to tie it back to some affirmative grant of authority in Title II, Title III, and Title VI.

      And so if you -- the only preemption provision in the Act is 253. So if you tie it back to 253, you have the Nixon problem, and that's where you run into it. Just as a quick footnote to this, if you read the Tennessee case, which is the Sixth Circuit case striking down the FCC's 2015 preemption order, as I said earlier in the Teleforum, the Court issued a very, very, very, very, very, narrow ruling and refused to comment on whether or not 706 gave preemptive authority or not. So I think that that's there.

      Now, the bill that the Democrats passed, they have added this very broad preemptive authority to Section 706. But, again, is it hortatory or not? I don't know. I'm more, legally speaking, it's such a blanket preemption. It's not even and the FCC shall make a determination on a case by case basis or whatever. It is just simply any state law is hereby banned, which I think is a rather sweeping attempt at legislation. So we'll see.

Nick Marr:  We don’t have any more questions right now. And since we're coming up on the hour, unless another one pops up, George or Larry, I'll send it back to you. Do either of you have any closing remarks on this?

Dr. George S. Ford:  I'd just like to repeat what we said earlier that this isn't a partisan attack on municipal broadband. I think there are cases where --

[Inaudible 54:22]

Dr. George S. Ford:  -- you can make an argument for it in unserved areas. I think the problems really arise when you're overbuilding and using a government network subsidized through various means to compete. And the economics discusses this and lays it out pretty clearly and also has some discussions about generally how to think about competition and the social premium or externalities that we assign to broadband.

      So whatever your position is on municipal broadband, I think that the paper is worth reading and understanding the economic and legal parameters of the issue, if anybody's really interested in that. It's not always obvious to me that people are interested in the economic and legal realities of something. They just decide that it's something they want, and they just proceed on.

      But there's something for everybody in the paper. And I think it could help clean up the arguments on either side of the issue that the arguments that people making.

Lawrence J. Spiwak:  Yeah, and just to echo that, broadband, particularly in these very difficult times, has almost become a bit of a religion. And people are in favor of municipal broadband, thinking it's going to be the greatest thing since sliced bread and it's all benefits and no costs. And I think the other side is that government, boo, markets, yay.

      And it's a very nuanced problem, and what we've tried to do in this paper, as we've gone through today, is first off, understand the economics of broadband. And we spend a really long time, a good deal of attention of the paper to doing that because George and I both been doing this business a long time and we find that every couple years, we have to remind people of how this business works. And it's a real -- people need to understand this, particularly as we're talking about spending possibly $100 billion on broadband deployment. And this is just one municipal broadband, certainly just one piece.

      To think that you've got 100 pages on this one topic just shows you how complicated this work is. And then, the other issue is the legal issues are very, very, very important. As a policy matter, we want to have broadband. We want to have it expended to all Americans. We want to have it to be reasonably priced, a good service. But there has just been no framework about this. It's just either good or bad or whatever.

      And what we've tried to do, like I said, this is published in the Law Review. The cites have been checked by everything else. And I really think this is the first sort of very comprehensive paper on this topic. And we just hope that people find it useful and informative. And we appreciate the FedSoc giving us the opportunity to talk about the paper today.

      And it's available, by the way, I would be remiss if I didn't say this, on the Federal Communications Law Journal webpage. And you can also do it on our webpage, which is, starting at the top there on our webpage, is www.phoenix-center.org. It's free. All it's going to cost you is about a ream of paper and a pound of 100-page law review, a lot of toner. But thank you.

Danielle K. Thumann:  Thank you both. Thank you both so much for such an interesting discussion. It is an excellent paper, and I encourage listeners to check it out. It is also available, I believe, on The Federalist Society webpage in the link to this event today.

Lawrence J. Spiwak:  Yes.

Nick Marr:  That's right. Danielle, anything to add? 

 Danielle K. Thumann:  No, I don't think so. Thank you so much for tuning in.

Dr. George S. Ford:  Thank you, Danielle, for doing this. And thanks FedSoc for having it.

Nick Marr:  On behalf of The Federalist society, I want to thank you all for the benefit of your valuable time and expertise today in discussing this and to the audience for tuning in. As a note to the audience, we welcome your feedback by email at [email protected]. And as always, keep an eye on your email and our website for announcements about upcoming Teleforum calls. Okay. So thank you all for joining us today. We are adjourned.

[Music]

Dean Reuter:  Thank you for listening to this episode of Teleforum, a podcast of The Federalist Society’s practice groups. For more information about The Federalist Society, the practice groups, and to become a Federalist Society member, please visit our website at fedsoc.org.