Supreme Court backs states in municipal telecom case

In the case of Nixon vs. Missouri Municipal League, the U.S. Supreme Court in January heard oral arguments to determine if states can bar or hinder municipalities and municipal utilities from entering the telecommunications services market. Ten weeks later on March 24, the decision came down 8-1 in favor of the petitioners: Missouri Attorney General Jeremiah W. Nixon, the Federal Communications Commission, and Southwestern Bell. While incumbent carriers and their supporters hailed the victory, organizations such as the Fiber to the Home (FTTH) Council—whose membership has benefited from several FTTH projects initiated by municipalities and municipal utilities—refused to concede that the war has been lost.

At issue was Section 253(a) of the Telecommunications Act of 1996, which contends that "No State...may prohibit or have the effect of prohibiting the ability of any entity to provide any interstate or intrastate telecommunications service."

The Supreme Court did not rule on the merits of utility telecommunications services; instead, it approached the case as a states' rights issue. Does the Telecommunications Act of 1996 clearly indicate that states cannot prohibit their entities from entering the telecom market? The Supreme Court, led by Justice David Souter, found that it does not. In other words, the high court affirmed Missouri's right to bar the municipalities that compose the Missouri Municipal League from offering telecom services, which currently applies only to voice services.

The ruling is a victory for incumbent carriers like SBC subsidiary Southwestern Bell, which called the Supreme Court's decision "welcome news." Ed Merlis, senior vice president, law and policy, of the U.S. Telecommunications Association (Washington, DC), deemed the ruling "a victory for consumers and for our economy....With its many tax and regulatory advantages, the government should not be in the business of competing directly with private enterprise."

Folks on the other side of the issue remain equally resolute. "[Allowing municipalities to compete] was the intent of the Telecommunications Act, although with the Supreme Court ruling, it wasn't made that way," reasons Ron Lunt, director of community broadband services for the American Public Power Association (APPA—Washington, DC). The APPA filed an amici curiae, or "friends of the court," in support of the Missouri Municipal League. "We hope no other state legislators jump on the bandwagon and bar utilities from providing service," says Lunt.

Eleven states currently bar or hinder municipalities from offering telecom services: Arkansas, Florida, Missouri, Minnesota, Nebraska, Nevada, South Carolina, Tennessee, Texas, Virginia, and Washington. Several other states, including Wisconsin, are mulling prohibition laws.

While a Supreme Court ruling in favor of the Missouri Municipal League would have nullified existing prohibition laws, its decision is by no means a death knell for municipalities in telecom, says Leonard Ray, vice president of the FTTH Council. "It doesn't mean that municipalities can't enter into telecom," he explains. "It just means they have to deal with whatever laws exist in their given state."

The existing laws vary greatly by state. Some states, for example, prohibit retail telecom services only. Public-utility districts cannot provide retail services in Washington, but they are allowed to provide wholesale telecom services. Nebraska will also allow utilities to lease dark fiber, provided they meet certain requirements: The lessee must be a certified common carrier, and the list price and profit distribution must be approved by the Nebraska Public Service Commission.

"As long as we have the ability [to provide wholesale services]," says Lunt, "the majority of [APPA] members do use a CLEC to provide telecom service, so they would still have the option of having a competitor in the market."

Ray believes the Supreme Court's ruling may actually be a defining moment for municipalities, if "it helps motivate folks to join forces more strongly than they have in the past to ensure that these laws are not enacted in any more states and try to fight the ones that exist." He cites a recent victory in Utah as an example. The $470 million Utah Telecommunications Open Infrastructure Agency (Utopia) FTTH project—backed by 18 municipalities and designed to deliver triple play services to 248,000 homes and 34,500 businesses via fiber—had been the subject of heated debate. On March 5, the Utah House and Senate reached a compromise on Senate Bill 66 (originally drafted by incumbent provider Qwest Communications) to allow the Utopia project to continue.

Moreover, Ray says, "The Telecom Act is probably going to be rewritten over the next three years, and that will provide an excellent opportunity for [municipalities] to begin lobbying at that level, should this galvanize them like I believe it will."

The FTTH Council has a real interest in this decision, since municipalities have been instrumental in the adoption of FTTH technology.

According to market researcher Render, Vanderslice & Associates, municipalities and public-utility districts composed 32% of the entire FTTH market in 2003. The RBOCs, meanwhile, accounted for just 0.4%.

For his part, Ray does not believe the Supreme Court ruling will have a profound impact on the FTTH market. "Municipalities will continue to be a catalyst, will continue to be strong advocates for the technology," he asserts, "but you're also going to see different avenues for FTTH. If it's not the municipalities, you'll see it through home developers, CLECs, and the rural independent carriers. The verdict is still out whether Verizon is going to do what it said it was going to do this year. The point is, it's not going to slow the FTTH market. It's unfortunate that states with prohibition laws will not get the benefits of municipal FTTH, but I think FTTH is inevitable. It's going to be brought by someone. The question is who or which groups will figure out how to do it—and do it first."

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