Federal regulation of the Internet is a bad idea. So is federal regulation of states that would rather keep their local governments out of the Internet business.

Following a recent federal court ruling about the power of the Federal Communications Commission (FCC) to regulate the Internet, supporters of government-run broadband Internet service have urged the FCC to preempt state restrictions on local government efforts to build and operate their own broadband networks that compete directly with the private sector. More significantly, an announcement yesterday by FCC Chairman Tom Wheeler, proposing yet another attempt to impose some sort of net neutrality regulations, suggested possible FCC examination of state law safeguards regarding municipal (muni) broadband projects. The inference is that the FCC would explore the possibility of preempting those state laws.

First, some background. Despite billions invested by private sector providers and widespread broadband coverage and choice for consumers, several U.S. cities and counties have taken it upon themselves to build and operate their own broadband networks providing retail Internet access service. In several high-profile instances, muni broadband projects have turned into business failures. As a result, local government budgets have run into serious financial troubles. Local taxpayers have been stuck with enormous debts.

Many states have considered it improper to put local governments in direct competition with free market providers of broadband Internet services and to risk previous taxpayer dollars. Moreover, assuming a dual role as public authority and as business proprietor poses inherent conflicts-of-interest for local governments. Such conflicts lend themselves to abuses of government power. To this end, approximately 20 states have placed various restrictions on government’s entry into the broadband business. Several states outright prohibit muni broadband projects. Other states impose certain procedural safeguards, such as requiring a local vote of the people for approval. The American Legislative Exchange Council (ALEC) Municipal Telecommunications Private Industry Safeguard Act takes the latter approach.

But supporters of government-run Internet services have urged the FCC to preempt those 20 or so states restricting their counties and cities from going into the broadband Internet business. It now appears that some supporters of government-run Internet services – and perhaps even the FCC – see a silver lining for municipal broadband projects in the D.C. Circuit Court of Appeals’ ruling in Verizon v. FCC (2014).

In that decision, the D.C. Circuit struck down the FCC’s attempt to regulate broadband Internet services (ALEC legislators opposed the FCC’s so-called network neutrality regulations when they were being considered). However, the D.C. Circuit concluded the FCC has some authority to regulate broadband Internet services under Section 706 of the Communications Act. In a Washington Post blog from February 3, a market analyst is quoted suggesting that Verizon v. FCC gives the FCC the power to preempt state restrictions on city and county governments going into the broadband Internet business.

Not so fast.

First, federal law contains no clear statement authorizing preemption of state restrictions on their cities and counties going into the telecommunications or broadband Internet business. The actual extent of FCC power to regulate the Internet following the D.C. Circuit’s January decision in Verizon v. FCC remains uncertain. But no matter how broad its regulatory power, the FCC cannot interfere with state control over cities and counties absent a clear statement of intent by Congress. Concerns for constitutional federalism supply the grounds for the U.S. Supreme Court’s clear statement rule.

Second, FCC preemption of state restrictions on government-owned broadband projects would violate constitutional federalism principles. Local governments are creations of the states. They remain accountable to state public policy choices. It would be constitutionally improper for a federal agency to turn counties or cities into separatist enclaves by granting them powers that their respective states never delegated to them in the first place.

Third, the U.S. Supreme Court has previously rejected federal law preemption of state prohibitions on telecommunications services. In Nixon v. Missouri Municipal League (2004), the Supreme Court expressly rejected claims that Section 101(a) of the Telecommunications Act of 1996 preempted Missouri’s statute prohibiting its cities and counties from offering telecommunications services. The Court based its decision in Nixon on the clear statement rule and constitutional federalism problems. It expressed concern over the federal “one-way ratchet” resulting from local governments being able to provide services in perpetuity, unaccountable to state legislative control. According to the Court’s majority, “[t]here is, after all, no argument that the Telecommunications Act of 1996 is itself a source of federal authority granting municipalities local power that state law does not.”

In short, states that safeguard taxpayers from dicey government-owned broadband ventures are safeguarded by constitutional principles and precedents. Rather than restrict states’ ability to ensure the financial soundness of their cities and counties, the FCC should look to promote successful private sector-led investment into faster and better broadband networks by ending rights-of-way discrimination, streamlining tower siting rules, reforming franchising processes and fees, and clearing away other red tape.

Seth L. Cooper is an Adjunct Senior Fellow of the Free State Foundation, an independent, nonpartisan free market-oriented think tank located in Rockville, Maryland.

(crosspost)