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Regulation - What is it Good For?

State versus Federal Regulation

One of the oldest tugs-of-war in the regulatory world is a battle between state and federal authority to impose regulations. This has been a constant battle in telecom regulation, but also extends across the regulation of many other industries.

The latest telecom clash between state and federal regulators comes from the attempt of states to implement net neutrality rules. The first state to pass a net neutrality law was California, but this was quickly followed by net neutrality rules in Vermont, Washington, Rhode Island, New York, Montana, and Hawaii.

The California net neutrality rules closely match those that were killed by the FCC in 2017. The California laws were quickly challenged by the US Department of Justice along with some large ISPs. The federal courts upheld the FCC’s authority to kill federal net neutrality but ruled that the FCC didn’t have the jurisdiction to override state net neutrality rules.

This year several industry lobbying groups have banded together and have sued in the U.S District Court in the Eastern District of California to stop the implementation of the California law. This includes the American Cable Association, CTIA — The Wireless Association, NCTA — The Internet & Television Association, and USTelecom — The Broadband Association. Other states have put implementation of state net neutrality rules on hold waiting for the outcome of this latest case.

The line between state and federal regulatory authority has always been a fuzzy one. The plaintiffs in this case argue that the California rules are unlawful because the state is trying to regulate interstate commerce – meaning communication between California residents and Internet servers sitting in data centers in other states. They argue that only the FCC can regulate this kind of traffic.

But the line between state and interstate traffic got blurred a long time ago as telcos and ISPs have implemented centralized technologies. For example, regulators always assumed that states have the authority to regulate telephone features like Caller ID or voice mail since these are sold to accompany landlines, which has always been considered to be under state jurisdiction. However, a close look at the technology used by telcos would show that some functions supporting telephone features are handled in other states. A company like AT&T or Verizon might house the master servers for identifying the identity of calling numbers in a single data center that serves a huge swath of the country. If a computer dips into a data center in Chicago to get the name of a calling party, does that make caller ID an interstate function?

Unfortunately, technology has badly blurred the lines between telecom products that are interstate in nature versus products that are delivered locally or within a state. My guess is that there are very few telecom products left that are purely local.

This kind of jurisdictional argument also raises the specter of carriers manipulating telecom service delivery to avoid regulation. To use my caller ID example, there is nothing to stop a telco from changing the way that caller ID works if doing so can avoid regulation – put the server in another state, and voila – caller ID is an interstate service.

This raises a larger issue to consider. The blurring of state versus interstate products raises the issue of whether states even have a role in regulating telecom services. For example, there are likely almost no web products or connections that completely begin and end within a single state. If the state / interstate issue is defined in the way the plaintiffs are asking in this case, then states likely have no role left in regulating broadband products.

That may be where the courts end up on the question – but that somehow doesn’t feel right. One of the regulatory roles of states is to protect their citizens against abuses by monopolies and bad actors. In cases where the federal government fails to act, states are the last line in protecting consumer rights. I have no idea how the courts will rule in this case. But I have a hard time thinking that states can’t act to make sure that there is no discrimination in the routing of Internet traffic affecting their citizens.

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