The 2nd U.S. Circuit Court of Appeals in Manhattan ruled recently that federal telecommunications law does not stop states from regulating broadband rates. This was in relation to a 2018 law passed by the State of New York that required ISPs to offer low-income rate plans for as low as $15 per month.

ISPs appealed the new law, and a U.S. District Court issued an injunction against the law. The recent ruling overturned that injunction and puts the law back into effect. The law allows ISPs with less than 20,000 customers to appeal the the implementation of lower rates, but there is no guarantee that ISPs will be relieved from the law.

I’ve written many times about the negative impact of forcing low rates onto ISPs. ISPs with a lot of low-income customers could quickly find their revenues streams decimated. Any legislator or regulator that makes this kind of rule must obviously think that ISPs sit atop gigantic margins – but many do not. An ISP with a lot of low-income customers will almost certainly have to increase other rates to offset the forced low rates, a move that would likely will put them at a competitive disadvantage.

This court ruling comes at an interesting time. The FCC just passed new rules that put Title II regulation and net neutrality back into play. One of the interesting provisions of the new rules is that the FCC purposefully decided to forebear the right to regulate broadband rates, meaning the FCC didn’t invoke the portions of Title II regulations that give the agency the ability to regulate rates.

The Court’s ruling was made under the assumption that ISPs are regulated under Title I rules – which are the rules that have been in place since the Ajit Pai FCC killed net neutrality. But suddenly, we are back in a Title II regulatory environment. The Court ruled that the FCC has no power to preempt State regulation under Title I rules, but that the FCC would have that right under Title II regulation. This means the Court believes the FCC could now preempt the State law since the agency just reinstated Title II regulations.

The court ruling creates several dilemmas for ISPs. The easiest path for ISPs to fight the reinstated New York law is to embrace Title II regulation and ask the FCC to preempt New York. That’s not something that big ISPs want to do – they have spent years and a lot of political capital vilifying Title II regulation. Everybody is expecting big ISPs to quickly appeal the recent FCC order that reinstates Title II regulation. If ISPs are successful in getting a Court to put Title II rules on hold, then the New York low-rate regulations will go into effect without recourse from the FCC.

If the big nationwide ISPs decide to try to kill Title II regulation, they will be throwing New York ISPs under the bus. But that’s not the end of the story. If the New York law goes into effect, it seems likely that other states will pass similar legislation. Many states are unhappy to see the ACP low-income subsidy die. But very few States are interested in using general funds to fund a new low-income subsidy program, so it’s going to be tempting to force ISPs to cover the discounts. If ISPs decide to fight against the FCC’s Title II rules, they might find themselves fighting against having to cut rates in dozens of states.

The Court ruling also creates a dilemma at the FCC. Even if the FCC has the right to tell New York that it can’t regulate rates – will it do so? The FCC recently made it clear that it did not want to try to absorb the dying ACP plan into the Universal Service Fund. But that doesn’t mean that the FCC will willingly play the bad guy and tell States they can’t tackle some state version of ACP relief.

It is nearly impossible to predict how the FCC will react. The FCC will certainly be happy to see States tackle the low-income problem since that takes the FCC off the hot seat. But the FCC would be happier with state plans that mimics ACP, where a State would fund the subsidy. The FCC will not like the precedent of states telling the ISPs they must cut rates. Which will the FCC dislike more – telling states they can’t cut rates or letting states exercise rate regulation?

Every ISP ought to be concerned about this ruling. However, there is no way to guess how the big ISPs and the FCC will react to the Court order. It’s unusual to encounter a regulatory ruling that is as challenging as this one for both ISPs and the FCC.