States Tap Buying Power to Get Net Neutrality

Montana contracts with ISPs total about $50 million annually, including wireless equipment, said a spokeswoman for Gov. Steve Bullock (D). The governor has no reason to believe ISPs risk losing contracts but sees his order as preventative, she said. Annual ISP service purchases from New York State’s centralized agreement are about $10 million, said a New York Office of General Services spokeswoman, citing a contract for comprehensive telecom services. New York City and some other localities have their own contracts, she said. California’s CALNET program, a contract with net providers selling services to state entities, is about $20 million annually, said a California Department of Technology spokesman.

New York Assemblymember Patricia Fahy (D) wants to make contract restrictions state law so “it couldn’t be simply overturned by a future administration,” a spokesman emailed. The executive order covers only state agencies, he added, whereas Fahy’s AB-8882 extends to counties, municipalities, school districts and libraries (see 1712210034). “We’re looking [to] amplify the power of the purse by exempting as many contracts as possible.” The FCC declined comment.

Big states like New York -- particularly in aggregate -- might have material effect, said New Street’s Blair Levin, a former FCC aide to Democratic chairs. It’s another example of a regulatory victory causing a potentially greater problem for those selling net access, he said. It’s difficult for the FCC to legally pre-empt a state’s power to define contract terms and “it creates an interesting public relations challenge for the ISPs, who have said they don't object to the net neutrality rules but only the other potential FCC authority under Title II, to object to the state's term,” he emailed of the Communications Act section. It would be bad for the state if all potential providers refused to agree, but if that happened, the state AG might see a potential antitrust problem and ISPs would have a PR problem, he said.

AT&T and Verizon likely have “a fair amount of state business,” but their financial exposure -- the amount that can be lost in an investment -- may be small, said UBS analyst John Hodulik. Cable exposure is insignificant, he said. The “main question” is whether such rules hold up in court, he said.

Taking away state contracts could have high financial impact for providers, but actions could be delayed by litigation and some providers may argue contracts precede the orders, said 556 Ventures analyst Bill Ho. The impact will depend on the value of the contract and how the state rule is written, he said. If the rule is black and white and “the company is tagged as not conforming … the company would lose all the business,” Ho emailed. “The caveat is how the contracts are awarded -- if it’s a bundle will they lose all the business or is there a way to extract things out?”

“A patchwork of different state rules would confuse consumers, harm competition, and impede innovation and investment,” so AT&T prefers federal legislation, a spokeswoman said. The carrier last week offered an internet bill of rights (see 1801240047) and pledges “open and transparent” network operation, she said.

Effects Debated

Big companies delivering broadband were “highly profitable” under the 2015 rules, so abiding by net neutrality shouldn’t hurt their businesses, emailed Free Press Director-Strategy Tim Karr. Free Press wants strong federal rules, but appreciates states’ “energy,” he said.

The executive orders could hurt state telecom services including the nationwide public safety network, said Information Technology and Innovation Foundation Director-Telecom Policy Doug Brake. “I don’t see how state agencies can participate in FirstNet -- where the state itself would be paying for prioritization and preemption of public safety data over best efforts Internet traffic -- while complying with these executive orders.” The orders could affect FirstNet since the nationwide public safety broadband network prioritizes first responder communications in emergencies, American Enterprise Institute visiting fellow Daniel Lyons blogged Monday.

“If [FirstNet] is an internet contract within the meaning of the order, then it would be affected,” a spokeswoman for Bullock emailed. A FirstNet spokeswoman said: “State and federal regulators have always provided public safety an appropriate regulatory environment to support their life-saving mission.” The network will “work closely with the states and public safety to ensure the successful deployment and operation of FirstNet,” she said.

If the network were inadvertently included, it would be easy to amend an executive order to exempt it, replied Public Knowledge Senior Counsel John Bergmayer. “If it were a problem, they could fix it.” The executive orders send a strong message and would likely be tough for the FCC to pre-empt, he said.

The state-contract approach could be pre-empted because it still conflicts with the FCC’s goal, argued AEI's Lyons. “In 2000, the Supreme Court struck down a similar effort by Massachusetts to prevent state agencies from purchasing goods from companies doing business with Burma because this power of the purse conflicted with federal policy toward the country.” The Dormant Commerce Clause stops states from unduly burdening interstate commerce, he said. “At a minimum, requiring certain network management practices within a state threatens the uniform treatment of traffic and raises the specter of balkanizing the network into a series of ‘splinternets.’”