More than a year after the FCC voted to preempt state laws in Tennessee and North Carolina that heavily restrict city- and county-owned utilities from providing broadband to consumers, the states and the federal regulator finally had their day in court.

Laws — heavily backed by cable and telecom giants like Comcast, Time Warner Cable, and AT&T — in these states prohibit municipal broadband providers from offering service outside of very specific geographical areas.

In Tennessee, a utility can only offer broadband within its electrical service footprint, even though they may provide fiberoptic phone service outside of those lines. In North Carolina, utilities can only sell broadband to other communities within their home county. So a city like Wilson, NC, one of the first places in the country to offer gigabit broadband to residents, can sell electrical service in six different counties, but broadband in just one.

Wilson and Chattanooga each filed petitions in 2014 with the FCC, arguing that these state laws ran afoul of what’s known as “Sec. 706,” the portion of federal telecommunications law requiring the FCC and state agencies to “encourage the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans.”

And a narrowly divided FCC agreed in Feb. 2015, voting to preempt these two state laws.

“[Y]ou can’t say that you’re for broadband and then turn around and endorse limits on who can offer it,” said FCC Chair Tom Wheeler at the time. “[Y]ou can’t say, ‘I want to follow the explicit instructions of congress to… remove barriers to infrastructure investment, but endorse barriers on infrastructure investment. I think, as they say in North Carolina, that dog don’t hunt.”

Almost immediately, the two states filed lawsuits aiming to overturn the FCC’s preemption order. The two states’ petitions were subsequently combined into a single case currently before the Sixth Circuit Court of Appeals.

Yesterday — only days after Tennessee legislators (with Comcast and AT&T lobbyists looking over their shoulder) struck down a bill that would have made this lawsuit unnecessary — the two sides made their case before a three-judge panel, which did little to indicate how it might be leaning.

Lawyers for both Tennessee and North Carolina argued that the FCC’s actions violate core tenets of state sovereignty, which “forbids the federal government from displacing a state’s ability to structure its own subdivisions.”

Tennessee’s solicitor contended that EPB — the city-owned utility in Chattanooga that sought to expand its service area — is in fact an arm of the state government, and that the FCC is “coming in and displacing Tennessee’s ability to dictate where and how service is provided by one of the arms of the state.”

But the judges questioned Tennessee’s claim that the FCC can’t regulate the “how” of telecom services.

“When you say ‘how service is provided,’ would you say it’s unconstitutional for them to regulate, for instance, broadband width or frequency of radio stations?” asked one judge. “So you stated it too broadly… ‘How’ they do it might include what frequencies they use.”

Tennessee countered that there is limiting principle at play “when the FCC attempts to affect those instances of sovereignty that are core state sovereignty… there are some things about being a state that are sacrosanct and the state has the ability to define those things without regard to federal law.”

But the judge fired back, pointing out that if the state operated a radio station, if would still be required to comply with FCC regulations regarding things like radio frequency.

“Why isn’t that fundamental to what a state does?” asked the judge. “It’s not, because it’s communications policy.”

Likewise, the judge noted that if a state subdivision — in this case a utility company — has to follow federal regulations, the state couldn’t then tell the subdivision to violate those regulations.

“We absolutely are not saying that states are immune from applicable regulations,” answered Tennessee, leading the judge to ask how the state distinguishes between something that is core to the state’s structure and something that is just “communications policy.”

“In this case, it’s all about the territory in which you provide service,” responded Tennessee. “It’s all about what the actual service territory is… which subdivisions are responsible for service in which parts of the state?”

The state argued that one of the core tenets of state sovereignty is the ability to divide the state up into different subdivision and say “in this area we want this subdivision to provide service” and to prevent “inefficient” overlaps in service.

This led Judge Helene White to comment that there may be a difference between keeping two utilities from conflicting in the same area and keeping a public utility from competing with a private business in the same market.

“If the service they are providing is one that is also provided by private entities, it starts to look more like you’re manipulating commerce and not regulating state authority,” said White.

The Tennessee solicitor then made the claim that the FCC is unfairly forcing utilities to offer broadband outside of their service area.

According to the state, the FCC is “saying public entities can’t limit themselves in terms of where they provide broadband service… If Google wants to provide service only in Nashville… Google is free to do that.”

But Judge White seemed puzzled by this line of thought.

“I thought what the FCC did was tell Tennessee and North Carolina that they can’t restrict the service provided, not that any provider… can’t limit their service,” she said.

Tennessee’s response was that EPB is a part of the state, so the FCC is effectively saying to Tennessee, “You can’t restrict yourself. You can’t decide to limit yourself when to invest in broadband. If you invest in broadband, you have to invest in broadband everywhere in the state.”

The solicitor likened the FCC’s actions to the government putting itself into the decision-making process between a board of a private company and its executives.

One of the judges asked North Carolina’s Solicitor General what would happen “if the state legislature decides that broadband is kind of a bad thing and we ought to limit it whenever we can” and passes laws to make it more difficult for state-controlled utilities to provide the service. Wouldn’t that sort of legislative action be contrary to Congress’ intention in Sec. 706?

North Carolina deflected, by maintaining that Congress had not explicitly given the FCC authority to preempt state laws, so it doesn’t matter.

An attorney for the FCC tried to make the case that the state laws at issue aren’t about the state’s structure or sovereignty.

“What these laws do is regulate competition in the interstate market,” said the FCC, “They’re about how an entity that may provide broadband actually does so.”

Pointing to Tennessee’s law that allows EPB and others to provide telecom services, but specifically prohibits utilities from expanding broadband service, the FCC contended that “Such a scheme does not in any way safeguard the public… it also doesn’t arbitrate between competing subdivisions” as the state argues. “Instead, all it does is regulate competition.”

Judge John Rogers, whose questions dominated the majority of the FCC’s time before the court, asked what would happen when a city-operated broadband network doesn’t want another city coming in and providing a competing service?

The FCC said this isn’t really the question raised by the laws at issue, but noted that a state could pass a provision that a city could only go into a new area only when invited. Such a law would likely not be seen as violating the spirit of Sec. 706; or at least it would pose a different question for the FCC to consider.

“Just this week, a bill in Tennessee was defeated that would have allowed just that,” noted the FCC. “It would have allowed cities to provide service outside of their electrical service territory” but only with the permission of the city into which they are moving.

Judge Rogers said the issue ultimately boiled down to “Is this something that regulated parties are allowed to do, or is it something that regulated parties are required to do?”

At first, that statement might seem to indicate that the judge was leaning in favor of the FCC’s argument, as the FCC contention has been that it is not ordering city-owned broadband providers to expand, just removing a roadblock their possible expansion.

But Rogers repeatedly raised concerns that this way of handling the matter was only taking the decision out of the state’s hand and ceding that control over to local government.

“It seems you’re interfering with the way the state structures its decision-making authority to exercise discretionary determinations,” the judge commented. “How is it not that?”

The FCC’s answer is that the states had already made the decision that cities could enter the broadband market, and the cities had chosen to do so, but “except for these competition laws at issue here,” the cities were not being allowed to operate their broadband services as intended by federal law.

Judge White eventually intervened to try to bring some order to Rogers’ comments.

“I think that Judge Rogers is talking about the unitary nature of the state, that the state government and the city government is really the same thing because of the power of the state,” she explained. “And so what he’s trying to make the point of is that you’re really just affecting who makes the decision… I think that what the [FCC] is seeing is… a barrier erected by the state and the city wants to do something that the state will only allow it to do a little bit, but not more and you see your authority as removing barriers, as removing the state’s denial to the city of the power to make that decision.”

A victory by the FCC in this case could throw open the doors nationwide for city- and county-owned broadband networks to challenge laws in 20 different states that significantly restrict their ability to offer service to consumers.

For example, in Washington state, the law allows municipalities to operate broadband networks, but they are only permitted to sell access on the wholesale market, meaning consumers need to go through a third party to buy access to something that their tax dollars have funded.

Utility providers in that state and others have been watching the Tennessee/North Carolina lawsuit, waiting for a resolution before deciding whether to invest time and effort into filing similar challenges to preempt laws in their state.

On the other side of the coin, if the states win, it could embolden telecom lobbyists — who have written most of these restrictive laws — to push even further to introduce laws in states where they don’t yet exist.

In fact, just this month, industry lobbyists in Colorado — where community broadband is not allowed, but where individual communities can seek exemptions from that law — tried to push through a bill that would make it significantly more difficult for towns and cities to build their own networks or launch private-public partnerships. After public backlash — and a letter from Netflix, Google, and others calling on the Colorado senate to kill the bill — it died in committee earlier this week.

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