Thursday, May 26, 2005 - The Progress & Freedom Foundation Blog

Is Judge Dillon in the Texas House?

May 30 will mark the end of the 79th regular session of the Texas legislature and communications issues are in the mix. The state utility commission was reauthorized. "Omnibus" telecom legislation that would reshape regulatory obligations has been making its way through the process for months and a special telecom tax - revenues are directed to the state Telecommunications Infrastructure Fund - appears to live for another day.

But what caught my eye this week was the House passage of legislation that would cut municipal franchise authorities out of the regulatory game for multichannel video services. It has been a hotly contested topic in Austin and promises to be an issue in several other states as the traditional telecommunications firms reconfigure their infrastructure with more fiber in order to compete for the "triple play" of video, voice and data (broadband) services. The ad and lobby warfare includes typical finger-pointing between industry players and their trade representatives. Whenever the term "level playing field" is used, senses should be sharpened and everyone should bring an extra dose of wariness to the table. In this debate, both sides availed themselves to the argument. In essence, Texas cable providers prefer new entrants to seek local franchises and the traditional telecom providers prefer either a statewide franchise - effectively preempting local franchise authorities - or no additional franchise obligation whatsoever.

In Texas, at least for the near-term, the statewide franchise took a step forward. The issue poses interesting interpretive questions about Title II and Title VI of the federal Communications Act. There is a very compelling public choice story to be told at all levels of government. But the local preemption question has the potential to explode as the issue makes its way to other state capitals. To understand the arguments, it is valuable to see how we arrived at our current legal and institutional position. What was happening in Austin this week has roots in a debate among 19th century jurists who ruled on the relationship between municipal authorities and large, networked industries like rail and water.

Where do municipalities get their legal authority? It borders on the absurd to think it comes from the national government, yet the Supreme Court has weighed in on the issue many times. Additionally, Congress gave the FCC the power to certify local franchise authorities (for cable.) Yet some American cities proudly trace charters back to the English Crown and others appear to exist only at the leisure of their representatives in the state capitol.

It may be obvious, but it is certainly worth stating: just as multichannel video technologies and services vary greatly, so too does the apportionment of power within the states. The relationships and power structures between states and their respective municipal authorities are heterogeneous.

The principle distinction is the level of independence local governments have from their respective state capital. In many states, local governments operate only with the power expressly granted by state statutes and charters or authority fairly interpreted from delegated powers. These states operate under what is called "Dillon's Rule" named after a 19th century Iowa jurist, author and municipal law expert John Forrest Dillon. In states where Dillon's Rule has been adopted, the probability of uniform statewide policy prescriptions - including limited preemption of local regulatory authority - is greater. And in case you were wondering, Texas is typically considered a Dillon's Rule state.

This paper from Brookings found that 39 states use Dillon's Rule to define the power of local governments but eight of those states only use it for a portion of their municipalities. (Check out the helpful map on page 18.) Ten states do not apply Dillon's Rule at all. As a result, what the cable folks didn't win on Tuesday in Austin still may be available in other state legislatures. For that reason alone, the fight over franchise authority will continue to simmer in statehouses.

From the pro- local preemption side of the debate, it will be correctly noted that Dillon's Rule has been upheld several times by the Supreme Court. It is often referred to as a rule of strict construction because local powers must be clearly defined by the state legislature. Ironically enough, Dillon was responding to widespread corruption among local political leaders regarding grants for public utilities, economic development spending (primarily on railroads) and public indebtedness (often associated with water and electric investments). Dillon's Rule effected reform and reined in the independence of local governments. Imagine that. Dillon put a shot across the bow of public officials who used their authority to extract extra-legal rents from public utilities under the guise of economic development. Some things don't change; the 1980s were rife with scandal as local franchise authorities extorted rents from cable providers. (Yes, extortion. This is not hyperbole. There were federal charges to that effect and people went to jail.)

Dillon's doctrine on municipal incorporation law was challenged in his day. A contemporary on the Michigan Supreme Court, Judge Thomas M. Cooley, articulated a very different view. Cooley argued for the inherent right of local self-governance and his view was adopted by Supreme Courts in several states including Indiana, Iowa, Kentucky, and notably, Texas.

In response to practical challenges presented by Dillon's Rule and encouraged by Cooley's logic, the "Home Rule" movement quickly spread. As an antithesis of Dillon's strict constitutional construction, constitutional amendments cropped up to protect the autonomy of local governments. Thus, Home Rule cities are constitutionally independent in many respects from directives of the state government and have the power to legislate, regulate or otherwise control policy that is not of statewide concern. However, in practice the application of Dillon's Rule suggests that the notion of local autonomy versus state authority is not a binary proposition. State and local governments tend toward a blending of powers often with different rules within the same state.

It is on this last point that the technologies of contemporary communications networks are central to the debate. IP networks present significant challenges to standard regulatory institutions, including jurisdictional distinctions among local, state, and national governments. The Census Bureau reports that there are at least 87,849 units of local government. A fair estimate suggests that there are more than 34,000 local cable franchising authorities. Will the future of IP based communications policy come from this many sources? Will state governments have the authority and political wherewithal to say otherwise? (Stay tuned to Austin until May 30 to find out an early data point.) Are franchise agreements even necessary? Remember that Demsetz Competition (Demsetz, 1968) is premised on natural monopoly and with multiple platforms including DBS, the idea of natural monopoly in the video marketplace is an illusion.

Now more than ever, traditional distinctions between the issues of statewide concern and the issues of local concern, and between intra- and interstate commerce, must be evaluated in light of today's multi-modal, mobile, IP-based communications marketplace. The Texas legislature is taking its first cut at the issue. We can expect it to be a big debate into the future.

posted by @ 11:27 AM | Cable , Communications , State Policy