No, Missouri Law Does Not Prohibit Political Subdivisions From Offering Internet Service to Its Residents and Businesses

No, Missouri Law Does Not Prohibit Political Subdivisions From Offering Internet Service to Its Residents and Businesses

That statement might come as a surprise to some folks. 

Some articles have stated – without qualification — that Missouri law bars political subdivisions (such as cities, counties, municipal utilities, school districts and other local government entities from offering internet access service to their citizens, or even owning the equipment that others use to provide that service. 

The authority given for this conclusion is Section 392.410.7 of the Missouri Revised Statutes.  That statute does generally prohibit Missouri political subdivisions from owning telecommunication equipment or offering telecommunication services, and in Nixon v. Missouri Municipal League, the United States Supreme Court did decide that federal law does not prohibit the Missouri legislature from restricting or prohibiting political subdivisions from providing any type of telecommunication service.  Since one reason the Missouri Municipal League challenged Section 397.410.7 was to allow municipalities to offer internet access service as part of a municipal telecommunication utility, it is not all that surprising that commentators have raised concerns about the statute. 

However, the issue actually addressed by the United States Supreme Court in the lawsuit, was whether federal law (the Telecommunications Act) prevented the Missouri legislature from restricting political subdivisions that wished to offer telecommunication services.  The case did not decide whether the particular statute in question (Section 392.410.7) actually did restrict political subdivisions from offering the public access to the Internet (as opposed to other types of telecommunication services).  In the twenty-plus years since the statute was passed, technologies and business models related to Internet access have evolved.  Today a number of Missouri cities now offer public access to the Internet directly or through partnerships with private ISPs.  While the approaches adopted by these political subdivisions have varied, in each case a way has been found to navigate Section 392.410.7 to avoid violating the limits imposed by that statute.

Just what does Section 392.410.7 prohibit – and why is it no longer particularly relevant to the Internet access offered by political subdivisions today? 

The Missouri legislature passed Section 392.410.7 in 1997 in response to federal legislation that deregulated the telecommunications industry.  Faced with the prospect of increased competition from the private sector, legacy telecommunication companies, convinced legislators that it would be unfair to allow municipalities (political subdivisions of the State) to offer traditional telecommunication services.  The rationale was that, unlike private competitors, a political subdivision (or for-profit entities that partnered with them) would have an unfair competitive advantage over existing “legacy” telecommunication companies because political subdivisions do not pay income or property tax and they are able to raise capital to finance operations through taxation.

For that reason Section 392.410.7 generally prohibits a political subdivision from “providing or offering for sale, either to the public or to a telecommunications provider, a telecommunications service or telecommunications facility used to provide a telecommunications service for which a certificate of service authority is required pursuant to [Section 392.410].”  A “certificate of service authority” (issued by the Missouri Public Service Commission (PSC)) was, and continues to be required before some telecommunication services may be offered, but Section 392.611.2 specifically excludes “Broadband and other internet protocol-enabled services” from regulation by the PSC, except to the extent the provider offers voice over internet protocol service (“VoIP” or “internet telephone” service). 

Additionally, the general “prohibition” against offering telecommunication services contained in Section 392.410.7 contains additional exceptions.  First, and most importantly, the statute does not prohibit a political subdivision from providing “Internet-type services” (as opposed to telephony service).  Second, it does not prohibit political subdivisions from providing any type of telecommunications services for its general governmental purposes, to students at educational institutions or for any educational or medical purpose.  Third, political subdivisions may own and/or operate telecommunications equipment to provide E911 or other types of emergency telecommunications services.  Finally, a city’s municipal utility (water, gas, electric, etc.) is expressly authorized to provide other telecommunication companies access to the municipal utility’s telecommunication and other assets on a nondiscriminatory, competitively neutral basis, at a price equal to what the political subdivision would charge if it were a for-profit business.

Read together, these exceptions make the statute largely irrelevant for a political subdivision that today wishes to own and operate a system designed to deliver access to the Internet for its citizens.  Today internet access provides the public multiple opportunities to obtain online healthcare, buy goods and services, obtain an education, and launch a new business – as well as communicate with friends located anywhere in the world.  The services that use the Internet to make this possible are offered by government, business, and nonprofit organizations. Those services are subject to varying degrees of federal, state and local government regulation, but the transfer data over the Internet by a political subdivision is not prohibited by the express language of Section 392.410.7.  Additionally, as noted above, the statute provides wide latitude for political subdivisions to provide any other type of telecommunication service in addition to internet access) in order to deliver governmental services:  public administration, healthcare, education and public safety. 

If Not Specifically Prohibited — Should Political Subdivisions Undertake to Provide Internet Access to the Public?

This is a much harder question to answer.  It requires communities, in consultation with legal and financial advisors, to  carefully consider of a number of other legal questions, as well as economic and local public policy concerns.  For example, a school district considering participation in a public-private partnership with the goal of offering internet access to each student’s home for online learning, would need to be careful that the arrangement did not jeopardize the district’s existing E-rate funding that now provides internet service to school buildings and classrooms.  Many of these questions will be identified and examined in future articles, and developing strategies to address them will be part of a systematic online “Digital Community Guide” that will be made available to local government officials, community stakeholders and their advisors on the Missouri Broadband Resource Rail early next year. 

However, at least part of the answer can be found in the Report published earlier this summer following the University of Missouri System’s online Broadband Internet Workshop.  A core conclusion of the Workshop was that local government (political subdivisions) should actively consider arrangements involving public-private partnerships with internet service providers and other interested stakeholders to speed the deployment of affordable, reliable, high-speed internet service, and the adoption of new digital applications that use the Internet to deliver better health, education and financial opportunities for their citizens.  

New Missouri Statute Encourages Public-Private Partnerships for Broadband Infrastructure

posted in: Legal and Regulatory | 0

9-3-2020

New Missouri Statute Encourages Public-Private Partnerships for Broadband Infrastructure

For many years Missouri cities and counties have used Community Improvement Districts (CID) and Neighborhood Improvement Districts (NID) to finance public infrastructure and to encourage economic development in designated geographic areas (“districts”) located within their borders.  CIDs and NIDs are well-suited for this purpose, because when approved by property owners or individuals living in the district, a CID or NID can raise revenues through taxes and/or special assessments on property located or sales occurring in the district.  For more general information about CIDs and NIDs see Missouri Local Incentives.

Up until now Missouri statutes did not specifically state whether internet broadband was a “public improvement” eligible for financing by a CID or a NID.  However, in this past session the Missouri legislature enacted HB 1768 which made some significant changes to both the CID and the NID Act.  In each case a new provision has been added that permits these districts to be used for public-private-partnerships that will construct or improve broadband infrastructure.  CIDs and cities and counties that create NIDs are now specifically authorized:

“[T]o partner with a telecommunications company or broadband service provider in order to construct or improve telecommunications facilities which shall be wholly owned and operated by the telecommunications company or broadband service provider…”

However, this specific authorization is limited to areas that are certified by the Missouri Department of Economic Development to be unserved or underserved. As a practical matter this means that the area to be covered in an agreement with a telecom or other broadband service provider (an “ISP”) must currently have internet service below speeds of 25 mps download and 3 mps upload.  This requirement is imposed by cross-reference to the Missouri’s Broadband Grant Program statute.

How can Missouri cities and counties use a CID or a NID to “partner” with a broadband provider and bring broadband service to their community?

One example might be for a CID (or the City/County acting through an NID) to contract with an interested ISP to build broadband assets and to deliver broadband service to residents and businesses located in the district, in exchange for an upfront lump sum cash payment.  This cash payments would constitute the CID/NID’s “contribution” to the partnership formed with the ISP.  The ISP partner would obtain conventional financing and/or grants from the federal government to pay for the balance of the cost of the system, and the ISP would operate and maintain the newly-constructed system.  Residents and businesses would subscribe for service on the system pursuant to a normal internet service model, but the cost of that service could be more affordable, because a portion of the capital investment was covered by the CID and/or NID.

To further government and public purposes, the newly-constructed broadband system could be made available for use by the city and county government and other government entities such as the local school district, the county public health department and municipal utilities.  These “government users” would use broadband to better deliver government services to the district’s residents and businesses.  For example public schools might use the system to provide remote learning opportunities to children – and help solve the homework gap.

The upfront investment from in the partnership by the CID/NID could be financed with debt paid by revenues produced from special assessments, taxes imposed in the district, or from fees paid by local government users of the system.

The picture below illustrates how this “ISP Public Support Subsidy Model” would work.  The CID or NID provides a portion of the funding for the broadband project, along with possible ongoing contributions by other local government entities that will use and benefit from the system.  Together, these public entities “partner” with an interested ISP to make broadband and its applications a reality for the district’s residents and businesses.

In the above-example, the CID or NID is only one part – albeit a critical part – of an overall plan to bring public support to a broadband infrastructure project that will be owned and operated by a private ISP.  Implementing the plan assumes that residents and businesses located within the CID or NID boundaries want broadband – and that they are willing to join together to help fund the “gap” that currently makes the expansion of broadband into their community financially impossible for the ISP acting alone.  However, one advantage of taxing districts is that their boundaries can be tailored to include those areas where residents and property owners clearly favor the approach and are willing to join together to help pay for it.

This and other approaches are described at pages 48-54 of the Workshop Report prepared for Bollinger County, Missouri, as part Broadband Workshop hosted by University of Missouri System earlier this summer.

Whether a CID or an NID is a practical solution for a particular community requires individualized legal and financial advice of professionals.  Many steps are necessary to properly explore and implement a workable financing plan that adequately protects the interests of the public and that provides a fair economic return on the ISP’s investment.  That said, the changes made by HB 1768 are a welcome new tool to allow local communities to begin to enjoy the benefits of Broadband.