By Larry Jones
March 29, 2004

In a setback for local governments, the Supreme Court in an 8 - 1 decision on March 24, ruled that states may prohibit local involvement in providing and selling telecommunications services. The Court's ruling applies only to telephone services provided by municipalities. It does not apply to cable-television or Internet services now being offered by many local governments.

The decision was handed down in Nixon, Attorney General of Missouri v. Missouri Municipal League. It overturns a ruling by the Eight U. S. Circuit Court of Appeals, which declared the state statute in violation of the federal Telecommunications Act of 1996. The circuit court ruled that the federal law barred states from restricting the ability of "any entity" to provide telecommunications services. But the Supreme Court ruled that "any entity,"as referenced in the law, does not apply to political subdivisions of the state.

This case was filed by a group of municipalities and municipal- owned utility companies in Missouri who got together starting in 1998 to challenge a state statute enacted in 1997 which prohibits political subdivisions from providing or selling telecommunications services. The group first petitioned the Federal Communications Commission (FCC) to declare the state statute unlawful because it violated the 1996 federal law, which authorized the preemption of state and local laws that prohibit the ability of "any entity" to provide telecommunications services. However, the FCC refused to declare the Missouri statute preempted, because in its view, "any entity" does not include state political subdivisions, but applies only to independent entities subject to state regulation.

Although the FCC refused to preempt the state statute, it argued against prohibiting municipalities from providing telecommunication services. The Commission said participation of municipally owned entities in providing telecommunications would "further the goal of 1996 Act to bring the benefits of competition to all Americans, particularly to those who live in small or rural communities in which municipally-owned utilities have a great competitive potential."