May 9, 2024

By Matt Wiederrecht, Head of Special Situations

The Bottom Line

Capstone believes a federal appeals court ruling allowing New York to impose price caps on broadband service for low-income households poses novel risks for internet service providers (ISPs)—most notably Comcast and Charter. The ruling opens a path for states to regulate broadband service prices for the first time. The risk is highest in progressive states like California, where lawmakers have a history of enacting consumer-protection laws.

• On April 26^th, the US Court of Appeals for the Second Circuit ruled that federal law did not preempt the ability of New York to impose broadband price caps and that a law passed in 2021 imposing a price cap of $15/month on 25 Mbps service for low-income households that receive some form of public assistance was legal. This ruling may be appealed, but it has not been so as of this writing.
• This ruling provides a path that other states could follow to impose price caps for the first time on broadband service. This would be negative for ISPs, hurting large ISPs such as Comcast (CMCSA) and Charter (CHTR), as well as smaller regional ISPs and rural telecommunications cooperatives.
• With the Affordable Connectivity Program (ACP) exhausting its funding and being wound down in May 2024, states may consider a price cap on broadband service for low-income households as a potential replacement for this federally funded consumer subsidy program. We are unaware of any other states looking to cap broadband prices at this time, but we would not be surprised if more progressive states explore the issue in the future.
• Price caps, or even the threat of potential price caps, could also be a potential impediment to investment in broadband infrastructure, make participation in the Broadband Equity, Access and Deployment (BEAD) program less attractive, and perhaps even cause ISPs to shun some states where there is a risk of price regulations like New York’s.
• For context, the price caps imposed by New York are below the $65/month price cap for low-income households included in the state’s BEAD Initial Proposal Volume II, and the FCC’s $30/month Affordable Connectivity Program (ACP) subsidy that pays 100% of the cost of 100 Mbps broadband service for most low-income households. This legislated broadband price camp comes in far lower than these price points and complicates New York’s efforts to attract bidders interested in taking BEAD funds to help fund broadband deployments in rural areas that currently lack adequate service.

A DEEPER LOOK

New York’s Price Regulation Legislation

When Governor Andrew Cuomo faced a political crisis in the months before his resignation in 2021, he put forward several relatively progressive policy ideas that he tried to get into law in a failed attempt to build public support for himself to prevent his impeachment by the state’s legislature. Ultimately, his efforts failed to save his political career, but one of his progressive policy initiatives that became law was a cap on broadband pricing for low-income households. This broadband price cap was enacted within the FY22 budget bill, which was signed into law in April of 2021, just months before Cuomo’s resignation.

The legislation was immediately challenged by the telecommunications industry and never implemented. However, on April 26^th, New York won a favorable ruling in the United States Court of Appeals for the Second Circuit and could implement this low-income price cap in the coming months if the decision by the courts is not appealed to the US Supreme Court or if new legal challenges are not filed.

New York’s low-income broadband price cap regime requires that ISPs offer two tiers of service to low-income households. The base plan that must be provided is a $15/month plan inclusive of all taxes that provide at least 25 Mbps service. The law also requires a higher end plan offering download speeds of 200 Mbps to be offered to low-income households at $20 per month. These price caps apply to all consumer broadband services serving fixed locations, including wireline service, fixed wireless service, and service provided by low Earth-orbit satellites (LEO). Eligible low-income households must prove they participate in some form of government support program like the National School Lunch Program (NSLP), Medicaid, the Supplemental Nutrition Assistance Program (SNAP), or some sort of senior citizen affordability program offered through utilities. It is important to remember that SNAP eligibility for NSLP for a family of four starts at $55,000, which is 185% of the federal poverty guidelines, which is not too far below the 200% threshold set by the Affordable Connectivity Program (ACP).

This law is not the first low-income price plan mandated in New York, but it is the first one imposed by law. In 2016, Charter agreed to offer a low-income plan priced at $14.99/month to households enrolled in the free and reduced-price lunch program or low-income seniors in connection to get the New York Department of Public Service support its acquisition of Time Warner Cable.

However, this legislative mandate, which just survived a legal challenge in the federal appeals court, is more expansive and applies not just to Charter but to every ISP with more than 20,000 subscribers within the state. The legislative price caps also apply to a broader universe of subscribers enrolled in a wider assortment of public assistance programs, including Medicaid and SNAP, and require ISPs to offer low-income consumers a $15 low bandwidth plan and a $20 200 Mbps plan.

Some provisions within this legislation are intended to give some breathing room, including the ability to periodically pass along inflationary cost pressures and request a hardship exemption from the Public Service Commission. However, we view these as insufficient to protect ISPs and nowhere near flexible enough to not make this legislated mandate a significant burden over the long term. For example, the periodic price increases are capped at the lesser of 2% per year or the change in the Consumer Price Index (CPI). The legislation also requires the Public Service Commission to periodically review if the minimum broadband speeds that must be offered to low-income households should be increased and if the eligibility requirements should be eased, which will almost certainly lead to ISPs being required to offer higher tiers of service over time and an expansion of the program to cover an even greater number of households.

The Court’s Ruling

When this matter was brought forth in federal district court, the judge sided against New York in a preliminary hearing, finding that the state was preempted by federal law in regulating broadband prices. The court granted a preliminary injunction barring New York from imposing its price caps because they would cause irreparable harm and unrecoverable losses. The matter was never resolved at trial because both the plaintiffs and state requested the district court enter a stipulated final judgement and permanent injunction so the case could be immediately appealed to a federal appeals court. The ISP coalition supporting the appeal was hoping for a favorable ruling that would permanently bar states from imposing broadband price regulations, which may have been a miscalculation on their part.

The United States Court of Appeals for the Second Circuit took up the case and overturned the district court’s ruling, vacating the permanent injunction, and sending the case back to the district court. Two justices voted in favor of the ruling, and one dissenting. It is unclear at this time if the coalition of ISPs opposed to this price cap will request the case be reheard by the entire appeals court or they will appeal this ruling by a three-judge panel of appeals court judges to the Supreme Court.

The appeals court ruling finds that New York is not preempted by federal law because neither federal law nor the Federal Communications Commission (FCC) has established any framework of rate regulation for broadband service, and there is no evidence Congress intended to exclude states from imposing their own price regulations. The court also found that a 2018 order from the FCC classifying broadband service as an information service strips the FCC of any potential authority to regulate broadband prices, opening the door for another party, like a state, to assert jurisdiction.

The judge dissenting from the majority opinion did so because he believed the court lacked jurisdiction even to hear the appeal and because New York’s law is preempted by federal law. His ruling, in part, rests on a plain reading of federal law, which states the FCC has authority over all interstate communications services, which leaves states no authority over ISPs except regarding certain policy areas like consumer protection. The judge also cites the same 2018 FCC order as the majority does as a reason why the court should block any attempt at state-level price regulations where FCC Chairman Pai points out how utility-style regulation of the internet would lead to “untenable social costs in terms of foregone investment and innovation.” The judge effectively states that the FCC was intentionally not pursuing rate regulation of any kind because of the negative effects such regulations would have on the industry and that the FCC’s deliberate actions and statements against rate regulations were sufficient to preempt any attempt by New York to impose its own rate regulations.

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