Updated with AT&T comment: Cable and phone companies eager to block municipalities from offering competing broadband services just won a big victory at a U.S. Appeals Court in Ohio.

Justices reversed an FCC effort to preempt state laws in Tennessee and North Carolina baring local governments from expanding publicly supported broadband systems.

“The FCC order essentially serves to re-allocate decision-making power between the states and their municipalities,” the court says. To do that, the regulators would need “at least a clear statement in the authorizing federal legislation” supporting such a move. The FCC cited the Telecommunications Act of 1996, which was designed to promote competition. But the court says it “falls far short of such a clear statement.”

The decision upholds laws in Tennessee and North Carolina that limit publicly owned broadband services to serving their immediate communities — not to areas nearby that want it. Cable operators have vigorously supported laws in about 20 states that restrict local governments’ ability to develop competitive systems.

The court decision immediately affects the Chattanooga, Tenn. Electric Power Board’s state-of-the-art 10 Gbps fiber optic service and Wilson, NC’s Greenlight fiber optic network.

The ruling “appears to halt the promise of jobs, investment and opportunity that community broadband has provided in Tennessee and North Carolina,” FCC Chairman Tom Wheeler says. “The efforts of communities wanting better broadband should not be thwarted by the political power of those who, by protecting their monopoly, have failed to deliver acceptable service at an acceptable price.”

Regulators will “consider all our legal and policy options,” he says.

In March a bill to change the Tennessee law and allow municipal systems to expand failed to make it out of a key committee. AT&T and Comcast lobbied against it. Cable and phone companies say that governments should be able help underserved areas, but not put them at a competitive disadvantage by challenging them in communities they do serve.

Responding to today’s ruling, AT&T Senior EVP of External and Legislative Affairs Jim Cicconi says the case “was never about the best way to get broadband into rural communities. It was about whether the FCC had legal authority to preempt state law….Tellingly, the Justice Department declined to defend the FCC’s actions in court.”

AT&T would like the FCC to “avoid creating further uncertainty in this area.”

The Appeals Court ruling acknowledged the public benefit from the municipal systems.

The one in Chattanooga “allows the schools to offer services not available in many parts of the country. Further, Chattanooga’s public library system—with a 14,000 square foot space dedicated to innovation—is a leading one in the nation.  The New York Public Library has announced that it sees Chattanooga’s library as a model for its renovations.”

The FCC also determined that after it was built “Comcast stopped raising its rates—which had risen sharply for years—and subsequently reduced them. ” And Comcast and AT&T “have vastly improved their Internet download speeds since the EPB’s entry.”

Similarly, Wilson’s Greenlight system’s phone, internet and cable rates “are cheaper than its competitors’” and it “offers its Gigabit Internet while maintaining a positive cash flow. Wilson also provides free
Wi-Fi to its entire downtown area, which in turn frees up money that downtown businesses
would normally spend for Internet. Each of the top seven employers in Wilson is a customer
of the fiber network.”

The FCC also found that Time Warner Cable “improved its top download speeds in response to Wilson’s entry.”

Former FCC Commissioner Michael Copps, who now advises Common Cause, says the state laws limiting municipal broadband “only exist because pliant legislators are listening to their Big Cable and Big Telecom paymasters. …This decision does not benefit our broadband nation. Nor is it a good reading of the law. But if the FCC cannot set aside these bad laws, then the people must. We will redouble our state-by-state efforts to repeal these odious policies.”