Two lobby groups representing small and medium-sized Internet service providers have taken the first step toward suing the Federal Communications Commission over a ruling designed to boost competition.

The groups are trying to overturn a condition imposed on Charter's purchase of Time Warner Cable and Bright House Networks. In exchange for approval to buy the cable companies, Charter agreed to compete against other ISPs by building new networks in cities and towns already served by high-speed Internet providers.

The American Cable Association (ACA), which represents smaller cable companies in mostly rural and suburban areas, and NTCA—The Rural Broadband Association, which represents small telcos, each filed petitions to overturn the condition with the FCC last night. This is basically a formality to demonstrate to a court that the groups have exhausted all available options before suing. Assuming the FCC rejects the petitions, the groups will likely file a lawsuit.

The "overbuilding" condition "will have devastating effects on the smaller broadband providers Charter will overbuild," the ACA said in a press release. The ACA's petition to the FCC claims that the condition is unlawful because, "It is not tailored to mitigate a merger-specific harm or confirm a merger-specific benefit."

FCC imposes conditions to protect public interest

Congress directs the FCC to determine whether mergers serve the public interest. The FCC can reject a merger if there aren't sufficient benefits to offset potential harms to the public, or it can impose conditions to ensure that the merger is a net benefit to the public interest.

In the Charter case, the FCC said the overbuild condition "will spur competition, leading to lower prices and greater choice for consumers." To satisfy the requirement, Charter must offer broadband with download speeds of at least 60Mbps to 1 million locations outside of its current territory where any other provider offers at least 25Mbps. Charter has five years to comply.

The ACA argues that the overbuilding condition will actually harm consumers because small providers will be driven out of business when forced to compete against the nation's second largest cable company. "As a result, Charter's overbuild targets will curtail services or be forced out of business entirely, further concentrating control of the market in a few, large providers," the ACA said. "In sum, the overbuild condition exacerbates rather than remedies merger harms and inflicts new harms in the markets served by smaller providers."

Since Charter is only building in new areas because it's forced to—rather than building in new areas because it makes economic sense—the big cable company isn't likely to continue upgrading those areas, the group argued. "[O]nce Charter fulfills the overbuild condition and harms the competition, it will have little incentive to upgrade those areas later given its entry was uneconomic," the ACA said.

Cable companies from Comcast on down generally don't compete against each other to begin with, but mergers eliminate the slim possibility that they could compete in the future. Charter CEO Tom Rutledge recently said that Charter avoids competing against other cable companies because that would make it hard to buy the companies later. If two cable companies compete, the FCC is unlikely to approve a merger between them, he said.

To fulfill the merger condition, Rutledge said Charter will primarily overbuild in the territories of telcos (i.e. traditional phone companies that offer broadband) instead of against other cable companies.

NTCA—The Rural Broadband Association made arguments similar to the ACA's in its petition, saying the FCC also failed to give the public sufficient notice of the residential build-out requirement before adopting it.

Lobby groups often file lawsuits against the FCC without first petitioning the commission to overturn a decision. But in this case, NTCA had not asked the FCC to deny the merger during the merger review process and thus wouldn't have standing to go to court, NTCA Assistant General Counsel Jill Canfield told Ars. (By contrast, the ACA did object to the merger.)

If the FCC rejects the petition to eliminate the overbuilding condition, the NTCA will then have the option to sue, she said. The group also believes the FCC did not fully consider the merger condition before imposing it, and the petition gives commissioners time to fix what the NTCA says is a bad idea, according to Canfield.

There is also a third petition to remove the overbuild requirement and other conditions filed by the Competitive Enterprise Institute, a libertarian think tank.

There were no such petitions filed by the bigger industry lobby groups, USTelecom and the National Cable & Telecommunications Association.

Disclosure: The Advance/Newhouse Partnership, which owns about 13 percent of Charter, is part of Advance Publications. Advance Publications owns Condé Nast, which owns Ars Technica.