Sunday, August 14, 2005

My Reasons

Reasons I oppose LUS Fiber to the Home

As I’ve had several letters published regarding LUS Fiber to the Home (FTTH), I’d like readers to know that I have no relationship with BellSouth or Cox. I’m not even a customer. I was raised in Lafayette and I am a minority partner in a family business located in Lafayette; however I represent no one but myself.

As this would significantly enlarge LUS and Lafayette Consolidated Government and put LUS customers and LCG taxpayers at risk, I believe that the burden is on LCG to show why voters should vote in favor of the LUS bonds. I will try to show that they have fallen short. I will try to show why voters should vote against the LUS bonds. I will try to show that LUS should not expand its involvement in the telecommunications business. The circumstances that might justify anything like this are few and far between.

If my position was based on who I know and what I think of them I’d be all for this. Ironically, the only people I know on either side of this debate are LUS director Terry Huval and FTTH proponent Kal Saloom. I’ve known both of them for most of my life. I’ve been friends with Kal since grade school. I have no doubts regarding their character, their motives, or their sincerity, but this is not how I decide such things. If you think you feel the same way I challenge you to this test; would your position on this be the same if Walter Comeaux was still mayor? Kenny Bowen?

One reason given in favor of LUS FTTH is the benefits of optic fiber. I do not dispute this; however, this is insufficient justification for such a significant government expansion. Optic fiber is just not that critical or imperative. It will not bring any new services that are not currently available from existing providers. There are already thousands of miles of optic fiber in Lafayette and much of its capacity remains unused because copper is able to meet most of the current demand.

Another reason given is that many want FTTH, and the existing telecommunications providers are unwilling to provide it. This is still insufficient justification. No business can prosper by making a premature investment in permanent infrastructure for which there is insufficient demand. If there is insufficient demand for BellSouth and Cox to install FTTH, there is insufficient demand for LUS FTTH. As demand warrants, BellSouth has been installing fiber in Lafayette Parish. BellSouth alone has thousands of miles of fiber in Lafayette Parish.

Another reason given is the lack of choice in providers. Not only is this an insufficient reason, it’s not entirely true. I know people who have dropped their BellSouth landed phone service in favor of cell phone service and there are a multitude of cell phone providers. There are also two direct dish TV services and one of them now offers local network channels. For broadband many have a choice between BellSouth and Cox. For those who don’t yet have access to or need for broadband, there are a multitude of dial-up internet service providers. Finally, BellSouth wants to get into the TV business and Cox wants to get into the phone business. The most likely effect of LUS’ entry into this market would be to discourage such future competition and expansion and instead possibly encourage existing providers to abandon this market. It’s possible that the mere prospect of LUS FTTH is already having this effect. This is because, though it may be acceptable for local government to encourage competition, it’s not a proper role for local government to be that competition.

Another reason given in support of LUS FTTH is the price competition it would bring. LUS claims that prices will be 20% lower than the competition. How low will LUS go if a price war ensues? I believe they are (or will be) constrained by law from pricing below an established threshold. Even if LUS were to succeed in bringing price competition, it’s not a proper role for local government to be that competition. In addition, any savings on LUS telecom (should they actually materialize) are likely to disappear in order to pay for the resulting increases in LUS electric and water rates or LCG taxes.

Another reason given is the jobs it might bring. It’s highly debatable as to whether or not LUS FTTH would bring sufficient number or quality of jobs to justify this expense. We can be pretty certain that, should LUS FTTH gain sufficient market share, it will cost some jobs at BellSouth and Cox. Even if we knew for certain that it would bring more jobs than it would cost, that alone is not sufficient justification. Lafayette voters knew that video poker would preserve jobs at Evangeline Downs, yet Lafayette voters defeated video poker. About surplus jobs simply due to LUS FTTH, we cannot know. We do know that it hasn’t happened for most other municipal broadband utilities. If it had I’m sure we'd hear it being shouted from rooftops.

Another reason given is a good chance of financial success. The history of other municipal broadband efforts suggests otherwise. Measured against the goals they have set for themselves, very few (if any) municipal broadband utilities have succeeded. Measured by revenue against expenses, some appear successful, but only if you discount repayment of debt on the original capital expenditure. In addition, municipal broadband expenses can be, and in many cases are, absorbed by, and concealed within other municipal departments. Virtually all municipal broadband utilities are being subsidized in some fashion. It's difficult for proponents to dispute this because very few municipal broadband utilities have made any contrary information available. They simply dispute without giving evidence. Even if LUS could succeed where so many others are failing, this alone is not sufficient justification to support this, though the prospect of likely failure is certainly sufficient justification to oppose it.

Another reason given is that so many civic organizations have endorsed LUS FTTH. I suspect that the proponents knew that they would be unable to persuade voters based on the merits of the plan and therefore solicited this boatload of endorsements. Some of the earlier endorsements, the ones in which some of the endorsers actually read the plan, contained caveats; they endorsed a fiber infrastructure and they endorsed the bonds but they failed to endorse the plan for LUS to become a telecom retailer. I suspect that many of the later endorsements were primarily based on the earlier endorsements. It started as a utopian dream and later it simply became fashionable to endorse LUS FTTH. A well-founded respect for Terry Huval and LUS may also explain a lot of it. In addition there’s a contagious enthusiasm for what is perceived to be best for Lafayette. This is a good thing when the perception matches with reality. However, in this case the cheerleaders have worked the fans into a frenzy without telling them that it’s a full-contact non-stop intrasquad game. Both sides continually sustain injuries but nobody ever wins. The proponents have done an effective sales job but haven’t shown the customer any other choices. Nor have many studied the fine print. It should be made clear that many of these endorsements were voted on not by the members of the endorsing bodies, but by a handful of board members. Regardless, these endorsements alone are not sufficient. The voters can think for themselves. There are very good reasons why more than 99% of municipalities are not trying this.

The only LUS FTTH justification that really makes any sense is the LCG revenue that could be generated by the in lieu tax. The in lieu tax is equivalent to a sales tax. It’s a cash cow for LCG. For those who think that it’s a good thing for local government to compete with existing business this makes perfect sense. Even if the telecom utility loses money, LCG can still collect up to 12% on gross revenues of LUS telecom. Furthermore, if LUS has to increase electric rates to compensate for telecom losses, LCG collects additional ILT on that increase, in effect double-dipping on LUS telecom losses. LCG could collect ILT twice on the same dollar, once when it’s a telecom loss and once again when it’s electrical earnings. LCG could theoretically collect 24 cents for every dollar LUS telecom loses. If you think local government is not big enough and should be bigger, here’s your justification.

None of the reasons given, alone or combined, justifies LUS competing against existing business, unless you accept, a priori, that this is an acceptable practice, in which case you need no other reason.

Regarding the bond election, it should be made clear that the obligation placed upon the people of Lafayette includes not just the sale price of the bonds, but also compounded interest. It would be more accurate and honest to call this a $200 million bond election.

I suggest local business owners do the math to see what kind of revenue and time frame it would take for your business to repay such a debt. Now imagine you're starting a new business from scratch in a highly competitive and rapidly changing market in which you have little or no previous experience. Remember also that your market is geographically limited to the city limits of Lafayette and it is already highly saturated and you have promised 20% savings to all customers. What combination of market penetration and price and profit margin and debt service would it take? I asked just such a question of businessman and fiber proponent Bill Fenstermaker and he was unable or unwilling to give me a direct answer. I don't think anyone can come up with a realistically achievable answer without including some kind of tax-funded subsidy.

It should also be made clear that LUS is not bound to use the bond money for FTTH. LUS can use the bond money any way it sees fit. Furthermore, defeating the bonds will not necessarily defeat LUS FTTH. Should this bond vote fail, LCG could decide to fund the FTTH construction using LUS revenues. In a very real sense this bond election and LUS FTTH are separate issues.

Finally, should this bond obligation have an adverse effect on utility rates and taxes, it will impact most those least able to afford it. It could also impact many who are not able to vote on it, including people not yet old enough to vote. Our children and grandchildren will be left with this obligation.

For those who remain undecided or unconvinced, I offer the following reasons to oppose LUS FTTH and to vote against the LUS bonds.

I oppose LUS FTTH because it’s an example of central planning: government experts deciding what the market demands. History has shown that central planning is inferior to the free market. Central planning causes market distortions leading to the misallocation of scarce resources. Resources are wasted on surplus goods causing shortages of other goods.

I oppose LUS FTTH because the business plan is based on achieving unreasonably optimistic penetrations in internet, TV, and telephone service. We are at the beginning of a trend of trading landed phone and TV service for wireless. These are shrinking markets. In addition, despite the advantages of optic fiber, many will prefer, and even pay a premium for the convenience of wireless broadband service. Finally, BellSouth and Cox are not likely to give up many existing customers without a fight, and they have deep pockets.

I oppose LUS FTTH because it presumes that copper and wireless and yet to be developed transmission technologies will remain static for as long as it takes to repay the bonds.

I oppose LUS FTTH because LUS is neglecting its core mission. LUS electric rates are among the highest in the state and LUS is often unable to meet the demand for water. In addition, many have become dissatisfied with LUS for drinking water and are willing to pay a significant premium for bottled water. You’d think with a monopoly water utility LUS would be able to keep bottled water from becoming such a big business locally, however, a government monopoly typically doesn’t have the political will to raise prices sufficiently to cover the costs of meeting demand, hence, water shortages and a big market for higher priced bottled water, furnished by the free market, which is willing to furnish the goods to those who are willing to pay the price. Furthermore, as far as I can tell the existing LUS fiber ring is not paying off. The demand just isn’t there. These are predictable consequences of mission creep. The money that LUS has already spent on fiber might’ve been better spent on water infrastructure and lower electric rates.

I oppose LUS FTTH because municipal broadband is failing elsewhere, even though it’s being disguised as success.

I oppose LUS FTTH because, to date, it’s by far one of the most expensive municipal broadband ventures in US history. It may actually be the single most expensive. I don’t know of any other municipal broadband venture that even comes close.

I oppose LUS FTTH because LUS is not really a business. When a business fails, it sells out or ceases operations, with owners and voluntary investors absorbing any losses. If a government utility fails, it most likely gets tax-funded subsidies, though it could possibly be sold at a loss. Either way the taxpayers unwillingly absorb the losses.

I oppose LUS FTTH because, as de-facto guarantors of all government liabilities, taxpayers are the only parties really exposed to this risk while LUS gets risk free entry into a new business.

I oppose LUS FTTH because it violates the distinction between government and the free market. Historically the primary legitimate purpose of civil government has been to enforce justice. LUS FTTH would not only supersede justice, it would invert justice. BellSouth and Cox pay federal, state and local taxes and fees, some to LUS and LCG, to all of which LUS is exempt. LUS FTTH would put BellSouth and Cox in the position of unwillingly subsidizing theirmunicipal competition. In addition, along with other LUS customers and LCG taxpayers, BellSouth and Cox would also be unwillingly assuming a portion of the LUS FTTH risk while LUS assumes none. This is clearly unjust. In the words of Lord Acton, “The will of the people cannot make just that which is unjust.”

I oppose LUS FTTH because I oppose anyone using government power for the benefit of anyone's pet project, which is essentially what this is.

I oppose LUS FTTH because it will increase the payroll of local government. The more people employed by LUS and LCG, the more votes they have in their pocket to support their next pet project.

I oppose LUS FTTH because LCG has yet to deliver on promises of efficiencies and cost savings of consolidated government. Why should I believe these new promises? It seems the more we give them in the way of tax and utility revenues and government power, the more they want.

I oppose LUS FTTH because I don’t want a government owned utility to be in a position of determining what I can or can’t watch. LUS will have to choose between offering or censoring potentially offensive programming.

I oppose LUS FTTH because, for the most part, the proponents have avoided addressing objections and have instead personally attacked many of those making objections. They speak as if there is absolutely not a single valid objection.

I oppose LUS FTTH because it is very likely to cause other unintended and unforeseen negative consequences.

I oppose LUS FTTH because the Lafayette economy (as opposed to the Lafayette government) is prospering quite well without it; so well that the Lafayette government has trouble keeping up.

Finally, I oppose LUS FTTH because, as I think I have shown, no matter how desirable the end, it just doesn’t justify the means.

David Hays

Sunday, July 10, 2005

Heartland Institute PolicyBot: Municipal Broadband

The Heartland Institute is a genuinely independent source of research and commentary founded in Chicago, Illinois in 1984. It is not affiliated with any political party, business, or foundation. Its activities are tax-exempt under Section 501(c)(3) of the Internal Revenue Code.

Heartland's mission is to help build social movements in support of ideas that empower people. Such ideas include parental choice in education, choice and personal responsibility in health care, market-based approaches to environmental protection, privatization of public services, and deregulation in areas where property rights and markets do a better job than government bureaucracies.

Heartland has been endorsed by some of the country's leading scholars, public policy experts, and elected officials. Dr. Milton Friedman calls a "a highly effective libertarian institute." Cato Institute president Edward Crane says Heartland "has had a tremendous impact, first in the Midwest, and now nationally."

Activities of The Heartland Institute are overseen by a 16-member Board of Directors, which meets quarterly. A staff of 22 works with a growing network of Heartland Senior Fellows, including George Clowes (school reform), Wendell Cox (transportation and sprawl), Jim Johnston (energy and regulation), Jay Lehr (science and environment), Maureen Martin (legal affairs), Merrill Matthews (health care), and Conrad Meier (health care).

Two committees provide outside advice and expertise: a Board of Policy Advisors and the Board of Legislative Advisors. The former consists of academics and professional economists who conduct research and participate in peer review of the institute's publications. The latter consists of elected officials who suggest topics and sources of information and sometimes produce model legislation.

The Heartland Institute received funding from more than 1,500 individuals, foundations, and corporations in 2004. Heartland does not solicit or accept grants from government agencies, does not conduct contract research, and does not rely on direct mail to raise money. No individual donor contributes more than 10 percent of its annual budget, and no corporate donor contributes more than 5 percent. Contributions to The Heartland Institute are tax deductible under Section 501(c)3 of the Internal Revenue Code.

People contribute to The Heartland Institute because they support the positions our authors take and our effectiveness in communicating with elected officials and other key audiences. For more than two decades, Heartland authors have consistently called for ways to empower people by limiting the size and cost of government. We do not take positions in order to appease or avoid losing support from individual donors. We have, in fact, a long record of standing behind our research even when it means losing the support of major donors.

For many years, we provided a complete list of Heartland’s corporate and foundation donors on this Web site and challenged other think tanks and advocacy groups to do the same. To our knowledge, not a single group followed our lead. However, critics who couldn’t or wouldn’t engage in fair debate over our ideas found the donor list a convenient place to find the names of unpopular companies or foundations, which they used in ad hominem attacks against us. Even reporters from time to time seemed to think reporting the identities of one or two donors--out of a list of hundreds--was a fair way of representing our funding or our motivation in taking the positions expressed in our publications.

After much deliberation and with some regret, we now keep confidential the identities of all our donors. If you do not approve of this policy, your argument is not with us but with those who would abuse a sincere effort at transparency. We urge anyone who sees the need for objective research and commentary on public policy issues to join us as a Member or donor.

BellSouth offer

May 16, 2005

Honorable Joey Durel
City Parish President
705 West University
Lafayette, LA 70506

Re: Public/Private Partnership Alternative to LUS Plan

Dear President Durel:

BellSouth understands that Lafayette seeks to enhance economic development and the competitiveness of Lafayette as a business location by providing higher speed Internet services to its citizens. Lafayette proposes both to build and to operate the infrastructure to support this service and use the revenue from the ‘triple play’ to support this investment. The following statements appear in the Fiber for the Future Newsletter on the LUS website:

"...more and more people come to understand the pivotal role telecommunications will play in our efforts to build a better Lafayette by creating better jobs, improving our education system and providing world class healthcare to our citizens."

"There is no doubt that a comprehensive, broadband fiber optics system is a vital communications tool for education, entertainment and interaction on a global scale."

"Maintaining and servicing our fiber optic communications system will require a tremendous network of administrative and support personnel, overseen by individuals with a vested interest in the future of our community."

As the Southeast’s leading telecommunications company, BellSouth certainly shares this vision of the pivotal role of telecommunications and the benefits which a comprehensive broadband fiber optics system can bring to the communities we serve. In fact, BellSouth has been serving Lafayette with fiber for over 20 years. In addition to this experience, we have a tremendous network of administrative and support personnel, and, as a company which has some 1,500 employees and 300 retirees who live in this community, and has already deployed 15,000 miles of fiber in Lafayette, BellSouth certainly has a vested interest in the future of this community.


This is why, in vibrant competition with cable TV companies, wireless providers and other communication services companies, BellSouth is proceeding with its extensive network expansion and upgrade plans to help bring these benefits to the residents of Lafayette. We believe that this type of free-market competition is the engine driving the communications technology explosion which has made these kinds of benefits even conceivable now, and which will make them attainable in the near future.

BellSouth realizes that the City desires to achieve availability and speeds of Internet access greater than that which might become available from commercial efforts alone. BellSouth proposes a public-private partnership to deliver higher speed Internet services, state of the art telephony services and video services to the citizens of Lafayette. BellSouth is proposing a nearly ubiquitous deployment and availability of these services in partnership with the City, significantly beyond that which would be available without such a partnership. This approach would be at a fraction of the cost and present no operational, market or financial risk to the City and would achieve the desired results more quickly. BellSouth differs with the LUS plan not in terms of the benefits that we and they both want to see brought to the residents of Lafayette, but rather in the approach by which we would achieve those benefits.

As we have discussed previously with City leaders, BellSouth’s current plans already anticipate a massive expansion of its fiber optics broadband network capabilities in Lafayette, one that is expected to reach approximately 80% of the households in Lafayette with high speed Internet, video and related broadband communications services at speeds of up to 24 Mbps within the next four years.

In return for financial support (whether cash, tax credits or incentives or other possible forms of payments or concessions) from the City to BellSouth amounting to just a small fraction of the cost of proceeding with the proposed LUS plan, perhaps only about one-half of what just the annual interest payments would be on the proposed bonds for the next four years, we believe it should be possible to create some form of public/private teaming arrangement with the City whereby BellSouth’s current network deployment plans could be accelerated so as to reach close to 100% of the Lafayette households with such broadband services at competitive market prices within that same time period. It is anticipated that the deployment schedule for such an accelerated network enhancement project could proceed along the lines laid out in the schedule attached to this letter.

Second, in order to solidly close the digital divide, we suggest that a wireless technology should be deployed for ubiquitous coverage to include the city and perhaps the entire parish. There are two different wireless technologies that could provide either primary or portable/low-speed mobile coverage for Lafayette. Either technology would work, but each has different costs and presents a different type of opportunity requiring further discussion.


-One wireless technology is WiMAX, a solution that promises to offer low cost ubiquitous wireless access with a cellular-like network of wireless base stations. These stations could be placed within the Lafayette area to provide both public access and public safety access within the city itself and in adjoining areas of the parish where Lafayette provides services. We currently estimate that 3-6 WiMAX base stations would be needed to cover the city and the adjoining areas if parish coverage is selected.

-A second alternative is the use of a mesh network where small transceivers are attached to street lights. The network is self-organizing and operates using a WiFi technology base. This solution would also allow public and private access and could provide high-speed internet services either for primary service or for portable/low-speed mobile use. We currently estimate that several hundred of these mesh access points would be needed to cover Lafayette and the adjoining unincorporated areas.

Either approach could provide a high-speed cost-efficient solution to Lafayette’s needs. The selection of one technology over the other is primarily a function of intended uses, the need for reliability and costs. Either solution could meet Lafayette’s needs. BellSouth is eager to work with Lafayette to clearly define the specific needs, to develop cost models and to develop a schedule that will produce an optimum solution.

Third, in addition to the benefits received by deployment of the above enhancements, there are 50 buildings within the LUS serving area in which BellSouth currently has a fiber presence. Our existing broadband deployment plans provision additional fiber facilities to both residential and business locations. This deployment initiative will configure the main feeder routes with sufficient spare fiber to allow for shortened installation intervals to buildings where service is requested. As BellSouth experiences increased demand for fiber based services such as SMARTRing® and Metro Ethernet, our triggers to place fiber over a larger geographical area increase. There are 25 buildings in Lafayette which have 5 or more existing DS1 circuits. Utilizing our construction proposal, BellSouth will place fiber to each of these buildings to the extent the building owner(s) agree to the new fiber addition.

Lastly, regarding connectivity for digital services leaving Lafayette, BellSouth currently has five leased OC3 internet backbone connections (150Mbps each, 750Mbps total) between Lafayette and New Orleans. In 1Q06 we complete a BellSouth fiber build from Lafayette to New Orleans and expand the capacity to 2 OC12s (total 1200Mbps) capacity. In addition, this can be expanded to 5000Mbps for a trivial cost.

We strongly believe that such a public/private teaming relationship, which preserves the existing free market competition between non-governmental communications companies yet holds the promise of accelerating the arrival of these


broadband telecommunications benefits for the residents and businesses of Lafayette, would be a far more efficient, cost effective and safer alternative than the proposed LUS plan of putting that utility’s ratepayers into the speculative fiber optic network building business. BellSouth would welcome the opportunity to explore in further discussions with the City the opportunities that such a public/private partnership could present for improving the lives, businesses and prospects of this community.

We believe that the public-private partnership which BellSouth is proposing for consideration and further discussion with the City would involve the City teaming with BellSouth to enable the citizens of Lafayette to reap virtually all of the benefits of the proposed LUS plan without having to incur the major investments and substantial risks inherent in that plan. In addition, we propose that these discussions include details of 1.) Our network based VOIP (Voice over Internet Protocol) solution for business customers and VOIP service for consumers; 2.) Our developing wireless/wireline capabilities where a user can transparently switch between the cellular network outside the home or business to a broadband DSL connection using WiFi inside the home or business; 3.) Evaluation of speed to the home in a fiber-to-the-curb (FTTC) environment and 4.) Lafayette’s status as a top 25 market for BellSouth and how that relates to our IPTV efforts.

We anxiously look forward to discussing this proposed approach.


Wednesday, June 15, 2005

My Reasons

As LUS Fiber to the Home would significantly enlarge LUS and Lafayette Consolidated Government, I believe that the burden is on them to show why voters should vote in favor of the LUS bonds. I will try to show that they have fallen short. I will try to show why voters should vote against the LUS bonds. I will try to show that LUS should not expand its involvement in the telecommunications business.

Click on title or follow this link for My Reasons

Wednesday, May 25, 2005

Municipal Broadband Is Not a Public Utility

It apparently doesn’t matter that as a group, telephone, cable, satellite, and wireless companies have succeeded in getting broadband to more than 90 percent of the zip codes in the U.S. It doesn’t matter that the U.S. leads the world with 34 million wireline broadband connections, accounting for more than 20 percent of the worldwide total of 150 million broadband lines at the end of 2004. And it doesn’t matter that, in pure broadband numbers, the U.S. is well ahead of China, France, Germany, Japan, the U.K., and just about every other industrialized country with a land area larger than New Jersey.

Go to any municipal broadband Web site, such as,, or, and you’ll find the discussion is focused solely on the size and virtues of the bandwidth pipe--with very little attention paid to the importance of a value proposition to the business plan.

Click on title for complete article

The Case Against Public Broadband

Municipal networking is the latest confidence game to hit the street. A real razzle-dazzle, fast-talking, high-tech, keep-your-eye-on-the-peanut kind of pyramid scheme that keeps the intended marks – consumers and taxpayers – so mesmerized by the prospect of getting something for nothing that they don’t see their wallets being lifted until it is too late.

This isn’t the first time that cash-strapped municipalities have cast greedy eyes on private markets. There was a time that street lighting, health care, public transportation and even electrical power were provided by competing private companies. But when cities are no longer able to squeeze consumers for more tax dollars, they seize control of the most lucrative businesses they can find within the city limits.

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The Myth of Natural Monopoly

It is a myth that natural monopoly theory was developed first by economists, and then used by legislators to "justify" franchise monopolies. The truth is that the monopolies were created decades before the theory was formalized by intervention-minded economists, who then used the theory as an ex post rationale for government intervention. At the time when the first government franchise monopolies were being granted, the large majority of economists understood that large-scale, capital intensive production did not lead to monopoly, but was an absolutely desirable aspect of the competitive process.

The theory of natural monopoly is also a-historical. There is no evidence of the "natural monopoly" story ever having been carried out-of one producer achieving lower long-run average total costs than everyone else in the industry and thereby establishing a permanent monopoly. As discussed below, in many of the so-called public utility industries of the late eighteenth and early nineteenth centuries, there were often literally dozens of competitors.

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Solving the Broadband Paradox

The most important and sometimes forgotten question we should be asking first is: Do consumers really want this stuff? In the minds of many industry analysts, consumer demand for broadband services is simply taken for granted. Many policymakers see an inevitable march toward broadband and want to put themselves at the head of the parade. They have adopted the Field of Dreams philosophy: "If you deploy it, they will subscribe."

But is this really the case? Are Americans clamoring for broadband? Are the benefits really there, and if so, do citizens understand them?

Most Americans still view broadband as the luxury good it really is instead of the life necessity that some policymakers paint it to be. Not every American needs, or even necessarily wants, a home computer or a connection to the Internet. This is especially the case for elderly households and households without children.

Click on title for complete article

Digital Divide Update: The Rhetoric Finally Matches the Reality

The pessimistic outlook regarding the diffusion of these new technologies was based on the simple fact that not everyone in America immediately gained access to them. That is, some citizens (wealthier and more educated individuals, primarily) gained access to new high-tech gadgets and services before others (lower income households in particular). This is hardly a shocking phenomenon. Nor should it ever have been cause for great concern.

First of all, this class of technologies hardly ranks in the same category as other "life essential" goods, such as heating, indoor plumbing, or electricity. Not every American needs, or even necessarily wants, a computer in their home or a connection to the Internet. Second, it has been the case historically that wealthier households act as "early adopters" (read: guinea pigs) for most new technologies, and if the technologies prove useful, they spread to the masses and their cost falls accordingly. The data shows that this is the case with computers and Internet access.

Finally, unlike many other technologies, it is unlikely America will ever witness anything close to 100 percent household penetration for computers or Net access.

Click on title for complete article

Broadband Deployment and the Digital Divide: A Primer

Lost in this debate, moreover, is the fact that access to the information superhighway does not require broadband. While broadband is superior, it is not necessary for access.

The first question, then, is whether low-income, rural, and other households are gaining access to the Internet at all. The second question is whether those households--and for that matter, all Americans--are gaining broadband Internet access. To both questions, the answers are decidedly positive.

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Digital Divide? What Digital Divide?

Americans should celebrate today's "digital deluge of opportunity."

"We better worry about the fact that the failure of basic education does not go well with the computer-based, highly unforgiving environment of the Internet"

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Monday, May 09, 2005

Digital Divide" / Universal Service / Technology Entitlements / The "E-Rate" Program

Few high-tech policy debates have attracted as much attention in recent years as the debate over the so-called "digital divide." Policymakers of all stripes, and at all levels of government, are considering what steps should be taken to solve the apparent gap between the technological "haves" and "have nots" in America.

But while some "Chicken Littles" decry a world of "technological segregation" or "classic apartheid" in a shameless attempt to turn this into a civil rights crusade, the reality is that Americans are gaining access to telecommunications and Internet technologies at an almost unprecedented rate when compared with technologies of the past. For example, while it took over fifty years for 50 percent of Americans to gain access to electricity, and over seventy years for 50 percent of all households to receive phone service, it has taken less that twenty years for 50 percent of Americans to gain access to a personal computer (PC) and less than ten years to receive Internet access. These results are all the more amazing in light of the fact that the former technologies were heavily subsidized by government while PC and Internet technologies have not been.

Moreover, even a cursory review of the marketplace for personal computers and Internet services reveals the remarkable choices and bargains consumers have available to them. Average PC prices have fallen below $1,000, but more importantly, entry-level systems can be found for well under $400. Many PC systems are now offered to consumers virtually free-of-charge with promotional discounts and mail-in rebates. Likewise, Internet access is typically priced very low at "all-you-can-eat" prices, such as $9.99 to $19.99 per month. In many cases, free Internet access and e-mail services can be found on the Web. And while high-speed Net access is not yet ubiquitous, new connections to the home are appearing every day.

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Cable Rates and Consumer Value

The cable industry has invested a staggering $75 billion in network upgrades since 1996 in an attempt to migrate from an analog, one-way, low-bandwidth service to a digital, two-way, high-bandwidth system.

This not only makes cable a better value for consumers by offering more channels and services, but it also allows cable to put greater competitive pressure on other service providers, such as telephone companies and satellite firms.

Whereas cable subscribers only had access to an average of 27 channels in 1986, today they have an average of 58 channels. Of course, the total number of channels available on any system can go into the hundreds if all services are considered, including music channels and video-on-demand. In fact, while not available on every cable system, there now exist over 300 different national cable programming networks compared to 87 in 1992.

While cable companies have been busy expanding upon their core mission to become better video programming providers, they have simultaneously made impressive strides in an entirely new sector—data delivery—and become America's primary provider of high-speed Internet access.

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Digital Divide Update: The Rhetoric Finally Matches the Reality

While it took many older technologies many decades to reach 50 percent of American homes (telephones took 71 years; electricity took 52; radio took 28), personal computers were available to half of American homes within 19 years of introduction and the Internet hit that mark in just 10 short years.

Click on title for complete article

Sunday, May 08, 2005

‘Not In The Public Interest –The Myth of Municipal Wi-Fi Networks’

Ownership of broadband networks by municipalities, like many other government initiatives, is framed in terms of best intentions. Proponents of municipal broadband ventures assert that a highspeed network will be a means of energizing decrepit downtown areas, breaking poverty cycles, increasing tourism, and earning a reputation as a tech-friendly city. Advocates seem to possess a euphoric “build it and they will come” mentality, hoping that fast and convenient internet access will
attract businesses and workers that stimulate the tax base, and keep young tech-savvy professionals from moving elsewhere.

It is an illegitimate function of government to provide goods and services that the market is willing and able to provide. Governments should be in the business of delivering only those products and services that are necessities for almost all of their residents, and which markets won’t or can’t deliver. In fact, the trend across the nation (and across the world) is to privatize government services. Governments have found tremendous cost savings by contracting out traditional government
functions such as jail management, landscaping maintenance, even emergency services, to private companies. They have found that the best way to get needed services to the people is through market forces, not through government command and control. The movement toward municipal networks, then, is counter to this experience and observation.

What is the real reason for municipal networks? Ultimately, after examining all of the negative aspects of municipal networks, one is forced to conclude that what is really driving municipalities toward offering municipal networks is that they view such networks as a new source of revenue for their unlimited spending appetites. In their imaginations, once built, the network will provide them with a new stream of cash with which they can build new administrative buildings and new vehicles, all the while playing at big business with the tax dollars of their constituents. That is illusory.

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Municipal ownership of broadband networks that compete with private telephone, cable
television and internet access companies for commercial and residential customers is an ill-advised strategy for attracting businesses and residents to a community. Competition by governmentowned and subsidized networks is inherently unfair and will discourage private broadband companies from investing in such communities. Ultimately, those communities will have fewer rather than more sources of broadband services, less rather than more competition, legacy rather than state-of-the-art technology, and higher rather than lower real rates for such services. Instead, municipal governments should focus on strategies that will encourage multiple broadband companies to invest in their communities, such as removing excessive franchise and right-of-way fees and requirements, and other barriers to entry; creating tax and regulatory incentives that encourage operators to upgrade their facilities; and developing programs that will encourage property owners to install “smart” broadband infrastructure and allow service to tenants on reasonable economic terms. Municipal governments should not wear the dual hats of regulator and competitor.

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Do No Harm or Do Good? Should the Government Provide for the People?

When government attempts to provide all social necessities for its people, it usually fails to accomplish this mission and often harms not only the causes it attempts to promote but also the people it tries to serve. Government failures in providing for the people manifest themselves in two ways. First, such attempts promote mediocre results and squash individual initiative among recipients by perpetuating reliance on government handouts. Second, government taxation and operating principles suppress individual responsibility, compassion, and charity among tax-paying citizens. By addressing these failures, a new model can be developed that could begin replacing many government programs in today’s society. This new model, based on religious values and an understanding of human nature, would provide more effective services for the people and would help foster a more Christian nation.

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Law, Liberty, Virtue, and Enterprise

What is the purpose of government? At present, government can be said to entail a multiplicity of state interference with our lives that is sometimes easily seen, but in most instances is less immediately clear. Unfortunately, many people seem to accept such "big government" as it encroaches upon them. Although in the last twenty years the arguments against state interference with the economy have gained wider acceptance, the relationship between economic liberty and individual liberty remains misunderstood, and the folly of "statecraft as soulcraft" continues to be widespread.

In this essay I will argue that a principled vision of government is vital, since ideas on the character and role of government are crucially linked to competing visions of society, freedom, and individual well-being.1 For this reason, we should ask, first, what we mean by government, and, second, why and in what form we need it. By discussing these problems, I aim to show why government must be strong but limited–why, in other words, Lord Acton was correct in writing, "There are many things the government can’t do–many good purposes it must renounce. It must leave them to the enterprise of others. It cannot feed the people. It cannot enrich the people. It cannot teach the people. It cannot convert the people."

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Thursday, May 05, 2005

What Are You Calling Failure?

There are two related logical misdemeanors committed by claimants for market failure. One is to blithely assume that any successful business model, were it to exist, would have or has been tried. The other is to assume that government action in the past was the best possible response to the problem at hand. Both of these errors are ironic, since they both impute error-free action to entrepreneurs in the wide sense—a charge that is inaccurately leveled at the advocates of laissez-faire. It is well known that entrepreneurs have come onto the scene time and again using hitherto untried business models.

For the very rare case where it is claimed that there is a net benefit to all which can only be obtained through a coercive institution, we must be explicit about the consequentialist or utilitarian ethics being applied, but also tread carefully, since subjective value informs us that all manner of costs often escape notice.

Will the regulatory body actually act in the public interest, or in its own interest, à la Public Choice theory, or in the interests of the regulated, à la capture theory? If there exists a solid case for government intervention today, will the objective factors upon which it rests change? They almost certainly will. When the case for intervention is no longer strong, or has a completely different structure, will the regulatory apparatus adapt appropriately, or go quietly into the night, or will it instead fight tooth and nail for the status quo and its legitimacy? The costs of such a future unjustified regulatory apparatus must be captured in the calculus.

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The 10 Myths Used to Sell a Fad

1. "The new fad/solution concerns everyone doing activity X – and everyone does X." This way the heat is really on to do the new stuff. If not, maybe your competitors will and maybe they will succeed and outdistance you. But then again, do you remember how people laughed at Sony because it did not join the Internet hysteria as much as other media companies? And do you remember how much less they lost in the end on Internet-related activities compared to other media companies? A lot less.

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Sunday, May 01, 2005

Municipal utilities are unfair to taxpayers and private investors

Municipal utilities are unfair to taxpayers and private investors. Governments unfairly enjoy many advantages over private, tax-paying vendors: regulatory power (permits, licenses, fees) over competitors; power to condemn privately owned facilities; tax-exempt debt financing; ability to mask costs of service delivery in municipal bureaucracy, and free use of taxpayers’ assets (rights-of-way, tax revenue, municipal employees). Give OCTax a McDonald’s franchise with those unfair advantages, and we’ll sell burgers 23 percent cheaper than our competitors (or charge the same price and keep the excess profit), as Irvine’s consultant suggests the city may be able to do in the electricity market. Those artificially low rates (or the excess “profit” that the city might skim off for the city treasury) would be illusory. They would be subsidized by taxpayers, who would pay higher taxes for other services to make up for taxes not paid by the tax-exempt municipal utility.

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Do Residents of Corona Need More Debt for Another Government Bureaucracy?

"I'm from the government, and I’m here to help.” Those may be the nine most frightening words any taxpayer can hear. Yet throughout the state of California, taxpayers are under assault by free-spending government bureaucrats. The latest government scheme cooked up by the city of Corona is to create a bureaucracy to take over electrical service to the city.

At a special lame-duck session on December 2 (two council members were replaced the following day), the Corona City Council unanimously voted to seek court approval of a hostile takeover of Southern California Edison’s electrical distribution system. It was soon apparent that the hearing was really no more than window dressing to comply with legal requirements. Despite public testimony three-to-one against the plan, and compelling testimony from Edison that the city’s feasibility study was fundamentally flawed, the council heard nothing to change their minds. Perhaps they were motivated by the fact that it was disclosed by the city manager for the first time at this hearing that the city had already spent $900,000 in their attempt! How many firefighters and police officers could be hired, or youth athletic fields built, with that money?

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Some Local Governments Propose Risky Business

Growing numbers of local governments are considering entering the utility business by forming their own municipal electric or telecommunications utilities. Known in some circles as "municipalization" (the opposite of privatization), this seems to be an offshoot of the "entrepreneurial government" movement, in which elected and appointed officials seek new, innovative ways to generate revenues without raising taxes. The problem is that these efforts place taxpayers at risk, misconstrue the role of government in the economy, and divert agencies from their primary purposes and functions.

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A Municipalization Experiment Fizzles

Anaheim's effort to become a "virtual community" was watched closely by other cities. It was a public-private partnership fostering technological advances. Could it be a way for cities to upgrade their telecommunications wiring and make money, too.

That was two years ago, when the city and FirstWorld Communications Inc., then known as SpectraNet, entered into a contract to provide cheaper and faster communications service for residents and businesses.

Was it too good to be true?

Apparently so.

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Municipalization and Subsidized Utility Competition

The Taxpayers' Perspective

Leveling the playing field may be an overused phrase, but it can sometimes succinctly describe a complicated situation. As the following Cal-Tax research bulletin lays out in some detail, the unlevel playing field involved in competition between municipalities and investor-owned utilities in telecommunications and energy markets should concern all taxpayers. This inequity has various causes: taxpayer subsidies enjoyed by a municipal utility, a municipality's power to condemn privately owned facilities or to commandeer their transmission lines, and a municipality's access to preferential loans and low-price federal power.

Municipal utilities in California have been part of the landscape since the 19th century, and they are here to stay. What's new on the scene is competition to provide utility services that heretofore have been provided by monopolies in the private sector, such as the major investor-owned utilities overseen by the California Public Utilities Commission, or by monopolies in the public sector, cities and municipal utility districts overseen by elected boards. Both Congress and the California Legislature have enacted laws that encourage, even mandate, competition between service providers. The questions raised in this bulletin highlight taxpayer concerns about government's involvement in that competition.

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Monday, April 18, 2005

More on Muni Ownership

This debate is quickly degrading into name-calling, with any free-market argument now dismissed out-of-hand as coming from "sock puppets." This is unfortunate, because a lot is at stake in the debate, not the least of which taxpayer dollars.

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Heartland Institute Reacts to Proponents of Municipal Broadband

On April 11, three liberal advocacy groups released two new reports claiming to make a case for allowing local governments to build broadband networks in competition with private companies and nonprofit organizations. The three advocacy groups are called the Media Access Project, Free Press, and Consumer Federation of America. Their reports are titled “Connecting the Public: The Truth About Municipal Broadband” and “Telco Lies and the Truth about Municipal Broadband Networks.”

The following statement can be attributed to Joseph Bast, president of The Heartland Institute, a national nonprofit organization based in Chicago, and author of two Heartland Policy Studies on municipal broadband.

Neither of these studies adds anything new to the debate over whether there is a genuine need for municipalities to get into the business of offering commercial broadband services. Instead, they simply repeat the rhetoric put forward by municipalities in the past.

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Just Say No to Government Building the High-speed Information Super Highway

The Texas Legislature is putting its final touches on a telecom bill. As you might expect, there is intense lobbying going on by both industry and consumer groups, with each hurling accusations at the other, and each claiming the moral high ground about what is “best” for consumers.

Also, as you might imagine, there are controversial provisions in the bill. One of the most controversial provisions is one that would forbid municipalities in Texas from building municipal broadband networks. In other words, making it illegal for cities, counties, or regional associations of cities to go into the broadband business.

This provision has been pushed at the state level in a number of states by the usual suspects: the large telecom and cable companies. It’s also opposed by the usual suspects: “consumer” groups. And now it’s being pushed in Texas, and looks to be included in the aforementioned telecom bill.

But the main reason that a ban on municipal networks is in the telecom bill is that it’s a very good idea to make it illegal for Texas municipalities to do something stupid. And municipal broadband networks are a very bad idea.

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Statement of Kent Lassman

Much of what I will share today is based on research done at The Progress & Freedom Foundation. However, we are not alone. Public policy organizations from Boston to Chicago, and from Denver to Seattle , continue to study, examine and test the ideas – and empirical results – that gird arguments for public provision of communications services. Fortunately, there is widespread agreement among independent analysts and academic scholars.

Public entities, in the words of University of Florida economist David Sappington and his coauthor Greg Sidak of the American Enterprise Institute, “may have greater ability than private firms to act anticompetitively. This enhanced ability arises in part from the expanded powers and special privileges that often extend to [public enterprises].”

In short, while municipal communications ventures are often permissible they are rarely advisable.

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Free Broadband From Socialism

Summary: Municipalities do not have a right to experiment with socialism. Municipalization is their attempt to turn back the clock and "snuff out" private competitors.

Should municipalities be allowed to build and operate broadband networks in competition with private companies? States around the country are considering laws making it difficult for cities to do so.

Informed, honest debate over municipal broadband is rare. Advocates of municipalization accuse anyone who disagrees with them of being in the pocket of big telecom companies. For example, Lawrence Lessig, writing in the March issue of Wired, refers to skeptics of municipal broadband as "broadband toadies."

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Municipal Broadband, Public Goods and Public Choice

There is much ongoing discussion of municipally-owned broadband projects, usually portrayed in this manner, as a battle between public-minded, well-intentioned politicians and greedy private firms who want to keep the forces of light from fulfilling the city's broadband dreams. Nevermind that good intentions are rarely sufficient basis for public expenditure. Despite utopian promises of economic development premised on building a a broadband network, this does not account for why private firms aren't doing it if this is the case. (See Laissez le Fiber Roulez)

"This is just like the government building sidewalks or roads," is one supporting analogy that is often used by municipal broadband proponents. The USA Today editorial approvingly quotes the City Parish Manager in Lafayette: "Installing fiber-optic cable, he credibly argues, is no different from laying down sidewalks or sewer lines." Unwittingly or not, the Manager is making what is called a "public goods" argument -- that a city or municipality needs to build this because it is a public goods.

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Laissez le fiber roulez

David Isenberg posts regarding the battle over municipal broadband network in Lafayette, Louisiana -- something like the Battle for New Orleans without Andrew Jackson, but with more lobbyists. The post -- complete with a snide and gratuitous aside about this august institution -- asks a question:

Does the government have the right to say what sectors of a community should be served? He proceeds that if you answer the question in the affirmative, that the government can then dictate service areas (presumably through franchise agreements, as it does with cable, or public utility regulation, as it does with telephony), or build it itself. If the answer is no, he claims then that democracy is lost and that path leads to the vicious cycle of a digital divide. (This may be a slightly uncharitable recounting, but then again I am accused of being an ILEC zombie, so my false consciousness probably clouds my thinking.)

To Mr. Isenberg, then, municipalization is a valid expression of universal service policy. I suppose it is, but one with a rather spotty track record and thus warranting skepticism.

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Why States Should Stop Municipal Broadband

On November 2, 2004, voters in Illinois’ Tri-Cities (Batavia, Geneva, and St. Charles) voted down referenda to approve a municipal broadband plan. It was the second time in as many years voters rejected the proposal.

I produced studies of the Tri-Cities proposals in November 2002 and again in October 2004. The conclusions of my second study appeared in full-page ads run by Comcast in local newspapers just prior to the November 2 vote. My new research found:

The availability of high-speed broadband services has expanded dramatically in the past two years. In the Tri-Cities area, for example, 100 percent of homes and businesses now have access to cable modem and DSL service. DirecTV and EchoStar (Dish Network) offer satellite broadband services, and several companies offer multipoint distribution service (MDS, or “wireless cable”). Starting this year, WiMax is expected to be offered in the area.

In general, downstream speeds for DSL have increased from 768 kb/s to 6 Mb/s, enough to support digital video. Deployment has begun for the next generation of DSL technology, ADSL2+, which can reach speeds of up to 15 Mb/s. Meanwhile, cable modems offers speeds of up to 4 Mb/s. Commercial options are even faster. WiMax is expected to offer speeds of 17-75 Mb/s.

Prices charged for broadband services are dropping. DSL is now sold for as little as $26 per month. Cable modem service costs about $43 per month; DirecTV satellite broadband, $59 to $89; WiMax is expected to be priced at $25-$50.

Many municipal broadband systems in place around the country have failed to meet their budgets, their revenue estimates, or their penetration goals, costing taxpayers and municipal utility ratepayers millions of dollars. Examples include Marietta, Georgia; Lebanon, Ohio; Tacoma, Washington; Paragould, Arkansas; and Ashland, Oregon.

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Why Voters Are Rejecting Municipal Broadband

One of the most closely watched municipal broadband efforts of the past two years went down to defeat on November 2. Voters in Illinois' Tri-Cities – Batavia, Geneva, and St. Charles – wisely decided their local governments should not be in the business of providing HBO and MTV.

The referenda's backers blame "misinformation" from SBC and Comcast as the reason why the measures were defeated by large margins for the second time in as many years, but they overlook two more likely explanations: The growing availability of inexpensive broadband and the increasing sophistication of consumers.

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Broadly Speaking, This Is Not the Government’s Business

Most people know, either from reading the newspapers or common sense, that local governments should not attempt to compete with private businesses to provide goods and services. Nevertheless, every few years a gaggle of consultants emerges seeking to sell local officials on the idea of getting into this or that business. The latest fad is municipal broadband networks.

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Cities Should Stay Out of Broadband Boom

No one has been more impatient for broadband than I have. Throughout my area there are fiber optic cables buried everywhere. I have fiber optics under my driveway and in my Christmas decorations, but no broadband connection to the Internet.

The reason for the slow broadband rollout in the United States is that broadband technologies have been burdened with outdated regulations and uncertainty about future regulation. Cable companies, because they have comparably lighter regulation, have moved quickly to enhance their video networks with broadband capability. But telecommunications companies have hesitated to assume the enormous risk and investment associated with building networks because they were afraid that such new networks would be subject to the same line-sharing regulations that plague their existing networks. It made no sense to make the enormous investment in a new broadband network if your competitor could free-ride on your network and cherry-pick your best customers.

The Federal Communications Commission has finally made it clear that those who build new networks will at least have an opportunity to profit from their own networks, and companies almost immediately announced enormous investments in broadband networks. SBC has announced that it would accelerate its $5 billion fiber rollout from five years to two or three years. And cable operators have invested $90 billion since 1996 to upgrade their systems.

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Municipally Owned Broadband Networks:

This analysis, revised and updated to reflect national and local changes during the past two years, finds the case for municipal ownership of broadband networks is even weaker than it was then. Broadband services that were scarce two years ago are now plentiful and reasonably priced. New data from communities that attempted to build and operate municipal broadband systems suggest taxpayers would be very much at risk, even under financing schemes involving certificates of participation. A broadband initiative in Illinois’ Tri-Cities area (Batavia, St. Charles, Geneva) continues to be a useful case study and precautionary lesson for other communities with similar plans.

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Government Entry Into the Telecom Business:

The movement toward competition in telecommunications is a worldwide phenomenon. Where government ownership has been the prevailing industry structure – which is most countries – this movement has taken the form of privatization of the industry’s assets. In the United States, where telecommunications has been privately owned but subject to pervasive economic regulation, competition has been facilitated by the growing realization that regulation is an imperfect mechanism that generally does not serve the interests of the consumers it is designed to protect.

While other countries have been privatizing, and the U.S. has been moving toward less regulation, especially at the federal level, there has been a growing countertrend at the local level. As a recent Progress & Freedom Foundation study by Kent Lassman and Randolph May shows, an increasing number of state and local governments have been entering the telecommunications market in some form.

Virtually all the local governments that have entered the telecom market have done so using a municipally owned electric utility as a base. These utilities enjoy a number of preferences. They are exempt from paying federal, state and local income taxes as well as property and other taxes. They raise most of their capital through issuance of bonds that are both tax-exempt and guaranteed by the local governments. They own the utility poles and rights of way. All of these factors give the municipalities artificial advantages vis-à-vis their private competitors.

In a 2001 PFF study, Jeffrey Eisenach asked whether government belonged in the telecom business and concluded that such entry was "not likely to produce desirable results." This paper builds on the earlier effort by examining the performance of a group of municipally owned telecom entrants.

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A Survey of Government-Provided Telecommunications:

Today, national, regional, and in many cases, private sector local firms provide a wide range of communications services using several different technological platforms. And, technological advances continue to drive new and innovative products and services to market and create opportunities for new competition. Nevertheless, a good case can be made that the continued overly intrusive and burdensome regulation and the imposition of a multitude of taxes and regulatory fees on private sector telecommunications providers by the FCC and state and local authorities contributed to the recent downturn in the telecom industry and indeed continues to harm the overall economy. There is no doubt that such overly intrusive regulation has impaired private sector telecommunications investment in new facilities and services at a time when much of the world is moving in the opposite direction to implement more privatization and less regulation.

In the midst of the current telecommunications industry downturn, a phenomenon that has not received as much attention as it should is the continuing growth in the number of public entities that offer telecommunications services. While the mega-trend in telecommunications has been for more consumer choice and less government regulation, evidence suggests that a disturbing counter-trend is gathering some force. More municipalities and states are involving themselves more directly than ever before, often through outright government ownership, management, and operation of telecom networks, and sometimes through less direct means of government involvement and support, in the provision of telecommunications services.

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When Government Enters the Telecom Market

Tacoma Public Utilities (TPU) was founded more than a century ago as Tacoma City Light and was granted monopoly status and the charter to “meet community needs for electricity.” More recently the utility has expanded its mission. In 1997 TPU embarked on an ambitious experiment to build a publiclyfunded telecommunications system called the Click! Network. The system was intended to provide high-speed access for cable television, data transmission and Internet services for TPU customers.

Now that the fourth anniversary of the launch of the Click! Network has arrived, it is an appropriate time to make an objective assessment of how the project has fared. Is the Click! Network fulfilling its promises? Has it successfully met the challenges of building an advanced telecommunications network? What risks and costs has it incurred? Beyond these concerns, the Click! Network raises a deeper question about the role of government in our society. Should tax-subsidized municipal entities be allowed to compete directly against private companies?

The Click! Network is a prominent example of an ongoing trend. Other municipalities have also expressed interest in moving into the telecommunications business. Local leaders across the state are watching and weighing the Click! Network’s performance. If deemed a success, the system will serve as a model for others who may decide to embark on the same path.

This paper presents an in-depth analysis of where the Click! Network stands today. It compares the promises made when the system started with its actual performance since 1997. The study assesses whether it is effective or desirable for public entities to enter this business and compete directly against existing telecommunications providers. It also assesses the impact of the Click! Network on Tacoma ratepayers and the system’s prospects if it continues on its present course. Finally, the study presents policy recommendations about how the system can be improved.

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Cashing in on Cable

Municipalities should think twice before entering the cable TV/Internet business. This is the conclusion of a new study released today by the Beacon Hill Institute at Suffolk University. The study, entitled Cashing in on Cable: Warning Flags for Local Government, identifies some of the political and financials pitfalls that threaten municipalities contemplating entry into the cable TV/Internet business.

Explaining the purpose of the study, David G. Tuerck, BHI executive director, said that the cable TV/Internet business is especially alluring to municipalities like the Massachusetts towns of Norwood and Braintree. These towns have an existing electric power business and believe they can compete effectively with the incumbent private-sector cable TV/Internet provider. The problem is that, given the highly competitive, technically changing nature of the telecommunications industry, entry into the cable TV/Internet business poses risks for any entrant, public or private. “As our study points out,” said Tuerck, “the rough-and-tumble cable business is not something for which the average town hall is well suited.”

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Does Government Belong in the Telecom Business?

Widespread recognition of the inefficiencies of government-operated businesses has led to a worldwide movement towards privatization. From airports to bus services, from steel mills to public housing, privatization has saved consumers and taxpayers billions of dollars through increased efficiency and market competition.

When it comes to telecommunications and the Internet, the United States has played an especially important role in the privatization movement. In 1993, the U.S. privatized management of the Internet infrastructure. In 1997, it negotiated the World Trade Organization General Treaty on Telecommunications Services, which encourages privatization of government-operated telecommunications carriers in other nations. It has privatized communications satellites, and even created a new entity, the Internet Corporation for Assigned Names and Numbers (ICANN), to facilitate the privatization of domain name management on the Web.

At the state and local level, however, the trend would appear to be going in the opposite direction: Instead of privatizing their government-owned telecommunications assets, some cities and states are expanding existing telecommunications activities, or even starting new ones. Typically, this means expanding existing municipal electric utilities or cable providers by entering the telecommunications business, but it can also include new infrastructure investments by state governments and even by such Federal entities as "power marketing administrations."

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The Half-Life of Policy Rationales

Technology and Electricity

Overcoming the Umbilical Mentality

Cato Institute

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The Half-Life of Policy Rationales

Avoiding the Grid

Technology and the Decentralization of Water

Cato Institute

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The Half-Life of Policy Rationales

How New Technology Affects Old Policy Issues

The Entrepreneurial Community in Light of Advancing Business Practices and Technologies

Cato Institute

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