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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