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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