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 lafayetteprofiber.com, tricitybroadband.com, or muniwireless.com, 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.

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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.

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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.

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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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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.

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‘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 BROADBAND NETWORKS: THE WRONG PATH TO INTELLIGENT CITIES

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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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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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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