At
the same time that FCC Chairman Julius Genachowski is once again advocating that local governments consider
building their own telecom networks, the well-established Iowa government network
has just announced that it wants to sell
itself off. The Iowa state government released a detailed request for proposals
(RFP) this month for the sale
or lease of thousands of miles of the Iowa Communications Network (ICN).
The
Iowa network is one of the oldest government telecom networks in existence, but
it now seems that the debt it has accrued over its history has rendered the
system unsustainable. The ICN was created more than 25 years ago, in 1989, and
currently includes an estimated 3,400 miles of
state-owned fiber and 5,261 miles of leased fiber connections. The network
offers video, voice, data, and Internet services to approximately 1,200
customers.
Despite
the many advantages the network has enjoyed through government subsidies,
investment, and special allowances, the ICN has operated at a loss for years. As
a government entity, the network currently pays no income or property taxes,
and it received a $16.2 million broadband stimulus grant through NTIA’s Broadband
Technology Opportunities Program in 2010 to build out 1Gbps service. Still, the
network ran at a deficit from 2007 to 2012. In fiscal year 2012, the network’s
revenue was $31.66 million and operating expenses were $41.49 million.
Given
these failures, the RFP offers the ICN for sale or lease to the
private sector. Notably, the RFP conditions any sale or lease on the ability of
a buyer or lessee to provide services to customers at a lower, overall
long-term cost than the state could offer. This indicates that the Iowa state
government acknowledges that the private sector could, and likely will, provide
service more efficiently to consumers than the government system can.
The
RFP states that if the Iowa state
government is able to lease or sell its network (in whole or in part) “the ICN has
additional potential . . . as a privatized entity.” Some benefits of
privatizing the network include allowing the ICN to offer a greater variety of
new services to existing customers and to generate new subscribers.
Although
a few government telecom networks have had some limited success, overall these
systems increase the financial burden on taxpayers without providing
commensurate benefits. As Free State Foundation scholars have observed in the
context of Utah’s UTOPIA network, the Mooresville
and Davidson, NC MI-Connection, and the Chattanooga, TN EPB network, most government-owned
and operated communications networks fall short of the benefits local
governments promise. (For a full audit of the UTOPIA network’s financial
failings, see “Report to the Utah
Legislature”).
For example, as of December 2012,
Chattanooga’s municipal smart grid and broadband initiatives run by EPB’s Fiber
Optic Division had reportedly cost approximately $390 million, funded by $229 million in
local revenue bonds, $111 million from federal stimulus grants, and $50 million
in loans from EPB’s municipality electric division (to establish the fiber
optic division). In other words, EPB’s electric customers have been
responsible for financing a $160 million loan to the EPB telecom wing, and
federal taxpayers provided the $111 million in “stimulus” funds. The final $29
million will be borne by EPB’s new Internet and cable television customers.
In addition to the inefficient use of stimulus
funds, the financial structure of the Chattanooga system possibly violates
state law. One report
found that EPB issued bonds for $219.8 million to finance the construction
of a fiber optic broadband network; however, only $48 million of that debt was
allocated to the communications business unit. According to University of
Denver professor Ronald Rizzuto, this
violates the Tennessee law that says: “A municipal electric system providing
any of the services authorized by this part shall establish and charge rates
that cover all costs related to the provision of such services.” Tenn. Code Ann. § 7-52-603 (2013). The allocation of capital costs to the electric utility to
foot the bill for the communications business is likely not uncommon among
municipal networks nationwide. Running a telecom network is a complicated,
capital-intensive, and risk-laden venture that should be left to the private
sector.
Municipal
or state governments should consider undertaking the construction and operation
of a telecom network only if customers are not adequately served by the private
sector. Allowing the marketplace to drive private sector
innovation and build-out of broadband networks will avoid the unnecessary loss of
taxpayer dollars, and it will better enable local governments to better perform
their traditional, core public services. Government-run telecom networks should
be considered only if local providers do not currently offer service to, or
have the intention of offering service to, the same customer base the government
system would serve.
Broadband investment has overwhelmingly come from
the private sector, and it will continue to do so if the proper policies are
promoted. It is vital to continue to focus on policies to incentivize private
investment and remove barriers to broadband build-out, as Chairman Genachowski
properly acknowledged.
Government-operated networks are not the solution, as the widespread failure of
these ventures nationwide shows.
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