Thursday, February 21, 2013

The Oldest Government-Owned Telecom Network Wants to Privatize

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.