Monday, March 03, 2014

Another One Bites the Dust: Burlington Telecom’s Failure Shows, Again, That Government-Operated Broadband Networks Are Not The Solution

In a public statement on February 19, Chairman Tom Wheeler laid out his plans for the Federal Communications Commission’s approach to broadband in reaction to the D.C. Circuit’s Verizon v. FCC decision. Many of the proposed Internet regulations and policies Chairman Wheeler announced amount to “solutions in search of a problem,” as House Subcommittee Chairman Greg Walden stated.
Among those problematic “solutions” is Chairman Wheeler’s idea to potentially preempt state restrictions on the ability of cities and towns to offer broadband services to their communities. The idea to encourage localities to build their own networks was introduced as a way to “enhance competition.” Chairman Wheeler elaborated after the FCC’s open meeting on February 20 that “the operating hypothesis” regarding municipal networks “is that if local communities say they want more competition and want to work through their locally elected officials” to accomplish that, they should be allowed to do so.
The goal of increasing consumer choice in Internet access is a worthy one. However, the Commission’s “hypothesis” that local entities can achieve that goal has been proven wrong repeatedly. Government-owned systems have experienced widespread failure nationwide, and the localities have passed the cost of those shortcomings onto taxpayers. In contrast, the private sector has been the central source of impressive investment and efficient broadband deployment for years, and the Commission should not interfere with the healthy growth and evolution of technology and business models by favoring localities over private investors.
The most recent government-owned network that is in the news for falling short of expectations is Burlington, Vermont’s network, Burlington Telecom (BT). On February 3, Burlington Mayer Miro Weinberger said the city had reached a settlement with Citibank in its lawsuit over its loans on the financially ailing BT cable system. The BT system has been deteriorating for years. In 2011, the New Rules Project released a report, which found that “in little more than a year, Burlington Telecom went from being a hopeful star of the community fiber network movement to an albatross around its neck.” The report found that BT’s debt to the city’s cash pool reached $17 million by 2009, and BT’s management “grossly overspent even their own estimates,” with over half of all expenditures allocated to a nebulous “other charges” line item. These findings imply a lack of transparency, irresponsible spending, and potentially fraudulent use of funds.
For the past two years, BT has been fighting the claims of Citibank, its primary creditor, that BT owes it $33.5 million; the proposed settlement is for $10.5 million, which will be funded “largely” through non-taxpayer resources. Not surprisingly, the city has had to look to the private sector to help in funding the settlement. 
Many local governments have encountered the same fate after investing heavily on money-losing municipal broadband projects. For example, the towns of Mooresville and Davidson, North Carolina, faced multi-million dollar debts after acquiring the MI-Connection Communications System from the bankrupt Adelphia Communications cable systems. Starting in 2011, the towns owed over $7 million in annual debt payments for five years, which constituted one-fourth of the town’s operating budget each year. Utah’s UTOPIA network was built with the goal of achieving a positive cash flow in five years. Instead, the network operated at a loss from 2003–2012, which caused “serious damage to the agency’s financial position” and resulted in total net assets of negative $120 million by 2011. Chattanooga, Tennessee’s Electric Power Board (EPB) network was built almost entirely at taxpayer expense. According to a 2012 National Taxpayers’ Union report, EPB’s electric customers were responsible for financing a $160 million loan, its new Internet and cable television customers financing $29 million, and federal taxpayers financing another $111 million via the 2009 “stimulus” bill to build the network. By 2010, the network had incurred a combined $176.5 million in cumulative debt and experienced a downgrade in credit rating due to the “high degree of business risk and operating margins that are less predictable than the EPB’s traditional electric operations.” And last February, the Iowa state government sought to sell off its Iowa Communications Network. The Iowa network is one of the oldest government telecom systems in existence, but the debt it accrued over its history rendered the system unsustainable. Other municipal “broadband busts” include Provo, Utah, Lafayette, Louisiana, and the N.C. Eastern Municipal Power Agency.
FSF President Randolph May concluded in a blog last year that the “common denominator” among these and other government-owned systems is this: “Because of almost universal cost overruns and less than projected demand for the services offered, taxpayers typically are left to bear the burden of the ensuing financial distress, either by providing direct subsidies from government coffers or by providing indirect subsidies through premium guarantees for bond offerings used to finance the projects.” Running a telecom network is a complicated, capital-intensive, and risk-laden venture that should be left to the private sector, unless private operators have not shown a willingness to provide service.
FSF scholar Seth Cooper also highlighted the problems with empowering local governments to directly compete with private broadband Internet providers in a February 26 Perspectives. He found that in addition to exposing local taxpayers to financial risk and wasting community resources, allowing governments to assume “a dual role as public authority and as competing business proprietor poses inherent conflicts-of-interest for local governments. Such conflicts lend themselves to abuses of government power.” He also found that FCC preemption of state safeguards on government-owned broadband projects to prevent such abuses may exceed FCC authority and violate constitutional federalism principles. As such, both legal and policy-driven analyses support leaving broadband network ownership and management to the private sector.
Luckily for Burlington, Mayor Weinberger seems to have chosen to divest the city from the telecom business. He stated that private investors have a better chance of competing successfully in the “highly competitive, quickly evolving and capital intensive” telecommunications business, and he is right.
Chairman Wheeler recognized in his recent statement that since 2009, nearly $250 billion in private capital has been invested in U.S. wired and wireless broadband networks. Telecommunications companies are leaders in domestic capital investments. AT&T and Verizon ranked in the top five “U.S. Investment Heroes of 2013,” together investing $34.5 billion last year. The telecommunications and cable sector was responsible for $50.5 billion of investment in 2013, comprising more than one-third of total capital investments in the U.S. economy. And since 1996, cable operators have invested over $200 billion into broadband infrastructure. Additionally, private sector investors — and not local taxpaying residents — bear the financial risks should private systems falter.
As Free State Foundation scholars have frequently discussed, broadband investment will continue to come from the private sector if the proper policies are promoted. The FCC should focus on policies to incentivize private investment and remove barriers to broadband build-out. However, government-operated networks are not the solution to promoting broadband deployment, as the widespread failure of these systems continues to prove.