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.
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