February 16, 1999


by Andy Oram
American Reporter Correspondent

CAMBRIDGE, MASS.—So you don’t want to move to the Coast, and you’re tired of hanging around your small town waiting for a telecom or cable company to provide high-speed data access. Go ahead and build your own network! Hundreds of municipalities have done it. But legal challenges to the practice are also mounting.

Gainesville, Florida did it. According to Ed Hoffman of Gainesville Regional Utilities, the city-owned electrical company, their data network started as a critical piece of the electrical infrastructure. Now they reach into several thousand homes.

The utility planned on using its network for purely internal purposes, like controlling power flows and monitoring subsystems. Bellsouth couldn’t offer the town enough capacity, and what it offered was too costly.

So about five years ago the electric company partnered with the local Shands Hospital, which needed a high-speed network for transmitting patient data, to build 100 miles of fiber network serving the city and parts of the surrounding county.

Using their extra capacity, they offered high-speed point-to-point service to businesses and government institutions, followed by Internet service to both institutions and residences. “There’s no end to our capabilities,” says Hoffman.

Do private Internet providers complain about the competition? Once in a while they do, but they also rush to link into the high-speed backbone offered by the city network. Hoffman believes that the network has improved the environment for private ISPs, all in all.

Tacoma, Washington tried every private angle possible before building its own network. Like Gainesville, the electric company in Tacoma wanted a high-bandwidth network that could read meters remotely, pinpoint power failures during storms, and control power stations.

Steve Klein of Tacoma Power reports disdainfully that the local phone company wasn’t even interested in looking at the financial pay-offs from building the network. Their switches were designed for short voice calls and tended to go down during critical transmissions of data. The project didn’t fit into their business plans, because it would require serious capital investment while they were getting along fine milking their existing infrastructure. “As a monopolist,” said Klein, “I knew of what I speak.”

Next he tried the cable company. It was a mom-and-pop operation taken over by TCI, which showed no desire to invest in improved infrastructure. And while the competing telephone companies were sympathetic, they were too small. “They were used to going down the main highway signing up some large business nearby, not stringing wires to a whole neighborhood.”

When Tacoma Power decided to build the network itself, it submitted its plans to a consulting group at the Stanford Research Institute, which pointed out that a small increase in investment could provide enough extra capacity to let them lease out service.

The city-owned hybrid network (fiber backbone and copper to residences) provided such a superior product to its competition that Klein says “we have to take care not to grow too fast.” Current Internet service uses a television screen and an attached keypad, but it is unbelievably cheap at $9/month. And fast, at 128 kilobits with an increase soon to 256 kilobits. “My infrastructure will pay for itself just meeting energy needs,” boasts Klein. “The rest is icing on the cake.”

Klein does not want to expand his electrical company to be in the market for all possible services a network can carry. So more competition is coming soon, as network capacity will leased to any and all interested ISPs.

Cities are well aware of their social impact when they build data networks. Over and over I heard people say that their students, their businesses, and their workers need high-speed Internet access. Mike Thompson of Pioneer Internet in Iowa says bluntly, “If small communities don’t invest in the technology to keep businesses and provide the same educational opportunities as cities, these communities will die.”

Glasgow, Kentucky is home to a passionate advocate of public infrastructure, William J. Ray. Still bearing the old American pride in the Tennessee Valley Authority, Ray says that municipal utilities are a key part of what government is meant to do.

The goal of city-owned telecom networks, according to Ray, is the same as that of municipal electrical utilities many decades ago: to offer services priced way out of reach by the private companies price. He refers to “cost-based rate versus market-based rate”—in other words, the city provides a service at cost instead of trying to make a profit. The Glasgow data network was in the red for nine years, but last year for the first time it started to show a profit.

The proponents of municipal networks I interviewed were united in their disappointment over the 1996 Telecom Act. Its promised competition never came—certainly not to those small towns with the ill fortune to be classified as “third-tier communities.” And so the movement to build municipal networks takes on steam.

These networks are spreading like wildfire across the Iowa prairie. Almost 40 towns and cities in that state have voted to build data networks. The story I heard from the assistant town clerk of Hawarden, Patty Anderson, was familiar.

The city council of Hawarden got “tired of hearing complaints from residents” about phone service; her own phones were unusable in a heavy rain. Businesses warned that they needed advanced applications like videoconferencing; one with customers as far away as Taiwan and Scotland said it would move out of town if they could not get a high-speed data connection.

In October 1994, a special referendum to allow the building of a communications network brought out 65% of the voters and passed with 96% of the ballots. The network offered cable before telecom. But they made their first phone call over the municipal network on October 20, 1998—and were forced to shut down by the Iowa Supreme Court on October 21.

The court ruled that an Iowa law enabling cities to build “communications networks” referred just to cable TV, not to telephony or data. They have since rescinded their decision, but because they have not issued another ruling the phone service remains disconnected.

Hawarden got caught in a nationwide struggle over the rights of cities to offer telecom services—including Internet service—on their networks, a struggle going increasingly to the opponents. Most recently, Texas ruled against the cities, and the FCC refused to step into the dispute; another case in Missouri has just gone before the FCC.

Opposition does not seem to come from any anti-government ground-swell among the citizens—after all, they’re the ones voting to build the networks—but from telephone and cable companies. When I heard how the schools had to shut down their phones, I was ready to pick up a shotgun and join the good people of rural Iowa in defending their networks. But at the receiving end of the barrel I found not the cash-stuffed national monopolists I expected, but a group of small independent operators.

Iowa, it seems, has more independent phone companies than any other state. Judy Pletcher, a spokesperson from their representative body, the Rural Iowa Independent Telephone Association, claims they are state-of-the-art. The dissatisfied cities building municipal networks, she says, are customers of big national companies.

There’s no dispute from Pletcher that national telephone companies are leaving Iowa for more lucrative contracts. GTE has announced that it’s selling all its local exchanges; U.S. West sells a bunch of exchanges on a routine basis. But RIITA is picking up the service and is convinced they can provide everything the cities are doing for themselves.

RIITA’s opposition is typical of telecom companies. They believe that cities are competing with them unfairly—by using taxes, by avoiding the payment of taxes and fees private firms have to pay, or by other kinds of cross-subsidy. Their complaints are summarized by the call for a “level playing field.”

The most disturbing concern raised by Pletcher was that cities who go their own way are making it harder for others to get service. What about the even smaller towns and the rural residents who can’t afford to build a network? Private companies, according to her, are committed to serving everybody in the communities they enter.

Proponents of city networks deny that they’re using tax money unfairly. Comparisons are very hard to make because the conditions under which public and private companies operate are so different. As Ray says, “Cross-subsidization is in the eyes of the beholder.” Jim Baller, who represents many city utilities, says “publicly-owned entities generally make payments in lieu of taxes that are often higher than the taxes paid by private entities.”

Baller points out that the criticism of city networks goes back at least 80 years, when cities developing their own electrical grids were lambasted by private utilities as “hotbeds of Bolshevism.” He casts doubt on the whole “level playing field” debate as being “like a debate over religion.” Instead, he wants us to “ask ourselves, honestly and realistically, ‘How are we going to ensure that all Americans promptly get the full benefits of the Information Age?’”

Bellsouth spokespersons told me they are “in favor of competition, including having municipalities enter our marketplace,” and that, “As a policy, Bellsouth has no objection to municipalities offering telephone service as long as they’re regulated the same way we are and don’t use tax money.”

In Kentucky, Bellsouth introduced a bill requiring cities to collect the same fees private companies do, including a 6% state tax, a 3% school tax, universal service fund subsidies, and a lifeline service subsidy. The bill was withdrawn, but will be reintroduced in the year 2000. Meanwhile, according to Bellsouth spokesperson Ellen Jones, the phone company is talking with local town officials.

While the tax restriction may seem to be a show-stopper for public facilities, cities have actually been able to work within it. The Gainesville network, for instance, started paying property and sales taxes a year ago, after Florida passed a law sponsored by Bellsouth and other companies.

Most cities fund networks by floating bonds, and as shown in this article, they are finding it quite feasible to pay off the bonds from revenues. But even these bonds could be considered unfair competition because they’re tax-free, says Iowa state representative Jack Drake.

Drake is the representative who introduced the original bill that Hawarden used to justify building its network. But Drake is a partisan of the level playing field movement, and says his bill was meant to apply only to cable TV service, just as the Iowa court ruled.

Luckily, he says, all parties are sitting down to talk out differences, hoping to reach agreement and thus head off a ruling by the court.

The true competitive advantage that cities have is size. They take on the job of providing access to everybody at the same time, and they can count on subscription rates of 80% or more.

But most of all, cities are committed to providing key services to citizens. They have proven that they can jump in where private companies dawdle.

Municipal networks invert everything we hear from free-market propagandists about the stifling effects of government and the drive inherent in private companies. If government was an enemy of innovation, the city-owned utilities would never have even tried to get into the data business.

Baller reprimands companies that support level playing field laws: “I have a problem with keeping people from helping themselves when you know you can’t help them.” And Ray scoffs, “It’s OK for cities to build water systems or electrical utilities, but we’ll draw the line at telecommunications services.”

But eight states have passed laws limiting or prohibiting city data networks. We will not really know the future of these enterprises until we get a ruling on them from the FCC or the U.S. Supreme Court.

The day after this article was published, on February 17, Hawarden got its municipal phone service back. The Iowa Supreme Court ruled that the Iowa law allowed municipal networks to offer telephone service.

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