Municipal Networks:

Raising Taxes Beats Raising Rates
John Wohlstetter
CEI C:\Spin
January 14, 2004
Print ArticleGovernments are notoriously slow to do anything, constantly out-paced by the private sector. Tell that to a growing number of municipalities who have decided to install their own broadband networks. Eighteen cities in Utah have agreed to build a $470 million fiber-to-the-home (FTTH) network, the largest such network to date planned for the local loop in the States. Named “Utopia,” when complete the network will serve 248,000 households and 34,500 businesses with access speeds of 100 megabits per second, all for $28 per month. Costs are expected to run $1,100 to lay fiber to the curb (near the home) and another $1,400 per home to run fiber from the curb into the premises; one consultant estimates 40 percent of targeted customers may subscribe within two years. The project’s executive director sees broadband as “an essential economic growth issue.” (In Utah, Public Works Project in Digital, New York Times, p. C1 (Nov. 17, 2003); source for the estimate of a 40 percent customer “take” rate for the new network: DynamicCity, Lindon, Utah).

Several rural communities in Wisconsin have built small broadband networks, after local telephone and cable firms declined to do so. The Grant County Public Utility District in Washington State spent $91 million to build an 800-mile fibernet that provides the county’s 13 residents per square mile with 10 gigabit-per-second access. One equipment firm, Adesta, now gets 60 percent of its business from pubic sector customers. (New Appetite for Fiber, Washington Post, p. E1 (Dec. 9, 2003).

Care to Compete against the Ump?

Utah’s Utopia network is structured as wholesale only, to avoid direct competition with existing retail companies. Direct competitive entry by Utopia is permitted, but only if the municipal carrier accepts regulations barring cross-subsidy between regulated and unregulated services. Yet no matter what the rules are, the umpire has incentives to dissuade competitive investment. Local governments can decline to grant regulatory relief to competing carriers. Thus, future private investments may be deferred or precluded. And unlike private firms, governments will always bill on a cost-plus basis. Call it a regulatory form of “moral hazard.”

Ideally, the federal government would adopt a national policy promoting deployment of broadband infrastructure, by deregulating all broadband investment and accelerating depreciation of legacy infrastructure investment. Having half a hundred states regulating broadband differently in a world where the marginal cost of calling coast-to-coast is the same as that of calling across the street, puts regulatory economics at odds with real-world costs. But the Bush White Hose shows no signs of life, while the FCC has endorsed a lead role for the states into the indefinite future.

The Telecom Act, whose broad pre-emptive authority over state law was affirmed by the Supreme Court, empowers the federal government to extend “universal service” obligations to include advanced services (two-way switched broadband). An FCC-state Joint Board must consider the impact on public education, health and emergency services, market penetration of residences, and deployment underway (Telecommunications Act of 1996, section 254(c)(1)). The Act also directs the FCC, upon a finding that advanced services deployment is lagging, to take deregulatory measures to stimulate more rapid competitive market diffusion (section 706(b)). Were it so inclined the FCC could use the latter provision to bypass recalcitrant state commissions. But faced with such conflicting mandates and the need for state participation in “universal service” political paralysis is the most likely prospect.

Meanwhile, the attraction of broadband bypass will only grow as Asia’s broadband express rolls on, delivering multi-megabit speeds while Americans sit on the brake in digital traffic jams. It may prove politically easier for governments to raise taxes to pay for broadband infrastructure, than for regulators to allow phone/cable companies to raise rates and write down equipment to achieve the same result—probably more cheaply than Utah’s Utopia network. As ever, politics trumps economics.

C:\SPIN is produced by the Competitive Enterprise Institute