Should Municipal Governments Be Banned From Broadband?

A growing number of municipal governments want to provide broadband Internet services in their communities. Cable and phone companies want to stop them. Which result would better serve public policy goals?

The battle has been heating up since the Supreme Court ruled last year in Nixon v. Missouri Municipal League that states have authority to bar municipalities from offering telecommunications services. Several states have done just that, and cable and phone companies are lobbying other states to follow suit.

They argue that the private sector is already providing sufficient broadband services to businesses and consumers, that entry by municipalities would distort the market and suppress investment, and that municipal governments would have unfair competitive advantages in offering broadband services (such as operating on a tax-free basis).

Cable and phone companies shouldnt be faulted for lobbying against municipal broadband, since they have a duty to shareholders to guard against perceived threats to revenues. But its helpful to look beyond the companies arguments for a moment to ask whats really going on here.

The answer: market failure. Most municipalities providing broadband are acting for two reasons. First, broadband access is critically important. It will help attract new businesses to their communities, and these businesses will spur economic growth, create jobs, and enhance tax revenues. Broadband Internet access will also serve the educational, healthcare, and cultural needs of their communities.

Second, many local governments are convinced they cant rely on the marketplace to bring affordable broadband to their communities any time soon. In short, the market is failing.

This failure is not surprising. The deployment and pricing of broadband by private companies are necessarily driven by profit. Decisions about bringing broadband to particular communities are based on whether the return will justify the investment.

Governments in localities left behind by the cable and phone companies because of this revenue-based calculus can either gamble on the hope that the companies will eventually bring affordable broadband to their communities, or they can try to solve the problem themselves.

The history of municipal electric utilities provides precedent for the latter course. These utilities began operating in the 1880s and mushroomed during the Depression. They met a need and fixed a problem. The need was to deploy electric service as rapidly and extensively as possible. The problem was that private utilities could not be counted on to serve all areas, since they concentrated on lucrative urban markets. Municipal utilities were successful in filling the void. Today more than 35 million Americans receive their electricity from nearly 2,900 publicly owned utilities and cooperatives.

The fact that most municipalities involved with broadband are simply trying to solve the problem of market failure addresses many of the arguments raised by cable and telephone companies. The fact is that cable and phone companies arent doing a good job in many smaller and rural communities theyre not providing any broadband services at all, or their rates are not affordable.

Municipal broadband services are not likely to cause market distortions or suppress investment because entry by municipalities in most cases is prompted by a failure by the private sector to serve their communities. The absence of any private investment is spurring entry by municipal governments. In fact, private companies have an incentive to keep older, existing facilities in place as long as possible before investing in new broadband infrastructure, especially in less lucrative markets.

Moreover, the Florida Municipal Electric Association has pointed out that where municipalities invest in broadband, there are more private providers of broadband service. FMEA says that municipalities sell broadband to private communications firms, and the result is a more competitive and symbiotic environment that benefits both consumers and the private sector.

Finally, its important to remember that municipalities providing broadband services are not for-profit entities seeking to compete against cable and phone companies, but instead are trying to provide economic and social benefits for their communities. Even if municipalities did compete with cable or phone companies, its not likely they would have any unfair advantage.

Local governments cant match the resources of the major cable and phone companies. Nor are they likely to offset this disadvantage through tax-free operations. Taking an example from a comparable industry, an American Public Power Association report (based on 2002 data) shows that net payments and contributions to local and state governments (such as payments in lieu of taxes) made by 573 public power systems amounted to 5.8 percent of operating revenues. Meanwhile, investor-owned utilities paid 4.9 percent of operating revenues in taxes and fees to local and state governments.

President Bush has recognized the contribution that municipalities can make toward advancing the countrys goals for universal broadband. In a June 2004 speech, the President endorsed efforts by municipalities to set up WiFi hot zones, calling these initiatives a great opportunity. And the Presidents observation applies with even greater force to bringing broadband access to business and residential premises.

Its hard to escape the conclusion that, when viewed as a response to market failure, provision of broadband services by municipalities serves important public policy goals. IT

John Cimko served for fifteen years at the FCC, and currently practices law at Greenberg Traurig LLP in Washington, D.C. The views expressed are solely those of the author and should not be attributed to his firm or its clients. For additional information, visit the firm’s Web site at www.gtlaw.com.

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