No. 100 Municipally Owned Broadband Networks: A Critical Evaluation (summary)

Broadband services have not been rolled out as quickly or as widely as many experts predicted during the late 1990s. Many smaller communities, in particular, feel left behind by the “broadband revolution.” Three such communities in Illinois (Batavia, St. Charles, and Geneva), located west of Chicago, have responded to complaints by their residents and businesses by proposing to build a municipally owned broadband network, using some of the assets and expertise gained by operating existing municipally owned electric utilities. The Tri-Cities debate presents a case study and a precautionary lesson for other communities with similar plans.

1. Why consider municipal ownership?

Advocates of municipalization claim access to broadband services is extremely limited. For example, Batavia assistant city administrator Randy Recklaus told the Kane County Chronicle in December 2001, “there is a desire and need in the community for broadband services. ... The quality of service and introduction of new products, by our current service provider, has been disappointing to our residents.”

Access to broadband, say advocates of municipalization, can help lure high-tech businesses choosing to relocate or expand and high-tech workers looking to telecommute. John Garvey of Convergence Research Inc. claims, “As medium and smaller sized municipalities struggle to compete with large cities, and as metropolitan suburbs compete with the city core, access to broadband is increasingly necessary to retain current businesses and attract new start-ups. Lack of high-speed Internet access – a reality and a dilemma in rural communities and in outlying suburban areas – contributes to the difficulty municipalities have in recruiting engineering firms, software houses and other businesses that rely on broadband access.”

With telecom companies on the bench due to miscalculations by policymakers, investors, and entrepreneurs, municipalities have emerged as less-handicapped players able to take to the field faster and perform better until the veterans are able to play again. Communities that own and operate their own electric utilities already own assets and have personnel that could be put to use on a broadband network.

2. Access to broadband services is more plentiful than advocates of municipalization claim or admit.

Advocates of municipally owned broadband networks often overlook ways of getting broadband services other than by cable modem or fiber optics. For example, the following broadband services are widely available in the Tri-Cities communities:

• ISDN (Integrated Services Digital Network)

• T-1 service

• DSL (Digital Subscriber Line)

• DBS (Direct Broadcast Satellite) service

• MDS (Multipoint Distribution Service), or wireless cable

Wireless cable involves using antennas mounted on water towers or high buildings to deliver high-speed Internet access to users. South Elgin, for example, has contracted with St. Charles-based MCC Technology to place antennas on four municipally owned water towers, giving virtually the entire village access to broadband. Rates are expected to range from $69.95 to $149/month.

Not all of these broadband services are as fast or reliable as the fiber-optic network envisioned by advocates of a municipally owned broadband network, and some may cost more than a typical small business owner wants to spend. But they are widely available now to residents and businesses in the Tri-Cities at affordable prices.

Why, then, should the city invest now in building its own fiber-optic broadband network? One can guess that the purpose is to subsidize a small number of community residents and businesses who want the highest quality broadband services but aren’t willing to pay the full price for them.

3. Municipally owned broadband networks are expensive to build and risky to operate.

Across the United States, only 8 percent of counties and local governments with more than 5,000 residents own their own electric utilities. Municipal cable systems are even rarer – just 1.3 percent. And offering Internet access is rarer still – 0.7 percent. Why, if municipal creation and ownership of broadband networks is such a good idea, is it so rare?

Building and operating a broadband infrastructure is an expensive endeavor. Spencer, Iowa, population 11,000, spent $17 million to create its fiber-optic network and run coaxial cable to 4,500 homes. This is $1,545 per resident and $3,777 per household. Like the Tri-Cities, Spencer started with a municipal electric utility and an existing fiber network linking public buildings.

City officials in Spencer hope to “break even” on the town’s investment by charging residents and businesses for telecommunications services. They may accomplish this goal, but it is a risky plan. The local cable company has cut its rates more than 50 percent, forcing the city to consider its own price cuts. The cable company is suing the city over the way the municipal service is being financed, which could further interrupt receipts. Price-cutting and legal action by Chicago-area cable providers can be expected to be at least as fierce, driving down likely revenues for a Tri-Cities municipal broadband entity.

Even bigger threats to a municipal broadband network’s financial health are changing state and federal regulations, new technology, and falling prices. Earlier this year the FCC and a federal appeals court removed some of the open access requirements that have kept SBC from expanding and aggressively promoting its DSL service and AT&T from investing aggressively in upgrading its cable networks. Wireless high-speed Internet access, either by satellite or ground-based broadcasting, costs far less to install and operate than a fiber-optic network and may render municipal networks obsolete within a few years.

If the new broadband entity is structured to be self-financing, what happens when technological change, deregulation, and competition cause receipts to fall short of projections? The municipal entity cannot be subsidized without triggering legal challenges under Section 253 of the 1996 Telecommunications Act. The only alternative is sale of the assets to a private firm and/or bankruptcy.

4. Alternatives to municipalization are available.

There are alternatives to municipally owned broadband networks that cost far less than the $17 million spent by Spencer, Iowa and do not pose the risk of municipal bankruptcy. Consider what is happening in communities surrounding the Tri-Cities:

• South Elgin allowed MCC to install antennas on top of the town’s three water towers. The antennas will serve the majority of South Elgin ... and the town gets 5 percent of MCC Technology’s gross sales.

• Huntley is deploying a novel wireless system developed by Motorola called Canopy. Fox Valley Internet is installing antennas on four Huntley water towers and will pay the village $300 a month per installed antenna.

• Elgin: Elgin’s Technology Action Team in September 2000 released a plan for “e-Elgin” that called for matching grants to businesses that upgrade their connections to high-speed Internet service and other electric infrastructure and abatement of the municipal portion of property taxes to encourage development and improvement of existing structures.

Another alternative to building a municipally owned broadband network is to boost true demand for broadband services (that is, businesses willing to pay the full cost of high-quality broadband services) in the area by taking the lead in repealing regulations that limit the advertising and sale of certain products over the Internet. The Tri-Cities could be for Internet businesses what Delaware is for companies looking to incorporate . . . a safe haven from anti-competitive regulations. Private telecommunications companies would rush to the Tri-Cities if it were home to thriving Internet businesses demanding broadband services.

Conclusion

Generally speaking, municipal ownership of broadband networks is probably not in the best interests of residents and most businesses, even in communities not well served today by private service providers. The chief advantage of a municipal broadband network is that it would speed up access to high-quality broadband services by six months or a year and subsidize this access for the small number of businesses and individuals who most want it. It is unlikely that more than a small number of residents would benefit from this speed-up, that their benefits would justify the steep cost, or that it is fair to force other residents and businesses to subsidize them.

Elected officials in the Tri-Cities should be commended for moving cautiously so far. They have discussed their options with companies in their area, studied other cities, and commissioned a study of the municipalization option. They will need to greet the finished study with healthy skepticism, since the consultants have a financial interest in advocating municipalization, but the report should provide some valuable guidance nonetheless.

Threatening to build a municipal broadband network may have been a good strategy to prompt AT&T and SBC to make good on past promises to upgrade the cable network and expand DSL services. Following through with municipalization, however, is probably not in the Tri-Cities’ best interest.

Based on Joseph L. Bast, "Municipally Owned Broadband Networks: A Critical Evaluation,"
Heartland Policy Study #100 (Chicago, IL: The Heartland Institute, November 2002). Printed copies of the 24-page study are available from The Heartland Institute for $10 each; the full text is also available on The Heartland Institute's Web site in HTML and Adobe Acrobat PDF formats.

Copyright 2002 The Heartland Institute. Nothing in this Heartland Executive Summary should be construed as reflecting the views of The Heartland Institute, nor as an attempt to aid or hinder the passage of legislation. Permission is granted to reprint or quote from this Executive Summary, provided appropriate credit is given.

Questions? Contact The Heartland Institute, 19 South LaSalle Street #903, Chicago, IL 60603; phone 312/377-4000; fax 312/377-5000; email think@heartland.org; Web http://www.heartland.org.

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