Utility Vehicle

Cities fight for right to compete with telcos

Big telecommunications companies arent crazy about government regulating their industry. But they get even hotter under the collar when government becomes a competitor.

Today more than 260 state and local governments operate telecommunications businesses, ranging from cable television to local phone and Internet services. And the pace of government entry into the field has grown dramatically in the past decade, says Jeffrey A. Eisenach, president of the Progress & Freedom Foundation, a Washington, D.C., think tank.

"Instead of privatizing their government-owned telecommunications assets, some cities and states are expanding existing telecommunications activities or even starting new ones," says Eisenach, who served as telecommunications adviser on President George W. Bushs transition team.

While Eisenachs research supports the private-industry position that government has no business in telecommunications, public utilities say they are providing services not otherwise available. About 75 percent of government-owned utilities are in towns with populations of fewer than 10,000.

According to the most recent survey by the Federal Communications Commission, people in rural areas are "particularly vulnerable to not being served by market forces alone."

Unfettered by the need for high profit margins, publicly owned telecommunications operators can offer broadband and interactive services in areas shunned by corporations, says the American Public Power Association. Amid growing electrical deregulation, telecommunications also gives public utilities a way to make more money from assets such as rights of way and utility poles, backers say.

But telecommunications industry trade groups contend that the government utilities tilt the playing field by receiving tax subsidies. They also avoid the government regulations private companies face. In some cases, they are the enforcers of such regulations. Unlike private companies, government utilities can claim rights of way through condemnation.

"Government entry in the marketplace distorts incentives and slows the development of private-sector competition," Eisenach says.

Along with small towns, some major cities are also developing communications utilities, including Los Angeles and Palo Alto, Calif., and Chicago, where a project called CivicNet has been designed to create an advanced telecommunications optical infrastructure. Of the 25 largest public utilities, 12 are either already in the telecommunications business or considering entry, according to a Freedom & Progress Foundation report.

The largest, by far, is the Los Angeles Department of Water & Power, which leases its network of more than 15,000 miles of dark fiber within the city.

To combat government competition, telecom companies lobbied state legislatures for laws banning government operations. But those laws, passed in nine states, hit a roadblock in May when a federal judge struck down Virginias law that prevented the Bristol Virginia Utilities Board from offering telecommunications services.

Before U.S. District Judge James P. Jones ruled that Virginias law violated the federal Telecommunications Act of 1996, the BVUB in Bristol, Va., had been supplying high-speed Internet service only to government offices. But after the ruling, the BVUB took steps to offer service over its $5 million fiber-optic system to private companies and to lease some of the fiber to companies that intended to offer cable television, telephone and security systems in Southwest Virginia.

"Unless its overturned, this decision will actually stifle telecommunications competition, not stimulate it," says Dana Coltrin, president of the Virginia Telecommunications Industry Association.

On the other side of the issue, Ron Lunt, director of telecommunications services at the American Public Power Association, called the ruling "very important. We had several states prohibiting governments from getting involved in telecommunications and the movement seemed to be gaining synergy. This should stifle that somewhat."

The issue before the courts is whether local governments qualify as "entities" under the 1996 Telecommunications Act. Designed to promote competition, the act allows any "entity" to provide telecommunications services. Jones ruled that municipalities did qualify as entities.

While the established incumbent carriers appeal the courts ruling to the Court of Appeals, the fight continues in Congress and before the Federal Communications Commission, where the regional Bells appear to enjoy unprecedented clout.

In two previous rulings involving Texas and Missouri, the FCC has upheld bans on municipal telephone companies.

While much of the attention has turned to small communities, state and federal government agencies are also delving into telecommunications, the Progress & Freedom Foundation says.

Federal agencies such as the Tennessee Valley Authority, the Bonneville Power Administration and the Salt River Project own substantial amounts of fiber and are marketing the networks to private and public customers, the foundations report says. The Bonneville Power Administration plans to spend $126 million in the next four years to expand its fiber-optic infrastructure.

At least 16 states own or are planning to build their own telecommunications networks, the report says. In Maryland, for example, the state is building a high-speed network to cross local service boundaries that incumbent carriers are forbidden by regulation to cross.

But while government agencies enjoy a number of advantages, they are also hamstrung by inefficiency and bureaucracy, Eisenach says. The state-owned Iowa Communications Network lost $24.5 million on an operating budget of $53.3 million in 1999, despite state subsidies. Faced with unanticipated losses, California decided to privatize its state-owned system in 1998.

While Eisenach supports the right of small towns to offer incentives such as tax breaks to bring broadband to underserved areas, he says there should be limits to government involvement.

"In principle, theres nothing wrong with cities providing incentives to deploy broadband," he says. "Running a telephone company — thats a different kettle of fish."