Iowa Network May Go On the Block

The state-run Iowa Communications Network may be sold to the private sector. An examination of the issues of public- vs. private-sector ownership

by / August 31, 1995
Sept 95 Level of Govt: State Function: Telecommunications Problem/situation: Should Iowa run their statewide fiber-optic telecommunications network, or is the private sector a better choice? Solution: To be determined Jurisdiction: Iowa Vendors: Iowa Network Services Inc

Contact: Tami Fujinaka, Iowa Communications Network 515/281-7246. Dick Vohs Iowa Network Services Inc. 515/830-0110

By Brian Miller Features Editor The Iowa Communications Network (ICN) - the only statewide, publicly owned telecommunications network in the country - may soon be sold to the private sector. Ownership of the network has been the subject of debate since its inception six years ago

In an effort to explore its options and make a decision on the ownership issue, the Legislature ordered an ad hoc task force to report by this October on the potential effects of several options, including: * Selling the network * Partnering with private companies * Keeping the network in the public domain The task force consists of representatives from various interests, including the private sector, schools, state network administrators and nonprofit organizations

"The balance of the discussion will be what to do with the [fiber] backbone," said Speaker of the Iowa House Ron Corbett. The questions being explored include whether the "state should operate it, or a utility, or some other entity." NETWORK DEVELOPMENT The network currently consists of about 2,000 miles of fiber providing services for 105 schools and colleges, three hospitals, three prisons and a National Guard armory. The $94.7 million third phase of network construction was approved by the Legislature this spring. The money is to be used to connect about 500 additional sites - mainly school districts - plus cover operating and maintenance costs over the next four years

Iowa's ICN is often hailed by the media as a model of future telecommunications infrastructure. But some Iowans question whether the state should have become involved in building a network in the first place

When the state began the project in 1989, it did not intend to own a network. Vendors responding to the first- and second-phase RFPs could bid lease capacity on existing lines or lay cable for the state, and they could bid on all or portions of the state. But only two responses to the request were submitted, and both were proposals to construct the network for the state

Iowa filled the vacuum by having the private sector build the network, then developed the organization to run ICN. More schools and hospitals have been connected to the backbone over the past six years

The state pays to have fiber cable installed to school buildings, and the school is responsible for purchasing equipment, including cameras and monitors. There is a $5-per-hour fee for schools using distance learning facilities

NONPARTISAN ISSUE The options facing the Legislature have backers from both sides of the aisle, and those interviewed said that what to do with the network remains essentially a nonpartisan issue

Corbett said he would prefer to sell the fiber-optic network, partly because the agency running it "was growing and growing, and we do not see an end to that. So the state may not be the best owner of it. We could sell it, and lease it back." He wouldn't venture a guess at how the House will eventually decide the issue

On the Senate side, meanwhile, there is the possibility that lawmakers could "throw up their hands" and "say dump this thing," said Senate Minority Leader Jack Rife. The Republican noted that ICN representatives have frequently come to the Legislature asking for supplemental appropriations in addition to working capital acquired through state bond sales. "What we have is a telephone company with a cash-flow problem," Rife said, explaining some lawmakers' frustrations with the network and a possible motivation to privatize it

The latest construction approved comes from the general fund. This means that in the future, the ICN will be in direct competition with other interests for limited public funds in budget battles. If the state hangs onto the network, funding will have to be found

Rife said he personally hadn't decided what to do about the network, adding that selling it part and parcel may be impossible "because we don't have a telephone company in all 99 counties," he said. Rife also declined to hazard a guess at how the Senate would come out on the issue

One problem with selling the network is the difficulty in placing a value on it. Another is that some telephone companies may want to buy parts of it, and do so to eliminate competition in their area

STATE-FINANCED COMPETITION Telecommunications companies are working the Legislature to take the network, or at least the switching facilities, out of state hands. Their main beef with public ownership is that the network could compete with telephone companies for telecommunications business, especially facilities which provide switching between local calling areas

"One concern is that the state may offer its facilities to non-facility based companies," said Dick Vohs, spokesman for Iowa Network Services Inc., a coalition of independent telephone companies. "The state would then be in competition with long-distance companies." The coalition is concerned that facilities and extra network capacity could be made available to businesses that make heavy use of telecommunications

One reason the coalition considers this to be a real danger is that proposals have been floated before in the Legislature to allow the network to lease its switches to private companies to help recoup network expenses

"Telecommunications is a very competitive industry, and there is concern that in the future, utilities may enter the marketplace," said Vohs. "The industry does not need competition from government as well." Current Iowa law doesn't allow ICN to compete in these arenas, "but the industry remains concerned" that statutes could be changed

Another issue concerning local telephone companies is the loss of cross-subsidy revenue if ICN manages to attract big business customers

Cross-subsidies work by having large telephone customers - such as businesses - pay more for services, which helps keep residential telephone rates low

"The only option we see is for the state to divest itself of the facilities so there is no tax-subsidized competition," Vohs said. "If they sell it to the private sector, that buyer would become a competitor," he said, because the competitors would be on more equal footing. Vohs also said his company would look at purchasing at least parts of the network if it is put up for sale

STATE DOES BETTER? While telecommunication industry interests are determined to make the network private, others advocate state control, including the network's chief operating officer, Harold M. Thompson. "We now have a state-owned technology platform that is doing all kinds of integration, including telemedicine and state and federal services," Thompson said. "The network is more than a telephone provider, and it's not something telephone companies normally put in." The main argument Thompson made against privatizing the network is that rates and control may become out of reach for schools and other institutions. "They come with the profit motive, and [they] look at where they will make money," he said. "And they make the most money in data. So they would lean toward data, and away from video" which is used for distance learning, telemedicine and other public benefits

"We have a gold mine here, and we've already invested in it," Thompson said. He also expressed reservations that the private sector would invest in schools, which take a lot of capital to get online and don't produce much of a cash flow to pay off the investment. Because of this, the private sector may not invest as readily in distance learning, one of the main reasons the network was built in the first place, explained Thompson

The state could save money if the network is privatized, Thompson admitted, "but how would we bring the schools into the Information Age?" While bonds paid for much of the network's installation, the state has had to pay for personnel, data processing and other administrative costs, including about $3 million approved for fiscal year 1996. The state expects about $12 million in revenue from schools and other users, which will be used to pay for maintenance, online time and teleconferencing costs. An ICN spokeswoman said that the revenue from users does not directly go into certain pots for defraying particular costs. This makes it difficult to determine exactly how much it costs to run the network

GOVERNOR UNDECIDED Meanwhile, Iowa Gov. Terry E. Branstad hasn't taken a position on selling or keeping the network in state hands, but he "wants the most efficient use of ICN," said an administration spokeswoman. "Regardless of who controls it, it must deliver education at rates that are affordable

"There are benefits to each scenario. However, we must protect education, because distance learning is what it is all about," the spokeswoman said

The report by the task force due to the Legislature next month will provide a basis for debate over how the network should be owned and operated. It is far too early to predict what the Legislature will do, if anything, about ownership of the network. But the report will provide a platform for debating the issues by outlining the effects of a decision to sell or keep the network. "We can't predict what will happen," said a governor's spokeswoman. "For example, the focus of the rural telephone companies may change in light of federal telecommunications changes."