Broadband Battle

A Supreme Court ruling is the latest twist in a fight over the ability of public utilities to provide telecom services.

by / July 8, 2004
The public utility in Glasgow, Ky., began delivering cable TV service via municipally owned network infrastructure in 1989, after community members complained about their cable company.

At the time, the existing cable company offered the 15,000-person community 24 channels of programming for $14.25 per month. Facing competition from the Glasgow Electric Plant Board (EPB), the company dropped its monthly fee to $5.95 for 45 channels, said EPB Superintendent William Ray.

The EPB introduced broadband Internet services a few years later -- charging residential customers $25.90 per month for T1 speeds -- and recently unveiled digital cable and HDTV.

Glasgow's decision to build a municipally owned broadband network made city residents among Kentucky's first to enjoy widespread broadband availability, according to Ray. Thirty other Kentucky communities followed Glasgow's lead.

Across the nation, approximately 570 publicly owned electric utilities offered some kind of community broadband services at the end of 2003, up from 511 reported in 2002, according to a survey conducted by the American Public Power Association (APPA) of its members.

But a recent U.S. Supreme Court decision may slam the brakes on that activity. In a Missouri case ruling, the court upheld states' power to stop municipally owned utilities from entering the broadband market. Ray and others worry the decision will trigger waves of state legislation barring municipal utilities from offering cable and telecommunications services.

"We've got to assume this is the precursor to new laws being introduced," said Ray, adding that several states already have laws on the books prohibiting municipalities from offering telecom services. "In those states, I think the battle is over. Now it really gets into political will and your individual risk aversion situation."

Bad Investment?
Opponents of the practice say it's about time states clamped down. Utilities may view their entry into these markets as bringing needed resources to underserved communities, but detractors see unfair competition. They say utilities -- as quasi-governmental entities -- have no place in the market, standing toe-to-toe with private companies.

"You have a couple of problems," said Thomas Lenard, senior fellow and vice president of research for the Progress & Freedom Foundation (PFF). "One is that typically these are losing propositions for taxpayers of the locality. The taxpayers of the municipality are being forced to make a very bad investment in terms of their taxpayer dollars.

"These are goods and services that are typically provided by the private sector," he said. "One of the reasons these are losing propositions for these localities is they are in head-to-head competition with private telephone and cable companies. This is a very competitive business. It's a low margin and high fixed-cost business. The private companies in it, many are having trouble surviving."

Government Entry Into the Telecom Business: Are the Benefits Commensurate With the Costs?, a research report co-authored by Lenard released in February as part of the PFF's "Progress on Point" series of policy reports, studies three municipalities and determined that the benefits of each municipality's entry into the telecom market didn't offset the costs.

No municipal telecom entrants are covering their variable costs, Lenard said in his report, and the municipal entrants are subsidized by the towns' residents -- subsidies amounting to anywhere from $350 to more than $1,000 per customer, excluding capital costs.

"Citizens are paying through the back door, through higher taxes or higher electricity bills," he said.

Lenard's report is available online.

The Long Road
The last decade has seen much argument over public utilities competing with private cable and telecommunications companies. The U.S. Supreme Court ruling is the latest mile marker on a long road.

Missouri legislators passed a law in 1997 prohibiting political subdivisions in the state from providing telecommunications services, which prompted a legal clash between the Missouri Municipal League and the state's attorney general. The scrap was settled by the Supreme Court in early 2004 -- after many years of litigation at various levels of the nation's court system.

The Supreme Court, in summary, held that political subdivisions -- including municipally owned utilities -- can't use the Telecommunications Act of 1996 as a shield against state laws prohibiting them from offering telecommunications services.

The Missouri Municipal League argued that the Telecom Act preempts Missouri law because the federal law contains language barring state and local governments from enacting laws or statutes limiting "any entity" from providing telecommunications services.

To the league, the words "any entity" mean literally any entity. The Supreme Court, though, said the phrase applies strictly to private-sector entities, because Congress could not have intended to give entities from political subdivisions that sort of protection.

Now supporters of municipalities' right to provide telecom services fear a spate of state laws setting harsh restrictions on how far a town or city can go down the road of selling cable TV or Internet services.

Ten states already have enacted laws that, to varying degrees, restrict municipalities from offering telecom services to residents, said Jim Baller, a partner in the Baller Herbst Law Group, who represented the Missouri Municipal League before the 8th U.S. Circuit Court of Appeals and the U.S. Supreme Court.

It's too early in states' legislative calendars to determine if more states will roll out similar legislation in upcoming sessions, he said.

"We hope there will be no such measures introduced, and if they are, that the dialog surrounding them will persuade state legislators that restrictions on municipal involvement are not a good idea," Baller said.

Competitive Pressures
In one sense, Glasgow is creating the competitive environment envisioned by the Telecom Act of 1996. Eight years after the act's passage, residents of the small town can choose from three telephone providers. In February, the EPB struck a deal with Cinergy Communications and will now offer regular phone service to Glasgow residents.

Under the deal, Ray said, Cinergy will purchase the hardware and software necessary to add telephone service to the EPB's network. The EPB will sell network capacity to Cinergy for signal transport, he said, and will handle customer service, marketing and billing.

"Cinergy's not going to have to open up an office and a storefront here, because we're going to brand it as Glasgow EPB telephone service," he said. "They're really going to be kind of invisible in the deal. They're building a fiber-optic link between Glasgow and Bowling Green -- a community about 30 miles West of us -- where Cinergy is already a CLEC [competitive local exchange carrier].

"It's a real opportunity for them to get more bang out of the investment they've already made," he said. "It's also a way for us to get more dollars out of a fixed investment."

The EPB could have provided telephone service itself, he said, but didn't want to assume the risk and acquire the capital to purchase the necessary switching and customer premises equipment, not to mention learning a new line of business.

As a result, the EPB is now the third provider of telephone service in Glasgow. Alltel is the incumbent telephone provider and South Central Rural Telephone Cooperative also competes.

"It should be clear that three can't survive," Ray said. "We will precipitate the demise of one -- hopefully both -- of them."

This is the very situation that causes some to cringe.

The PFF's Lenard contended that municipal entrants into the telecom market deter competition. Thanks to their unregulated status, he said, municipal utilities simply have too great an advantage over private providers.

"If you're a private company, is it more or less likely you would enter a market if you had to compete with a government entity that's being subsidized and is competing with you? It's less likely," he said.

Is Anything Really Settled?
Part of the problem is the 1996 Telecom Act's murky nature, and some observers say the issue of municipal utilities providing telecommunications services may help spark revisions to the Telecom Act itself when Congress' next session convenes in 2005.

Though the Supreme Court's decision brings some clarification to the fuzzy regulatory lines, observers say plenty remains to be resolved.

"There are a lot of other uncertainties in the law right now," said Richard Geltman, general counsel of the APPA. "In terms of the Supreme Court decision, it only affects the 10 to 12 states, which presently have barriers to entry. That means we're dealing with 40 states where there is no such barrier from the state legislature or the state public utility commission."

Geltman said Virginia is a perfect example of how quickly attitudes can shift. The state enacted laws that prohibited utilities from offering telecommunications services, but changed the law after being sued in district court, which resulted in a decision that federal law did supersede Virginia law.

That case, which was similar to the Missouri case, was then appealed to the 4th U.S. Circuit Court of Appeals. Before it could be decided, however, the state Legislature stepped in with a compromise based on an agreement between the state's municipal utilities, and the cable and telephone industry in Virginia, he said.

Another factor that could change people's minds in a hurry is what happens in the marketplace itself.

"Telephone companies and cable companies have been saying they are going to do a good job of expanding their Internet services in a very short period of time to areas in the country that are either unserved or underserved," he said. "It depends on whether those promises are kept. If they are not kept, the state legislatures will be reluctant to keep barriers in place or to impose new barriers."

It's difficult for financially battered telecom companies to produce the capital to invest in infrastructure for expanding service offerings. Everybody involved is clearly aware of this, and future deliberations to determine whether municipally owned utilities will enter telecommunications markets will likely be influenced by the harsh economic climate some of these companies face.

The Road Ahead
Geltman said the Supreme Court decision will help cable and telephone companies persuade state legislatures to prohibit municipally owned utilities from competing.

"Before, at least politically, you could say, 'You can't do this, because this is what the federal statute said,'" he said. "Then you'd argue about whether the federal statute covered a state law that prohibited municipal utilities from offering telecom services. Now that argument isn't there. The court has spoken and said the state legislature has the authority."

The APPA's biggest fear is how the Supreme Court decision will be characterized, he said, because the court's decision did not address the policy merits of utilities offering these services.

In one decision in the long-running Missouri case, the FCC ruled that Missouri did have the power to forbid municipal entities from entering the telecom market, but then-FCC Chairman William Kennard and other commissioners said in written statements that the Missouri law violated the competitive spirit of the Telecom Act.

The Supreme Court's decision acknowledged that municipal utilities' arguments on the policy benefits of municipal entry into such markets had at least "a respectable position."

"We're afraid the opponents of municipal utilities' provision of services will say, 'The FCC has said this is a bad idea,' and that's clearly not been the case," Geltman said. "Or opponents will say, 'Now that we have this legal authority clarified, state legislatures should go ahead and pass prohibitive legislation.' This fight will be fought out on a state-by-state basis at this point, until such time as Congress decides to act."
Shane Peterson Associate Editor