Broadband: On the Side

Larger public utilities have started adding high-speed data to their service menus. What does this mean for their communities and for the principle of fair competition?

by / November 22, 2002
Their facilities reach into every home and business in town. Their technicians know how to maintain complex equipment. They own extensive rights of way, in which they may already have installed miles of fiber-optic cable.

It makes perfect sense, many say, for public utilities to offer broadband data services to business and residential customers.

Some already do. Approximately 450 public power organizations have set up shop as telecom providers, according to the American Public Power Association (APPA); their businesses include wholesaling fiber-optic capacity to delivering high-speed Internet, cable TV and telephone service and users.

Most public utilities that have jumped on the (broad)bandwagon serve small communities, where they're often the only game in town.

A market of 10,000 or fewer people is not attractive to bigger players, such as cable TV and telephone companies, said Ron Lunt, the APPA's director of telecommunications services.

"The only way they're going to get it is if they provide it themselves," Lunt said of small towns that want high-speed Internet and data services.

Now the bigger public utilities are entering the arena. The Los Angeles Department of Water and Power (LADWP), the nation's largest public utility, wholesales fiber-optic capacity to service providers.

JEA, the largest community-owned utility in Florida and the nation's eighth-largest public power utility, could provide much of the infrastructure for a countywide high-speed network under discussion in Jacksonville, Fla.

Click Network, an operating section of Washington's Tacoma Power, delivers cable TV service; wholesales cable capacity to four Internet service providers (ISPs); and sells high-speed, fiber-optic Internet connections to businesses.

Unfair Competition?
When larger public utilities enter the broadband business, they may vie directly with established telephone and cable TV firms. This competition is a boon to a community, according to some public officials.

The arrival of Click Network spurred Tacoma's existing cable TV and telephone carriers - AT&T and Qwest - to upgrade their services, said Mayor Bill Baarsama.

"We have cutting-edge technology in this market that's really something to behold, and a highly competitive market where the consumer has choice," Baarsama said.

Established carriers argue that government and quasi-government entities enter the fray armed with unfair advantages. Some in the cable industry note that municipalities regulate cable TV franchises, and many cable carriers offer high-speed Internet service. If utilities owned by municipalities compete against those cable carriers, that's a conflict of interest, according to critics.

Municipal utilities also have an edge, private carriers argue, because they can tap public funds or issue bonds to build their infrastructures.

"They don't have to go to the capital markets," said Link Hoewing, vice president of technology of Verizon Communications, which, in addition to its cellular phone offerings to consumers, provides DSL service to residential customers. "They're doing it on a tax-supported basis and with a fairly high guarantee that they're going to get some customers, because the taxpayers are the ones that are going to be subsidizing the service. We are concerned that it's basically unfair competition, and we're facing a lot of competition in the marketplace already."

Arguments like these have persuaded some state legislatures to bar public utilities from entering the telecom market or restricting services utilities can provide. The APPA challenged some of these laws in court, arguing that the federal Telecommunications Act of 1996 specifies "any entity" - including a local government entity - may provide telecom services.

Extra Income in Los Angeles
Public utilities enter the broadband business for several reasons. One is to subsidize the fiber-optic networks they develop for internal use, which is what originally spurred the LADWP to lease unused strands of its own fiber-optic cable to telecom carriers, universities, government entities and others.

Those customers added their own equipment to light up the fiber to carry data.

"We've made pretty good revenues doing that over the last eight years, and it's helped offset our construction costs for expanding that metropolitan network," said Bruce Hamer, director of the LADWP's Fiber Optic Enterprise.

"In the last year and a half, we've chosen to move on up the value chain to become a 'wholesale carrier's carrier,'" he said, noting that the LADWP now activates fiber strands itself and leases point-to-point circuits to ISPs and other retailers.

Though the wholesale market has been good to the utility, the LADWP has no plans to compete in the retail broadband market, Hamer said; retail is a much more complicated business, requiring facilities for customer service, billing and other back-office functions.

"We're trying to keep our life a little more simple," he said. "Yet we want to encourage lots of service providers to come to our city and compete with their services and pricing to deliver services to end-users."

Wired City
Tacoma Power also got into the broadband business to support the network it built to monitor its distribution facilities and automatically reroute power when outages occurred.

"The utility could not find a wireline provider to offer the kinds of capability they needed to get data from remote locations to a central location," said Diane Lachel, government and community-relations manager of Click Network.

Once planners realized how many neighborhoods the new network would reach, they decided to pursue new revenues by offering broadband services. The utility financed the construction with money it earned selling surplus power from its generating stations on the wholesale market.

Click solved another problem in Tacoma: Many neighborhoods did not have cable TV or high-speed Internet service, or when they did, that service was poor, Lachel said. City officials credit the city's data infrastructure for keeping several businesses in town and attracting new ones.

Mayor Baarsama said, because of the services Click provides and the improved offerings from AT&T and Qwest, Tacoma boasts more broadband capacity than Seattle.

"We made the move, and now, rather than being a secondary market, we're a primary market," he said.

Why the Telecoms Don't Build Out
"Some of the telecommunications providers are not building out the infrastructure quickly enough," said Ron Gdovic, executive director of 3 Rivers Connect, a nonprofit organization working to create a community-owned high-speed network in southwestern Pennsylvania.

When telecoms fail to expand their facilities, some neighborhoods and whole communities go without high-speed Internet service, causing some public utilities to fill the void.

The telecoms are not wholly at fault, Gdovic said. Certain federal and state regulations discourage expansion, and shareholders demand carriers realize a return in three years on infrastructure investments.

"That's next to impossible," he said.

One roadblock to expansion is a policy embedded in FCC rules implementing the Telecommunications Act of 1996, said Verizon's Hoewing. That particular policy stipulates incumbent carriers must allow competing firms to use their networks until the competitors build their own, he said, and the rates the FCC allows telecoms to charge for this use are far too low.

"Every time I decide to put a new fiber connection in someplace, I've got to provide it to a competitor at 60 percent below my cost, on average," Hoewing said. "That's really a disincentive for us to invest."

Verizon wants the FCC to let the company charge market-based rates for use of its network.

About 55 percent of Verizon's residential network lines are connected to phone-company offices equipped for DSL service, Hoewing said. To increase that number, Verizon needs to install new fiber.

"Over time, we can transition out the network," he said. "I think a change in policy will make it happen a lot faster."

Bio: Contributing Writer Merrill Douglas is a freelance writer based in upstate New York. She specializes in applications of information technology. E-mail:

Merrill Douglas Contributing Writer
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