A historical, economic, and legal analysis of municipal ownership of the information highway.

AuthorCarlson, Steven C.
  1. INTRODUCTION

    Years before people spoke of the information superhighway, a small town in Appalachia created a communications system that is now the envy of today's Silicon Valley. Residents receive cable television, telephone service, and fast Internet service over a single wire. The fiber optic network is not a pilot project for a major telecommunications venture, but an effort by a municipally owned electric utility designed to implement an energy conservation program. Municipalities across the country are now following the model of Glasgow, Kentucky.(1)

    Local governments commonly pave streets, supply water and gas, haul trash, and provide electricity. Local governments have now begun providing the next utility: the efficient provision of information through fiber optic networks.(2) These initiatives, undertaken by local governments, have provoked legislative, administrative, and judicial disputes at the state and federal levels. These disputes question the authority of local governments to include communications among the other utilities provided to their citizenry.

    This article will attempt to explain why, in an era of privatization, local governments have begun municipalizing communications services. First, municipalization is a trend arising as a response to monopoly in the cable television and local exchange telephony markets. Milton Friedman remarked that natural monopolies produced three evils among which we must choose: private monopoly, public regulation, or public monopoly.(3) Unregulated and regulated private monopolies in the communications industry have been found unpalatable. Municipal utilities are a viable alternative. History shows that municipal utilities have provided electric service with a level of efficiency on par with that of regulated private utilities.(4)

    Second, municipal utilities are the best entities to provide broadband services because the Internet is a public good.(5) Private cable operators stand to gain little from upgrading their systems to interactive platforms, as the benefits they gain from Internet provision are limited to access fees.(6) High access fees, however, reduce the utility of the Internet. The Internet is a true public good and its benefits are maximized through fast access and low fees. Publicly owned utilities offer the lowest possible service rates, and so are the best providers of Internet access.

    Third, municipally owned utilities may be less prone to shirk than private firms.(7) Federal law has weakened the franchising authority of municipalities, leaving private firms unbeholden to the demands of local communities.(8) Municipalization has emerged first in smaller towns where forces of social coercion render public officials more responsive than absentee private managers.(9)

    This article will then address current political and legal conflicts regarding municipal communications utilities. Federal law generally permits and encourages provision of communications services by all prospective market participants.(10) State law, however, increasingly prohibits municipalities from providing communications services.(11) The political process behind the passage of these state laws will be discussed and it will then be argued that the strong preemption language of the Telecommunications Act of 1996(12) does protect municipally owned telecommunications systems from anti-competitive state laws.(13) Additionally, a recent decision by the Federal Communications Commission ("FCC"), which refused preemption of an anti-competitive state law will be rebutted.(14)

    The article will conclude that local governments should provide advanced communications services in the same manner that they provide water, gas, electricity, and sanitation services.(15) Electricity, at the opening of the twentieth century, granted citizens access to new services that reshaped their lives. Now, on the eve of the millennium, fiber optic technology is offering vast new services that, like electricity, will transform local economies and personal lifestyles. State laws that prohibit municipalities from providing communications services are antagonistic to principles of local autonomy and are expressly contrary to federal law. In the words of Franklin Delano Roosevelt, local governments should be able to keep a "birch rod in the cupboard" and be free to establish municipally-owned utilities to correct for the failure of incumbent firms to pave the information highway.(16)

  2. LOCAL GOVERNMENTS ARE PAVING THE INFORMATION HIGHWAY

    Throughout the 1990s Americans have heard politicians, businessmen, and social visionaries promoting the coming of the information superhighway. Vice Presidential candidate A1 Gore coined the phrase "the information superhighway," and promised the electorate the creation of a national "infostructure" that would be as critical to the national economy as the interstate highway network that his father helped establish in the 1950s.(17) Business leaders are charting the development of a cybercommerce, which is predicted to be worth as much as $150 billion within the next decade,(18) while futurists predict that interactive networks will revolutionize democracy, provoking a decentralization of government and a resurgence of Jeffersonian ideals.(19) The media have become saturated with news of the information highway, and yet the vast majority of American homes are still served by traditional broadcast or cable TV and "Plain Old Telephone Service" (POTS). Representative Edward J. Markey, Chairman of the House Subcommittee on Telecommunications and Finance, summarized the hype and reality of the information highway by saying: "The good news from Washington is that every single person in Congress supports the concept of an information superhighway. The bad news is that no one has any idea what that means."(20)

    1. Municipal Broadband Projects

      The information highway is coming, and some of the first places in the world to have fast and easy access are small towns that have decided to municipalize their communications utilities.(21) The New York Times recently reported that a "creeping socialism" has appeared in America, and that local governments have taken the initiative to bring the long-promised "information highway" to their citizens:

      In an America where free-enterprise advocates have routed their critics, few people would expect local governments to plunge into competition with the private sector in the fast-evolving information industries. Yet that is what is happening in a growing number of communities.(22) Local voters, often in sweeping majorities, have approved bond issues to finance broadband networks. For example, an Alta, Iowa referendum realized an eighty-eight percent voter approval rate.(23) In Muscatine, Iowa, ninety-four percent of the voters sanctioned the bond issue.(24) Similarly, in Spencer, Iowa, the incumbent cable company out-spent proponents 130-to-1, and voters nonetheless approved the project by a ninety-one percent majority.(25) In Coldwater, Michigan, voters first rejected a proposal to issue general obligation bonds to finance a broadband network, but subsequently approved an issue of revenue bonds.(26)

      Municipal broadband networks have begun appearing around the country. The first municipal broadband network was created in 1989 in Glasgow, Kentucky.(27) Other cities that have established, or are planning, such networks include Anaheim, California;(28) Detroit Lakes, Minnesota;(29) Batavia, Illinois;(30) Gainsville, Florida;(31) Lincoln, Nebraska;(32) Newnan, Georgia;(33) and Milpitas, California.(34)

      This article will ask three basic questions about municipal communications utilities. First, why do communities want them? Second, can the municipalization of these utilities be justified economically? And third, do communication laws protect these municipal utilities against politically powerful incumbent carriers?

    2. Benefits of Broadband Networks

      Why would a municipality be interested in establishing broadband networks? Voters approve these initiatives to gain improved cable television, telephony, and Internet access. Other benefits derived from broadband networks include: improving the efficiency of electricity distribution, preserving the lifetime of streets, providing better governance, and attracting business.

      1. Better Cable Television, Local Telephone and Internet Service

        Municipalities can improve the quality of their services by municipalizing communications utilities. Private, incumbent firms permit their physical facilities to deteriorate and their support services to lapse in the absence of competition. In the cities and towns where municipalization has occurred, residents had been complaining of poor cable television reception, programming black-outs, lack of channels, poor response to service calls, and high monthly fees.(35) Such rural towns are particularly dependent upon cable lines for communication, as mountains and distance from broadcast centers precludes over-the-air broadcast reception.(36) In the rare instances where head-to-head competition exists for communications services, access fees plummet and services improve.(37) For example, prior to the creation of the Glasgow municipal broadband network, the incumbent cable operator offered twenty-four channels at $14.25 per month.(38) Upon arrival of competition, the operator began offering forty-five channels at $5.95 per month.(39)

      2. Improved Efficiency in Electricity Distribution

        Advanced communications facilities improve the efficiency of electric utilities. The broadband network in Glasgow, for example, was originally designed as a means to promote energy conservation.(40) Glasgow's Electric Plant Board reports saving about three kilowatts of peak demand per home since the creation of its communications system.(41)

      3. Longer Lifetimes of Streets

        Local governments seek to preserve the quality of their streets by preventing excessive cutting of pavement.(42) Cuts...

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