Tired of Slow Speeds, Some Cities Build Their Own Net, Cable Firms
For years, Harry Belcastro bought Internet and cable TV access from Earthlink Inc., Comcast Corp. and other telecommunications companies.
Then, when Belcastro and his family moved to this Atlanta suburb two years ago, he signed up with an unusual service provider: the city of Newnan, population 16,000.
For $25 a month, Newnan residents can hook up to a high-speed Internet connection. For $30 more, they can subscribe to a 74-channel cable TV package. They also can buy $30-a-month local phone service with caller ID, voicemail and 13 other add-ons most carriers charge extra for.
The big selling point for Belcastro, though, was a super-fast commercial-grade Internet connection for his home-based businesses.
“We couldn’t afford this anywhere else,” said Belcastro, noting that the bundle of services offered through Newnan’s $40-million network would set him back more than $1,000 a month if he bought it all from the private sector.
He pays less than half that.
Frustrated by a slow or spotty rollout of high-tech communications services, 357 municipalities have dug up streets to build their own networks and compete against companies that they in some cases also regulate.
The number of cities with their own services has grown 54% in the last two years, according to a report by the Progress and Freedom Foundation, a Washington think tank. The trend is fueling welcome investment in networking equipment two years after the epic collapse of the $400-billion-a-year telecommunications industry drove thousands of independent Internet service providers and telecom companies out of business.
But at the same time, the municipal ventures are raising ethical, legal and financial questions about the wisdom of using taxpayer money to wire communities.
Critics say the current spending spree on government-run networks recalls the billions that cities spent building professional sports facilities in the 1990s in largely unsuccessful efforts to stimulate economic development.
Privacy Concerns
Government-run networks also raise free speech and privacy concerns because government ownership of telecom facilities raises the specter of politicians’ influencing programming on local cable TV systems or even spying on citizens’ e-mail. And private-sector rivals complain that cities don’t have to pay income taxes and have easier access to both capital and the public rights of way needed to string communications cable.
“This is not about us being against competition; we just want competition to take place on a level playing field,” said Phil S. Jacobs, president of Georgia operations for BellSouth Corp. With cities building their own telecom networks, Jacobs predicted, “the second telecom bubble is about to burst. But this time, instead of shareholders, who know they are taking the risk, it is going to be taxpayers who get hurt.”
The issue will come to a head next month, when the Supreme Court is scheduled to hear oral arguments from SBC Communications Inc. and other local phone giants that contend the Telecommunications Act of 1996 allows states to bar cities from building telecom networks.
The landmark law, aimed at prodding the nation into the digital age by deregulating the telecom industry, allows “any entity” to provide telecom services. Congress didn’t define “entity,” and the phone companies contend that cities don’t qualify.
“Our basic position is that we don’t believe it is in the public interest for the government to use public funds to build telecommunications facilities,” said Paul K. Mancini, SBC’s assistant general counsel, who helped write the company’s Supreme Court brief.
“Our biggest concern is that, in the absence of an identifiable market failure, it is really not good to have government entities in a competitive market when they regulate that market [and] set franchise fees and the terms and conditions of service -- that’s just a classic conflict of interest.”
Supporters counter that the growth of city-run networks has been a boon to consumers, particularly in smaller towns and communities where advanced services are either costly or unavailable.
“There are many people in this country that are left in the slow lane with regard to 21st-century communications,” said Rep. Rick Boucher (D-Va.), who represents a largely rural district in southwestern Virginia where he said broadband Internet access can cost as much as $1,200 a month. “Local governments should be free to address that problem just as they did a century ago by providing essential electric and water utility service to citizens.”
Beyond that, the municipal move into telecommunications is viewed by some as providing powerful encouragement for telecom companies to improve their service and reduce prices.
‘History All Over Again’
“This is like the history of electrification all over again and communities realize that if they don’t roll their sleeves up and get involved, they are not going to get broadband and other advanced communication services,” said Jim Baller, a Washington, D.C., lawyer who specializes in representing local governments and public power utilities on telecommunications issues.
Cities and companies first butted heads in the utility business around the turn of the century after Thomas Edison opened the first central electric generation plant in New York City in 1882.
Private utilities at the time focused on lighting big cities, businesses and the homes of the wealthy. Frustrated small towns and poor regions rushed to establish publicly run companies to provide power for communities deemed unprofitable by private enterprise.
More than a century later, the deregulation of the power industry has enticed companies to compete against cities in offering electric and gas to consumers, putting pressure on cities to find new revenue sources to shore up their utility ventures.
In fact, in most cases, municipal telecom services are managed by the same public utility that provides electrical power.
Newnan, Ga., Steps In
Newnan entered the telecom business about seven years ago after failing to persuade phone giant BellSouth to upgrade the communications lines that link Newnan’s remote power stations. The city had nearly 100 years of experience running its own electric, water and sewage company and officials concluded it wouldn’t be much of a stretch to build a telecom network, including a cable TV system.
“Our local cable company was doing a sorry job of providing service, so we stepped up to the plate when we thought the city could help,” Newnan Mayor Keith Brady said during an interview inside the hulking brick building that serves as the administrative headquarters for the city’s electric, cable TV and Internet facilities. About 12,000 households, or a little less than half of the area residents served by Newnan’s system, are city cable customers. “The response from our citizens has been overwhelmingly positive,” Brady said.
Less pleased was rival cable operator Charter Communications Inc. It filed an unsuccessful federal lawsuit to stop Newnan from offering cable service. Later, Charter offered Newnan residents as much as $300 to switch their cable TV service to Charter.
“We still hold the majority market share there,” said Charter spokesman Dave Mack. “But the playing field isn’t level in Newnan. There is a question about whether the city should be in this kind of business when, at the same time, they are regulating it.”
Lewis K. Billings, the mayor of Provo, Utah, understands the hesitation. “I am generally of the opinion that government should be very careful doing things best left to the private sector,” Billings said in an open letter to residents, who are expected to vote next month on a $39-million telecom network that would complement new upgrades to the city-owned electric utility.
But “in the absence of others who are really able and willing to build the kind of system” we want, Billings continued, “we are debating and considering whether or not Provo city should undertake to provide the big [communications] pipe to every home and business in the city. Given our other existing utility operations, there are many economies of scale that could result.”
Even the smallest towns like the math. Reedsburg, a central Wisconsin community of 3,800 homes, this year built a $6-million fiber optic network that provides cable TV, wireless networking, phone service and even video-on-demand for movie buffs. Residents were so enthusiastic that 1,000 signed up the first week that service was offered last spring.
But not all municipal systems are prospering. The city of Tacoma, Wash., has lost more than $16 million since it launched its Click! telecom network in September 1997. City officials in Marietta, Ga., voted in October to put their $30-million network up for sale after losing $8.8 million over seven years. And Iowa is considering selling part of its decade-old, $350-million system.
“There is quite a bit of hubris on the part of cities in thinking they can manage all of the fancy, dandy technologies of telecom,” said Randolph J. May, director of communications policy studies at the Progress and Freedom Foundation, which published a study on municipal telecommunications companies in October. The group is supported by cable TV and phone industry trade groups.
“Over and over again we’ve found that the private sector can do these things better,” May said.
The Belcastros don’t agree. Every room in their home in Newnan is wired for cable TV, high-speed Internet and as many as four phone lines.
They use their speedy broadband connection to run Tekhaus, an embroidery digitizing company, and 2nd Nature Productions, a syndicated-radio and music production company, which Harry manages with his 24-year-old son, Brett. The price is right, the elder Belcastro said, and the customer service can’t be beat.
“Because you are dealing with local government, you know the vendor’s employees by name,” he said. “You don’t wait on hold on an 800 number and talk to someone that has no idea about your unique requirements. In other words, you aren’t held hostage by the cable guy.”
