Ken Silverstein EnergyBiz Insider Editor-in-Chief

The case is one of many that the American Public Power Association points to when it says that Congress should do nothing to impede city-owned utilities from getting into or expanding their current high-speed broadband services. The ultimate goal is to provide universal Internet service and not just to those areas that are economically attractive and densely populated. Private companies, in fact, are not required to deploy Internet services to entire communities.

If munis fill the void, they bring with them some risks. The chief concern is whether they would place private firms at competitive disadvantages and whether they would "cross subsidize" any telecom venture with monies earmarked for providing electricity to consumers. That worry has prompted about 12 states to bar municipal utilities from offering any type of telecommunication services. There have also been attempts to do the same at the federal level, albeit they have failed.

It's one thing for municipal utilities to provide Internet services to areas without affordable options. It's another if they compete with the major providers. Congress is addressing the issue now and may include language in a subsequent bill that would give private companies the "right of first refusal" to service a community. In Scottsburg's case, Verizon said it would be unable to create a ubiquitous Internet coverage because the rural area was sparse and made it cost prohibitive.

Public power systems "are fostering a competitive marketplace where consumers are benefiting from the availability of advanced communications services that are the lifeblood of economic development and which can support rich educational and employment opportunities," says the Washington-based public power association, in recent congressional testimony.

Private telecom providers say that public entities could thwart privately-owned competitors who would otherwise employ workers and pay taxes. Clearly, a lot of money could be at stake. The public power association says that of the roughly 2,000 city-owned power companies, about 621 of them offer some type of high-speed access.

And the field will only expand. The Federal Communication Commission reports that during the year 2004, high-speed lines serving residential, small business, larger business, and other subscribers increased by 34 percent, to nearly 38 million lines. The service providers that report to the FCC had at least one high-speed service subscriber in 95 percent of the nation's zip codes, although this says nothing about how much profit may exist in each venue.

Cross Subsidies

According to the Progress & Freedom Foundation, a market-oriented think thank that studies the digital revolution, more and more municipal utilities are providing broadband service because they have already paid off their embedded costs and have the cash on hand to invest. And while it may seem logical to include Internet access as part of a public utility's job, the foundation maintains that it is not.

"This argument fails to convince, however, and particularly in areas where broadband service is already available," says Adam Peters, regulatory counsel. Broadband "networks are private goods, and should be supplied by private entities, with the possible exception of high-cost, rural areas. Private firms have better incentives and are far more accountable to their 'constituency' by holding down costs and making wise investments in technology."

Municipal entrants into communications markets may have several artificial advantages over those in the private sector. Benefits may include tax avoidance and the ability to raise capital through guaranteed tax-exempt bonds, says Peters. And telecom ventures are risky, which means there is a high probability of "cross subsidization" by more profitable divisions of the town's utility. He points to Bristol, Va., Kutztown, Pa. and Ashland, Ore.: All provide internet service where private companies already participate and all were unable to control their costs and required some form of subsidization.

But as the Scottsburg, Ind. example shows, private companies are motivated to enter areas where profit margins are highest whereas municipalities are driven mostly to preserve and expand economic opportunities. And even in crowded urban areas, Internet coverage can be spotty; depending on which side of the digital divide citizens may live.

An opinion piece in the The Dayton Beach News-Journal points to just how critical municipal internet services are to Florida: The Jacksonville muni teamed with a well-known children's clinic to provide special broadband services to allow inner-city and low income sick children to have weekly -- online -- appointments with their doctors. Gainesville Regional Utilities, meantime, built a fiber optic network around the city to accommodate the local hospital and state university there.

The Jackson Energy Authority in Jackson, Tenn., meantime, is now constructing a complex to provide those telecom services to its customers. It expects to have 40 percent penetration of the residential cable market in three years as well as 26 percent and 24 percent of the high-speed and telephone markets, respectively, during that time. The project, which commenced in January 2004 and is expected to take 18 months to complete, is predicted to be cash flow positive in four years time.

"The reality has been that local governments only spend money to build systems when they believe a need exists, and that these local systems encourage private companies to deploy and invest in competitive systems," says the public power association.

State utility regulators must establish rules to help ensure a competitive market. It's a high-wire act in a world where the race to offer high-speed access will only intensify. But, if part of the goal is to bridge the digital divide between the fortunate and less fortunate, then munis must not be excluded from participating.

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