Heartland Institute Comment on U.S. Conference of Mayors Statement

Published February 3, 2006

(February 2, 2006) On January 25, the U.S. Conference of Mayors issued a public letter to members of the U.S. House and Senate committees currently debating changes to the Telecommunications Act of 1996.

The letter expresses the concerns of many of the country’s mayors, some of them legitimate but some not. Of six topics addressed in the letter, the mayors’ comments on three are most suspect, according to Heartland Institute President Joseph L. Bast. His comments on each of the three topics follow.

Close the Digital Divide: The authors call for “reasonable ‘build out’ requirements for providers” so that cable companies and their new competitors do not “bypass less profitable neighborhoods.”

Comment: This is misplaced egalitarianism and will slow, rather than accelerate, the deployment of new broadband systems. More than 96 percent of all households are already connected to a cable network. New entrants can be expected to serve market niches based on their content, price, technology, or other unique selling propositions. Why should these companies be required to serve every neighborhood before they are allowed to serve one? No other new product or service is similarly regulated.

Franchise agreements used to deliver exclusive access to customers, so cable companies could justify building citywide networks from the start rather than building from one neighborhood to the next. Franchise agreements no longer create such monopolies (and it’s a good thing they don’t), yet mayors want to insist companies act as if they still do. Build-out requirements are a major barrier to entry for companies both large and small seeking to compete with incumbent cable cables.

Maintain Local Government’s Franchise Agreement Authority: The authors claim “preserving local franchise authority ensures that key services for our citizens and businesses are tailored to meet local needs, including public, education and government access channels, local emergency alerts and institutional networks.”

Comment: There is nothing keeping mayors from using locally generated tax revenues to pay for these things, or to finance them out of the 5 percent franchise fee that franchise reform proposals typically promise. What mayors actually fear is having to go to voters to defend the many perks and projects that are now quietly funded by cable subscribers through their franchise fees.

There are approximately 33,000 local video franchise agreements in place today, costing each household an average of about $37 a year. Do we really think telephone companies and other national companies should be expected to negotiate 33,000 agreements in order to provide new services nationwide? This can’t be efficient, and at best it will delay the roll-out of new services by many years.

Technological change has turned communications into a national and even international networked industry. Old ways of regulating voice, video, and data no longer work when new technologies can allow a single line to deliver all three services. Smart public officials, like those in Texas, are replacing local franchising authority with streamlined state franchises. A strong case can be made for going even further and adopting a federal franchising process, or abolishing the franchising process altogether.

Municipal Broadband: The authors ask Congress to “allow local governments … to develop municipal broadband networks either through public-private partnerships or systems wholly owned by the municipality.”

Comment: Decisions by governments to compete directly with private businesses must always be scrutinized, since opportunities for unfair competition abound. Communications does not seem to fit the traditional definition of a “public good,” since it is being privately provided, the market is competitive, and it is not an indispensable public service. On conventional public policy grounds, municipal communication systems ought to be rejected.

In cases where municipalities have launched their own municipal communications systems, the pattern has been cost overruns, loans from other units of government, and annual losses paid for by taxpayers. There has been a disturbing lack of transparency as local officials conceal the size of these losses from their own taxpayers and voters.

It is certainly within the power of state governments to tell local units of government not to put taxpayers at risk by “playing entrepreneur” in this risky and competitive line of business. Whether Congress should ban municipal communications networks is less clear.

If the nation’s mayors want to retain their freedom in this arena, they should begin by using it more responsibly. Money-losing utilities should be closed or sold, not subsidized, and financial records ought to be accurate and made available to the public and outside researchers. Until these things happen, Congress is wise to consider a ban on new municipal communications systems.

Joseph Bast ([email protected]) is president of The Heartland Institute, a 22-year-old nonprofit research organization based in Chicago. His latest policy study on municipal broadband is available online at http://www.heartland.org/PublicationIssue.cfm?pblId=3&pisId=579.

For scores of objective reports on municipal broadband, visit The Heartland Institute’s Web site at http://www.heartland.org, click the PolicyBotâ„¢ button, and select “Telecommunications” from the topic list.