Why States Should Stop Municipal Broadband

Published January 1, 2005

On November 2, 2004, voters in Illinois’ Tri-Cities (Batavia, Geneva, and St. Charles) voted down referenda to approve a municipal broadband plan. It was the second time in as many years voters rejected the proposal.

I produced studies of the Tri-Cities proposals in November 2002 and again in October 2004. The conclusions of my second study appeared in full-page ads run by Comcast in local newspapers just prior to the November 2 vote. My new research found:

  • The availability of high-speed broadband services has expanded dramatically in the past two years. In the Tri-Cities area, for example, 100 percent of homes and businesses now have access to cable modem and DSL service. DirecTV and EchoStar (Dish Network) offer satellite broadband services, and several companies offer multipoint distribution service (MDS, or “wireless cable”). Starting this year, WiMax is expected to be offered in the area.
  • In general, downstream speeds for DSL have increased from 768 kb/s to 6 Mb/s, enough to support digital video. Deployment has begun for the next generation of DSL technology, ADSL2+, which can reach speeds of up to 15 Mb/s. Meanwhile, cable modems offers speeds of up to 4 Mb/s. Commercial options are even faster. WiMax is expected to offer speeds of 17-75 Mb/s.
  • Prices charged for broadband services are dropping. DSL is now sold for as little as $26 per month. Cable modem service costs about $43 per month; DirecTV satellite broadband, $59 to $89; WiMax is expected to be priced at $25-$50.
  • Many municipal broadband systems in place around the country have failed to meet their budgets, their revenue estimates, or their penetration goals, costing taxpayers and municipal utility ratepayers millions of dollars. Examples include Marietta, Georgia; Lebanon, Ohio; Tacoma, Washington; Paragould, Arkansas; and Ashland, Oregon.
  • Municipal broadband is a risky venture. Due to their much larger size, experience, and economies of scale, commercial competitors are able to offer better content and lower prices than municipalities. The costs of programming, marketing, customer acquisition, and account maintenance, often underestimated or unplanned for, have forced municipalities to raise taxes, subsidize broadband out of electricity revenues, or scrap the project halfway through. Fiber-to-the-home networks are especially risky because their installation costs are many times the cost of wireless competitors. The Tri-Cities proposal, for example, would have cost $62 million–about $3,539 per household.

Free to Make Mistakes?

The argument can be made that local governments ought to be allowed to make mistakes, with those most mistaken serving as cautionary lessons for other cities considering similar projects. Just because municipal broadband is a bad deal and risky proposition for taxpayers doesn’t necessarily mean states ought to step in to protect taxpayers, as the Pennsylvania legislature has done with the recent passage of a law severely curtailing municipal attempts to build duplicative broadband systems.

Nevertheless, I believe this is a case where state preemption is justified. Telecommunications and broadband are intrastate, interstate, and increasingly global services. The experience of the past decade demonstrates how the absence of a consistent, comprehensive, and nondiscriminatory national regulatory regime in the United States has slowed the roll-out of new telecommunications services, causing a nearly catastrophic depression in the telecommunications industry and leading the U.S. to lag behind other developed countries in deploying high-speed broadband services.

Allowing the nation’s 55,000 towns and municipalities to create and subsidize their own local broadband utilities is equivalent to inviting 55,000 government units and their attendant regulators, bureaucrats, and “technology officers” to help determine national telecommunications policy. It’s a bad idea.

The federalism argument fails for a second reason: Local governments are creatures of state governments, which control their taxing and borrowing authority, routinely preempt and overrule their regulatory authority, and bail them out when they become bankrupt. Unlike the states, for which the U.S. Constitution guarantees broad autonomy from the national government, municipalities have only as much rope as states choose to give them. This is one area where their entrepreneurial ambitions ought to be reined in.

The American Legislative Exchange Council (ALEC), a national nonpartisan membership organization for state legislators, adopted model legislation in 2002 that imposes substantial limits on municipalities seeking to launch their own broadband systems. Legislators interested in protecting taxpayers as well as their state’s economies from these misguided ventures would do well to contact ALEC and consider introducing or supporting similar legislation for their states.

Joseph L. Bast ([email protected]) is president of The Heartland Institute.

For more information …

Joseph L. Bast’s October 2004 Heartland Policy Study No. 105, “Municipally Owned Broadband Networks: A Critical Evaluation (revised),” is available online at http://www.heartland.org/PublicationIssue.cfm?pblId=3&pisId=579.