Municipal Networks Become Rivals For Fiber-Optic Telecom Companies
By DAVID ARMSTRONG and DENNIS K. BERMAN
Staff Reporters of THE WALL STREET JOURNAL
TACOMA, Wash. -- The troubled telecommunications industry has yet one more thing to worry about: competition from City Hall.
Spurred by local businesses and consumer dissatisfaction with cable-television, Internet and telephone service, municipal governments across the country are building their own speedy fiber-optic networks to compete with private industry.
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Here in Tacoma, Harry Sanders, a 75-year-old retired television repairman, says the cable-TV service he used to get from Tele-Communications Inc. was so bad he could improve the picture by switching off the cable box and using his old-fashioned roof antenna.
So, when Tacoma introduced a municipal fiber-optic network in 1998, Mr. Sanders was among the first to sign up. Now, he raves about his flawless television picture -- and lightning-fast Internet connection.
After Tacoma got into the communications business, TCI upgraded its network to offer high-speed Internet service, better cable reception and additional channels. Now nearly every home and business in the city of 194,000 has access to a variety of the latest telecom services.
Scores of other mostly medium-size and smaller localities -- from Alameda, Calif., to Gainesville, Fla. -- have also challenged their local cable, phone and Internet providers by installing public fiber-optic networks. And dozens more are following suit, installing technology that can transmit Internet, phone and cable data as light beams through hair-width strands of glass. Older networks, such as those that primarily move information in the form of electrons through copper wire, generally offer slower or more limited service.
City Hall as Rival
A sampling of municipalities that have built their own fiber-optic networks:
Alameda, Calif.
Ashland, Ore.
Braintree, Mass.
Chattanooga, Tenn.
Coldwater, Mich.
Gainesville, Fla.
Harlan, Iowa
LaGrange, Ga.
Tacoma, Wash.
Wadsworth, Ohio
Funded in many cases by special municipal bonds and in others by cash generated by local utilities, the new municipal networks are the information-age equivalent of improved roads and sewers, city officials say. In some instances, the public networks are providing services to customers passed over by private companies, such as smaller businesses or low-income families. Memphis in June approved plans for a city-owned fiber-optic network that is slated to include housing projects that lack high-speed Internet access.
Struggling Industry
For the telecommunications industry, the new competition comes at a bad time. Regional Bell and cable companies also have poured billions into improving their connections to homes, without yet seeing much return. AT&T Corp., which acquired TCI in 1999, has suffered large losses because the huge investment it made in upgrading its cable network hasn't offset declining long-distance business.
Overall, the industry built capacity too quickly, creating a glut of mostly long-distance data and phone routes connecting major cities. But many communities still lack fast Internet connections because companies have hesitated to complete the arduous and expensive process of extending high-capacity lines into homes and businesses -- known in the industry as going "the last mile."
With only about 9% of households nationwide estimated to have high-speed cable and Internet service, often referred to as broadband, some local governments are responding to demand in their areas. Less concerned about turning profits, these municipalities are more willing to incur heavy last-mile expenses.
Unfair Advantages?
AT&T and some other companies complain that government-built systems often receive unfair advantages: bond financing that is tax-exempt and therefore less expensive, easier access to rights-of-way and licensing by the very entities that own them. "Philosophically, we believe this business should be left to private industry," says Steve Kipp, spokesman for AT&T's broadband unit.
Fighting back, the industry has pressured legislatures in Texas, Missouri and eight other states to pass laws restricting or banning municipal networks from providing telecom services. Companies also are trying to head off proposed municipal networks with aggressive local public-relations campaigns aimed at persuading voters that the systems will lose money, forcing taxpayers to pick up the tab.
The corporate public-relations effort in Alameda included satiric fliers delivered to homeowners, comparing the idea of a government fiber-optic system to a public pizza-delivery service. In Eugene, Ore., corporate opponents suggested that the city's next step could be buying its own satellite. Alameda plowed ahead with its network, while Eugene chose to move more cautiously.
Competition from cities generally has spurred private telecom providers to add new services, cut prices and become more responsive to customers, according to a Federal Communications Commission report issued last year. One instance, said the FCC, was Laurens, Iowa, where voters in 1997 approved a municipal communications authority that has built a public fiber-optic network. The local cable company, TCI of the Heartlands, responded by doubling the number of channels on its basic service and offering higher-quality digital cable-TV.
In Tacoma, the local cable company, now known as AT&T Broadband, not only put in new fiber-optic lines to provide fast Internet service, it also offers cable packages at relatively low prices. Today, AT&T's $25.52 monthly fee for standard cable in Tacoma is still $2 higher than that of the city system, but about 20% below what residents in nearby Seattle pay for the same AT&T service.
When Tacoma's $89.5 million public system began offering a new type of interactive service, combining television and the Internet, AT&T Broadband introduced a similar offering. Tacoma was only the second place in the country AT&T offered this service. "We will not shy away from the fact we are competing" against municipal networks, says Mr. Kipp of AT&T Broadband, the country's largest cable operator.
The public-private competition has become so intense that some communities are crying foul. The small city of Scottsboro, Ala., alleged in a filing with the FCC earlier this month that Charter Communications Inc., the cable company controlled by Microsoft Corp. co-founder Paul Allen, is using illegal "predatory pricing" to try to put Scottsboro's network out of business. Charter has offered $200 rebates to customers who switch from the city service and rates well below those of other communities served by the company, the Scottsboro filing said.
Charter, based in St. Louis, says its pricing reflects legitimate "competition that benefits customers." Scottsboro and the FCC say the city's filing probably won't lead to any further administrative or legal action.
Law Sparks Competition
Some municipalities, primarily those in rural areas, built their own telecommunications networks as far back as the 1960s. But the explosion of activity in this area came after enactment of the major federal telecommunications law in 1996 that encouraged competition in the provision of cable, Internet and telephone service.
Most of the public fiber-optic systems are built by municipally owned electric utilities. The utilities liken their expansion into the telecommunications business to their own creation in the early 1900s, when communities ignored by private power firms arranged for their own electricity. At least 97 public power utilities -- out of the roughly 2,000 that exist nationally -- have built telecom networks, according to the American Public Power Association, a trade group.
But in some states, industry lobbying against the public networks has paid off. Most of the 10 states that have already restricted or banned municipalities from running telecom systems acted after industry pressure.
And the pressure isn't ending. The California Cable Television Association, an industry group, last month used its lobbying skill to insert language it wants into a pending state bill that would speed the creation of municipal utility districts to help deal with the state's power problems. The cable-industry provision has nothing to do with the power crisis but would ban the creation of such municipal authorities for the sole purpose of getting into telecom services.
The state Senate has approved the amended bill, which now awaits action in the Assembly. "Since we had the votes, there wasn't much choice for the [bill's] author and the cities but to accept our amendments," says Dennis Mangers, senior vice president of the cable group.
The author of the underlying legislation, Democratic Sen. Nell Soto, says she might have been able to push her bill through without the amendment. But she didn't want "to get in the way of" the cable industry's business goals and didn't mind including the ban in her bill, she says. Still, "you feel the power of the lobbies," she adds. "They are there every day."
Cable and telephone companies pushed for a law Nebraska enacted in May. It bars municipal networks from offering retail communication services and requires cities and towns to contribute half of any profit they make from the leasing of fiber-optic networks to a state fund to improve Internet access. State Sen. Curt Bromm, the Republican chairman of the Nebraska legislature's Transportation and Telecommunications Committee, acknowledges that industry lobbying helped propel the legislation and that the law will favor telecom companies. But overall, he adds, the new statute "fosters competition and cooperation between the private sector and public sector."
Some municipalities have counterattacked, filing lawsuits that contend that the restrictive state laws are invalid because they conflict with the 1996 federal telecommunications act. The federal act forbids states from "prohibiting the ability of any entity to provide any interstate or intrastate telecommunications service."
In response to a suit filed by the city of Bristol, Va., which is building its own network, a federal judge in that state in May struck down Virginia's law barring municipalities from the telecom business. Virginia's attorney general has said he intends to appeal the ruling.
Battles also are taking place at local polling places. In Eugene, a ballot initiative last year on whether to allow the city's Water and Electric Board to get into the telecommunications business provoked strong opposition from Qwest Communications International Inc. and AT&T Broadband. The companies and their local allies collectively spent nearly $87,000 on fliers and newspaper ads, including the one that warned against giving Eugene so much latitude that "it could even buy an orbiting satellite." The opponents also argued that power customers could unwittingly end up paying for the plan.
Supporters spent only $8,000 on competing ads, but voters approved the initiative. After all the corporate lobbying, though, the city has scaled back an estimated $250 million plan to provide fiber-optic service to every home and business. For now, Eugene will undertake only a $3 million initial project to serve most of its businesses. Debra Wright, who heads the project for the Water and Electric Board, says that corporate pressure didn't influence the decision to move more cautiously.
In Eugene and other communities, the industry has argued that if taxpayers understood the cost and risks of municipal fiber-optic ambitions, most of the plans would be defeated. "By and large, they all lose money," says Ronald Rizzuto, a finance professor at the University of Denver who has conducted industry-funded studies of municipal cable systems.
Moving to Glasgow, Ky.
One example Mr. Rizzuto cites is the city of Glasgow, Ky. But William J. Ray, superintendent of Glasgow's Electric Plant Board, says the industry analysis ignores the economic benefits of municipal networks. Franchino Mold & Engineering Co. opened a new facility in Glasgow three years ago, in part, because the city's fiber-optic network allowed for an easy exchange of data with engineers at the company's Lansing, Mich., headquarters, a company official says.
The 12-year-old Glasgow fiber-optic system, one of the first of its kind, provides relatively inexpensive cable and high-speed Internet services to 8,000 homes and businesses, or two-thirds of the local market. It has broken even for the past four years, Mr. Ray says.
In an attempt to damp enthusiasm in other communities considering construction of government networks, AT&T Broadband has attacked the finances of Tacoma's system, known as Click!Network.
The AT&T unit has asserted in local newspapers that Click!Network has lost $15.7 million in three years -- and that city taxpayers ultimately will foot the bill. Tacoma Power, the utility that built the network, says the loss is $7.8 million and largely related to start-up costs. AT&T Broadband's Mr. Kipp won't comment on whether his company's system in the area is in the red or the black.
Tacoma Power funded Click!Network from a $100 million surplus generated from power sales to California and other states. More recently, a drought has reduced the utility's hydro-plant production and forced it to buy electricity in the expensive wholesale market. If Tacoma Power hadn't spent heavily on a fiber-optic network, it might not have had to make recent sharp increases in residential power rates, AT&T Broadband maintains.
Proponents of Click!Network respond that the new services -- and the competition -- are worth the investment.
Write to David Armstrong at david.armstrong@wsj.com2 and Dennis K. Berman at dennis.berman@wsj.com3
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