A commentary piece by FFM Investigative Director Tom Steward was featured on MPR this morning. The article focuses on municipalities considering an investment into municipal telecom and the often overlooked risks. The article can be found below and on MPR's website.
When there's a private option, cities have no business offering broadband service
by Tom Steward
December 2, 2010
As municipalities across the state consider whether to invest in mega-million-dollar telecommunication systems, the ones really taking the biggest risk are the taxpayers.
In Christopher Mitchell's recent commentary ("To communities that seize broadband initiative, benefits flow fast," Nov. 29), Christopher Mitchell urges local governments to get in the business of competing with the private sector in one of the fastest-changing and most capital-intensive enterprises anywhere -- broadband infrastructure and services. What he leaves unsaid is that cities and taxpayers face the prospect of steep negative fiscal repercussions for dabbling in this sector of the communications marketplace.
Mitchell focused on the newly installed FiberNet system in Monticello, Minn. It's too late to ask whether residents of Monticello really needed a third choice to surf the Internet with marginally increased speeds -- for now. The fact is, the capital costs of installation and construction left the government-owned and -operated network with a $26 million financial liability through its use of revenue bonds to finance the operation.
Unfortunately, taxpayers have not yet seen the true cost of the network. Unlike private companies, government has the luxury of pricing services at rates that do not necessarily reflect the actual cost of the service. Once the city starts paying off its initial investment (as a private entity would), the difference must be made up another way, whether it is reflected in a rate increase, cutback in service, or cross-subsidization through another government source.
The risks are very real. Just ask the city of Moorhead.
The city's GoMoorhead network failed to attract enough subscribers to break even, let alone become self-supporting. To cover its losses, the city issued double-digit electric rate hikes, leaving taxpayers to subsidize the failed GoMoorhead experiment. The city faced expensive equipment upgrades for the system, underscoring the difficulties faced by local governments attempting to compete in a fast-changing, high-tech environment, particularly in an era of budget crunches.
Instead of continuing to force all taxpayers to subsidize their neighbors' Web surfing, the Moorhead Public Service Commission decided to cut its losses, selling off GoMoorhead last year. The system's new owner has already made significant technical upgrades and service improvements, offering special rates to new customers in celebration of its one-year anniversary of private ownership.
Then there's the case of the Burlington, Vt., broadband network, which author Mitchell has described as "one of the best examples" of municipal broadband. And on that, we are in complete agreement. Indeed, Burlington Telecom is one of the best examples of the high risks to taxpayers of publically funded municipal broadband systems.
According to the Burlington Free Press, the FBI has joined a criminal investigation into Burlington Telecom over its questionable use of millions of taxpayer dollars to cover the system's operating losses. In addition, Burlington Telecom's primary lender is in the process of repossessing the service provider's telecom equipment, which will shut down service for thousands of subscribers.
If we've learned anything from these examples in Minnesota and elsewhere, it's that there is no need for municipalities to offer a different version of a service already in place, especially one that puts enormous risk on taxpayers and is done with public subsidies. Instead, cities should focus on providing essential services not already offered by private companies.
In a time of shrinking budgets and service cuts, municipal telecom is a losing proposition both for local governments and taxpayers.
Tom Steward is investigative director for the Freedom Foundation of Minnesota, which describes itself as "an independent, nonprofit educational and research organization that develops and actively advocates the principles of individual freedom, personal responsibility, economic freedom, and limited government."