Who Says Municipally Owned Telecom Networks Lose Money?

Who Says Municipally Owned Telecom Networks Lose Money?
September 27, 2005

Joseph Bast

Joseph L. Bast c.v. Joseph Bast is president and CEO of The Heartland Institute, a 29-year-old... (read full bio)

Would you like to receive a huge outpouring of angry, bitter, and insult-laden emails? Then I have just the thing for you. Try writing about municipally owned communications systems--cable TV, telephone, and Internet access--and report that they lose money.

I did this, and hardly a day passes without a colorful email accusing me of all sorts of things. For example, the general manager of one Iowa communications utility called me a "liar," "horse's behind," "pig," and "full of horse manure"--all in a single email.

I admit I am not a technologist. I can't answer your questions about how to wire a Wi-Fi system. My wife hooked up our Tivo, and usually I call for her help when my computer locks up.

But I do know a lot about government finance and privatization, and this is the knowledge I've tried to bring to bear on the issue of municipal broadband.

For example, I know that Cedar Falls, Iowa has had a municipally owned communications system for nine years. The system has covered its operating costs since the second year, but not its capital and finance costs, which we can track with a financial measure called free cash flow to investors. The Cedar Falls municipal communications system has had negative free cash flow every year except one. It is $3.1 million short of paying back what taxpayers have paid into it.

Muscatine, Iowa has had a municipal communications system for six years. It's had negative free cash flow every year except 2004. It is $25.6 million short of payback.

Spencer, Iowa has had a municipal communications utility since 1999. Spencer had negative free cash flow until 2003 and seems to have had a positive cash flow since then ... but Spencer's electric utility has paid more than $9 million in capital costs for construction of the communication utility, transferred $1.55 million in assets to the communications utility, and loaned it $8 million at 4.5 percent interest, less than the 5.75 percent the electric utility pays for its own bonds.

Finally, Bristol, Virginia operates a municipal communications utility that it launched in 2002. It too is unlikely ever to achieve positive free cash flow. It was originally funded by a $15 million revenue bond issue, then refunded in 2004 at $27.5 million. It has borrowed $14.9 million from the electric utility and has had operating losses (including cost of capital and interest) of $8.6 million so far.

The Iowa numbers come from a report by Dr. Ronald Rizzuto, which I edited and my organization just published. The Virginia numbers come from a report we published earlier this year. These case studies are important because advocates of municipal broadband systems say they won't cost taxpayers anything. Each of these communities claims its municipal broadband system is breaking even or about to break even.

The three Iowa systems are the largest in the state and among the oldest in the country, so they are probably the best case studies we can find. Cedar Falls' system is frequently cited as "proof" that municipal broadband can spur economic development.

Spencer is held up as a model by advocates of a municipal broadband system in Illinois' Tri-Cities--a proposal that has been rejected twice by voters. Bristol was held up as a model by advocates of a municipal broadband system in Lafayette, Louisiana, where voters in July approved $125 million in bonds.

I try to tell the advocates of municipalization there are alternatives they could pursue, such as cutting taxes and fees on telecom services and removing regulatory barriers to new investment and competition. But those suggestions fall on deaf ears. They insist we can't wait for private companies to roll out new broadband services.

Though often expressed in economic terms, the case for municipal broadband is an emotional argument, not an economic one. It is a product of the anti-corporate ideology that is very widespread in the country today. People are not taught basic economics in high school or in college. As a result, they have no idea how the business world works.

Into this gap steps myths and mistakes about excessive profits, monopolies and "duopolies," and unfair competition. The media feeds this ignorance by demonizing industries one at a time: tobacco companies, HMOs, drug companies, oil companies, and telephone and cable companies. Denouncing big corporations is what passes for informed public debate these days.

It doesn't matter how you feel about big corporations. The facts show the case for municipal broadband is very weak. If your real interest is affordable broadband and not bashing big corporations, then you will have no trouble understanding what I've written or what you need to do.

Unfortunately, the people I am most likely to hear from have not understood any of this, and they'll be up late tonight making sure I know that.


Joseph L. Bast (jbast@heartland.org) is president of The Heartland Institute, publisher of IT&T News, and author of a policy study on municipal broadband published by The Heartland Institute in 2004.

Joseph Bast

Joseph L. Bast c.v. Joseph Bast is president and CEO of The Heartland Institute, a 29-year-old... (read full bio)