"The Future Is Not What it Used to Be" ²

As recently as a year ago, the Federal Communications Commission believed that the prospect of rapid private-sector deployment of advanced telecommunications services was very good, except in rural areas. According to the Commission,

204. ... [W]e conclude that the deployment of advanced telecommunications capability to all Americans is reasonable and timely at this time. Providers are rapidly building the infrastructure for two major types of advanced services - DSL services and cable-based services. Large-scale entry by other providers deploying fixed wireless and satellite technologies is also likely. Great amounts of capital, even by the standards of the communications industry, have poured into the infrastructure for advanced services. Demand, measured by the rates of subscription to high-speed services, is increasing rapidly and shows no sign of losing momentum.

205. Despite our conclusion that deployment is reasonable and timely overall, we realize that not all Americans have access to advanced services today. Indeed, the data support the troubling conclusion that market forces alone may not guarantee that some categories of Americans will receive timely access to advanced services. ³

Profound changes are also manifesting themselves in the marketplace. Numerous competitive local exchange carriers have either cut back on their plans to compete with incumbent telecommunications providers or have gone out of business altogether. ⁶ The same misfortune has befallen many of the "broadband overbuilders" that had intended to build sophisticated new communications networks that would enable them to compete simultaneously with providers of voice, video, data and other advanced communications services. ⁷ Even the major incumbent providers of cable and telecommunications services have retreated from their bold claims to extend their services aggressively outside their traditional markets. ⁸

In this environment, it may well be years before private-sector cable and telecommunications providers are willing and able to offer communities outside the nation's major population centers the same level of services at comparable prices as they are offering in major markets. There is nothing venal or surprising about this - profit-maximizing firms owe their investors a fiduciary duty to attack the most lucrative markets first. But given the critical importance of prompt and affordable access to advanced communications services, many affected communities are coming to believe that they cannot afford to wait for the private sector to get around to them.

"What's Past Is Prologue." ⁹

For rural communities, being left behind by the private sector is nothing new. During the first few decades of the electric power industry, privately-owned electric power companies literally left Rural America in the dark while electrifying more densely-populated and lucrative urban markets. Today, the same patterns are repeating themselves in the telecommunications industry. This time, however, many larger cities have joined rural communities in being at risk of falling behind urban population centers in obtaining the full benefits of the Information Age. These benefits include the ability to attract and hold on to businesses, the ability to create attractive educational and employment opportunities, and the ability to offer the many other technology-based advantages that collectively make for a high quality of life.

At the turn of the last century, residents in thousands of rural communities that were shunned by the private electric power companies formed their own electric utilities, in recognition that electrification was critical to their economic development and survival. The great majority of these communities thrived while others failed, and the public power systems they created still exist today, providing their customer-owners superior service at substantially lower prices than their counterparts in the private sector. Public power utilities also emerged in several large cities - including Austin, Cleveland, Jacksonville, Knoxville, Los Angeles, Memphis, Nashville, Portland, San Antonio, and Seattle - where residents believed that competition was necessary to lower prices, raise the quality of service, or both. These public power systems, too, have stood the test of time.

As they did in the electric power industry, local governments can play a critical role in ensuring that our Nation's telecommunications goals are met, particularly in rural areas. The Federal Communications Commission underscored this point in its second report on the deployment of advanced communications services, in which it featured the experience of Muscatine, Iowa, as an example of how rural communities can help themselves to obtain competitive broadband services. ¹⁰ The Commission unanimously reaffirmed and strengthened these findings in the Missouri preemption case, even while finding that the agency lacked the legal authority to preempt state barriers to municipal entry. ¹¹ Although the composition of the Commission has changed, there is no reason to believe that the new Commission will view these facts in a fundamentally different way.

The Relevant Considerations

A local government that is dissatisfied with the pace, nature or quality of private-sector deployment of broadband services in its community will theoretically have a number of options ranging from doing nothing to becoming a full-service provider of broadband services. To determine which option(s) may be viable, the local government will have to analyze carefully the legal, technical, marketing, financial, political and other considerations affecting its community. While generalizations cannot substitute for case-specific analyses, there are some useful lessons to be learned from the experiences of others.

First, communities that already operate their own electric utilities have several advantages that may contribute to the success of a broadband project. To remain competitive in the increasingly competitive electric power industry in the years ahead, public power utilities will need highly sophisticated communications infrastructure and facilities. Such infrastructure and facilities can readily support the provision of video, voice, data and other advanced telecommunications services, either by the utilities themselves or by other providers of such services. Furthermore, public power utilities also have decades of experience in operating complex technologies, serving customers of all kinds, managing billing and collection systems, and providing technical support. They have access to essential poles, conduits and rights of way. Public power utilities also have a century-long tradition of universal service.

With assets such as these, public power utilities have successfully provided broadband communications since the late 1980s, when the public power utility of Glasgow, Kentucky, upgraded its communications infrastructure for internal purposes and discovered that it could use its new facilities to offer better and cheaper cable television service than the incumbent provider. Currently, more than eighty public power utilities are offering broadband services in over thirty-three states, and many more are considering doing so. These utilities range from small systems serving less than 1000 customers to the $100 million, state-of-the-art fiber network planned for Memphis, Tennessee, which will furnish wholesale high-speed communications services on an "open access" basis to telecommunications and data providers and resellers, which will in turn offer cable TV, video on-demand, high-speed data connections, telephone services and other advanced communications services throughout the city. ¹²

Public power utilities may also lead the way to the next generation of advanced telecommunications services - those offered through fiber to the home. For example, while major broadband providers claim that they have yet to find a business model that would justify offering fiber-to-the-home ¹³, the Public Utility District of Grant County, Washington, has already installed over 7,000 fiber miles and is building out an open-access fiber-to-the-home system that will make advanced telecommunications services available at gigabit speeds to approximately 40,000 homes and businesses by 2006. ¹⁴ The Grant County PUD will charge residents and businesses $40 a month for access to its system, and they will then bring their own bandwidth to applications offered by cable, telecommunications, and other service providers over the PUD's network. This plan was well received in a recent pilot program to test consumer acceptance.

While helpful, operating an electric utility is not a prerequisite to a local government's ability to foster the rapid deployment of broadband communications in its community. For example, Chicago's CivicNet project promises to bring prompt and affordable fiber connectivity, not just to the City government's 1600 sites, but also to thousands of other organizations, including businesses, schools, libraries, hospitals, community centers, churches and even individuals. ¹⁵ By aggregating the $25 million in annual telecommunications expenditures of the City's agencies and holding out the promise of substantial user fees paid by the others using the system, the City has given itself sufficient clout to attract private-sector partners who will build and operate the CivicNet system in accordance with the City's goals and specifications.

The City of Lynchburg, Virginia, furnishes a smaller-scaled but equally creative example. In 1997, the City began to construct a 42-mile fiber optic network to interconnect its municipal buildings and school facilities. The City essentially paid for the network within 18 months, as measured by the costs that the City would have had to pay to obtain equivalent services from the incumbent telephone company. When local businesses and residents urged the City to make its system available to the public, the incumbent telephone and cable companies of Virginia pushed a law through the state legislature that not only barred Virginia's localities from offering telecommunications services themselves, but that also precluded localities from leasing their telecommunications infrastructure and facilities to potential competitors of the incumbents. In response, the City embarked on a nationwide search for a strategic partner that would purchase the City's network and operate it in a manner that advanced the City's goals. The City eventually sold the system for $1 to CFW Communications, a century-old telephone company in central Virginia which had reinvented itself as an aggressive telecommunications provider. In return, the City obtained a 30-year irrevocable right to use the fibers that it was currently using, 8 dedicated fibers on all newly-constructed routes, the lowest rates for telecommunications services in Virginia for a period of 10 years, a commitment by CFW to extend high-speed services to 95 percent of the City's addresses in defined stages within four years, and numerous other significant benefits. ¹⁶

Even in sparsely-populated areas in which fiber-based networks may be infeasible, local governments have stepped forward to bring themselves into the 21st Century. Examples include Washington County, Ohio, ¹⁷ Greenup, Illinois, ¹⁸ and the Missouri Basin localities of Keokuk, Iowa, and Sioux Falls, South Dakota, ¹⁹ which are all working to implement fixed wireless solutions. Numerous other satellite and terrestrial possibilities are also under development. ²⁰

New Challenges

Local governments that enter the communications field are likely to face challenges that are somewhat different from those faced by their predecessors.

First, shortly after the Telecommunications Act became law, a number of states enacted explicit state barriers to municipal entry. While some of these laws were working their way through the courts, several other states enacted laws that were ostensibly intended to balance the interests of public and private providers of cable and telecommunications services. While Section 253(a) of the Telecommunications Act prohibits both explicit and effective barriers to entry, proving that a non-explicit state law is an "effective" barrier to entry ²¹ may in some cases be difficult to prove. Doing so will require a showing that the measure "inhibits or limits the ability of any competitor or potential competitor to compete in a fair and balanced legal and regulatory environment." ²² Where such a showing is not possible, public entities will have to comply with the state laws or persuade the state legislatures to change them.

Second, incumbent cable and telecommunications providers have undergone a metamorphosis over the last few years that has left several of them larger and better able to cross-subsidize anti-competitive behavior. In several recent cases, incumbents have engaged in clearly predatory behavior, as if taunting affected competitors and federal agencies to try to stop them. When considering entry into broadband services market, public entities must therefore be prepared for the possibility that the incumbents will not only respond aggressively, but perhaps even unlawfully.

Third, for the last several years, the most rapidly growing source of competition for cable companies, particularly in rural areas, has been Direct Broadcast Satellite (DBS) service. While legal and technological problems have limited the growth of this platform, the legal issues have largely been removed, and the technological issues are not as severe as they used to be. Broadband DBS service is still constrained by the need for most users to use dial-up modems over ordinary telephone lines for the upstream link, but over time, new technologies may solve or mitigate this problem. If that occurs, DBS may prove to be a very formidable competitor in rural areas.

Finally, in the current "hands-off" deregulatory environment, new public entrants into the broadband communications market must be prepared to rely on themselves. It is unclear at this point whether, or to what extent, the Federal Communications Commission, or other branches of the federal government, will forcefully intercede to prevent anticompetitive practices. While these agencies may ultimately decide that strong pro-competitive intervention is necessary if deployment of broadband services continues to lag, that is not something on which public entities can rely in formulating their business and economic decisions.

Conclusion

Given the critical importance of prompt and affordable access to advanced telecommunications services and the relatively slow pace of deployment of such services outside the major population centers, local governments will increasingly perceive the need to take matters into their own hands. Some will find that establishing and operating their own broadband networks is feasible. Some will find that working with strategic partners is the best course. Others will find that attractive alternatives do not exist, or no longer exist. In each case, however, the longer a local government waits, the more its community will miss out on the benefits of the Information Age. Unfortunately, as history shows, there are great dangers in waiting too long.

Footnotes:

^* Jim Baller and Sean Stokes are principals in the Baller Herbst Law Group, Washington, D.C.

¹In City of Bristol, Virginia v. Earley, 2001 WL 520469 (W.D.Va. May 16, 2001), appeal pending, Nos. 01-1741, 01-1800, CA-173 (4th Cir.), the federal district court found that in Section 253(a) of the Telecommunications Act of 1996, Congress clearly and unequivocally expressed its intent to protect all entities, including public entities, from state barriers to entry into telecommunications. Section 253(a) provides that "No State or local statute or regulation, or other State or local legal requirement, may prohibit or have the effect of prohibiting the ability of any entity to provide any interstate or intrastate telecommunications service." The court applied canons of statutory construction to which the United States Supreme Court has consistently adhered for over fifty years, including cases involving federal preemption of traditional state powers. Bristol, 2001 WL 520469 at *5, citing Salinas v. United States, 522 U.S. 52, 57 (1997) and United States v. Gonzales, 520 U.S. 1, 5 (1997). An appeal of the Federal Communications Commission's failure to preempt a similar Missouri law is currently pending before the Eighth Circuit, Missouri Municipal League v. FCC, No. 01-1379 (8th Cir.).