ISP lobby has already won limits on public broadband in 20 states

It's no secret that private Internet service providers hate when cities and towns decide to enter the telecommunications business themselves. But with private ISPs facing little competition and offering slow speeds for high prices, municipalities occasionally get fed up and decide to build their own broadband networks.

To prevent this assault on their lucrative revenue streams, ISPs have teamed up with friends in state legislatures to pass laws that make it more difficult or impossible for cities and towns to offer broadband service.

Attorney James Baller of the Baller Herbst Law Group has been fighting attempts to restrict municipal broadband projects for years. He's catalogued restrictions placed upon public Internet service in 20 states, and that number could be much higher already if not for the efforts of consumer advocates.

Some state restrictions have been in place for decades. A new wave of state laws were passed in the years after the federal Telecommunications Act of 1996 was passed, Baller told Ars. Another wave of proposals came after a US Supreme Court decision in 2004 that said the Telecommunications Act "allows states to prevent municipalities from providing telecommunications services."

Pennsylvania enacted a new law limiting municipal broadband later in 2004, but then the tide began to turn.

"The next year we saw 14 states consider barriers, and we fought most of them off, and then it was two or three a year," Baller told Ars. "We won all the battles for a while until North Carolina in 2011 and South Carolina in 2012, and there were no new ones in 2013." (That North Carolina bill was titled, "An act to protect jobs and investment by regulating local government competition with private business.")

In Utah, a new bill would make it harder for regional fiber networks to expand. That one also drew criticism, and the legislator who proposed it said he's make some "minor adjustments."

Baller said the Kansas bill is the most extreme one he's seen.

"In its key operative language, it says that municipalities can't provide telecommunications, cable, or broadband services, period, and they can't make their facilities available to private sector entities that would otherwise use them to provide telecommunications, video, or broadband services," he said. "When you think about that combination, what do you have left? You can provide for your own internal needs, there's an exception for that, but that's pretty much it."

Recent laws restricting municipal broadband buildouts, often based on a model devised by the American Legislative Exchange Council, are usually subtler. One tactic is to require public broadband networks to quickly achieve profitability, something that is difficult even for a private entity because of how much initial construction costs. Some laws also force municipalities to impute to themselves costs that private providers would pay, even if the municipality doesn't actually have to pay them.

"Municipalities typically have lower costs than private entities and do not seek the high short-term profits that shareholders and investors expect of private entities," Baller wrote. "As a result, municipalities can sometimes serve areas that private entities shun and can often provide more robust and less expensive services than private entities are willing to offer. Imputed cost requirements—a form of legislatively sanctioned price fixing—have the purpose and effect of driving municipal rates up to the uncompetitive levels that private entities would charge if they were willing to provide the services at issue. Imputing costs is also difficult, time-consuming, inexact, and highly subjective. As a result, imputed cost requirements give opponents of public communications initiatives virtually unlimited opportunities to raise objections that significantly delay and add to the costs of such initiatives."

The Kansas Cable Telecommunications Association argued that "scarce taxpayer dollars should not be used by municipalities to directly compete with private telecom providers." That's an argument Baller has seen time and again.

"These bills are supposedly intended to create fair competition but what they're really intended to do is thwart altogether or significantly delay and make public communications projects as unattractive as possible," he told Ars.

The key to defeating these proposals is to share information with state legislators, Baller said. "They're usually not professional lawmakers, they have jobs," and not much time to study bills before voting on them, he noted. "Often the key is to inform people what the real implications of the laws can be in their state."

Baller and others have worked with community members to help prevent such bills from being passed. Baller helped organize opposition in Kansas from organizations including Google, OnTrac, Alcatel-Lucent, and several utility and telecom consortiums. The proposal in Utah has "just come on our radar screen, so we're evaluating how to respond there," he said.

While the UTOPIA regional fiber consortium that bill targets has been in many ways a financial failure, municipal broadband can succeed. In Chattanooga, Tennessee, a fiber network built by a community-owned electric utility has provided affordable high-speed broadband in a rural area, turned a profit, and forced competitors to upgrade their services. The electric utility in Bristol, Virginia, serves most of its residents and businesses with a fiber to the premises network, and it was praised in the federal government's National Broadband Plan as "a good example of the potential of community broadband in rural America."

Bristol was able to deploy its network before politicians in Virginia placed restrictions on similar projects.

Cox Communications, a cable company that is backing the proposed broadband restrictions in Kansas, told Ars that "approximately 22 other states hav[e] some type of restriction on the use of taxpayer dollars for these kinds of facilities."

Taxpayer dollars can be used to build networks, but Christopher Mitchell, director of the Telecommunications as Commons Initiative at the Institute for Local Self-Reliance, argued that cable company arguments pointing to taxpayer funds are misleading.

"Most networks sell bonds to private investors who are repaid by revenues from the network. No taxpayer dollars," he told Ars. "If anything, taxpayer dollars are better spent by no longer overpaying for service to schools, fire departments, and the like. And the municipal utilities that often operate the network generally pay far more in what is called PILoT—Payments in lieu of taxes—than the private providers do, meaning that even though the prices on muni networks are generally lower than what existed in the market prior to the muni entry, more of the revenue goes to pay for other government services. The result is that municipal networks more often subsidize the general fund rather than the general fund subsidizing a municipal network."

Cox said its "22 other states" statistic is based on internal research and declined to say which states it includes in that figure. As we mentioned, Baller has identified 20 states with such restrictions. Let's take a look at each one (quotes come from Baller's analysis):

Sad states of affairs

Alabama: Municipal communications services must be self-sustaining, "thus impairing bundling and other common industry marketing practices." Municipalities cannot use "local taxes or other funds to pay for the start-up expenses that any capital-intensive project must pay until the project is constructed and revenues become sufficient to cover ongoing expenses and debt service."

Arkansas: Only municipalities that operate electric utilities may provide communications services, but they aren't allowed to provide "basic local exchange service," i.e. traditional phone service.

California: Public entities are generally allowed to provide communications services, but "Community Service Districts" may not if any private entity is willing to do so.

Colorado: Municipalities must hold a referendum before providing cable, telecommunications, or broadband service, unless the community is unserved.

Florida: Imposes special tax on municipal telecommunications service and a profitability requirement that makes it difficult to approve capital-intensive communications projects.

Louisiana: Municipalities must hold referendums before providing service and "impute to themselves various costs that a private provider might pay if it were providing comparable services."

Michigan: Municipalities must seek bids before providing telecom services and can move forward only if they receive fewer than three qualified bids.

Minnesota: 65 percent of voters must approve before municipalities can offer local exchange services or operate facilities that support communications services.

Missouri: Cities and towns can't sell telecom services or lease telecom facilities to private providers "except for services used for internal purposes; services for educational, emergency, and health care uses; and 'Internet-type' services."

Nebraska: Public broadband services are generally prohibited except when provided by power utilities. However, "public power utilities are permanently prohibited from providing such services on a retail basis, and they can sell or lease dark fiber on a wholesale basis only under severely limited conditions."

Nevada: Municipalities with at least 25,000 residents and counties with at least 50,000 residents may not provide telecommunications services.

North Carolina: "Numerous" requirements make it impractical to provide public communications services. "For example, public entities must comply with unspecified legal requirements, impute phantom costs into their rates, conduct a referendum before providing service, forego popular financing mechanisms, refrain from using typical industry pricing mechanisms, and make their commercially sensitive information available to their incumbent competitors."

Pennsylvania: Municipalities cannot sell broadband services if a "local telephone company" already provides broadband, even if the local telephone company charges outrageously high prices or offers poor quality service.

South Carolina: The state "requires governmental providers to comply with all legal requirements that would apply to private service providers, to impute phantom costs into their prices, including funds contributed to stimulus projects, taxes that unspecified private entities would incur, and other unspecified costs."

Tennessee: Municipalities that own electric utilities may provide telecom services within their electric service areas "upon complying with various public disclosure, hearing, voting, and other requirements that a private provider would not have to meet. Municipalities that do not operate electric utilities can provide services only in 'historically unserved areas,' and only through joint ventures with the private sector."

Texas: The state "prohibits municipalities and municipal electric utilities from offering telecommunications services to the public either directly or indirectly through a private telecommunications provider."

Utah: Various procedural and accounting requirements imposed on municipalities would be "impossible for any provider of retail services to meet, whether public or private." Municipal providers that offer services at wholesale rather than retail are exempt from some of the requirements, "but experience has shown that a forced wholesale-only model is extremely difficult, or in some cases, impossible to make successful."

Virginia: Municipal electric utilities can offer phone and Internet services "provided that they do not subsidize services, that they impute private-sector costs into their rates, that they do not charge rates lower than the incumbents, and that [they] comply with numerous procedural, financing, reporting and other requirements that do not apply to the private sector." Other requirements make it nearly impossible for municipalities to offer cable service, except in Bristol, which was grandfathered.

Washington: The state "authorizes some municipalities to provide communications services but prohibits public utility districts from providing communications services directly to customers."

Wisconsin: Cities and towns must "conduct a feasibility study and hold a public hearing prior to providing telecom, cable, or Internet services." Additionally, the state "prohibits 'subsidization' of most cable and telecom services and prescribes minimum prices for telecommunications services."

This article was updated to include the statement about taxpayer dollars from Christopher Mitchell.