Reining In Municipal Wireless, Broadband: The Pennsylvania Story

Telecom Policy Report, Dec 15, 2004

By Hugh Carter Donahue, Ph.D.

When it comes to innovation and competition in wireless Internet and broadband telecommunications, Pennsylvanians seem fated to a state of dependence. Following a Supreme Court ruling reining in municipal telecommunications and broadband networks, incumbent carriers and some longdistance phone companies launched initiatives in state legislatures in Florida, Louisiana and Pennsylvania, among other states, to quash municipal systems entirely. Pennsylvania fell under the thumb of Verizon and rural telcos in the closing days of the 2004 legislative session, and this legislation highlights how difficult it is to stimulate high-speed Internet deployment without insulating incumbent and rural carriers from competition and innovation.

The Borough of Kutztown, with a population of 5,200, began causing some worries by leasing out telecommunications and entertainment service contracts to independent vendors that offer services over the municipally owned fiber-optic network the town had built in 2000. Its municipal broadband system is resulting in dramatically lower voice, Internet and cable-TV fees for Kutztown residents. A graver concern emerged when Philadelphia announced plans last summer to build a municipal Wi-Fi network and to launch wireless Internet services for its residents. Legislation, initially sponsored to address Kutztown, then took on urgency.

Under the law, Pennsylvania cities and towns along with municipally owned utilities will have a much tougher time offering telecommunications and broadband services through high-speed fiber and broadband over powerlines. Except for municipal telecommunications and broadband systems currently up and running, the law makes it illegal for municipalities and municipally owned utilities to offer telecommunications and broadband unless and until their incumbent telco declines to match their proposed service offerings.

This update of Pennsylvania's historic, innovative 1993 telecom law paves the way for incumbent and rural telcos to upgrade their existing networks pretty much on their terms and timetables. Verizon, in particular, should profit handsomely, because it is poised to offer wide ranges of high-speed services and entertainment to consumers. The fewer the number of competing providers and the lower the rollout costs, the greater the market share and profit for the phone giant. Rural phone companies score, too, by owning the customer well into the future.

The legislation potentially is perilous to municipally owned utilities, which may find themselves threatened when their customers demand broadband over powerlines to match services provided by privately owned utilities in nearby communities. Under this law, municipally owned systems now have to get a green light from their local telcos before offering broadband services.

Perhaps the negotiation clause in the legislation will impel incumbents to match the quality of broadband services that municipalities and their owned utilities might propose. However, it is unlikely their services could ever be as affordable or as much a source of local pride.

It is a pity the legislation so favors inertia. Municipal systems patronize local vendors as well as high-speed Internet and telecom access providers like Level 3, Sprint and MCI. They can be installed at low cost, they can generate revenues for municipalities, and they can promote a good business environment for small firms by offering the high speed services that are so vital for commercial success. And they offer these benefits at prices closer to cost than for-profit entities like Verizon. Their robustness, in turn, would promote market discipline on the part of incumbent phone companies. Such efficiency enhances the competitiveness of Pennsylvania enterprises by encouraging entrepreneurs to locate in mature cities, large and small, across the Commonwealth.

According to Frank P. Caruso, the director of information technology for the Borough of Kutztown, "This legislation delays advanced technology from reaching rural Pennsylvanians. Verizon essentially has bought time, again, and it accomplished its primary objective to thwart competition by stopping further municipal deployments."

He continues, "I cannot see justification for the legislation. Verizon is given billions [in] taxpayer money to build out advanced technology and then resell the services to taxpayers at an unreasonable rate. How does this help the rural community? Municipal systems directly benefit their communities. Service fees stay at home, working to grow the community. Municipal systems also promote use of third-party vendors and service providers and, as importantly, municipal systems reduce the burden on the state to fund communities like Kutztown."

There is little, if any, public policy rationale for insulating incumbent and rural telephone companies from municipal fiber or wireless broadband competition. While the coming arrival of Internet telephony, also known as voice over Internet Protocol (VoIP), means that Verizon and the rural telcos will not have an ironclad lock on Pennsylvania, the new law protracts the dependency of Pennsylvania consumers and businesses upon them unduly well into the future.