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Problems With Government-Sponsored Broadband Expansion

Sept. 25, 2020, 8:01 AM

Now six months into the Covid-19 pandemic, the internet has offered Americans a welcome economic, educational, and psychological lifeline to weather the crisis. Contrary to claims that Covid “broke the internet,” the data reveal that U.S. networks were resilient to the traffic surges.

With Americans’ increased reliance on broadband, politicians on both sides of the aisle are actively campaigning on the issue of expanding broadband deployment. As one would expect, the Republicans are focusing on promoting private sector deployment, while the Democrats are aggressively pushing for the expansion of government-owned networks (GONs).

For those of us who study telecom policy for a living, the debate over the merits of municipal broadband is nothing new. But what has been missing from the debate over the years is a cohesive legal and economic analysis to frame the discussion. Fortunately, a new 100-page study, just published in the Federal Communications Law Journal, attempts to fill that gap, and its findings are important. (For disclosure, I am one of four authors of this study.)

State Law Limitations

At the heart of the debate is the fight over state laws that seek to limit the subsidization of municipal systems, encourage first the pursuit of alternatives to municipal entry, and protect taxpayers from undue risk (or at least inform them of it by, say, requiring a referendum). About half the states have laws governing municipal broadband.

Having lost at the state level, many proponents of government-owned networks have attempted to find preemptive relief either from the Federal Communications Commission or under the Communications Act. Others have sought a new law from Congress. These efforts have proved futile.

The U.S. Supreme Court appears to hold that as a constitutional matter, the federal government cannot intervene into the relationship between states and their political subdivisions.

Given this precedent, it is frustrating that Democrats in Congress recently passed legislation (the Moving Forward Act, a more than $1.5 trillion infrastructure bill) to preempt state municipal broadband laws, a bill that if eventually enacted into law will inevitably be struck down as unconstitutional. Not only is it pure political showmanship, but it is bad policy to boot—particularly affecting those areas where private firms already provide service.

Subsidized Entity

As this new study demonstrates, municipal broadband is in almost all scenarios subsidized entry, covering capital costs and losses with tax dollars and other internal transfers—a point that advocates of municipal broadband generally do not contest. As such, this subsidized municipal entry is prone to be predatory (i.e., prices are below incremental cost) and not pro-competitive.

In Chattanooga, Tenn., for example, the city’s system received a federal grant equal to about $2,000 per subscriber, and millions more in subsidies from the city’s electric ratepayers. In Bristol, Va., direct subsidies received from various sources equaled about $7,000 per subscriber. And in a recent audit of the municipal system in Lafayette, La., the auditor discovered sizable and improper cross-subsidies between the city’s services (electricity, sewer, water) and its broadband network. The auditor concluded that the director of the city’s services “was aware of the improper activity and may have violated several state laws.” Several government employees in Bristol are now doing hard time for nefarious activities involving the city’s municipal broadband network.

Accordingly, because municipal systems are disconnected from profit maximization and asymmetrically subsidized, it should come as no surprise that even the mere threat of municipal entry can reduce private sector investment.

This deterrence effect is especially pernicious at a time when private providers are undergoing widespread and costly upgrades to their networks in response to a national call to increase broadband deployment to all Americans.

Legal Issues: Antitrust, Due Process

The study also explains that municipal broadband raises several legal concerns other than questions of preemption.

For example, GONs that have been found to have improperly cross-subsidized their operations could be in violation of the antitrust laws. The Supreme Court has ruled that municipal systems are not immune from antitrust scrutiny because they are not acting only “to serve the public weal.” (See City of Lafayette v. Louisiana Power & Light Co.) Instead, the municipal entrant blatantly seeks to capture market share from private sector providers and does so with below cost (predatory) pricing.

Perhaps more directly, since governments operating broadband networks act as both regulator and competitor, recent caselaw indicates that municipal broadband raises significant constitutional due process concerns. A 2016 court decision found it to be inherently unfair for a government-owned entity (in this case Amtrak) to compete with firms for which it simultaneously regulates rates, terms and conditions over key inputs of production.

Following this logic, it is also unconstitutional for a city both to regulate broadband providers—and they all do—and to compete against these regulated firms. If a legal challenge was brought under this theory against a GON, then it might just spell the end to municipal broadband.

In sum, this new, sweeping study on municipal broadband prescribes a heavy dose of caution regarding municipal entry into the communications business. The paper does not rely on rhetorical and emotional argument—which is the typical modality of debate on the issue—but draws insights from economic theory and legal precedent. On those grounds, it is certainly a new contribution to the debate over government-supplied broadband.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Lawrence J. Spiwak is the president of the Phoenix Center for Advanced Legal & Economic Public Policy Studies, a non-profit 501(c)(3) research organization that studies broad public-policy issues related to governance, social and economic conditions, with a particular emphasis on the law and economics of the digital age.

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