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May 19, 2000

The Honorable Jim Bunning
United States Senate
818 Hart Building
2nd and C Streets, NE
Washington, D.C. 20510

Dear Senator Bunning:

This letter will violate almost every piece of advice commonly given to people communicating with their elected representatives who hope to actually have their letter read. It will be too long and not nearly concise enough, but the issues of competition in the electric power market in general, and with the Tennessee Valley Authority (TVA) in particular are too important and complex to be reduced to a simple executive summary.

Over the last several months you have made some very troubling statements about TVA and, by association, public power. While this letter is not a preprogrammed no-holds-barred defense of the status quo and of the present direction and leadership of TVA, it is intended to help you understand the reasons why public power should be defended and why a strong TVA is vital to the economic health of our region and, perhaps, our republic.

In the May 17, 2000 issue of The Courier-Journal, you were quoted as saying, "It's just not fair that we have a system that makes you pay more for your power because you live on the wrong side of the fence." This statement resonated with me as it is the same statement that another republican senator, George Norris of Nebraska, was making seventy years ago. Before TVA and the rural electric cooperatives were brought into existence, Norris and many others were becoming outraged at the actions of the privately owned electric utilities of the day. They found that the private corporations had monopolized the electrical industry and that they sold electricity at the highest rates they could possibly obtain. Norris himself compared the costs of lighting the Canadian and American sides of the International Bridge at Niagra Falls. The same number of lights, the same bridge, the same river and the same method of production of power; the only difference was the price: Ontario Hydro Power (a government-owned utility in Canada) charged only $8.43 per month for the Canadian half of the bridge, while the private U.S. corporation billed $43.10 per month! So, your feelings about the problem with rate disparity on each side of a fence are not new, but today's rate disparities certainly pale when compared to those that existed before TVA and other public power entities were created.

Today LG&E and AEP have slightly lower rates for most customer classes than TVA. That has not always been the case. In the case of LG&E and AEP, their low rates stem mainly from their decisions over the last several decades to refrain from investments in nuclear reactors and to stick to coal fired generation. At the same time, these utilities were not asked to build extremely large and expensive reactors and generators during the last several decades for the purpose of helping our country maintain its nuclear deterrent. TVA has performed many tasks beyond the goal of enriching its stockholders. Some of these activities have not been profitable. Some of their decisions have not been good. But, taking the last several decades as a whole, their rates have been lower than the aforementioned private utilities. Who is to say, given the unknowns of clean air requirements and the like, that the results of the next several decades, taken together, will be any different? Making the sort of attack you are presently making against TVA because their rates are slightly higher than their neighbors to the north today seems really short sighted and arbitrary.

As you probably know, TVA was born at the Wilson Dam at Muscle Shoals, Alabama. When Wilson Dam first began producing power, before the creation of TVA, Alabama Power Company owned the only transmission line from the dam. In those days, the War Department, who had responsibility for the dam, had no alternative but to sell the government's power to the private utility at the ridiculously low rate of two-tenths of a cent per kilowatt-hour. Alabama Power, meanwhile, sold that same energy to residents of Florence, Alabama, within stone throwing distance of the dam, for ten cents per kilowatt-hour. They were making a 5000 percent profit! Now this is the sort of rate discrepancy we should all be worried about. That is the outcome we should expect if the balance of competition between public power and private power is upset. The old adage, "history repeats itself," should be the principle guiding all considerations of changes to the electric power industry.

Your recent statements, and some elements of the amendment you are proposing to the deregulation bill, could undermine the competition that customers have enjoyed for decades. The dynamic of competition between the government-owned utilities and the privately owned utilities has made the scenarios mentioned above disappear. However, you seem intent upon weakening one side of the equation. To keep the electric power industry from becoming a mirror of today's Microsoft dominated software industry, and to prevent the return of the price gouging described above, the democratic state must be more powerful than any private concentration of wealth. We need a strong and affirmative government and strong public power systems if we are to preserve our present low-cost power and our republic.

It is true that Franklin Roosevelt and George Norris, the brains behind the creation of TVA, would hardly recognize their "grand experiment" today. In the beginning, the TVA Board was filled with great dreamers, engineers, and public servants intent upon their task of delivering a new technology to a vast region of the country which desperately needed it. At the same time, they recognized their place in the battle against corporate greed and corruption. In the last forty years, much of that vision and determination has been lost, but that is no reason to disband the army. TVA is still vital to the creation of a competitive environment for electric power. Indeed, they could also be a major factor in creating the same sort of success story for the democratization of broadband telecommunications as they created for the democratization of electric power. Attached to this letter is a paper written a few years ago urging them to take up that gauntlet. Unfortunately, they have ignored that opportunity. We can only assume that this is a result of the leadership which has been assigned to TVA in the last several decades and the constant attacks they experience at the hands of Congress and private power companies.

Luckily, you and the Senate can correct both of these problems. You and the rest of the Senate should only confirm the nominations to the TVA Board of persons with the real expertise to lead such an important agency. We urge you to press for a revitalization of TVA and public power instead of further weakening them. In restructuring, press for true competition, the kind we had in the thirties and forties. Do away with all "fences" and prescribed territories. Challenge the private and public utilities to come to the field of battle with fewer rules instead of more. Let customers vote for whom they want to buy power from by giving them free and open access to the market. Make sure that private consolidation, like that which we are seeing in Kentucky with PowerGen taking over LG&E and KU, is not allowed to repeat history by monopolizing the market and setting rates without regard for the actual cost of generation and transmission. Keep a strong and willing army, or a "birch rod in the cupboard" as Franklin Roosevelt called it, in TVA and other public power companies, that is capable of setting the standard, doing battle when necessary, and making sure there is always competition in the electric power and other infrastructure dependent marketplaces.

At the Glasgow Electric Plant Board, we have actual experience with full and open competition. We constructed a municipally owned broadband network more than eleven years ago. We use that network to bring true head-to-head competition to a private cable television operator. We also use that network to make the people of Glasgow among the first in the nation to receive high speed Internet access throughout the community. If you are interested, there is a wealth of information about our project at www.glasgow-ky.com. We believe true full and open competition should be the goal of any effort to restructure the electric power industry. We believe you can play a starring role in creating this new environment.

In Kentucky, thirty cities and towns have decided that they want to operate their own public power systems for the benefit of their citizens. They serve more than one-half million customers. We believe our existence creates the competitive environment which has helped cause the private utilities to lower their rates and improve their services. We also believe that local governments should always have the right to provide services which their citizens ask them to provide. We implore you to consider the wisdom of the people of these thirty communities and join us in preserving and increasing the competition which has benefitted our communities for so many years.

Respectfully,

William J. Ray, P.E.
Superintendent

WJR/sh

Enclosure

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25 RUCTLJ 1 (Cite as: 25 Rutgers Computer & Tech. L.J. 1)

(Posted on Glasgow's Website by Permission of the Author)

Rutgers Computer and Technology Law Journal
1999

A Historical, Economic and Legal Analysis of Municipal Ownership of the Information Highway
by Steven C. Carlson a, aa
Copyright (C) 1999 Rutgers Computer and Technology Law Journal; Steven C. Carlson

  1. Introduction
  2. Local Governments Are Paving the Information Highway
    1. Municipal Broadband Projects
    2. Benefits of Broadband Networks
    1. Better Cable Television, Local Telephone and Internet Service
    2. Improved Efficiency in Electricity Distribution
    3. Longer Lifetimes of Streets
    4. Improved Governance
    5. Magnets for Attracting Business
    6. Summary
  3. Municipalization Is a Response to the Problem of Monopoly
    1. Cable's Monopoly Over the Market for One-Way, Non-Interactive Video Programming Distribution
      1. Direct Broadcast Satellites
      2. Cable Overbuilders
      3. Wireless Cable
      4. Open Video Systems
    2. Lack of Competition in the Market for Two-Way, Interactive Networks
      1. Technical Characteristics of the Information Highway
      2. Failure of Telephone, Satellite and Wireless Cable Companies to Provide Access to the Information Highway
      3. Lack of Incentives in the Cable Industry to Deploy Favored Broadband Technology
    3. Summary
  4. The Emergence of Municipal Broadband Networks Parallels the Rise of Publicly Owned Electric Utilities
  5. Regulatory Effects Attenuate the Efficiency of Regulated Privately Owned Utilities
    1. Inefficiencies from Rate-of-Return Regulation in the Electric Industry and the Relative Efficiency of Municipally Owned Utilities
    2. Municipal Franchise Regulation, Deregulation and Federal Price Caps: Unsatisfactory Solutions to the Problem of Monopoly in the Cable Industry
      1. Municipal Franchise Regulation
      2. Deregulation
      3. Federal Price Regulation
    3. Municipal Ownership of Communications Utilities: A Solution to the Problem of Monopoly
  6. The Internet Is a Public Good That Is Best Provided by Publicly Owned Utilities
  7. Towns Municipalize Their Utilities as a Response to Shirking
  8. State and Federal Laws Diverge in Their Treatment of Municipally Owned Broadband Networks
    1. Federal Constitutional Law
    2. The Telecommunications Act of 1996
    3. State Law
    1. States That Authorize Municipal Creation of Broadband Networks
    2. States That Prohibit Municipalities From Providing Telecommunications Services
    3. States That Adhere to Dillon's Rule
  9. The FCC's Decision: In re Public Utility Commission
    1. Misplaced Reliance on Hunter v. Pittsburgh
    2. A Political Understanding of In re Public Utility Commission
  10. Conclusion
I. Introduction

Years before people spoke of the "information superhighway," a small town in Appalachia created a communications system that is now the envy of today's Silicon Valley. Residents receive cable television, telephone service, and fast Internet service over a single wire. The fiber optic network is not a pilot project for a major telecommunications venture, but an effort by a municipally owned electric utility designed to implement an energy conservation program. Municipalities across the country are now following the model of Glasgow, Kentucky.

Local governments commonly pave streets, supply water and gas, haul trash, and provide electricity. Local governments have now begun providing the next utility: the efficient provision of information through fiber optic networks. These initiatives, undertaken by local governments, have provoked legislative, administrative, and judicial disputes at the state and federal levels. These disputes question the authority of local governments to include communications among the other utilities provided to their citizenry.

This article will attempt to explain why, in an era of privatization, local governments have begun municipalizing communications services. First, municipalization is a trend arising as a response to monopoly in the cable television and local exchange telephony markets. Milton Friedman remarked that natural monopolies produced three evils among which we must choose: private monopoly, public regulation, or public monopoly. Unregulated and regulated private monopolies in the communications industry have been found unpalatable. Municipal utilities are a viable alternative. History shows that municipal utilities have provided electric service with a level of efficiency on par with that of regulated private utilities.

Second, municipal utilities are the best entities to provide broadband services because the Internet is a public good. Private cable operators stand to gain little from upgrading their systems to interactive platforms, as the benefits they gain from Internet provision are limited to access fees. High access fees, however, reduce the utility of the Internet. The Internet is a true public good and its benefits are maximized through fast access and low fees. Publicly owned utilities offer the lowest possible service rates, and so are the best providers of Internet access.

Third, municipally owned utilities may be less prone to shirk than private firms. Federal law has weakened the franchising authority of municipalities, leaving private firms unbeholden to the demands of local communities. Municipalization has emerged first in smaller towns where forces of social coercion render public officials more responsive than absentee private managers.

This article will then address current political and legal conflicts regarding municipal communications utilities. Federal law generally permits and encourages provision of communications services by all prospective market participants. State law, however, increasingly prohibits municipalities from providing communications services. The political process behind the passage of these state laws will be discussed and it will then be argued that the strong preemption language of the Telecommunications Act of 1996 does protect municipally owned telecommunications systems from anti-competitive state laws. Additionally, a recent decision by the Federal Communications Commission ("FCC"), which refused preemption of an anti-competitive state law will be rebutted.

The article will conclude that local governments should provide advanced communications services in the same manner that they provide water, gas, electricity, and sanitation services. Electricity, at the opening of the twentieth century, granted citizens access to new services that reshaped their lives. Now, on the eve of the millennium, fiber optic technology is offering vast new services that, like electricity, will transform local economies and personal lifestyles. State laws that prohibit municipalities from providing communications services are antagonistic to principles of local autonomy and are expressly contrary to federal law. In the words of Franklin Delano Roosevelt, local governments should be able to keep a "birch rod in the cupboard" and be free to establish municipally-owned utilities to correct for the failure of incumbent firms to pave the information highway.1

II. Local Governments Are Paving the Information Highway

Throughout the 1990s Americans have heard politicians, businessmen, and social visionaries promoting the coming of the information superhighway. Vice Presidential candidate Al Gore coined the phrase "the information superhighway," and promised the electorate the creation of a national "infostructure" that would be as critical to the national economy as the interstate highway network that his father helped establish in the 1950s.2 Business leaders are charting the development of a cybercommerce, which is predicted to be worth as much as $150 billion within the next decade,3 while futurists predict that interactive networks will revolutionize democracy, provoking a decentralization of government and a resurgence of Jeffersonian ideals.4 The media have become saturated with news of the information highway, and yet the vast majority of American homes are still served by traditional broadcast or cable TV and "Plain Old Telephone Service" (POTS). Representative Edward J. Markey, Chairman of the House Subcommittee on Telecommunications and Finance, summarized the hype and reality of the information highway by saying: "The good news from Washington is that every single person in Congress supports the concept of an information superhighway. The bad news is that no one has any idea what that means."5

A. Municipal Broadband Projects

The information highway is coming, and some of the first places in the world to have fast and easy access are small towns that have decided to municipalize their communications utilities. [FN21] The New York Times recently reported that a "creeping socialism" has appeared in America, and that local governments have taken the initiative to bring the long-promised "information highway" to their citizens:

In an America where free-enterprise advocates have routed their critics, few people would expect local governments to plunge into competition with the private sector in the fast-evolving information industries. Yet that is what is happening in a growing number of communities.6
Local voters, often in sweeping majorities, have approved bond issues to finance broadband networks. For example, an Alta, Iowa referendum realized an eighty-eight percent voter approval rate.7 In Muscatine, Iowa, ninety-four percent of the voters sanctioned the bond issue.8 Similarly, in Spencer, Iowa, the incumbent cable company out-spent proponents 130-to-1, and voters nonetheless approved the project by a ninety-one percent majority.9 In Coldwater, Michigan, voters first rejected a proposal to issue general obligation bonds to finance a broadband network, but subsequently approved an issue of revenue bonds.10

Municipal broadband networks have begun appearing around the country. The first municipal broadband network was created in 1989 in Glasgow, Kentucky.11 Other cities that have established, or are planning, such networks include Anaheim, California;12 Detroit Lakes, Minnesota;13 Batavia, Illinois;14 Gainsville, Florida;15 Lincoln, Nebraska;16 Newnan, Georgia;17 and Milpitas, California.18

This article will ask three basic questions about municipal communications utilities. First, why do communities want them? Second, can the municipalization of these utilities be justified economically? And third, do communication laws protect these municipal utilities against politically powerful incumbent carriers?

B. Benefits of Broadband Networks

Why would a municipality be interested in establishing broadband networks? Voters approve these initiatives to gain improved cable television, telephony, and Internet access. Other benefits derived from broadband networks include: improving the efficiency of electricity distribution, preserving the lifetime of streets, providing better governance and attracting business.

1. Better Cable Television, Local Telephone and Internet Service: Municipalities can improve the quality of their services by municipalizing communications utilities. Private, incumbent firms permit their physical facilities to deteriorate and their support services to lapse in the absence of competition. In the cities and towns where municipalization has occurred, residents had been complaining of poor cable television reception, programming black-outs, lack of channels, poor response to service calls, and high monthly fees.19 Such rural towns are particularly dependent upon cable lines for communication, as mountains and distance from broadcast centers precludes over-the-air broadcast reception.20 In the rare instances where head-to-head competition exists for communications services, access fees plummet and services improve.21 For example, prior to the creation of the Glasgow municipal broadband network, the incumbent cable operator offered twenty-four channels at $14.25 per month. Upon arrival of competition, the operator began offering forty-five channels at $5.95 per month.22

2. Improved Efficiency in Electricity Distribution: Advanced communications facilities improve the efficiency of electric utilities. The broadband network in Glasgow, for example, was originally designed as a means to promote energy conservation.23 Glasgow's Electric Plant Board reports saving about three kilowatts of peak demand per home since the creation of its communications system.24

3. Longer Lifetimes of Streets: Local governments seek to preserve the quality of their streets by preventing excessive cutting of pavement.25 Cuts dramatically reduce the life of pavement. By establishing a municipally owned broadband network with sufficient capacity, a local government can lease bandwidth to incoming competitors and allow for orderly development of the local infostructure without imposing undue burdens on their streets.

4. Improved Governance: Broadband networks are also a means for local governments to improve the services offered to their citizens. Schools, libraries, and hospitals have obvious needs for improved communications. Other government divisions which would benefit from broadband networks include land use committees,26 police stations,27 fire stations,28 public works,29 and city hall.30

5. Magnets for Attracting Business: Local governments also hope to attract businesses to their communities by creating broadband networks. Many businesses, such as banks and stock brokerage firms, rely on continuous streams of data. Some fiber-optic companies (competitive access providers, or "CAPS") have laid small networks to target these businesses. Piecemeal fiber networks have proven unsatisfactory, as occasional breaks in service interrupt critical data streams. The solution to this problem is to build a fiber-optic loop which permits the uninterrupted flow of data even if one point of the loop is broken. CAPS, which serve only the most lucrative customers, may be unwilling to construct a broader loop connecting other sites. Local governments, seeking to wire schools, libraries, and other services, may be the best entities to lay the fiber loops that attract business.31

6. Summary: There is broad interest in upgrading communications facilities. Residents, existing electric utilities, commercial establishments and local governments themselves can all benefit from the creation of broadband networks. The key question, however, is that if the demand for improved services is real, then why doesn't the private sector step in and provide the services itself? Are there true efficiency gains to be made from municipalizing the information highway? This article argues that there are three normative bases for promoting municipalization of broadband networks: (1) in monopoly markets, public firms are as efficient, or more efficient, than regulated or unregulated private firms; (2) municipal utilities are the best entities to provide Internet access, as the Internet is a true public good whose benefits are maximized by fast, cheap access and; (3) public ownership is superior to private ownership where the lack of competition and franchising oversight leaves private management free to shirk.

III. Municipalization Is a Response to the Problem of Monopoly

Municipalization may be the best response to the problems of monopoly in the communications industry. Economists have long recognized that there is no good solution to contend with monopolies. Milton Friedman, for example, has stated:

When technical conditions make a monopoly the natural outcome of competitive market forces, there are only three alternatives that seem available: private monopoly, public monopoly, or public regulation. All three are bad so we must choose among evils.32
If effective competition is not available in a given market, the choice must be made among the "evils" of private monopoly, public monopoly, or public regulation. Incumbent cable and local telephone companies are monopoly providers of their respective services. Advances in technology have promised to break these monopolies, but have failed to give rise to effective competition that would alleviate the need to choose among Friedman's three "evils." As long as monopoly conditions persist, public monopoly is as viable an ownership model as the "evils" of regulated or unregulated private firms.

This section of the article will explain the persistence of monopoly in the cable industry. Cable lines are the critical infrastructure for the growth of the information highway because they have sufficient bandwidth to provide the full range of services promised by the digital age. Monopoly in the telephone industry will not be discussed because telephone wires lack broad bandwidth. Instead, the focus will be on emerging technologies that have promised to offer competition to the cable industry in markets for non-interactive and interactive video services. The first considered will be technologies that have attempted to rival the cable industry in distribution of one-way, non- interactive video programming. Secondly, the present technologies that promise development of two-way, interactive communications networks will be considered. This section of the article will conclude that these rival technologies have been unsuccessful in competing with cable, for reasons involving technology, finance, and politics. The dominance of the cable industry over the one-way, non-interactive video distribution market is particularly detrimental to the public interest because it insulates the cable industry from competitive forces that would compel the upgrading of its plant to offer two-way, interactive networks. Municipalities that desire development of the information highway should not wait for it to be paved by the cable industry, because the industry has no incentive to do so.

A. Cable's Monopoly Over the Market for One-Way, Non-Interactive Video Programming Distribution

Terrestrial cable companies dominate the market for multichannel video programming distribution. Of those homes that receive more than over- the-air broadcast television, eighty-seven percent subscribe to cable.33 Over sixty-four million homes subscribe to cable nationwide.34 Cable has survived the challenge of rival technologies in the video distribution market. The following are the main sources of competition to cable, as well as the reasons for the liability in breaking the monopoly enjoyed by the cable over the market for one-way, non-interactive video programming distribution.

1. Direct Broadcast Satellites: Direct broadcast satellite services are viewed as the best source of competition for cable. Two direct broadcast satellite ("DBS") firms, EchoStar and DirecTV, offer transmission of hundreds of channels of digital-quality video programming to owners of fourteen-inch receiving dishes. DBS service has become increasingly popular, serving approximately 5.5 million subscribers.35 DBS services, however, face numerous difficulties that limit its viability as competitors to cable. First, DBS service is expensive. Second, technical and legal constraints prevent DBS providers from carrying local programming.36 Third, the cable industry helped block a key merger between a DBS firm and Rupert Murdoch's News Corp. that would have strengthened the competitive edge of the satellite industry.37 2. Cable Overbuilders: Some cable markets permit duplicative competition. New entrants have overbuilt the systems of incumbent providers in over eighty markets, however, the vast majority of cable markets have not supported competition.38

3. Wireless Cable: Wireless cable offers an attractive alternative to traditional cable industries. No wires need to be extended to individual homes, and no franchises need to be obtained from local governments for use of rights of way. This technology is formally known as multichannel multipoint distribution service ("MMDS"). MMDS employs transmitters that can be affixed to existing utility or street light poles, beaming signals straight to the home. MMDS has a primary limitation in that it requires "line-of- sight" vision that restricts its utility in neighborhoods with many trees. Phone companies such as Bell Atlantic, NYNEX, and PacTel, which had invested heavily in wireless systems, suspended their programs in 1996.39

4. Open Video Systems: The Telecommunications Act of 1996, opened the way for telephone companies to construct their own cable networks. The open video system ("OVS") provisions encouraged the entry of telephone firms into the video market by lifting various regulations, including common carrier obligations. However, telephone companies have not pursued this option. OVS systems have been built in only a handful of markets.40

B. Lack of Competition in the Market for Two-Way, Interactive Networks

The cable industry alone has the favored technology to develop two-way, interactive broadband networks. Current communications networks--cable and telephone wires--lack the combination of switching capacity and broad bandwidth that are necessary to permit the growth of the information superhighway. Cable companies can deploy what many experts consider to be the best technology for broadband networks--cable modem technology.41 Despite the potential benefits of cable modems, cable operators lack incentive to develop this technology. This Section will discuss briefly some technical aspects of broadband networks, and then consider technologies that have promise to spur development of the information highway. After demonstrating that the other technologies fail to rival the cable industry, it will be asserted that the cable industry lacks incentives to deploy its favored technology. Municipalities wanting to promote development of the information highway should not wait for the cable industry to provide this resource.

1. Technical Characteristics of the Information Highway

As a preliminary matter, this discussion requires a brief technical description of the information highway. The telecommunications community refers to the information superhighway as "broadband networks."42 Broadband networks are characterized by the convergence of three primary services: voice, data, and video. These three services can be carried on the same wire if the network architecture has two primary components: switching capacity and broad bandwidth. Briefly stated, telephone wires have switching capacity, but lack broad bandwidth;43 cable wires, by contrast, have broad bandwidth but lack switching capacity.44 The challenge for the information superhighway is in combining the switching capacity of telephone service with the broad bandwidth of cable systems. These features must be present not only in the trunk lines of the networks, but must also be continuous to the home. The final segment of the networks--the "last mile" to the home--is the most costly to lay.

2. Failure of Telephone, Satellite and Wireless Cable Companies to Provide Access to the Information Highway

Various industries have sought to provide competitive access to the information highway, but the technologies have been slow to emerge. This Section will review some of the most promising means for bringing competition to Internet access.

Cable/Telco Mergers: In the early 1990's,45 cable operators and telephone companies first proposed the integration of their systems.46 The mergers collapsed when increased cable rate regulation reduced the cable industry's profits, and the phone companies' inspections of cable facilities revealed the high costs of system upgrades.47 Similarly, a 1998 proposal between AT&T and TCI met with shareholder resistance.48

Telco Initiatives: The telephone industry is pursuing unilateral ways to improve its transmission capacity. It has developed technologies called Integrated Services Digital Network ("ISDN") and Asymmetric Digital Subscriber Line ("ADSL"). These technologies are favorable from the standpoint of the telephone companies because the companies need only make improvements at central switching facilities and at the customer's site. The technologies are unlikely to gain wide acceptance, however, because their transmission speeds are too slow. Video, for example, cannot be transmitted in real time over either technology.49

Wireless Cable: Wireless cable offers an attractive alternative to traditional cable for the provision of broadband networks. However, the technology requires line-of-sight transmission. Prominent investors have pulled out of this technology.50

Low Earth Orbit Satellites: The satellite industry is planning to provide advanced telecommunications services through low earth orbit ("LEO") satellites. Companies such as Teledesic and Iridium are currently developing fleets of several hundred satellites that will hover in geostationary orbits at relatively low altitudes to provide world-wide telephone and Internet service.51 The LEO initiatives suffer from fundamental drawbacks because the portable receivers will be large and expensive,52 and because the satellites themselves are an unknown technology.53

3. Lack of Incentives in the Cable Industry to Deploy Favored Broadband Technology

Cable companies are pursuing what many experts consider the favored technology for broadband networks--cable modem service.54 Cable modems are modems that operate over cable lines rather than telephone lines. This not only affords fast access, but it also gives the consumer uninterrupted access to the Internet without tying up the telephone line. Despite the potential benefit of cable modem technology, cable operators have been slow in developing this technology. There are three primary reasons for this: 1) upgrades are expensive; 2) cable operators may have little direct interest in upgrading their systems; and 3) little competition is compelling an upgrade.

Cable upgrades are expensive. Two main developments are present in an upgrade. First, cable operators have devised a way of reversing the flow of a portion of the data stream. This allows users to send signals "upstream" to a central facility, which then sends "downstream" the requested movies, Internet sites, or voice conversation. Second, cable companies have developed the switching capacity that makes this interactivity possible. This is extremely costly for two reasons: 1) the actual wires to the home need to be replaced; and 2) the network architecture needs to be reconfigured. Cable companies can only justify the costs for this network transformation in a handful of lucrative markets where they predict high consumer demand for advanced telecommunications services.55

However, cable companies lack incentives to provide Internet access. Cable operators earn revenue from the programs they carry, either through advertising revenue generated from cable-owned programs, or through carriage fees imposed upon independent programmers.56 Competition from Internet-based programming will drive down the advertising revenues and carriage fees that cable operators reap from existing programming.57 Notwithstanding access fees, cable operators may gain little from Internet provision.58 Although cable wires offer the best network technology for the provision of information services, it remains unclear whether cable companies have an interest in providing access to the Internet.

Cable companies also resist incurring the costs to upgrade their systems because they are not subject to effective competition. If rival communications firms could better challenge cable's dominance of the one-way, non-interactive programming distribution market, cable operators would be compelled to offer two-way services as an additional feature to secure customers. The telephone companies, satellite firms, and cable over-builders have failed to challenge cable's dominance. Absent strong competition, and absent independent incentives to upgrade networks, it is unclear what market forces will compel cable operators to deploy broadband networks.

C. Summary

The cable industry maintains a monopoly over the distribution of video programming. Rival technologies have failed to break cable's dominance in the market for one-way, non-interactive video services, and have yet to offer a practical means of providing two-way, interactive services. The cable industry has been successful in suppressing the emergence of new technologies, and Congress has failed to stimulate competition in the communications market through regulatory incentives in the Telecommunications Act of 1996. No viable sources of competition have emerged that seriously challenge incumbent communications carriers. Local telephony and multichannel video programming distribution will likely remain monopoly industries for the foreseeable future. These monopolies are particularly detrimental to the public interest because they suppress development of the information highway.

IV. The Emergence of Municipal Broadband Networks Parallels the Rise of Publicly Owned Electric Utilities

If communications utilities are natural monopolies, then what is the best way to contend with them? As Milton Friedman asked, which of the "three evils"-- private monopoly, public monopoly, or public regulation--must we choose? The answer to this question in the cable industry is informed by analogy to the electric industry. The electric industry is particularly relevant because of the broad proliferation of municipally owned electric utilities. As with broadband networks, municipal ownership of electric utilities began in smaller towns. Like the Internet, electricity first emerged as a novelty. Electricity soon grew from an innovation to a commodity, and towns refused to endure the abuses of private monopoly. By the early 1900s, some of the largest markets in the country had established publicly owned electric utilities. Municipalization, having begun in small towns, became one of the top political issues of the century. Debate raged over whether this new technology should be exploited by capitalist "robber barons" or seized by government-seated "Bolsheviks." Technological and regulatory changes have since diminished the prominence of publicly owned electric utilities, but their past popularity and their continued economic viability attest to the practicability of employing publicly owned utilities as a solution to the problem of monopoly. This section will draw a parallel between the currently-observable trend of municipalization in the communications industry and the history of municipalization in electricity.

What were the reasons for municipalization of electricity? Municipally owned electric utilities began in small towns that presumably could not attract private investors.59 Municipal utilities were particularly common in cities of 5,000 residents or less.60 The higher incidence of municipal ownership of electric utilities, in small communities, does not necessarily indicate that local governments were the preferred providers of electricity. Rather, citizens may have been forced to choose between municipal power or no power at all.61 Municipal utilities, therefore, filled a void and brought electricity to communities that would have otherwise been left "in the dark."

Municipal ownership of electric utilities flourished in the late nineteenth and early twentieth centuries. In every year from 1894 to 1925, fifty or more new public utilities were formed.62 In 1912, municipal utilities constituted thirty-two percent of the total number of power facilities in operation.63 At the peak of public power in 1923, public utilities were found in 3,083 municipalities.64 The continuous rise in the number of public utilities over thirty-one consecutive years attests to the support these utilities enjoyed from the local voters.

Municipalization then spread from small towns to big cities. Electricity had grown from a novelty to a necessity, and the market evolved from competition to monopoly. Citizens and political leaders were already sensitized to the practices of other monopoly industries, notably the railroads, and they anticipated the chokehold that electricity robber barons would exert over customer communities. Municipalization, once a response to the absence of private capital, became a solution to the problem of monopoly. Every year from the turn of the century through the early 1920s, dozens of municipalities bore the cost of eminent domain to acquire private electric companies.65

In one case, the City of Detroit acquired the Detroit Electric Light and Power ("DELP"). Detroit's mayor, Hazen Pingree, had recently been elected promising to create a city-owned power system. After violent competition between two private companies culminated in a merger that threatened to subject Detroit to a monopoly provider, citizens approved Pingree's proposal for a municipally owned utility by a vote of 15,282 to 1,745.66 "True to [Pingree's] calculations, the cost of street lighting in Detroit declined from $132 a lamp per year in 1894 to $87 per lamp under municipal ownership in 1898 and to $63 by 1902."67 DELP's general manager, William H. Fitzgerald, projected the impact of Detroit's municipal utility on other cities: "'If the city were to do its own lighting at about half what other companies bid, it would establish a bad precedent, . . . and other cities that are now lighted by companies owned by the General Electric Company would be apt to follow Detroit's example."'68

The City of Cleveland also acquired its local power company, the Cleveland Electric Light Company ("CELC"). CELC, which had begun as a small private illuminating company, had since been acquired by J.P. Morgan's company, General Electric. Voters approved the City's takeover of CELC, despite Morgan's attempt to derail the referendum. Morgan also tried to stop the city's efforts to raise money for construction of a large electric plant. The City of Cleveland succeeded in raising the capital and, in 1914, was able to provide power at the rate of three cents per kilowatt hour, in contrast to CELC's prior rate of ten cents per kilowatt hour.69

The excitement over municipalization filtered up to the presidential campaign of 1932. Candidate Franklin Delano Roosevelt proclaimed:

[W]here a community, or a city, or a county, or a district, is not satisfied with the service rendered or the rates charged by the private utility, it has the undeniable right as one of its functions of government . . . to set up . . . its own governmentally owned and operated service . . . [T]he very fact that a community can, by vote of the electorate, create a yardstick of its own, will, in most cases, guarantee good service and low rates to the population. I might call the right of the people to own and operate their own utility a 'birch rod in the cupboard,' to be taken out and used only when the child gets beyond the point where more scolding does any good.70
The prominence of municipal power has since diminished, largely for two reasons. The advent of alternating current favored the growth of large, centralized generating plants. Municipalities did not have the economies of scale to compete with these plants, and many divested.71 The rise of state public utility commissions also provided consumers with assurance that private utilities offered fair rates, which diminished the political appeal of publicly owned power.

The degree of the historical debate over electric utility municipalization is remarkable when compared with the relative silence today over municipalization of fiber-optic networks. As with electricity the Internet may become a utility that the public demands to be provided publicly. This trend has been documented in smaller towns, and may accelerate to larger cities if it can be shown that public communications utilities can provide better service than private providers.

V. Regulatory Effects Attenuate the Efficiency of Regulated Privately Owned Utilities

Municipally-owned utilities perform cost-efficiently relative to regulated private firms due to the efficiency-distorting effects of regulation. This phenomenon has been noted in the electric industry and is also present in the cable television industry. Private electric utilities have, until very recently, been governed by rate-of-return regulation. Cable operators have been controlled by municipal franchise regulation and federal price regulation, and have also been granted deregulation. These four methods of dealing with the problem of monopoly all produce inefficiencies in private utility provision.

A. Inefficiencies from Rate-of-Return Regulation in the Electric Industry, and the Relative Efficiency of Municipally Owned Utilities

In the electric industry, regulation reduces the efficiency of private firms for two primary reasons. First, rate-of-return regulation allows private utilities to inflate their cost bases.72 Second, regulatory bodies cannot define true market prices and compel adherence to them.73 State regulatory commissions grant utilities the quid of legal monopoly without exacting the quo of effective price controls. Regulation insulates utilities from the buffeting forces of competition and assures them of profits.

As a result of the distortive effects of regulation, municipally owned utilities perform on par with their regulated private counterparts. There are many aspects of electricity provision, some at which municipally owned utilities excel, and some at which privately owned utilities are better. Municipally owned utilities offer lower average rates than do their private counterparts.74 Public firms are often more efficient at distributing utility services than are private firms.75 Private firms tend to over invest in capital due to the distorted effects of regulation.76 Conversely, private firms are generally more effective at minimizing their internal costs than are public firms.77 Overall, publicly owned firms have been found to perform as efficiently, or more efficiently, than regulated private firms. Studies that most strongly advocate a preference of private industry attribute only a modest advantage to private utilities.78 The bulk of the studies comparing private and public utilities indicate either that no significant discrepancy exists between the two ownership models or that there is a substantial gain in efficiency through public ownership.79

These findings show that rate-of-return regulation distorts the competitive advantages of electric utilities. Analogous distortions are also present in the cable industry. Although the methods of regulation in the cable industry are different, all forms of regulation create undesirable incentives that distort the behavior of private firms, rendering them inefficient.

B. Municipal Franchise Regulation, Deregulation and Federal Price Caps: Unsatisfactory Solutions to the Problem of Monopoly in the Cable Industry

Government policy towards the cable industry has experimented with municipal franchise regulation, deregulation, and federal price regulation. All three potential solutions have yielded unsatisfactory results. The current regulatory regime is now in flux, as the 1999 statutory date for deregulation is being challenged by the FCC and members of Congress.80 Federal and local regulators have been unable to settle on a choice between the different forms of public regulation and the alternative of deregulation. Little attention, however, has been given to Milton Friedman's "third evil" of public ownership. This next section will give an overview of the approaches that have been adopted for regulating cable television and show that none have succeeded in promoting the efficient distribution of video services. Municipal ownership, I will conclude, is a better option.

1. Municipal Franchise Regulation

Municipal franchise regulation was the original form of regulation applied to the cable television industry. Today, municipal franchise regulation governs only the basic tier of cable services.81 The efficacy of the franchise auction model is undermined by three factors: high transaction costs of ownership transfer, clustering of the cable industry, and preemption of franchising authorities by federal law.

Franchise auctions are best applied to markets that are not capital-intensive. Airwaves, for example, can be auctioned efficiently. Given an adequate number of bidders and freedom from collusion between them, the competitive bidding process forces prices down to levels obtainable in competitive markets. The only government regulation of airwave franchisees is regulation of the franchise process itself. The franchise auction model receives strong support from notable law and economics scholars.82

In capital-intensive industries high sunk costs restrict the fluidity of the franchise auction process.83 When franchises are not renewed, owners of cable systems must transfer control of facilities to the auction winner. High transaction costs, for both physical and human capital, limit the feasibility of such transfers. Furthermore, owners of capital-intensive franchises will overprice services in new markets if they do not have the assurance of a long-term contract to amortize sunk costs. Long-term contracts grant the operator wide latitude in deviating from the original terms of the contract in response to changing market conditions and unfulfilled predictions. Contract enforcement is problematic due to high expenses, transaction costs, and the unwillingness of municipal regulators to publicize difficulties in the franchising process.84 Given the problems of contracting in capital-intensive industries, the model of franchise auctions advocated by law and economics scholars soon collapses into the very sort of blow-by-blow municipal regulation that they denounce.85

Clustering of the cable market further limits the utility of franchise auctions. As the cable market matures, larger firms continue to acquire smaller operators and to form contiguous regions of market dominance.86 Little competition survives within the clusters. The cable industry is following the trend of the early electric industry toward oligopoly, with each major company respecting the others' markets. Without an adequate number of bidders, the franchise auction model cannot succeed.

Federal law also weakens the efficacy of franchise auctions by preempting the franchising authority of local governments. The Cable Act of 1984 and subsequent rule making preempted local franchising authorities from imposing rate regulations in markets with "effective competition."87 The Cable Act of 1992 further removed rate regulation from the domain of local officials by granting the FCC exclusive jurisdiction over all but the bottom tier of programming.88 Communications legislation has recognized the authority of local governments to impose quality controls on cable franchisees, but the courts have construed the law to limit the substantive demands of franchising authorities.89 Local franchising authorities are left with little authority to compel quality service and to restrict opportunistic behavior.90

2. Deregulation

Recent years have shown that deregulation is an undesirable solution to the monopoly problem. Congress deregulated the cable industry from 1986 to 1992. This six-year experiment revealed the monopolistic nature of the cable market. During this period, cable rates increased at triple the rate of inflation.91 The economic rents enjoyed by the cable industry during the period of deregulation indicate that the industry is a prime candidate for regulation. The popular discontent with cable deregulation was such that the 1992 Cable Act which re-regulated cable was the only bill enacted during the Bush Administration over the President's veto.92 The Telecommunications Act of 1996 mandates deregulation of the cable industry by March 31, 1999.93 This statutory repeal date is now being challenged by the FCC and by members of Congress due to the failure of technology to produce effective competition in the market for video programming distribution.94

3. Federal Price Regulation

The cable industry was re-regulated under the Cable Act of 1992. Economists have generally lambasted the price caps imposed on cable television by Congress and the FCC. In 1993, the FCC instituted a 10% rate roll-back, and prices actually increased.95 The FCC has since initiated a quiet retreat from its roll-back schedule.96 Congress has mandated termination of the policy by 1999.

The first damaging effect of the FCC's price regulation has been a drop in quality of the regulated product and the concomitant restructuring of the industry into unregulated areas.97 Cable operators shifted premium shows to unregulated pay-per-view channels.98 Although industry-wide rate regulation eliminates inefficiencies of regulating cable operators on a case-by-case basis, it provokes a restructuring of the market which overall impairs the market.99

The second detrimental effect of rate regulation in the cable industry is the fostering of an oligopoly. Competition has suffered in the cable industry as a result of rate regulation, and price regulation promotes collusion among members of a regulated industry.100 The cable industry is presently going through a phase of clustering, with fewer and fewer competitors available to bid on franchise renewals.101 Cable operators frequently "swap" markets in order to concentrate their dominance in certain markets.102 Although clustering can be seen as a method of streamlining management and achieving efficiencies in scale, it can also fence off regional markets from competitive entry. William Ray, the Director of the Glasgow, Kentucky, Electric Plant Board put it this way: "There is an unspoken treaty among all cable operators. They do not tread on the territory of one of their brethren. Towns seldom, if ever, have a choice [between operators]."103

C. Municipal Ownership of Communications Utilities: A Solution to the Problem of Monopoly

Recent history shows that private cable operators have not provided cost effective service. Neither municipal franchise regulation, deregulation, nor price cap regulation are satisfactory solutions to the problem of monopoly. Where public regulation and private monopoly fail, perhaps Milton Friedman's "third evil" of public monopoly is the option that yields the most effective solution. As noted above, public ownership has been a cost- effective solution in the electric power industry. Today, municipalization has re-emerged as the best form of ownership of the information highway.

Landslide electoral mandates for municipalization buttress the claim that broadband networks should be publicly owned. In Iowa, as previously discussed, super-majorities of ninety percent have often ratified municipalization proposals.104 America's laboratories of democracy are also laboratories of regulation. In the face of failed regulatory and deregulatory programs, local ownership is emerging as a preferred solution to the problem of monopoly. Considerations of public goods economics and notions of public duty also contribute to the notion that municipalization is the best model of ownership for the information highway.

VI. The Internet Is a Public Good That Is Best Provided by Municipal Utilities

Economically, local governments are the best entities to provide broadband services because the Internet is a public good. Public goods are goods that are nonrival in consumption--once the good is provided, the additional resource cost of another person consuming the good is zero.105 The classic public good is the lighthouse. One ship's "consumption" of a lighthouse's light does not diminish the ability of a second ship to use the same light.

Some public goods are best provided by private firms. Ronald Coase discussed the idea that even the classic public good--the lighthouse--should be privately provided.106 Coase revealed that historically private industry had erected lighthouses and financed their construction and operation through "light dues" collected from ships using the service. Private incentives, he argued, spurred the lighthouse industry to produce a higher quality of light than would have been provided by government.107 The Internet, however, is technologically distinct from the lighthouse light for two primary reasons: 1) the value of the commodity increases with the number of users--the quality of the "light" increases as more people rely on it; and 2) the organization that provides the service only provides access and does not determine the quality of the commodity provided.

The vitality of the Internet increases as more users rely upon its services. Internet users are both suppliers and consumers of network services.108 Access problems--slowness, busy signals, service interruptions--currently stunt the growth of the Internet. All potential users benefit from widespread, cheap, reliable, and fast access. Internet access providers benefits are limited to access fees. As access providers raise fees maximizing their own profits, fewer individuals will choose to rely on the Internet.109 Positive externalities, which confer a benefit, decrease. Thus, because publicly-owned utilities offer the lowest possible user fees,110 they are the best providers of Internet access.

Furthermore, Internet providers generally add no value to the service. Ronald Coase noted that private firms were better suited to manage the lighthouse industry because they were able to provide a higher quality of light--through entrepreneurial lightbuilding and responsive service--than government.111 Internet providers, however, add little value to the public good. A provider, for example, might create an innovative interface which allows easy access to news, stock quotes and chat rooms. Even so, the underlying content is unaffected by the identity of the provider. The purported benefits of private provision of other utility services do not equally apply to the Internet. Because the quality of Internet content cannot be improved by the provider, the best provider is the one which can provide cheap, reliable and fast access. Thus, government is the best provider.

VII. Towns Municipalize Their Utilities as a Response to Shirking

Towns municipalize their communications services as a response to shirking and other opportunistic behavior by private utilities. Federal law has weakened the municipal franchising process to the point that private cable companies are left unbeholden to the local community,112 with few restraints on shirking and other opportunistic behavior.113 The phenomenon of municipalization first arose in smaller towns, which are the most inclined to respond collectively to breaches of service. Certain geographic regions have an especially strong penchant for promoting municipal ownership.

The form of ownership adopted by any enterprise is determined by the transaction costs of managing that enterprise; chief among these transaction costs is the problem of shirking.114 Municipal ownership can minimize problems of shirking. In competitive markets, the property rights structure of the firm makes private enterprise a superior ownership model to public ownership. Managers of private companies have little incentive to shirk when their personal stake in the firm may be jeopardized by poor performance. This reasoning breaks down, however, in the case of monopoly, and particularly in the smaller towns where municipalization first emerged. In places like Hawarden, Iowa, where the incumbent cable operator faces no effective competition from rival firms, where FCC rate regulation leaves the operator unbeholden to the local officials, and where the management has little face-to-face contact with its clients, it is unclear that the needs of the community will be met by private management. Private management has ample latitude to shirk.

In contrast, public management is constrained from opportunistic behavior by the forces of social coercion, particularly in the smaller towns where municipalization has occurred.115 Feelings may run high in rural America about the quality of video distribution, especially when poor reception compromises key programming. Public officials responsible for television reception may become vulnerable social targets when they neglect to ensure quality service. Prestige may adhere to the post for those who perform well.116

Certain regions have a history of public response to problems of monopoly. The Northeast and Midwest have long been centers of collective action against investor-owned electric utilities. Public power systems continue to be especially concentrated in Massachusetts, Vermont, Ohio, Indiana, Kansas, Nebraska, Iowa, and Minnesota.117 Many of these states were also centers of the Grange movement in the 1870's, when farmers collectivized to counter the abuses of the railroad industry.118

Some regions may be more prone than others to advocate municipalization as a solution to the problem of monopoly. These are laboratories of democracy. The municipalization of electricity also began in small towns, and spread to cities in response to the abuses of monopoly. As the Internet grows to be an essential utility, larger markets may resist monopoly domination of broadband networks. Already, mid-sized cities like Anaheim, California are creating publicly owned broadband networks.119 As in the age of electrification, the question of municipalization may grow from a small-town referendum to a national debate.

The preceding discussion has stated three reasons why municipally-owned communications utilities are preferable to private utilities: (a) regulatory effects attenuate the efficiency-maximizing incentives of private ownership, such that public firms operate as efficiently as, or more efficiently than, private firms; (b) the Internet is a true public good, distinct from Coase's lighthouse, which is best provided by government with its lower access fees; and (c) the binding force of social norms assists the rise of municipal ownership in smaller towns. This suggests that not only are towns like Glasgow justified in establishing their public communications utilities, but also that municipalization may spread to major markets. Political and legal concerns have surfaced, however, that threaten the ability of municipalities to provide these services.

VIII. State and Federal Laws Diverge in Their Treatment of Municipally-Owned Broadband Networks

Is it lawful for municipal utilities to construct broadband networks? Federal and state laws provide conflicting answers to this question. The Telecommunications Act of 1996 opens local communications markets to competition by all potential competitors, including municipal utilities. Cable and local telephone lobbies, however, are succeeding in opposing the mandate of federal law by promoting anti-competitive laws at the state level that prohibit municipalities from providing communications services. Imbalances exist in the political process of many state legislatures which were absent in the enactment of the Telecommunications Act of 1996. These imbalances have permitted local cable and telephony lobbies to foreclose municipal utilities from the telecommunications market. Congress created mechanisms to protect municipal utilities from anti-competitive state laws, but political concerns have constrained the federal government from exercising this power.

A. Federal Constitutional Law

Federal law broadly permits local governments to provide utilities on a competitive basis. Private companies have long protested the effects of government competition, and have brought federal actions for violations of due process,120 equal protection,121 antitrust laws,122 and the First Amendment.123 The courts have afforded local governments wide latitude in providing utility services, but have indicated that local governments can incur liability for due process124 and antitrust125 violations for overly aggressive competition with private providers.

B. The Telecommunications Act of 1996

Congress passed the Telecommunications Act of 1996 ("the Act") to establish a pro-competitive telecommunications policy that would allow all potential competitors, including public utilities, to enter local cable and telephone markets. Congress passed the Act with huge majorities in both houses, signaling a compromise among all the major lobbying interests.126 The Regional Bell Operating Companies ("RBOCs") and other incumbent local exchange carriers ("ILECs"), however, resisted the proposal to open their markets to competition, and demanded concessions from Congress before they would consent to the legislation. Congress proposed a quid pro quo in order to facilitate passage of the statute. The quid that Congress granted in return for the quo of local competition was that the ILECs would receive the right to operate under substantially less regulation, the right to enter into vast new geographic and product markets (including long distance, equipment manufacturing, and cable television), and the right to form strategic partnerships and other business relationships that had been previously foreclosed to them.

On Capitol Hill, the ILECs submitted to laws that opened local communications markets to all potential competitors. The ILECs wanted to secure Congressional approval of their entry into other product markets, and so they needed to give Congress an unconditional promise to open their local markets to competition. The ILECs thus submitted to very broad pro-competitive language in the Telecommunications Act. Through the Act's passage, the ILECs obtained federal approval of their entry into other lucrative markets.

Congress recognized that the ILECs could poison the compromise once the Act had passed. The legislators anticipated the legal barriers that the ILECs might erect at the state level in order to restrain competition. Congress therefore endowed the FCC with broad authority--and compelled its exercise--to preempt state and local laws that restrict competition. Section 253(a) of the Act provides:

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.127
Subsection (d) continues:
If, after notice and an opportunity for public comment, the Commission determines that a State or local government has permitted or imposed any statute, regulation, or legal requirement that violates subsection (a) or (b), the Commission shall preempt the enforcement of such statute, regulation, or legal requirement to the extent necessary to correct such violation or inconsistency.128
Congress gave teeth to the provision by mandating its enforcement129 and by protecting any entity seeking to provide telecommunications services. The provision applies to any laws that have the effect of prohibiting competition. Whether the phrase any entity covers municipally-owned utilities is presently a focus of debate. Although the FCC recently ruled that the phrase does not extend to municipally-owned utilities,130 a close reading of the Act suggests that Congress did intend for municipally-owned electric utilities to be covered by the Act's preemption provision.131 This result was reached by a state court.132 The appeal of the FCC's ruling to determine the scope of the preemption language is pending before the D.C. Circuit.

The question of whether the preemption provision of the Telecommunications Act covers municipally-owned utilities will largely determine the ability of municipalities to create broadband networks.

C. State Law

States have diverged in their willingness to permit municipalities to construct broadband networks. Three states have expressly authorized municipalities to own and operate telecommunications utilities. Six states have passed, or are considering, legislation to prohibit municipalities from providing telecommunications services. Other states are governed by general rules--Dillon's Rule--that hold municipalities to affirmative grants of power. These states in effect have prohibited municipalities from providing telecommunications services by withholding express permission to provide these services. This section of the article will suggest why some states have empowered municipalities to provide telecommunications services, while others have sought to restrict their authority. Furthermore, it will distinguish between the two restrictions on municipal authority under state law--anti-competitive statutes and Dillon's Rule. A conclusion is reached that the first set of restrictions on municipal autonomy - the passage of anti-competitive legislation--is preempted by the Telecommunications Act of 1996. However, the second set of restrictions--the absence of express authority in Dillon's Rule states--constitutes a fundamental tenet of state sovereignty, and is beyond the preemptive scope of the Telecommunications Act of 1996.

1. States That Authorize Municipal Creation of Broadband Networks

The states that have enacted laws which expressly authorize municipalities to provide telecommunications services are Iowa, Minnesota and Georgia.

Iowa. The State of Iowa has endeavored to create a telecommunications backbone that will connect schools to the Internet. The original project mandated by the legislature was to connect one school per district to the network. Cities have pressured the legislature to facilitate broader connectivity to the network. The state legislature passed a telecommunications law that authorizes municipal utilities to provide this service.133 The telecommunications law creates an exception to an earlier, general law in Iowa that government entities cannot compete with private businesses.134

A second reason behind the passage of the telecommunications law was that many existing municipal cable systems needed upgrading. Many Iowa towns had installed municipally-owned cable systems in the 1980s when private companies refused to invest in those communities. These cable systems are now in need of upgrades. In order to facilitate the issuance of bonds to finance the upgrades, the towns lobbied for express statutory authority to provide telecommunications services over the rebuilt network.135

Georgia. The State of Georgia is pursuing the nation's most far-reaching effort at creating a publicly-backed state-wide fiber-optic network that unites the fiber distribution systems of individual municipalities.136 Georgia specifically authorized its local governments to provide telecommunications services.137

Minnesota. Cities in Minnesota are now creating broadband networks.138 The legislature has permitted municipalities to provide telecommunications services since 1991.139 The law does require a 65% supermajority voter approval. The Minnesota legislature did not pass a bill promoted in the 1998 legislative session to repeal the supermajority requirement.140

2. States that Expressly Prohibit Municipalities from Providing Telecommunications Services

Several states have enacted laws, or are currently considering bills, that prohibit municipalities from providing communications services. These laws are the result of a lobbying imbalance in the state legislative process and should be preempted under the Telecommunications Act of 1996.

Incumbent communications lobbies have fewer restraints on their lobbying interests at the state level than at the federal level. The incumbent providers from the cable and local telephony industries, naturally, want to protect their market share from competition. As noted above, in order to secure the lifting of federal regulations and acquire the permission to enter new product markets, incumbents consented to broad pro-competitive statutory language. At the state level, however, the ILECs are not faced with the same pressures to consent to competition. They have the influence to close their markets to any competitors whose lobbies at the state level are not strong enough to ensure the maintenance of a competitive regime.141 Municipal utilities, for example, do not have the political posture to withstand the lobbying pressures of the ILECs. Municipal utilities are represented at the state level by their state municipal leagues. These municipal leagues have varying political influence from state to state, and they have full legislative agendas that cannot always accommodate the lobbying interests of municipal utilities. Thus, the incumbent cable and telephony lobbies are able to prevail over the interests of municipal utilities, despite the viability of municipal utilities as sources of competition in the communications market. The following are some laws that have been passed or are being considered at the state level that prohibit municipalities from providing telecommunications services.

Missouri: Missouri law provides that no political subdivision of the state shall provide or offer for sale, either to the public or to a telecommunications provider, a telecommunications service or telecommunications facility used to provide a telecommunications service.142

Nevada: The Nevada legislature enacted a law in 1997 that prohibits cities whose population is 25,000 or more from selling telecommunications services to the public.143

Tennessee: Current law provides that no entity of local government shall have the authority to operate a cable system, to provide pager service, or to operate as an Internet service provider.144 A bill is currently pending that would prohibit the provision of telecommunication services by municipalities unless they adopt for-profit accounting procedures.145

Texas: Texas law provides that a municipality or municipal electric system may not offer for sale to the public, either directly or through a telecommunications provider, services, such as telecommunications, for which a certificate of convenience and necessity is required.146

Virginia: A bill was adopted by the Virginia legislature that will prohibit any local government from offering telecommunications equipment, infrastructure, or services for sale or lease.147 The bill shows the caprice of the state legislative process by exempting from its provisions any town "which is located adjacent to Exit 17 on Interstate 81."148

These state laws single out telecommunications as a service barred from provision by municipalities. The laws, on their face, prohibit, or have the effect of prohibiting, municipal entities from providing telecommunications services. By the provisions of the Telecommunications Act of 1996, the FCC should be compelled to preempt these state laws.

3. States that Adhere to Dillon's Rule

Some states prohibit municipalities from providing telecommunications service through judicially-created rules imposing limits on powers of political subdivisions. These states follow Dillon's Rule, which states that municipalities do not have the authority to engage in a project unless the authority is expressly granted by the state legislature. Restrictions on municipalities in Dillon's Rule states arise from the absence of legislative action, and not from an affirmative prohibition on municipal activity. Dillon's Rule restrictions on municipal authority to engage in communications projects are beyond the preemptive reach of the Telecommunications Act of 1996. States observing Dillon's Rule are thus free to prohibit municipalities from providing telecommunications services simply through legislative inaction.

Dillon's Rule is a judicially-enforced rule that has been incorporated into some state constitutions, and that is codified into law in other states. First proposed in 1868 by John Dillon, Chief Judge of the Iowa Supreme Court, Dillon's Rule provides:

[A] municipal corporation possesses and can exercise the following powers and no others: First, those granted in express words; second, those necessarily implied or necessarily incident to the powers expressly granted; third, those absolutely essential to the declared objects and purposes of the corporation--not simply convenient, but indispensable . . .149
The decision to adopt and adhere to Dillon's Rule is a fundamental attribute of state sovereignty. Local governments have no set place under the Federal Constitution, leaving states free to adopt any means of allocating powers to their political subdivisions. States have vacillated on the extent of authority that should be granted to municipalities. Proponents of local autonomy, like Thomas M. Cooley, have influenced the field of municipal law towards granting municipalities sovereignty in local matters.150 Reformers, like Dillon, have argued that the benefits of local autonomy were outstripped by the potentially disastrous consequences of local government run amok. Because there is no federal underpinning to the status of cities as entities of limited sovereignty, or merely as creatures of their states, state legislatures have been free to grant or revoke powers to their political subdivisions. The decision of how much power to reserve to states is a fundamental feature of state sovereignty.

Municipalities in those states that observe Dillon's Rule, are prohibited from providing cable and telecommunications services unless they are expressly authorized by their state legislature to do so. State courts in Pennsylvania and South Carolina have strictly applied the rule to deny municipalities the right to provide cable television services.151

The preemptive scope of the Telecommunications Act does not reach restraints on municipal authority in the Dillon's Rule states. No law specifically restricts municipal entry into the telecommunications market. Rather, municipalities cannot provide those services that they have no authority to engage in. To find that the Telecommunications Act preempts Dillon's Rule restrictions on municipal authority would be to turn municipal law on its head and establish the federal government as a source of power for municipalities. Such a finding would intrude sharply into the sovereign authority of a state. This would not only allow the federal government to intervene in the relationship between a state and its local governments, but it would also permit the federal government to preempt the very method by which a state allocates power to its political subdivisions. The preemptive scope of the Telecommunications Act cannot reach this far. To do so would be to effect a fundamental change in the balance of power between state and federal governments, raising serious Tenth Amendment concerns.

IX. The FCC's Decision: In re Public Utility Commission

Municipalities are at risk of losing their legal authority to provide telecommunications services. The FCC recently ruled that it lacks the authority to preempt state laws that prohibit municipalities from providing telecommunications services. The dispute arose under the Texas law discussed above, the Public Utilities Regulatory Act of 1995 ("PURA95"). The City of Abilene had engaged in preparations to construct a broadband network, and to lease capacity of the system to an independent telecommunications provider, ICG. The city filed a petition with the FCC to preempt enforcement of PURA95 pursuant to section 253 of the Telecommunications Act of 1996. The FCC's ruling came as a shock to the local government community and has put in question the authority of other municipalities to offer telecommunications among the services offered in their communities.

The FCC's ruling, in Public Utility Commission, is based upon principles of municipal law applied in error. The FCC declared that it was denying Abilene's petition to preempt because it did not consider the City of Abilene to be an "entity" separate and apart from the State of Texas. The FCC stated that preempting enforcement of PURA95 would interfere with the relationship between the state of Texas and its political subdivisions in a manner that was not intended by section 253 of the Act. The ruling was an exercise of comity on the part of the FCC not to interfere in the internal relations of the State of Texas. This comity is misplaced. The ruling constitutes deference to the anti-competitive practices that the FCC was mandated to preempt.

A. Misplaced Reliance on Hunter v. Pittsburgh

The FCC's opinion relies on Hunter v. City of Pittsburgh.152 The Hunter Court established the principle that states have absolute discretion to grant and revoke powers of municipalities:

Municipal corporations are political subdivisions of the state, created as convenient agencies for exercising such of the governmental powers of the state as may be entrusted to them. . . . The number, nature, and duration of the powers conferred upon these corporations and the territory over which they shall be exercised rests in the absolute discretion of the state. . . . The state, therefore, at its pleasure, may modify or withdraw all such powers, may take without compensation such property, hold it itself, or vest it in other agencies, expand or contract the territorial area, unite the whole or a part of it with another municipality, repeal the charter and destroy the corporation. . . . In all these respects the state is supreme, and its legislative body, conforming its action to the state Constitution, may do as it will, unrestrained by any provision of the Constitution of the United States. . . . there is nothing in the Federal Constitution which protects [inhabitants and property owners] from these injurious consequences.153
The Supreme Court, subsequent to Hunter, dismissed the above quotation and the principles it espouses as "unconfined dicta."154 States are supreme rulers of their local governments, but only so far as their rule does not violate provisions of the Federal Constitution. The case which most clearly exemplifies this principle is Gomillion v. Lightfoot.155 The Court has followed Gomillion with numerous other opinions that depart from the above-quoted dicta and adhere to the principle that the Federal Constitution limits the power of states to manipulate their political subdivisions.156 The FCC would only be bound by Hunter had the state's manipulation of its political subdivisions not resulted in the violation of principles of the Federal Constitution. In this case, however, the Texas law frustrates the goals of the Telecommunications Act of 1996, contravening the Supremacy Clause.

B. A Political Understanding of In the Matter of Public Utility Commission of Texas

Why did the FCC refuse to preempt the Texas law in In the Matter of Public Utility Commission of Texas? Political considerations may have entered into the decision. The FCC had poor relations with the states at the time it ruled on the Texas case. The Eighth Circuit had recently criticized the FCC for trodding on states' rights and exceeding its jurisdiction in the deregulation of local telephony. In Iowa Utilities Board v. FCC,157 the Eighth Circuit considered whether the FCC had exceeded its jurisdiction by establishing pricing rules to promote deregulation of local telephone service. The court abrogated the authority of the FCC to deregulate local telephone markets and held that the FCC's pricing rules disrupted the balance between federal and state power.158 In the wake of Iowa Utilities Board, the FCC may have been overly solicitous of states' rights, and reluctant to assert its authority against the internal political affairs of states.

The ruling in Public Utility Commission of Texas has grave consequences for the future of municipalized broadband networks. Municipalities cannot establish broadband networks without the clear legal authority to do so. Absent clear powers of home rule, they need express legal permission to enter the telecommunications market before they are able to issue bonds to finance the broadband projects. The FCC opinion will have a "chilling effect" on the ability of municipal utilities to upgrade their facilities and provide telecommunications services. This opinion leaves municipal utilities vulnerable to the influence of incumbent communications providers in the state legislative process. Through its holding in Public Utility Commission of Texas, the FCC lost an excellent opportunity to promote the proliferation of the information highway.

X. Conclusion

Municipal utilities should pave the information highway. The Internet is beneficial to the user, but not profitable to the carrier. Low access fees promote the greatest overall utility of the Internet, but minimize the take-home profit for access providers. Fast Internet access also dilutes the value of programming currently carried by cable companies. It should be no surprise that after a decade of hype over the information highway, private firms have yet to provide consumers with the networks that promise to reshape our society.

Capitalism has triumphed in recent decades and rendered state-run enterprises anachronisms throughout the world, but not all markets call for private firms. There is no good economic solution to the problem of natural monopolies. The video communications market remains a monopoly today, with unregulated and regulated private firms failing to provide efficient service to consumers. Where competition is absent from a market, Milton Friedman's "third evil" of public ownership is a viable option. Public ownership of the information highway is particularly attractive, considering the public goods nature of the Internet.

Public ownership of the Internet has begun. Smaller towns, dissatisfied with the services offered by their local cable operators, already demand municipalization of broadband networks. The trend is now accelerating to larger cities. Like electricity, which began as a novelty, and which was publicly provided first in small towns, the Internet is growing into a vital resource that people demand to be provided publicly.

Recent referenda have threatened the dominance of incumbent firms over the provision of communication services. With municipalization proposals winning ninety percent approval ratings, private cable and telephone companies have successfully pressed state legislatures to enact laws to block local governments from offering telecommunications services. Although the Telecommunications Act of 1996 was designed to preclude the passage of such laws, political constraints have restricted its application. The FCC has stated that it cannot shield the telecommunication development plans of local governments from the effects of anti-competitive laws passed in state legislatures. Without express authority to create broadband networks, local governments lack the legal standing to finance communications projects. The FCC has lost a critical means of promoting development of the information highway. When the Texas decision is reviewed on appeal, it is hoped that the courts will recognize the right of communities to "keep a birch rod in the cupboard" and establish locally-owned access to the information highway.

aYale Law School, Class of 1999

aaSpecial thanks are due to the following individuals: William Ray, of Glasgow, Kentucky, for being a pioneer; James Baller, of Baller Law Group, for inspiring the research and giving continuous updates on the law; Professor Robert Ellickson, of Yale Law School, for welcome skepticism; Suzanne Boyce, for extra-editorial support; and Rita and Charles Carlson, for everything else.

FN1. See Glasgow Kentucky, the Blue Grass State (visited Oct. 4, 1998) http://www.glasgow-ky.com [hereinafter Glasgow Website], for more information on the Glasgow Utility and essays by its director.
FN2. See discussion infra Part II(A).
FN3. See Milton Friedman, Capitalism and Freedom 28 (1962).
FN4. See discussion infra Part V.
FN5. See discussion infra Part VI.
FN6. See id.
FN7. See discussion infra Part VII; Louis de Alessi, On the Nature and Consequences of Private and Public Enterprises, 67 Minn. L. Rev. 191, 201- 02 (1982).
FN8. See infra notes 158-160 and accompanying text.
FN9. See discussion infra Part II.
FN10. See discussion infra Part VIII.
FN11. See id.
FN12. See 47 U.S.C. s 253 (1996).
FN13. See id. at (a) and (d).
FN14. See In re Public Util. Comm., 13 F.C.C.R. No. 6, 3460 (1997), and discussion infra Part IX.
FN15. See discussion infra Part X.
FN16. See James Baller, Navigating the Information Superhighway: Public Power's Role 6 (1994) (report prepared for the 1994 Communications Infrastructure Workshop sponsored by the American Public Power Association)(quoting 1932 presidential campaign address of Franklin Delano Roosevelt). Roosevelt advocated that municipal governments should wield the threat of the municipalization of electric utilities as a birch rod against the private electric industry. See id.; see also text accompanying note 145 infra for an excerpt of the address.
FN17. See Paul R. Verkuil, Reverse Yardstick Competition: A New Deal for the Nineties, 45 Fla. L. Rev. 1, 9 n.64 (1993).
FN18. See Todd Hixon, The Big Deal That Was Too Big To Fly, N.Y. Times, Mar. 13, 1994, s 3, at 11.
FN19. See generally Alvin Toffler, The Third Wave (1980). Newt Gingrich advocated shaping national policy to Toffler's third wave philosophy. See Newt Gingrich, Foreword to Alvin Toffler & Heidi Toffler, Creating a New Civilization: The Politics of the Third Wave 13 (1995).
FN20. Jonathan Blake & Lee J. Tiedrich, The National Information Infrastructure Initiative and the Emergence of the Electronic Superhighway, 46 Fed. Com. L.J. 397, 398 (1994) (quoting Representative Edward J. Markey, Chairman of the House Subcommittee on Telecommunications and Finance).
FN21. See Barnaby J. Feder, Some Local Cheers for 'Creeping Socialism': A Few Towns Build Their Own Cable Companies, N.Y. Times, Oct. 4, 1997, at D1. The Wall Street Journal has also reported on the propagation of municipal communications utilities in Georgia. See Jeffery Ball, Road to Fiber-Optic Network is Paved with Many Obstacles, Wall St. J., Mar. 26, 1997, at 1.
FN22. Feder, supra note 21.
FN23. See Iowa Association of Municipal Utilities (visited Oct. 4, 1998) http://www.iamu.org [hereinafter IAMU Website] for a tally of referendum results in Iowa.
FN24. See id.
FN25. See Feder, supra note 21.
FN26. See Tammy Williamson, Deal to Fund Construction of Cable, Internet Line, Bond Buyer, Jan. 28, 1998, at 29.
FN27. The Glasgow network was featured in the legislative history of the Telecommunications Act of 1996. See Communications Act of 1994: Hearings on S.1822 Before the Comm. on Commerce, Science, and Transp., 103rd Cong. 351 (1994) (statement of William J. Ray, General Manager, Glasgow Electric Plant Board) [hereinafter "Ray Congressional Statement" ]. See also Glasgow Website, supra note 1.
FN28. See The Official City of Anaheim, California Website (visited Oct. 4, 1998) http://www.anaheim.net/utility/telecom3.html. See also Adrian E. Herbst, Local Government Utilities as Fiber Optic Network Operations, at 15 (containing a pamphlet prepared for the 1997 International Municipal Lawyers Association Annual Conference).
FN29. See Jonathan Gaw, Municipal Utilities Plug into the Future, Star Trib. (Minneapolis), Sept. 7, 1997, at D1.
FN30. See Herbst, supra note 28, at 15.
FN31. See id. at 17.
FN32. See id. at 19.
FN33. See Ball, supra note 21.
FN34. See Master Telecommunications Plan for Milpitas (appendix to Nicholas Miller & Kristin M. Nuen, What Is the Emerging Role of Local Governments in This New World of Telecommunications, 435 Prac. L. Inst. 7, (Mar. 14-15, 1996)) [hereinafter Milpitas Master Plan].
FN35. Telephone Interview with Robert Haug, Executive Director of Iowa Association of Municipal Utilities (Apr. 15, 1998). Residents similarly remark that telephone service is poor, with the providers refusing to upgrade a deteriorating plant, even when trenches are opened. See id. Residents of smaller towns typically must make long distance calls to access the Internet. See id.
FN36. See Letter from William J. Ray, Superintendent, Glasgow Electric Plant Board, to author (May 6, 1998) (on file with author).
FN37. See Doug Abrahms, Cable Competition Hasn't Flourished Since Telecom Act, Wash. Times, Feb. 6, 1998, at B9.
FN38. See Ray Congressional Statement, supra note 27.
FN39. See id.
FN40. See id. Most municipal electric facilities are distribution systems that purchase power wholesale from an independent generating facility. See id. at 352. The municipal utilities pay two fees to the generating facility. See id. The first fee is for the power that the distribution utility actually buys from the generator. See id. The second fee, the "demand charge," represents the share of the generator's total power that would have to be wheeled to the distributor in a time of peak demand. See id. at 356. Electric utilities minimize their demand charges by creating two-way communication systems that offer real-time pricing that encourages consumers to shift their load to off- peak hours. See id. These programs are called "demand side management." Id. The electric industry has traditionally relied on microwave technology for its communications needs. See id. at 354. The FCC, however, has auctioned off portions of the microwave spectrum to other uses, requiring electric utilities to use terrestrial communications lines. See id. They are increasingly using fiber optic technology, as it is cheaper than copper. See id. Fiber also leaves excess bandwidth that can be used for interactive television and telephony. See id.; Telephone Interview with Robert Haug, supra note 35; see also Thomas V. Chema, In Support of Demand Side Management, Pub. Util. Fortnightly, Jan. 18, 1990, at 11.
FN41. See Ray Congressional Statement, supra note 27.
FN42. See generally Milpitas Master Plan, supra note 34, at 90-91.
FN43. See id. at 90 (finding that streets with 3-9 utility cuts are expected to require re-surfacing every 18 years, representing a 30% reduction in service life relative to streets with less than three cuts). "If MFS, TCG, and PacBell each trench down Main Street, Jacklin, Abel, or Milpitas Boulevard, as is likely, the useful life of the surface of these very busy streets could be reduced by 31%, or eight years." Id. at 91.
FN44. See id.
FN45. Broadband networks can facilitate land use planning. The City of Scottsdale, Arizona, for example, has entered into a partnership with NASA to use remote sensing data to support daily decisions on surface water management, pavement maintenance, zoning enforcement, wildcat dumping, traffic loading, infrastructure management, and land use planning. See City of Scottsdale: The West's Most Western Town (visited Oct. 4, 1998) http://www.ci.scottsdale.az.us.
FN46. Police stations can use improved communication technology for remote monitoring of intersections to catch red light runners. Video conferencing will conserve police budgets by allowing remote video arraignment of criminals. See Milpitas Master Plan, supra note 34, pt. IV. See id.
FN47. See id.
FN48. See id.
FN49. City halls can use broadband networks to disseminate public information. See City of Milpitas (visited Oct. 4, 1998) http://www.alphais.com/milpitas/ index/html. The City of Milpitas, California, has a website which posts daily updates on storm emergency information, as well as information on permits, licenses, utility rates, plans ordinances, and proceedings of city council meetings. See id.
FN50. See Ball, supra note 21.
FN51. See id.
FN52. See id.
FN53. This approach has succeeded in Georgia, where the City of LaGrange has attracted out-of-state telemarketing firms that rely on high-speed telecommunications facilities. See Ball, supra note 21.
FN54. Friedman, supra note 3, at 28.
FN55. See id.
FN56. See id. at 29.
FN57. See discussion infra Part III(A).
FN58. See discussion infra Part III(B).
FN59. See discussion infra Part III(C).
FN60. See id.
FN61. See Federal Communications Commission, Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming, Fourth Annual Report, 13 F.C.C.R. 1034, 1040 (1998).
FN62. See id.
FN63. See id. at 1049.
FN64. See id. at 1070.
FN65. See id. at 1070-71.
FN66. See id. at 1070.
FN67. See id. at 1072.
FN68. See id. at 1072-73.
FN69. Federal copyright law prohibits DBS providers from broadcasting any local channels unless they broadcast all local channels. See 17 U.S.C. s 119 (1998); see also Prepared Testimony of Charles Ergen, Chief Executive Officer Echostar Communications Corporation Subject-Video Competition: Hearing on Multichannel Programming Before the Subcomm. on Telecommunications, Trade and Consumer Protection, Fed. News Service, Apr. 1, 1998, available in LEXIS, Nexis Library, Curnws File [hereinafter Ergen Testimony] (urging Congress to modify restrictions of copyright law); Bryan Gruley, Here's Why It's Hard to Get Local Channels on Your Satellite Dish, Wall St. J., Mar. 3, 1998, at A1 (explaining that federal copyright law prohibits satellite carriers from giving local channels to consumers who have had a cable hookup in the past ninety days. In a meeting with EchoStar President Charles Ergen, Senator John McCain learned of the provision and exclaimed, "Sweet Jesus, who wrote that? I don't blame those [cable] folks for wanting what they want, but I'm surprised at what they get."). The satellite transponders currently in orbit, however, do not have the technical capacity to carry the full gamut of local channels. Satellite firms are now designing "spot beam" technology that will allow the targeted transmission of local signals to their respective markets, but current DBS providers lack the legal and technical capacity to carry local signals. See Cable vs. DBS: The Sky Is Rising, Broad. & Cable, Mar. 17, 1997, at 30. The DBS industry cites this deficiency as a primary reason for low subscriber rates. See Ergen Testimony, supra. Our experience as a company (as well as independent studies) matches the conclusions of the FCC: 8 of 10 people who walk into a satellite dealer's showroom disappoint the dealer and walk right back out because the dealer cannot show them a satellite product that gives them what they really want. They can't get their local stations from satellite. There is good reason for this: consumers spend three-fifths of their time watching their local channels.... Id.
FN70. Cable operators faced a huge competitive threat in 1997 from a proposed partnership between Rupert Murdoch's News Corp. and EchoStar, a direct broadcast satellite provider. See Cable vs. DBS: The Sky Is Rising, supra note 69, at 30 (describing the deal). Rupert Murdoch's satellites were purported to be equipped with the spot-beam technology which would allow broadcast of local signals. See Glen Dickson, Sky to Put Stations on the Spot, Broad. & Cable, Mar. 17, 1997, at 34. The partnership would have allowed transmission of several hundred local and national channels with digital quality picture. See Cable vs. DBS: The Sky Is Rising, supra note 69, at 30. The proposed EchoStar deal would likely have compelled cable operators to upgrade their systems to provide the interactive services that are beyond the technical capabilities of direct broadcast satellite providers. See id. at 31. The deal collapsed, however, when News Corp. entered into pending merger negotiations with a rival satellite company, Primestar, which is comprised of a consortium of cable operators. See John M. Higgins & Price Colman, Primestar/News Corp. Deal Could Be Announced This Week, Broad. & Cable, May 26, 1997, at 11; Steve Lohr, Murdoch Gets Primestar Stake in Pact with His Cable Rivals, N.Y. Times, May 28, 1997, at D1. News Corp. allegedly agreed to enter into partnership with the cable-backed satellite company in consideration for the settlement of terrestrial disputes with cable operators over the carriage of News Corp. programming. See John R. Wilke, Antitrust Suit Filed to Block Primestar Purchase, Wall St. J., May 13, 1998, at A3 (reporting that Murdoch had been "black-balled" by the cable industry and that he sought the Primestar deal as a means of repairing his relations with cable). If the Primestar merger is allowed to progress, it will secure a key satellite orbital in the hands of the cable operators, and will eliminate an important source of competition for terrestrial cable operators. See id.
FN71. See Federal Communications Commission, Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming, Third Annual Report, 12 F.C.C.R. 4358, 4375 (1997). In overbuilt markets, cable rates plummet to roughly half of pre-competition rates. See Abrahms, supra note 37.
FN72. See Robert W. Crandall & Harold Furchgott-Roth, Cable TV: Regulation or Competition? 93-95 (1996).
FN73. See id. at 93-94.
FN74. See id.
FN75. See id. at 94.
FN76. See 12 F.C.C.R., supra note 71, at 4389-90.
FN77. See 47 U.S.C. s 571 (1996).
FN78. See 12 F.C.C.R., supra note 71, at 4365.
FN79. See id.
FN80. See id. at 4400. Reed Hundt, former chairman of the FCC, explained the reluctance of telephone firms to enter the video market as based on cost and inexperience with the relevant technology. See Interview with Reed Hundt, former FCC Chairman, in New Haven, Conn. (Apr. 30, 1998).
FN81. See Crandall & Furchgott-Roth, supra note 72, at 18-19.
FN82. See Broadband Bob Report, (visited Sept. 29, 1998) http://www.catv.org/bbb-report/, for an in-depth explanation of cable modem technology.
FN83. See id.
FN84. See Crandall & Furchgott-Roth, supra note 72, at 18-21.
FN85. See id. at 19.
FN86. Telephone wires offer the switching capacity to allow point-to-point calling, but offer narrow bandwidth that supports little more than voice traffic. Ordinary telephone lines offer a maximum of 56 kilobytes per second (Kbps) of transmission speed. See Bell Atlantic, Bell Atlantic Homepage (visited Sept. 29, 1998) http://www.bell-atl.com/adsl/ [hereinafter Bell Atlantic Website]. Technical constraints limit the transmission speed to even lower figures, explaining why typical modems operate at a speed of 28.8 Kbps. See id. The switching capacity permits the user to contact any site on the Internet, but the narrow bandwidth constrains the transmission speed.
FN87. Cable systems have bandwidth broad enough to support transmission of up to five hundred video channels. See Crandall & Furchgott-Roth, supra note 72, at 18-21. The flow of information, however, is strictly one way--cable lines do not offer switching capacity. See id. The network architecture of cable systems limits the ability of cable operators to provide interactive services. See id. Cable networks have a "tree-and-branch" architecture which is designed to deliver a one-way flow of information. See id. (describing network architecture of cable and phone systems and providing diagrams of each). Phone systems, by contrast, have "star networks" that provide the opportunity for every customer to communicate with every other customer on the network. See id.
FN88. See id.
FN89. Prominent proposed mergers included those between Bell Atlantic and Tele-Communications, Inc. and between Southwestern Bell and Cox Enterprises. See Hixon, supra note 18.
FN90. See id.
FN91. See Seth Schiesel, With Cable Deal, AT&T Makes Move to Regain Empire, N.Y. Times, June 25, 1998, at A1. Within less than three weeks after the announcement of the merger proposal between AT&T and TCI, the value of AT&T's stock dropped 12%. See Steven Lipin, Some Megamerger Deals Have Hurt Stock Prices, Wall St. J., July 8, 1998, at A3; Holman W. Jenkins Jr., Why Shareholders are Bailing on Mike Armstrong, Wall St. J., July 22, 1998, at A15.
FN92. See Crandall & Furchgott-Roth, supra note 72, at 90.
FN93. See id.
FN94. See id.
FN95. See 13 F.C.C.R., supra note 61, at 1042.
FN96. ISDN will boost transmission rates to 128 Kbps, which is only ten times greater than that for existing modems. See Bell Atlantic Website, supra note 86. ASDL offers faster transmission (1.5 megabps), but is limited by the distance of the customer from the central facility. See id.; see also Broadband Bob Report, supra note 82.
FN97. See supra text accompanying note 76.
FN98. See id.
FN99. See Broadband Bob Report, supra note 82. Satellite companies seeking to provide interactive communications services must use low earth orbit satellites. See id. The low orbit is necessary to minimize the time for a given signal to "bounce" from ground to sky and back. See id. This is why DBS providers, like Echostar and DirecTV, cannot provide Internet access. Large fleets of LEO satellites are required because a single satellite can only cover a limited geographic area. See id.
FN100. See id.; see also Quentin Hardy, To Sell a World Phone, Play to Executive Fears of Being Out of Touch, Wall St. J., June 4, 1998, at A1.
FN101. See Broadband Bob Report, supra note 82; Hardy supra note 100.
FN102. Teledesic has contracted Boeing to construct its satellites. See Seth Schiesel, Teledesic Faces Challenges on Satellite Plan, N.Y. Times, May 1, 1997, at D4. Boeing, however, does not specialize in satellites and the program is already years behind schedule. See id.
FN103. See Broadband Bob Report, supra note 82, for an in-depth explanation of cable modem technology.
FN104. See id.
FN105. See id.
FN106. See Abrahms, supra note 37.
FN107. See id.
FN108. See Broadband Bob Report, supra note 82.
FN109. See id.
FN110. See id.
FN111. See id.
FN112. See id.
FN113. This technology is in place today in several test sites around the country, appearing under brand names such as "Home." See, e.g. Comcast, Comcast Home (visited Sept. 29, 1998) http://www.comcast.com/cable The service is expensive, with Home costing between $29.95 to $49.95 per month on top of fees for cable television. See id.; see also 13 F.C.C.R., supra note 61, at 1066 (listing sites of interactive cable television).
FN114. Independent programmers often pay cable operators "launch support payments" as high as $2 or more per customer, as well as temporary license-fee deferrals, license-fee rebates, temporary or long-term free carriage, price freezes, and plenty of marketing help. See Thomas W. Hazlett & Matthew L. Spitzer, Public Policy Toward Cable Television 154-55 (1997).
FN115. Studies show that America Online is successfully competing with MTV and CNN for prime time audiences. See Richard Tedesco, Audience Will be Well Dispersed by 2000: TV Viewers Will Increasingly Migrate to Online Attractions, Broad. & Cable, Sept. 29, 1997, at 30.
FN116. Cable operators will also enter the video-on-demand market for sending movies directly to the home, on demand. This market, however, is expected to be competitive, which will limit the cable operators' stake. See 13 F.C.C.R., supra note 61, at 1063-64.
FN117. See Abrahms, supra note 37.
FN118. See Friedman, supra note 3, at 28.
FN119. See Martin T. Farris & Roy J. Sampson, Public Utilities: Regulation, Management, and Ownership 270-71 (1973).
FN120. See id.
FN121. See id.
FN122. See generally Baller, supra note 16.
FN123. See Farris & Sampson, supra note 119, at 267-68.
FN124. See id.
FN125. See David Schap, Municipal Ownership in the Electric Utility Industry: A Centennial View 23 (1986).
FN126. See id. (reporting that 82.3% of all municipally owned electric utilities were found in cities of 5,000 residents or less, as compared with 72.8% of privately-held electric companies).
FN127. See Farris & Sampson, supra note 119, at 270.
FN128. See id.
FN129. See Schap, supra note 125, at 9 tbl.1.1.
FN130. See id.
FN131. See Richard Rudolph & Scott Ridley, Power Struggle 38 (1986) (noting that, in 1912, "there were 1,737 public power systems and 3,659 private companies in operation.").
FN132. See Schap, supra note 125, at 9 tbl.1.1.
FN133. See id. at 21-22.
FN134. See id. at 28-30 (tabulating statistics of municipalization of private electric plants and showing that, from 1900 to 1923, between fifteen and sixty- two private utilities converted to public ownership every year); see also Carl D. Thompson, Municipal Electric Plants 9 (1922) (recounting statistics of municipal ownership and noting that 131 private plants went over to municipal ownership between 1912 and 1917).
FN135. See Rudolph & Ridley, supra note 131, at 33.
FN136. See id. at 32.
FN137. See id. at 33.
FN138. Id.
FN139. Id. at 1.6(d) (quoting William H. Fitzgerald).
FN140. See id. at 37.
FN141. See id.
FN142. See id.
FN143. See id.
FN144. See id. at 37-38. CELC was still in operation at this time. See id.
FN145. See Baller, supra note 16, at 6 (quoting Franklin Delano Roosevelt).
FN146. See Schap, supra note 125, at 56-60.
FN147. See id. at 49-66.
FN148. See Harvey Averch & Leland L. Johnson, Behavior of the Firm Under Regulatory Constraint, 52 Am. Econ. Rev. 1052, 1052 (1962).
FN149. See George J. Stigler & Claire Friedland, What Can Regulators Regulate? The Case of Electricity, 5 J.L. & Econ. 1, 11 (1962).
FN150. See H. Craig Petersen, An Empirical Test of Regulatory Effects, 6 Bell J. Econ. 111, 124 (1975).
FN151. See Averch & Johnson, supra note 148, at 1052. The technique of rate- of-return regulation is described as follows: ... [G]overnment regulatory agencies commonly employ a fair rate of return criterion: After the firm subtracts its operating expenses from gross revenues, the remaining net revenue should be just sufficient to compensate the firm for its investment in plant and equipment. If the rate of return, computed as the ratio of net revenue to the value of [the] plant and equipment (the rate base), is judged to be excessive, pressure is brought to bear on the firm to reduce prices. If the rate is considered to be too low, the firm is permitted to increase prices. Id. Averch and Johnson conclude that the structure of rate regulation creates a regulatory bias that permits the firm to operate inefficiently by not minimizing costs at the level of output selected. See id. at 1068.
FN152. See Stigler & Friedland, supra note 149, at 11 (revealing that electric utility regulators produced no significant changes in the average levels of electric rates, and finding that the presence of regulation did not significantly depress the stock values of electric utilities). The authors explained their findings by asserting that regulatory bodies do not have access to sufficient rate data to distinguish between the cost of producing the market supply in an unregulated market and the price charged by the unregulated market. See id.; see also Gregg. A. Jarrell, The Demand for State Regulation of the Electric Utility Industry, 21 J.L. & Econ. 269, 287 (1978) (analyzing changes in average rates between 1912 and 1917 for two groups of states--"early-regulated" states that established commissions between 1912 and 1917, and "later-regulated" states that established commissions after 1917). Jarrel found that, between 1912 and 1917, early-regulated states experiences a 26% increase in prices relative to the price changes in later- regulated states. See Jarrel, supra.
FN153. See infra notes 154-159 and accompanying text.
FN154. In 1992, the average retail rate of investor-owned utilities was 18.8% higher than that of publicly owned utilities. See MSB Energy Associates, Explaining Public Power's Low Rates: A Critical Review of the EEI [Edison Electric Institute]-Sponsored Report: "Subsidies and Unfair Competitive Advantages Available to Publicly Owned and Cooperative Utilities" 1 (report to the American Public Power Association) [hereinafter MSB Energy Associates]. Academic journals confirm this statistic. See, e.g., Sam Peltzman, Pricing in Public and Private Enterprises: Electric Utilities in the United States, 14 J.L. & Econ. 109, 124, tbl.1 (1971) (providing breakdown of statistics for mean electricity prices in 1966 between residential, commercial, and industrial customers, and stating that public utilities provided electricity at rates ranging from 78.9% to 91.3% of private utilities' rates). Public utilities attribute, in part, their lower rates to tax benefits, such as exemptions, preferences in income taxes, investment tax credits, non-income taxes, cost of capital, and preference power. See MSB Energy Associates, supra, at 7-14 (acknowledging that public utilities gain competitive advantages over investor- backed utilities through exemptions and preferences in income taxes, investment tax credits, non-income taxes, cost of capital and preference power).
FN155. Distribution markets often coincide with political boundaries, and local governments may have existing facilities that permit efficient utility service. See Leland Gerson Neuberg, Two Issues in the Municipal Ownership of Electric Power Distribution Systems, 8 Bell. J. Econ. 303, 321 (1977) (comparing the relative cost efficiency of private and public distribution utilities and finding that public distribution utilities are efficient relative to investor-owned utilities). Generation of power, by contrast, is best performed by private firms, because their appropriate generation markets do not correspond to political boundaries. As has been noted, the advent of alternating current encouraged the development of large, centralized generating facilities whose economies of scale could not be matched by municipally owned generating stations. See Schap, supra note 125, at 56-60 tbl. 3.1 to 3.10 (noting that the development of alternating current precipitated a rapid decline in the number of municipally owned electric utilities, and charting the decline in number of municipal utilities generating their own electricity, by region, after the development of alternating current). The relative efficiency of power generation is not pertinent to the present study, because telecommunications utilities are strictly distributional in nature. See id. at 124-25.
FN156. See generally William J. Baumol & Alvin K. Klevorick, Input Choices and Rate-of-Return Regulation: An Overview of the Discussion, 1 Bell J. Econ. 162 (1970) (recognizing the Averch & Johnson effect and noting that its distorted effect may be accompanied by other inefficiencies due to regulatory lag); E. David Emery, Regulated Utilities and Equipment Manufacturers' Conspiracies in the Electrical Power Industry, 4 Bell J. Econ. & Mgmt. Sci. 322, 336-37 (1973) (describing potential for collusion in the electrical equipment industry as a result of the regulatory environment); Peterson, supra note 150, at 124 (providing empirical evidence that the regulated firm spends a larger portion of total cost on capital as regulation tightens and forces the rate-of-return to approach the cost of capital); Robert M. Spann, Rate of Return Regulation and Efficiency in Production: An Empirical Test for the Averch-Johnson Thesis, 5 Bell J. Econ. 38, 50 (1974) (reporting empirical findings that rate of return regulation distorts input choices). These regulatory effects are a primary cause of the inefficient behavior of private firms. See Fare et al., The Relative Performance of Publicly-Owned and Privately-Owned Electric Utilities, 26 J. Pub. Econ. 89, 97 (1985) (reporting that 66% of privately-owned utilities were at a point of decreasing returns to scale).
FN157. See Baumol & Klevorick, supra note 156, at 182-89 (emphasizing that regulated firms exploit time lags in the regulatory process to maximize profits). Empirical studies corroborate this finding. See Peltzman, supra note 154, at 124-25 (finding that regulated private utilities price electricity more aggressively than public utilities and that government ownership of utilities leads to greater price rigidity, downward biases in price, broader pricing groups, and narrower product variety); see also de Alessi, supra note 7, at 14- 15 (reporting that public utilities are less effective at pricing electricity and that they impose fewer peak-load tariffs than their private counterparts); Scott E. Atkinson & Robert Halvorsen, The Relative Efficiency of Public and Private Firms in a Regulated Environment: The Case of U.S. Electric Utilities, 29 J. Pub. Econ. 281, 293 (1986) (reporting price inefficiencies in public firms); Fare, supra note 156, at 96-99 (finding that private firms had higher "allocative efficiency" (i.e., efficiency in choosing input combinations based on input prices) than public firms, but that they had lower overall efficiency, presumably due to the Averch-Johnson effect); Patrick Mann, Publicly-Owned Electric Utility Profits and Resource Allocation, 46 Land Econ. 478 (1970)(observing that public utilities have widely varying profit rates).
FN158. The Edison Electric Institute ("EEI") recently released a study attributing a 4.4% efficiency gain to private firms. The results of the EEI report have been taken from a rebuttal published by the American Public Power Association. See MSB Energy Associates, supra note 154, at 1 (the results of the EEI report have been taken from a rebuttal published by the American Public Power Association because the EEI declined to release its report to the author); see also W. Mark Crain & Asghar Zardkoohi, A Test of the Property- Rights Theory of the Firm: Water Utilities in the United States, 21 J.L. & Econ. 395, 406 (1978) (reporting that privately owned water utilities exhibit higher degrees of economic efficiency and lower operating costs than their publicly owned counterparts). The authors' findings, however, failed to give an unconditional endorsement of private utilities. See id. Their data showed that, although total costs of given output levels are higher in public utilities, marginal costs are lower in public utilities than in private firms. See id. The studies that give the strongest endorsement to privately owned electric utilities account only for internal costs, and do not consider the impact of the Averch-Johnson effect on the efficiency of the firm. See de Alessi, supra note 7; Peltzman, supra note 154.
FN159. See Atkinson & Halvorsen, supra note 157, at 286-90 (reviewing prior studies, adopting refined models to account for a broader variety of variables, and finding that public and private utilities are equally cost-inefficient); Fare, supra note 156, at 89-90 (stating that publicly owned utilities are slightly more efficient than ones that are privately owned); MSB Energy Associates, supra note 154, at 1 (reporting that, after various subsidies were accounted for, average rates for privately owned electric utilities were still 10.6% higher than for publicly owned utilities); Neuberg, supra note 155, at 320 (limiting his study to the distribution of electricity and finding that municipally owned electric distribution utilities were cost-efficient relative to investor owned utilities, with efficiency gains ranging from 6.40% to 25.50%). In a study unique for its small scope and high degree of thoroughness, Peter Kemper and John M. Quigley compared the cost efficiency of private and public refuse haulers in Connecticut. See Peter Kemper & John M. Quigley, The Economics of Refuse Collection 63-65 (1976). The researchers scrutinized the ledgers of a number of municipalities and private firms and found that private collection is from 25% to 36% more expensive than municipal collection. See id.
FN160. See Chris McConnell, Cable Rules, FCC Says; Commission Concern Over Rates, Lack of Competition, Prompts Study of Cable Program Costs, Broad. & Cable, Jan. 19, 1998, at 89. "Rep. Edward Markey (D-Mass.) said he agreed [with the FCC] that the March 31, 1999, sunset date for rate regulation 'is an unworkable date in light of the current dearth of affordable competitive alternatives to cable monopolies."' Id.
FN161. The basic tier is a bare-bones package to which only about 3% of cable customers subscribe. See Hazlett & Spitzer, supra note 114, at 48.
FN162. See Harold Demsetz, Why Regulate Utilities?, 11 J.L. & Econ. 55, 62- 63 (1962).
FN163. See id. at 55-56.
FN164. See id.
FN165. See id. at 55-62 (arguing that the problem of monopoly in utility services can be solved through the auction of monopoly franchises). The Demsetz model requires that there be an adequate number of bidders and freedom from collusion between the bidders. See id. at 58. Periodic auctioning of the monopoly franchise between the bidders would yield competitive pricing. See id.; see also Ronald R. Braeutigam, Optimal Policies for Natural Monopolies, in Handbook of Industrial Organization 1289, 1301-02 (Richard Schmalensee & Robert D. Willig eds., 1989) (describing the Demsetz model as competition for the market, rather than competition within the market); Richard A. Posner, The Appropriate Scope of Regulation in the Cable Television Industry, 3 Bell J. Econ. 98, 115-16 (1972) (proposing to refine the Demsetz model by advocating the use of short-term franchise durations to alleviate problems of long-term contracting).
FN166. For an excellent summary of the difficulties of franchise auctioning in capital-intensive industries, see Oliver E. Williamson, Franchise Bidding for Natural Monopolies--In General and with Respect to CATV, 7 Bell J. Econ. 73,73-76, 92-101 (1976) (criticizing the "frictionless" franchise auction model of Demsetz, enumerating the difficulties of such auctions in the cable industry, and providing empirical evidence of the collapse of the Demsetz model in Oakland, California).
FN167. See id. at 81.
FN168. See id. at 81-82.
FN169. See id. at 82.
FN170. See id. at 82-83.
FN171. See id. at 79-81.
FN172. Empirically, the franchise auction model has not succeeded. Historical analysis reveals that municipalities were not successful in applying the franchise auction model during the era of electrification. See George L. Priest, The Origins of Utility Regulation and the "Theories of Regulation" Debate, 36 J.L. & Econ. 289, 308-13 (1993). Oliver Williamson observed that the cable television franchise auction in Oakland, California soon collapsed into blow-by-blow municipal regulation. See Williamson, supra note 166; but see generally Mark A. Zupan, The Efficiency of Franchise Bidding Schemes in the Case of Cable Television: Some Systematic Evidence, 32 J.L. & Econ. 401 (1989) (providing empirical evidence in support of the franchise auction model). Zupan suggested that several mechanisms restrain opportunistic behavior of cable operators, including penalty clauses embedded in the franchise contract, push/pull coercion by the city, cross-city reputational concerns, and the threat of municipalization. See Zupan, supra at 420-24. Zupan's findings rely heavily on the existence of multiple bidders in the auction process. See id. In today's matured cable market, single operators often dominate an entire region, precluding the effectiveness of the auctions advocated by Zupan.
FN173. See 13 F.C.C.R., supra note 61, at 1115-21, para. 140-56 (describing clustering of the cable industry).
FN174. See Cable Communications Act Rules, 58 R.R.2d 1 (1985) (defining "effective competition" as the existence of at least three over-the-air channels).
FN175. See Cable Television Consumer Protection & Competition Act of 1992, Pub. L. No. 102-385, 106 Stat. 146 (codified as amended in scattered sections of 47 U.S.C.).
FN176. See Hazlett & Spitzer, supra note 114, at 48 and accompanying text.
FN177. See Century Fed., Inc. v. Palo Alto, 710 F. Supp. 1559 (N.D. Cal. 1988) (holding that franchise fee violated First Amendment); Century Fed., Inc. v. Palo Alto, 710 F. Supp. 1552 (N.D. Cal. 1987) (striking down as violative of the First Amendment most municipal conditions on cable franchises other than those dealing with financial qualifications and franchise fees); Group W Cable, Inc. v. Santa Cruz, 669 F. Supp. 954 (N.D. Cal. 1987).
FN178. See Letter from William J. Ray, supra note 36 ("The Cable Act of 1992 makes it virtually impossible to non-renew the franchise of an incumbent. There is an unspoken treaty among all cable operators. They do not tread on the territory of one of their brethren. Towns seldom, if ever, have a choice."); Letter from Robert Haug, Executive Director of the Iowa Municipal Utilities Association (May 6, 1998) (on file with author) ("The [F]ederal [T]elecommunications [A]ct has been interpreted in such a way as to further weaken franchise authority of a city--essentially prohibiting denial. The way it's been viewed here is that a company still needs a franchise, there is still a public referendum requirement to pass the franchise agreement, but the voters can't say no.").
FN179. See id.
FN180. See Hazlett & Spitzer, supra note 114, at 3-4. The authors noted: The conclusion is inescapable that cable television operators have, at least for the past several years, enjoyed economic rents: returns are easily in excess of the risk-adjusted cost of capital. Cable would thus appear to be a prime candidate for rate regulation that would lower consumer prices and expand the volume of sales. The industry exhibits marked tendencies toward monopolistic market structure, and the classic case for public utility-type regulation appears to prevail. Id. at 41.
FN181. See id. at 3-4.
FN182. See id. at 41.
FN183. See id. at 59.
FN184. 47 U.S.C. s 543(c)(4) (1996).
FN185. See McConnell, supra note 160.
FN186. See Cable Television Consumer Protection & Competition Act of 1992, Pub. L. No. 102-385, 106 Stat. 146 (codified as amended in scattered sections of 47 U.S.C.).
FN187. See Hazlett & Spitzer, supra note 114, at 103. The FCC, avoiding public embarrassment, publicized data produced by the cable operators demonstrating that regulation succeeded in producing a 5.9% rate cut for the average consumer. See id. at 107. A noted telecommunications expert, Nick Allard, commented: "The dirty little secret is that both the FCC and cable operators have the same interest: to prove that the rules work and that rates don't go up." Id. (citing Vincente Pasdeloup, Can the FCC Cope? Cable World, May 23, 1994, at 172 (quoting Nick Allard, partner at Latham & Watkins)).
FN188. See Hazlett & Spitzer, supra note 114, at 149-56 (describing regulatory retreat, especially the "going forward" rules which allowed rate increases for those cable operators that offered more channels).
FN189. See id.
FN190. See id. at 138-44 (reporting that cable operators engaged in extensive retiering of their channels and adding numerous "fishbowl" channels--low-cost channels resembling a cablecast fishbowl--to dilute out quality programming).
FN191. See id. at 143-49.
FN192. See Andrew F. Daughety & Robert Forsythe, The Effects of Industry-Wide Price Regulation on Industrial Organization, 3 J.L. Econ. & Org. 397, 431- 33 (1987).
FN193. See id. at 398. "Industry-wide rate regulation requires some form of coordinated decision making on the part of the regulatees.... [f]or example, both the railroads and the motor carriers formed privately controlled and privately operated rate bureaus where firms would meet and discuss rate proposals to be made to the Interstate Commerce Commission." Id. "This practice is known as collective rate-making; in 1948 Congress passed the Reed- Bullwinkle Act to protect such activity from antitrust litigation." Id. Rate regulation is understood to have induced concentration of the trucking industry, for example. See id. at 398-99.
FN194. See 13 F.C.C.R., supra note 61, at 1115, at para. 140-41; see also Letter from Robert Haug, supra note 178; Letter from William J. Ray, supra note 36.
FN195. See 13 F.C.C.R., supra note 61, at 1115, at para. 147 (listing system- for-system swaps).
FN196. See 13 F.C.C.R., supra note 61, at 1122, at para. 157.
FN197. Letter from William J. Ray, supra note 36.
FN198. See Friedman, supra note 3, at 28.
FN199. See discussion supra Part IV.
FN200. See IAMU Website, supra note 23.
FN201. See discussion infra Part VI.
FN202. See Harvey S. Rosen, Public Finance 65 (3d. ed. 1992). See also de Alessi, supra note 7, at 200.
FN203. See Rosen, supra note 202, at 65.
FN204. See id.
FN205. See R.H. Coase, The Lighthouse in Economics, 17 J.L. & Econ. 357, 375-76 (1974).
FN206. See id.
FN207. Coase noted that the shipping industry bore the entire burden of financing the lighthouses, and so took a more active role in their oversight than if the lighthouses were provided by the government. See id. at 360-72. Private incentives, he also argued, prompted the lighthouse entrepreneurs to construct lighthouses on perilous crests of rock where public firms would not venture. See id. One firm, for example, repeatedly reconstructed a lighthouse on the Eddystone Rocks after successive demolitions by storms. See id. at 365- 66.
FN208. See Henry H. Perritt, Jr., Access to the National Information Infrastructure, 30 Wake Forest L. Rev. 51, 72 (1995).
FN209. Comcast, for example, is offering its Home cable modem service for $29.95-$49.95 per month on top of fees for cable television. See Comcast Home, supra note 113. The town of Glasgow offers its entire cable modem/cable television package for $29. See Glasgow Website, supra note 1.
FN210. See Rosen, supra note 202, at 66.
FN211. See Baller, supra note 16 and accompanying text.
FN212. See Coase, supra note 205, at 365-66, 372-74.
FN213. See supra notes 175-177 and accompanying text.
FN214. Residents of smaller towns complain of poor reception, lack of channel variety, and interruptions in service due to deterioration of the cable lines. See Telephone Interview with Robert Haug, supra note 35. Cable operators reportedly forego opportunities to upgrade their plant when municipalities trench the streets for other projects. See id.
FN215. See supra notes 21-34 and accompanying text.
FN216. See Richard Hellman, Government Competition in the Electric Utility Industry: A Theoretical and Empirical Study 234, map 4 (1972).
FN217. See id. at 193-98.
FN218. See de Alessi, supra note 7, at 201-02. "Shirking is broadly defined as the unanticipated failure to meet contractual obligations. It includes opportunistic behavior by members of the team as well as by other business enterprises." Id. at 194, n. 15.
FN219. See id. at 203-08.
FN220. See id. at 209.
FN221. See IAMU Website, supra note 23.
FN222. Cf. Robert C. Ellickson, Order Without Law: How Neighbors Settle Disputes 169, 177-78 (1991) (revealing the binding force of social relations).
FN223. Municipal posts can attract well-qualified individuals, presumably for benefits of prestige, and not pecuniary award. One survey found that 65% of chief executives of municipalities had earned an M.A., M.S., or Ph.D., and that over 30% of police chiefs had earned an M.S., M.A., or Ph.D. See Richard C. Bingham et al., Professional Associations and Municipal Innovation 68-69 (1981). Fire chiefs, however, were found to have much lower levels of education--fewer than 15% had a college degree. See id. This suggests that the prestige value attenuates rapidly with distance from the top of the local government hierarchy. See id. at 68.
FN224. See Hellman, supra note 216.
FN225. See id. at map 4 (1972) (providing a map of the national distribution of local public power systems, supplied by the American Public Power Association, June 1971). Many of these states were also centers of the Grange movement in the 1870s, when farmers collectivized to counter the abuses of the railroad industry. See Farris & Sampson, supra note 119, at 22-31.
FN226. See Farris & Sampson, supra note 119, at 271.
FN227. See Anaheim Website, supra note 28.
FN228. See 47 U.S.C. s 253 (1996).
FN229. See discussion infra Part VIII(C)(1)-(3).
FN230. The courts have ruled that local governments do not violate the Due Process Clause by establishing municipal utilities and simultaneously taxing and competing with incumbent providers. See Madera Waterworks v. Madera, 228 U.S. 454, 456 (1913) (holding that the property of a private waterworks company is not taken without due process of law by the municipality constructing a competing plant); see also Warner Cable v. Niceville, 911 F.2d 634, 642 (11th Cir. 1990) (acknowledging that the city's dual role as regulator and competitor could give rise to a valid due process claim, but ruling that the cable operator's allegations were not yet ripe for review as they did not establish an injury).
FN231. The Supreme Court has ruled that local governments do not violate the Equal Protection Clause by taxing the competitor of a municipal enterprise. See Puget Sound Power & Light Co. v. Seattle, 291 U.S. 619 (1934). The Court, in 1934, held that the City of Seattle did not unfairly discriminate against a private electric utility when it imposed a tax on both the private utility and a competing municipal utility, knowing that the latter would be unable to pay the tax. See id. at 621-25. The Court recognized that the City was free to destroy competition through taxation, so long as it acted consistently with state law. See id.
FN232. Municipalities that engage in proprietary activities continue to enjoy immunity from antitrust liability when they act pursuant to an express state policy. See Paragould Cablevision, Inc. v. Paragould, 930 F.2d 1310, 1312 (8th Cir. 1991) (permitting a city to displace competition when it provided cable service pursuant to an express state policy). In Paragould, the Eighth Circuit denied a cable operator's antitrust action against a city. See id. at 1315. The plaintiff company alleged that the local government and public utility had facilitated monopoly leveraging by using the municipality's monopoly power in the electric utility business to restrain competition in the cable television business. See id. at 1313. The court stated that the municipality would be exposed to antitrust liability unless it could show, under the Parker doctrine, that it was acting pursuant to an express state policy. See id. at 1312 (citing Parker v. Brown, 317 U.S. 341 (1943)). The court found, however, that the city was expressly authorized by a state statute to provide cable service, and that the displacement of competition was a reasonable and necessary consequence of the city's acting pursuant to the state statute. See Paragould, 930 F. Supp. at 1314. The municipality, thus, was entitled to state action immunity. See id.
FN233. See Warner Cable Communications, 911 F.2d at 638 (ruling that a municipality would not "drown out" the speech of a cable operator--even if it destroyed the company through competition--simply because the city's voice attracted a larger share of the audience).
FN234. See id. at 642 (noting that a city's dual role as regulator and competitor might produce self-interested, unfair government action that would give rise to a valid due process claim).
FN235. Courts are limiting the scope of Parker immunity for governments that engage in proprietary functions and that act under home rule powers. See Columbia and Columbia Outdoor Adver. v. Omni Outdoor Adver., 499 U.S. 365, 374-75, 379 (1991) (stating that "antitrust immunity does not necessarily obtain where the State acts not in a regulatory capacity but as a commercial participant in a given market," and that a "possible market participant exception" may strip government enterprises of antitrust immunity) (dictum); Paragould Cablevision, 930 F.2d at 1312 (citing Omni Outdoor Adver., and declining to create a market participant exception without clear guidance from the Supreme Court). The Supreme Court has eliminated Parker immunity for local governments acting under home rule powers. See Community Communications Co., Inc. v. Boulder, 455 U.S. 40, 52-56 (1982) (limiting Parker immunity to those municipal activities engaged in pursuant to an express, affirmative state policy, and holding that general home rule statutes do not confer adequate authority on local governments to warrant Parker immunity).
FN236. See Pub. L. 104-104, Feb. 8, 1996, 110 Stat. 56.
FN237. The bill received broad bipartisan support in both the Senate (voting 91 to 5 in favor of the bill) and in the House (414 to 16). See Christopher Stern, New Law of the Land; First Major Rewrite of Communications Regulation in Half-Century Could be Signed This Week, Broad. & Cable, Feb. 5, 1996, at 8.
FN238. See Thomas W. Hazlett, Explaining the Telecommunications Act of 1996: Comment on Thomas G. Krattenmaker, 29 Conn. L. Rev. 217, 225 (1996).
FN239. See id.
FN240. See 47 U.S.C. ss 271-76 (permitting Bell Companies to enter new markets); see also Peter Huber et al., The Telecommunications Act of 1996 5, 62 (1996); see also Hazlett, supra note 238, at 223-33.
FN241. See 47 U.S.C. s 253.
FN242. See id.
FN243. See 47 U.S.C. s 253(a) and (d) (1996).
FN244. 47 U.S.C. s 253(a).
FN245. 47 U.S.C. s 253(d).
FN246. The statutory language provides that the FCC shall preempt all anticompetitive laws. 47 U.S.C. s 253(d) (1996). The FCC has responded to this grant of authority by preempting several local laws that expressly prohibit, or have the effect of prohibiting, the provision of telecommunications services. See, e.g., In re Public Util. Comm., 13 F.C.C.R. No. 6, 3460 (1997); In re TCI, Inc., 12 F.C.C.R. 21396 (1997); In re Classic Telephone, Inc., 11 F.C.C.R. 13082 (1996).
FN247. See 47 U.S.C. s 253(a).
FN248. See In re Public Util. Comm., 13 F.C.C.R. at 3467. The ruling is being appealed to the U.S. Court of Appeals for the D.C. Circuit.
FN249. Five reasons indicate that the phrase any entity is intended to cover municipally-owned electric utilities. First, the preemption provision is written in broad language, with no exceptions express or implied. See 47 U.S.C. s 253(d). Second, the Act elsewhere empowers electric utilities to provide telecommunications services, by repealing provisions of the Public Utilities Holding Company Act ("PUHCA") which had prohibited private electric companies from diversifying. See 15 U.S.C. s 79(z)-5(c)(a)(1)(A) (1996). Third, it is evident that Congress intended all electric utilities to be able to provide electric service, as no distinction is made that suggests that only private electric utilities could provide telecommunications services. Other sections of the Act show that Congress was fully capable of distinguishing between public and private utilities. The federal pole attachment requirements of the Act, for example, explicitly distinguish public utilities from private utilities. See 47 U.S.C. s 224(a)(1) (defining "utilities" which are subject to federal pole attachment requirements and exempting from the requirements "any railroad, any person who is cooperatively organized, or any person who is owned by the Federal Government or any State," where "State" is defined as "any State, territory, or possession of the United States, the District of Columbia, or any political subdivision, agency, or instrumentality thereof"). Fourth, in the legislative history of the Act, Congress was fully aware that publicly-owned electric utilities were already providing telecommunications services, and that more public electric utilities were planning to enter the telecommunications market. See Ray Congressional Statement, supra note 27. And fifth, the FCC has subsequently used the phrase "any entity" to include municipal telecommunications providers among those parties that would be obliged to contribute to the universal services fund. See In re Federal-State Joint Bd. on Universal Serv., 12 F.C.C.R. para. 8776, 9186 (1997) (requiring publicly owned telecommunications providers to contribute to universal service fund).
FN250. See Iowa Tel. Ass'n v. Hawarden, Ruling No. 18320 (Sioux Co. D. Ct., Dec. 11, 1996), rev'd on appeal Ruling No. 145/97-83 (Iowa 1998) (reversing summary judgment rulings and remanding for entry of a declaratory judgment in favor of ITA).
FN251. See In re Public Util. Comm., 1997 WL 603179 (F.C.C.).
FN252. See Iowa Code Ann. s 476.96.3 (West Supp. 1998); Ga. Code Ann. s 46-5-162(17) (West Supp. 1998); Minn. Stat. Ann. s 237.19 (West 1992).
FN253. See Mo. Ann. Stat. s 392.410.7 (West Supp. 1998); Nev. Rev. Stat. Ann. s 268.086.1(a) (Michie Supp. 1997); Tenn. Code Ann. s 7-52-406 (Supp. 1997); S.B. 2362, 2369, 100th Leg. (Tenn. 1997); Tex. Util. s 54.202 (West 1997); H.B. 335 (Va. 1998).
FN254. See Merriam v. Moody's Ex'rs, 25 Iowa 163, 170 (1868).
FN255. See infra, note 291 for examples.
FN256. See Iowa Code Ann. s 476.96.3.
FN257. See Iowa Code Ann. s 23A.2.1.a (West Supp. 1998).
FN258. See Telephone Interview with Robert Haug, supra note 35.
FN259. See id.
FN260. See id.
FN261. See id.
FN262. See Ball, supra note 21.
FN263. See Ga. Code Ann. s 46-5-162(17).
FN264. See Gaw, supra note 29.
FN265. See Minn. Stat. Ann. s 237.19.
FN266. See id.
FN267. See Letter from James Baller, Principal, Baller Law Group, to author (Apr. 14, 1998) (on file with author).
FN268. See infra notes 275-81 and accompanying text.
FN269. See 47 U.S.C. ss253(a) and (d).
FN270. See Telephone Interview with James Baller, Baller Law Group (Mar. 5, 1998) (on file with author).
FN271. ILECs have large lobbying staffs at the state level. In Missouri, for example, Southwestern Bell assigns two lobbyists to each legislator. See id.
FN272. See id.
FN273. See id.
FN274. See id.
FN275. See Mo. Ann. Stat. s 392.410.7.
FN276. See Nev. Rev. Stat. Ann. s 268.086.1(a).
FN277. See Tenn. Code Ann. s 7-52-406.
FN278. See S.B. 2362, 2369, 100th Leg. (Tenn. 1997).
FN279. See Tex. Util. s 54.202.
FN280. See H.B. 335 (Va. 1998).
FN281. A lawyer tracking the legislation noted that the town adjacent to Exit 17 is home to a prominent legislator. Telephone Interview with James Baller, supra note 270.
FN282. See infra note 292 and accompanying text.
FN283. See Merriam v. Moody's Ex'rs, 25 Iowa 163, 170 (1868).
FN284. For an excellent overview of the use of legislative and judicial home rule, see George D. Vaubel, Toward Principles of State Restraint upon the Exercise of Municipal Power in Home Rule, 22 Stetson L. Rev. 643 (1993).
FN285. Merriam, 25 Iowa at 170.
FN286. See id. at 176-77.
FN287. See id.
FN288. Thomas M. Cooley wrote an influential treatise advocating that municipalities were endowed with an inherent right to self-governance. See Thomas M. Cooley, A Treatise on the Constitutional Limitations Which Rest upon the Legislative Power of the States of the American Union, ch. VIII (1896).
FN289. See id.
FN290. See infra note 291 for examples.
FN291. See Warner Cable Communications, Inc. v. Schuylkill Haven, 784 F. Supp. 203, 211-12 (E.D. Pa. 1992); Sheppard v. Orangeburg, 442 S.E.2d 601, 603 (S.C. 1994). South Carolina has subsequently repealed Dillon's Rule. See Williams v. Hilton Head, 429 S.E.2d 802 (S.C. 1993).
FN292. See U.S. Const., amend X.
FN293. See In re Pub. Util. Comm., 13 F.C.C.R. No. 6, 3460 (1997).
FN294. See id. at 3463.
FN295. See id. at 3467-68.
FN296. See id.
FN297. See id. at 3544.
FN298. See id. at 3544-45.
FN299. 207 U.S. 161 (1907); see also 13 F.C.C.R. No. 6, 3460 (1997).
FN300. Hunter, 207 U.S. at 178-79.
FN301. See Gomillion v. Lightfoot, 364 U.S. 339, 344 (1960).
FN302. See id. (establishing that states do not have plenary power to define the powers of their municipalities). The State of Alabama passed an act redefining the municipal boundaries of the City of Tuskeegee. See id. at 340. The effect of the act was to gerrymander the previously square-shaped city into a 28-sided figure excluding all but a handful of blacks from the voting district. See id. The Court recognized that plenary authority of a state over its political subdivisions would permit it to manipulate constitutional provisions, like the Fourteenth and Fifteenth Amendments, out of existence. See id. at 346.
FN303. See, e.g., Lawrence County v. Lead-Deadwood Sch. Dist. No. 40-1, 469 U.S. 256 (1985) (holding that the Supremacy Clause limits the authority of states to manipulate their political subdivisions, insofar as the federal Payment in Lieu of Taxes Act preempts the ability of states to stipulate how political subdivisions apportion federal funds); Washington v. Seattle Sch. Dist. No. 1, 458 U.S. 457 (1982) (ruling that states are not free to revoke powers of their political subdivisions in such a way as to single out a constitutionally protected group); Avery v. Midland, 390 U.S. 474 (1968) (ruling that a State did not have the power to apportion courts of local government units in such a way as to violate the Equal Protection Clause); Mobile v. Watson, 116 U.S. 289 (1886) (holding that a State could not manipulate its political subdivisions in such a way as to impair valid debts, presumably in such a way as would violate the Contracts Clause).
FN304. See Iowa Util. Bd. v. FCC, 120 F.3d 753 (8th Cir. 1997).
FN305. See id.
FN306. See id. at 793-94.
FN307. See id. at 799. The court asserted that the jurisdictional provision of the 1996 Telecommunications Act is a "fence that is hog tight, horse high, and bull strong, preventing the FCC from intruding on the states' intrastate turf." Id. at 800.
FN308. See Iowa Util. Bd. v. FCC, 120 F.3d 753 (8th Cir. 1997).
FN309. See In re Pub. Util. Comm., 13 F.C.C.R. No. 6, 3460 (1997).
FN310. See id.
FN311. See id.
FN312. See supra note 16 and accompanying text.
END OF DOCUMENT
Westlaw Delivery Session Summary Report
For
CARLSON, STEVEN C 646749 Thursday, May 20, 1999 16:22:49

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Infotricity: Why Muni Electrics Like Cable TV from Public Utilities Fortnightly (Nov. 15 issue)

by William J. Ray, P.E.

"The great obstacle of man is the illusion of knowledge," says Daniel Boorstin, distinguished American historian and Librarian of Congress emeritus. It is what we think we know that keeps us from making progress toward discovering new certainties. The electric utilities of today have a lot in common with the sailors who accompanied Christopher Columbus. They stand on the shores of a new continent gazing into the unexplored wilderness of competition and transformed missions, paralyzed from fear due to their "illusion of knowledge."

When Columbus sailed west on the morning of August 3, 1492, he was discarding the conclusions of the orthodox Christian authorities of the day. After four trips to the New World he died believing he had been exploring the east coast of Asia. It turns out his main discovery was the discovery of ignorance, European man's ignorance of the world. The Glasgow Electric Plant Board and several other municipal electric utilities of today have embarked upon similar voyages of discovery. Old dogma is difficult to overcome, but if all electric utilities pay attention to the main discoveries of these voyages, they can cast off the ignorant ramblings of modern day economic and business authorities and discover the possibilities of a new product, infotricity.

Infotricity is the term we have given to the product we have been offering at the Glasgow Electric Plant Board. It is a combination of electric power, cable television, telephony, and high speed LAN and Internet services. It is a mixture of electrons and information, or "bits." It is a complicated and unexpected set of interrelations. It has unimagined consequences and possibilities. It is another new world.

The modern day "authorities" have written and said much about the new world we have discovered in Glasgow and other municipalities. The Cable Telecommunications Association has even created a site on the Internet dedicated to spreading their particularly slanted misinformation about us. Even magazines and periodicals which our industry trusts implicitly, like Public Utilities Fortnightly, have published articles spreading the illusion.

The actual entries from our logbook should help everyone. The fact is, when we decided to construct a broadband network and offer entertainment and telecommunications services, we did not plan on immediate revenue gains from these new products. Instead, we planned on rediscovering our initial mission of providing and simplifying technology for our customers. We looked out upon a landscape where the possibilities of services from new telecommunications technologies and the realities of the actual services being offered were not even in the same field of view. Similarly, we saw that the rates being charged when these services were offered were outrageously high. We set out upon a voyage to discover ways to rectify these images and we have learned much.

One of our early discoveries was that our existing lineman, accountants, engineers, etc. were plenty smart enough to design, construct, operate and maintain a broadband network capable of delivering a flow of bits just as robust as the power network they were already operating to supply a flow of electrons ( I know several engineers will correct me and say that we actually provide a flow of "holes" where electrons were, but I hope they will allow me this more convenient description here). In operation, we find that the information flowing back to our dispatch center relative to the performance of the broadband network actually helps us find trouble and potential trouble on our power network. We have been able to use this information and the newfound communications capabilities with our substations and other devices on our network to dramatically increase the reliability of our electric power product.

When we started offering cable television service on our new broadband network, we really started making discoveries. We found that our customers gave us a new level of respect for our efforts to bring them something they could get from no one else; truly competitive, cost based, rates for cable service, and an opportunity to choose from multiple providers. We discovered that people really like programming featuring local events like government meetings, school activities, local sporting events and local talk shows. They even love to see District Small Claims Court on television! We would have never guessed it before our voyage, but we discovered that becoming a conduit for bringing these local events into the homes of our customers makes us more welcome in the homes of our customers and cherished in their hearts. Finally, we found that there is no more reliable method of getting information about our services into the minds of our customers than utilizing the "commercial insertion" opportunities afforded to distributors of cable programming by nearly all of the major services like CNN, Discovery Channel, TNT, etc.

Our discoveries in the provision of high speed computer networking may be the most exciting of all. We provide a flow of bits for everyone. If you are one of our electric customers and you are about to buy your very first home computer, we will provide expert advice to you on which machine to buy. When it arrives, we set it up for you and teach you how to access information on the Internet through our network. On the other end of the spectrum, if you are a business or industry which needs a high bandwidth bit pipe to another location in the community or to other locations via the Internet, we can provide you with a dedicated fiber circuit to meet your needs. Once our bit service is established to one of our customers, we have a constant interactive relationship with them. We can email them to inform them of our power system status. We can explain the reasons for outages and give them advice on helping us prevent them. They can email us to report that the street light in front of their house is out or to request additional information on their power or cable television charges. We can establish our homepage as their homepage, thus again reinforcing our position as the "well of knowledge" for our community. The same customers that find it convenient to have an electric utility which can furnish them anything from a flow of electrons for a sixty amp single phase connection to a dedicated substation for a fifteen megawatt connection, find it similarly convenient to purchase their flow of bits in the same manner and from the same entity.

No dissertation on the virtues of the Glasgow project and others similar to it would be complete without exploring the financial results thereof. Even King Ferdinand and Queen Isabella expected Columbus to return with some spoils to prove that he had indeed found a new world. We never envisioned our cable television service as a stand-alone money maker. Rather, we saw it as an important structure in our vision of the infotricity utility.

CATV Income chart

We are quite pleased that we have finally crossed over into positive net income for the fiscal year just ended. As you can see from the graphic above, the people of Glasgow were quite willing to make a long term investment in broadband infrastructure that they believed would bring them exponentially more benefits than the costs of the early losses. Indeed, they were correct in their vision. The following chart shows the amount of money retained in the local economy since our project lowered the cost of cable television service.

Cost Savings chart

Shopping centers do not apply the rules of cost-benefit analysis before they make a decision to build a parking lot beside their building. Neither do they measure the profit and loss of those parking lots. If they did, none of us would find a place to park. We, like they, should evaluate the impact of these new services in the light of the impact on the whole of the operation. Electric utilities must also see the value of becoming infotricity utilities before they decide to embark upon a voyage like ours. However, our transition to infotricity utility has been good for our energy sales business as shown in the next chart.

Kilowatthours Sales chart

The New World we discovered is a world with dew still on it, so rich with possibilities that we can hardly imagine what will happen next. We can see infotricity actually making the deregulation of our industry a reality. When we are all infotricity utilities it will be easy for a generation utility to post their prices on the web. So posted, it will be simple for our customers to shop for the best deal, make the deal, have their usage monitored by the vending utility and get billed for it via email. With the bit pipe extended to the home, it will be a natural next step to extend the pipe throughout the home, it will go everywhere that electron pipes go. Appliances will all report their usage of energy to the utility on the ubiquitous network. We will then create power rates for discreet devices. We can run "specials" on clothes drying energy after 10 PM or special dishwashing energy sales on the weekend. The days of the one electric meter for the whole house will be gone. These are but a few of the many things we have discovered in the new world of infotricity.

How does an electric utility decide if they are to sail off to this new world? The answer lies in each particular utility's philosophy on risk, altruism, and patience. If the Glasgow project is comparable to the voyage of Columbus, then the decisions of other utilities are similar to the European countries decisions on colonization. In those days the English settlements called themselves plantations and Francis Bacon's essay "Of Plantations" (1625) is illustrative of the decisions each electric utility must make. "Planting of countries," he wrote, "is like planting of woods. For you must make account to lose almost twenty years' profit, and expect your recompense in the end. For the principal thing that hath been the destruction of most plantations hath been the base and hasty drawing of profit in the first years. It is true, speedy profit is not to be neglected, as far as it may stand with the good of the plantation, but no farther." A plantation then, was a place of risk and of calculation. It is the same today in the electric utility business. Will you join us in the new world or will you listen to the ravings of today's orthodox authorities and eliminate infotricity from your customer's future?

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Affirmative Government and

Public Power --

A Model For Democratizing Bandwidth

by William J. Ray, P.E.

The technology or "infrastructure" that we all know as the lifeblood of our republic, our water systems, highway network, and electric power grid did not come without the active involvement of a strong and "affirmative" government. All of these systems were first initiated by private businesses looking for profit.

Throughout history we have seen that the healthy profit motive often evolves into unmitigated greed, when certain services transform themselves from interesting luxuries into life or death necessities. Such was certainly the case with electric power in this country. The attempts by private corporations to monopolize that technology could only be combatted by the strength and resolve of an affirmative government. The creation of public power systems and the non- profit rates they charged caused electric power to be democratized. Today, that same model can be used to offset the greed of modern telecommunications companies which charge exorbitant rates and refuse to build systems capable of exploiting the capabilities of modern computer technology for the masses. Using the lessons we have learned, and continue to learn in the war over electricity, we can avoid a similar fate with broadband telecommunications. The democratization of broadband telecommunications will give our economy a similar boost to that which it received with the coming of low-cost electric power. It is a "least common denominator" solution to economic development and the stimulation of commerce which is not bound to bricks and mortar infrastructure. There is an opportunity here for our government to spur the development of a new, telecommunications-based, economy which will be capable of sustaining growth and equalizing the experiences of all Americans. The recipe for this economy is written in the history of the electric power industry.

Contrary to popular belief, the development of electric power did not begin in the United States. The first serious experimentation was done in Europe as early as 1730. But for decades the phenomenon remained a curio with no practical application. The real potential for electric power began to take shape with the development of the electromagnet, the telegraph, and crude electric motors during the early 1800's. America really became excited about electric power when early arc lighting demonstrations were done in Paris and London. The prospect of lighting city streets became the nucleus of the new industry.

From the very beginning, the men creating the new industry were more interested in the profit potential of it than the potential ability to improve the lot of all people. More people wanted access to electricity than the industry was able or willing to provide. Thus, some cities sought, through an affirmative government, to provide this service for themselves.

In April 1893, Detroit citizens voted 15,282 to 1,745 on an advisory ballot in favor of creating a municipally owned electric plant, Detroit Electric Light and Power (DELP) and its parent company, General Electric Company, fought against the effort. They saw municipal ownership as a dangerous precedent. "If the city were to do its own lighting at about half what other companies bid, it would establish a bad precedent," admitted William H. Fitzgerald, general manager of DELP. Hazen Pingree, a prosperous shoe manufacturer and municipal reformer was the new mayor of Detroit. He countered DELP’s argument, "If this was done," he declared, "it will take electric lights out of the luxuries of life, only to be used by the wealthy, and place it within the reach of the humblest of citizens."1 The resistance that Pingree ran up against to provide the common people with electric power as a nonprofit service is the same that exists today when an affirmative government seeks to democratize other technology.

Affirmative government was the enabling agent for the democratization of electric power. It mixed with electric power to form public power. Affirmative government has successfully been used in America as an economic development tool for centuries, but it has always been controversial. For example, Albert Gallatin, Thomas Jefferson’s Secretary of the Treasury, and John Quincy Adams proposed a detailed ten-year plan for the construction of roads and canals by the government. Even in the Jefferson administration, Gallatin was contending that the future of the transportation network could not "be left to individual exertion"2 because of its overarching importance to the future of the republic.

Unfortunately, the system of improvements proposed by Gallatin and Adams was never implemented. "With this system in ten years from this day," Adams lamented in 1837, "the surface of the whole Union would have been checkered over with railroads and canals. It may still be done half a century later and with the limping gait of State legislature and private adventure. I would have done it in the administration of the affairs of the nation...I fell and with me fell, I fear never to rise again, the system of internal improvement by means of national energies."3

Fortunately, he was wrong. Franklin Roosevelt adopted his proposals one hundred years later when he created the Tennessee Valley Authority and, with it, public power. Adams would also be glad to see the interstate highway system, even though it took one hundred and thirty years to manifest itself.

Adams and Franklin Roosevelt both understood affirmative government’s ability to affect economic development for the many, instead of the few. They realized that turnpikes, canals and electric systems were not always built to connect thriving communities; rather, they could also be built to penetrate the wilderness in the hope of creating thriving communities. Roosevelt’s creation of the TVA and his strong belief in public power systems proved the wisdom of this philosophy. Public power has succeeded in democratizing electric power.

The elixir of public power has functioned like an antibiotic for the infection of greed that prevented the democratization of electric power in the early days. The importance of this elixir has not diminished with age. However, the infection is now mutating into new strains that must be combated. These take the form of new initiatives by the investor owned utilities (IOU’s) to eliminate public power from the landscape.

Interestingly, these efforts now come wrapped in the outwardly pleasing garb of "deregulation." The IOU’s which first proposed our present system of regulation as a means of stemming the creation of public power systems, now want that system dismantled. They want to return to the "good old days" before public power existed to create competition for them. They would even like to abolish all regulations which prevent them from consolidating and becoming larger and larger. Even now they are merging and aggregating assets at a rate which can only be compared to their glory days of the 1920's. The days of the trusts are returning.

How is this possible? Well, the elixir is getting much more difficult to produce since one of the major ingredients, an affirmative government, is missing. There is a complete void of affirmative government philosophy today. While even staunch private business proponents like Woodrow Wilson recognized in 1912 that, "Without the watchful interference, the resolute interference of the government, there can be no fair play between individuals and such powerful institutions as the trusts,"4 the investor owned electric utilities, telephone companies, and cable television companies have been able to convince everyone to worship Ronald Reagan’s philosophy of, "Government is not the solution to our problem, government is the problem."

Reagan’s principles are still all the rage in Washington. Unfortunately, his idea of getting government off the back of business has resulted in business on the back of government. The attack on federal authority is conducted in the name of state and local rights, but the beneficiary is corporate power. As a result, the giant corporations threaten democracy itself. Henry Adams examined this issue as early as 1870. The Erie Railroad, he wrote, had "proved itself able to override and trample on law, custom, decency, and every restraint known to society, without scruple, and as yet without check. The belief is common in America that the day is at hand when corporations far greater than Erie...will ultimately succeed in directing government itself."5 Today, that belief is closer to reality than it has ever been. BellSouth, TCI, AT&T and others force our legislators to seek their approval before passing laws. Recently, Microsoft suggested that our national economy would be slowed significantly if the government tried to interfere in their release of Windows 98! Bill Gates says what’s good for Microsoft is good for America.6 It seems that Adams’ pessimism was well founded.

To compound our dilemma, another technology is now available which could even eclipse electric power in its capacity to improve our lives. That technology is broadband telecommunications. Like electric power in the early years of this century, broadband is bristling with possibilities. It needs only an affirmative government to democratize it. The story of the Glasgow (Kentucky) Electric Plant Board is illustrative of the possibilities.

In 1988 the Glasgow Electric Plant Board (GEPB), a municipally-owned public power system began constructing a broadband network throughout the community of 14,000. In the tradition of affirmative government, they heard the cries of the people of Glasgow for competitive cable television and other services, and responded.

The GEPB built a network capable of delivering services which the private sector found unprofitable or just too risky. A competitive cable television service caused the incumbent private cable operator to lower their rates and improve their service. A basic service package of 52 channels sells for an average of $14.25 per month in Glasgow. Four megabit per second computer connections and internet access is available for about $20.00 per month. Comparable bandwidth from a telephone company might cost over $1,000 per month.

The GEPB used its existing poles, trucks, billing system, and expertise to expand on the affirmative government philosophy which created it. Using that philosophy, they have been able to also take broadband telecommunications out of the luxuries of life, only to be used by the wealthy, and place it within the reach of the humblest of citizens. The lower rates for cable television have freed up millions of dollars to be spent in the local economy. The high speed LAN connections and internet access have allowed local business to exploit the new technology, increasing profits and services, and help them run their businesses more efficiently. The very presence of the bandwidth has created new jobs and new businesses. In fact, the broadband network has penetrated the wilderness and created a thriving economy where none existed before.

Standing in the way of the construction of similar systems throughout the land are the same forces that Hazen Pingree had to face down in Detroit one hundred years ago. This time, instead of General Electric, the opposition comes from the telephone and cable companies, but their song has the same lyric. Today, they are convincing state legislatures to ban affirmative government. They are compelling weak-minded state legislators to pass laws making municipal operation of broadband telecommunications systems illegal! They are thus condemning the citizens of those states to a life without the new technology of the day or, at the very least, economic servitude to the behemoth cable and telephone companies.

The federal government shares the blame here also. While the Telecommunications Act of 1996 directs the FCC to strike down any state or local law which has the effect of restraining any entity from providing telecommunications services, the presently impotent FCC refuses to do so. They fear "stepping on the toes of state legislatures." Even though the federal government has affirmed the Bill of Rights against local vigilantism and has preserved natural resources against local greed. It has civilized industry, secured the rights of labor organizations, improved income for the farmer and provided a decent living for the old. Above all, the federal government has vindicated racial justice against local bigotry. Still, today’s FCC feels powerless to implement the will of Congress. Had the present state rights philosophy espoused by the FCC existed in the past, there would still be slavery in the United States.

It is obvious to everyone that the democratization of electric power, through affirmative government, has provided, and continues to provide, unfathomable benefits to our people and our economy. The GEPB project allows us to glimpse the possible benefits of doing the same with broadband telecommunications. The time has come for affirmative government to set this process in motion.

The cable and telephone companies will surely howl about the socialistic implication of this course, but history does not validate their claims. Affirmative government programs like public power have not set our nation on the road to totalitarianism. Fifty years ago, Thurman Arnold scoffed at "the absurd idea that dictatorships are the result of a long series of small seizures of power on the part of the central government." The exact opposite, he pointed out, was true: "every dictatorship which we know flowed into power like air into a vacuum because the central government, in the face of real difficulty, declined to exercise authority."7 Or, as Franklin Roosevelt observed, "History proves that dictatorships do not grow out of strong and successful governments, but out of weak and helpless ones."8

The success of the mixture of electric power and affirmative government cannot be denied. Even though the IOU’s fought this mixture with every fiber of their being, in retrospect it has even been good for them. The profits of the IOU’s have steadily risen over the last sixty years, as has the standard of living of the republic which has been blessed with democratized electric power. It is not time to water down this solution, but rather to apply it to the "next great thing"...broadband telecommunications.

Notes

1. Richard Rudolph and Scott Ridley, Power Struggle - The Hundred-Year War Over Electricity (New York: Harper & Row, 1986), pp. 33.

2. Albert Gallatin, "Report on Roads and Canals," The Government and the Economy: 1783- 1861, ed. Carter Goodrich (Indianapolis, 1967) pp. 6-8.

3. J. Q. Adams to C. W. Upham, 2 February 1837, in Brooks Adams, "The Heritage of Henry Adams," introduction to Henry Adams, The Degradation of the Democratic Dogma (New York, 1919), pp. 25.

4. Woodrow Wilson, The New Freedom (Englewood Cliffs, N.J., 1961), pp. 164.

5. Henry Adams, "The New York Gold Conspiracy," in Adams, The Great Secession Winter of 1860-61 and Other Essays, ed. George E. Hochfield (New York, 1958) pp. 189.

6. Associated Press, "Microsoft Throws Self a Pep Rally," The Courier-Journal, 6 May 1998, pp. C5.

7. Thurman Arnold, "How They Are Voting," New Republic, 30 September 1936.

8. Franklin D. Roosevelt, Fireside Chat, 14 April 1938.

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Glasgow EPB and Tennessee Valley Authority Respond to Cable Industry Misinformation

In city after city across the country, the cable television and telephone industries provide propaganda about the Glasgow Electric Plant Board and our telecommunications activities. The following letters provide the reader a good cross section of the responses to the misinformation disseminated by those parties most interested in preventing the spread of municipally owned broadband networks.

May 28, 1997

Mr. Robert W. Jodon
Editor
The Daily Reporter
15 West Pearl Street
Coldwater, MI 49036

Dear Mr. Jodon,

Imagine my surprise after learning that Cliff Cleland of Mercom, Inc. recently reported to the Coldwater City Council that our telecommunications project here in Glasgow, Kentucky is an utter failure! According to the written transcript I received, he and Craig Martin of the law firm Howard & Howard provided a series of half-truths and outright false statements to the council members and then had the audacity to punctuate their remarks by quoting Harry Truman. So, to paraphrase Harry Truman, this letter is written to tell the truth and give Mercom hell.

The people of Glasgow began discussing the construction of a municipally-owned broadband network capable of providing competitive cable television service and other telecommunications services over ten years ago. We ultimately decided to construct the network and it has been operating since 1989. The representatives of the incumbent cable operator made the very same statements to our city council that were recently made to yours by Mr. Cleland. Having tried everything possible to protect their monopoly, they finally filed lawsuits to try and scare us off. The Glasgow City Council members were not afraid. We DID NOT spend "hundreds of thousands of dollars in legal fees." Actually our insurance policy paid our legal expenses, had this not been possible we would have still taken the opportunity to use our own money and stand up legally to the bullies at the local cable company. By the way, we won all of the litigation, a fact which Mr. Cleland neglected to include in his remarks.

The people of Coldwater need to understand one thing about the project CBPU is contemplating. It will never make economic sense from the perspective of the owners of Mercom or the local phone company. It will also not make a lot of money for the city coffers anytime soon. Projects that make a lot of money are best left to the private sector. Projects like parks, sidewalks, storm sewers, and streets do not make money and thus are the natural domain of the public sector. The time has now come for broadband telecommunications networks to be added to the list of public sector projects.

While our SUCCESSFUL project has struggled to break even from the perspective of our balance sheet, it has provided a fifty channel basic cable television package to the residents of Glasgow for $13.50 per month for eight years. Our participation has caused the other local cable provider to offer the same package for as little as $5.95 per month and recently $12.50 per month. This competition has saved the cable customers in Glasgow well over $10 million during those years compared to what the people of Coldwater, or most other cities, would have paid. We have also learned how to provide Internet access to homes and businesses in Glasgow for $12 a month at speeds for which the phone company charges $500 a month, and more. As a result, we have captured over 55% of the cable television market in Glasgow and we are still growing rapidly. As you can see, the definition of a failure, like beauty, is in the eye of the beholder.

This project is not complicated. This is an economic concept as old as our country. When the people of a community want a service and cannot get it for a reasonable price from the private sector, they have elected to do it themselves. This is why Coldwater owns streets, parks, water and sewer plants and electric utilities. Now the people of Coldwater want modern telecommunications services at competitive rates. The most conservative free market economist of all time, Adam Smith in his 1776 treatise on economics, "The Wealth of Nations" said, "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest." The project CBPU proposes, is mainly a way to get the telecommunications giants concerned about their interests in Coldwater again. Out of that concern will flow real competition. Out of that competition will flow a better way of life for the people of Coldwater.

July 15, 1997

Public Pulse
The Daily Reporter
15 West Pearl Street
Coldwater, MI 49036

Dear Editor:

This letter is written in response to the letter from Clifford Cleland published in your paper under the headline "Mercom, Inc. manager puts facts on the table." It is certain that was a pretty bare table after Mr. Cleland was finished setting it, as many of his statements were anything but factual.

I have never been asked to endorse the Coldwater Board of Public Utilities plan. A consultant sent me copies of Mr. Cleland's remarks about the Glasgow project and I did, because I detest people being told lies by cable operators, respond by writing a letter to this newspaper.

Mercom, through its attorney, filed an open records request asking for all financial records, including audit reports, on the Glasgow Electric Plant Board for the last several years. We provided the records as we are a public entity and they have the right to look at all of that information. That is pretty handy isn't it? Wouldn't it be nice if the citizens of Coldwater could get the same information about the activities of Mercom? If the CBPU puts in the system they are contemplating, the citizens will be able to see how every dollar is spent. Many right-thinking citizens consider that one of the most important aspects of municipally owned utilities. When the city owns the utility, citizens know they are not being charged unreasonable rates for services they simply cannot live without.

After getting copies of all of our financial statements, Mr. Cleland remarks that the system has lost money. I said as much in my initial letter to this paper. This system is not a cash cow for the city -- it is a resource for the people of Glasgow. How else can I state it, we sell a 51 channel cable package for $14.95 per month! Obviously, starting with zero subscribers, we lost money in the early years. We planned for that and borrowed sufficient funds to capitalize those losses. On a cash flow basis, the project now breaks even and actually makes a little money. That was in the information Mr. Cleland received. In fact, it is available to everyone on our website at www.glasgow-ky.com.

We have NOT subsidized our telecommunications system with electric rates. Over the last 14 years we have increased electric rates twice and lowered them three times. Our average cost per residential kilowatt hour this year was six cents. The remark about TVA "ordering" us to pay $300,000 to the electric division is pure hogwash. That information was taken out of context from our most recent audit and dealt with allocation of costs between different accounting entries. The net impact on the citizens is that the telecommunications activities actually subsidize some overhead costs of the electric utility! In other words, we get more out of the employees we already had as the telecommunications revenues pay a portion of all of our salaries!

The rest of Mr. Cleland's recent letter is the same old worn out cable television whining that every city hears when they start talking about bringing some REAL competition to these guys. I always laugh when they talk about how they already have fierce competition from broadcast television and video stores. The cable operator in Glasgow said that too. Amazingly though, they did not lower their rates to $5.95 per month in response to any of that fierce competition. They DID lower their rates when the city gave them some REAL competition though!

The FACT is the technology is now available to bring competitive cable television and high speed internet connectivity to everyone. The QUESTION is are the citizens of Coldwater content to wait until some benevolent company brings that technology to them, or do they want to do it for themselves NOW?

Mr. James Paxton
Editor
The Paducah Sun
P. O. Box 2300
Paducah, KY 42002

Dear Editor:

This is in response to your editorial regarding Paducah Power and my remarks at a recent meeting there. It is unfortunate that you did not raise the issues you raised in your editorial at the meeting so we could have discussed them there.

Your belief that a city-wide communications network is an "effort to preserve and pad government jobs at the expense of the private sector" is laughable. One could say that the expansion of the Fire Department takes jobs away from undertakers, furniture salesmen and carpenters in Paducah, but most believe this to be a worthy trade off. You should familiarize yourself with the facts about our project. On December 17, 1995 your paper published an in- depth study of the project and interviewed several local business people. They spoke fervently of our project. David Fraser did not have to catch up with any of them as they ran away as fast as they could, rather he found them thankful that the city had provided them a more fertile field for them to plant their businesses in.

The people of Paducah should understand that present day cable television markets are similar to electric power in the 1930's. In those days electricity was nearly completely controlled by a few large utilities. It was a market that they had used their wealth to master, and thus they could charge whatever the market would bear for the technology. The owners of those electric utilities were very happy, and they did not want that situation to change. They uttered the same words you did in your editorial long before you. I believe that one means by which democracy can combat the forces of entrenched and organized greed is through the use of government. "A government," Senator George Norris said "in the truest sense is only a method to bring to humanity the greatest amount of happiness." That is what we ought to get out of government. Using this philosophy resulted in electric power being made cheap and available to all. We can do the same for information power.

Our network delivers a fifty-one channel basic cable package for $13.50 per month. It has done so for the last eight years. We have never had a rate increase. This is called cost-based pricing. The citizens of Paducah pay roughly twice that price. This is called market-based pricing. Market- based pricing is fine in an openly competitive marketplace. An openly competitive marketplace is one where other competitors are free to enter the same business you are in and do a better job than you, taking away your customers if they can. This is called free enterprise. The system we have constructed in Glasgow, and the one being considered in Paducah, PROMOTES free enterprise. Do the people of Paducah really look at Comcast and BellSouth and say "Now there is a little business, just like mine, that needs to be protected from the big bad guys at Paducah Power System?"

Since you stated in your editorial that your opinions did not result from greed, we must assume you are simply devoted to free markets and limited government. That would make you a devotee of the words of Adam Smith and his 1776 treatise on economics, "The Wealth of Nations." The most famous sentence in that book is: "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest." You should then be in total agreement with the project Paducah Power proposes, as it is mainly a way to get those two telecommunications giants concerned about their interests in Paducah again. Out of that concern will flow real competition. Out of that competition will flow a better way of life for the people of Paducah.

March 13, 1998

Mr. Pete Lovrovich
City of Ashland
Electric Department
90 N. Mountain Avenue
Ashland, OR 97520

Dear Mr. Lovrovich:

This letter is written in response to the information you faxed us. The document you sent is a new twist on the fairy tales regarding our project that the cable television industry is writing and distributing all over the country. It is somewhat heartening to know that the threat of competition is scaring them so much that their "information" is getting even more fictional. It is hoped that this letter will provide you some useful information from someone who knows the facts and is not afraid to provide them.

First and foremost the Glasgow project is an exercise in the provision of municipal infrastructure. About the only factual information in the document you sent us relative to our project is that the project was not designed to produce revenue. We know of no municipal infrastructure that actually produces net income for the city. Sidewalks produce no revenue. The same is true for storm sewers, parks, ambulance service, and police protection. The cable industry likes to talk about these projects losing money. What they do not like to admit is that citizens have decided that advanced telecommunications services and competitive cable television have now become, in their eyes, essential services. That means they expect their city government to come in and perform that function which they created a city government for; provide a service that they cannot get in a satisfactory fashion from the private sector.

The financial aspects of our operation are an open book. The cable industry gets its information from us by filing open records requests. We have made it even easier for them by posting our information on our website at www.glasgow-ky.com. The problem is, they do not like the facts, so, in classic cable television operator fashion, they contort them in the hope that the audience will be too stupid to check out the facts for themselves. As a non-profit municipal corporation, we issue revenue bonds often. We issue revenue bonds to pay for all capital projects whether they be for electric distribution plant (by far the most common occurrence) or for telecommunications plant extensions. Their contention that we have issued revenue bonds to finance continuing losses of the project is an interesting one. Have you ever issued revenue bonds on the open market? If so, you realize the scrutiny these bond sales receive. They must be blessed by bond counsel, a rating agency like Moody's, a financial advisor and finally by sophisticated purchasers of such debt. If anyone believes that we, or any municipality, could issue revenue bonds and receive a Moody's "Aaa" rating for a financially unstable project they simply do not live in the real world.

The Tennessee Valley Authority is our de facto regulator. They have been notified of the misrepresentation of their study of our project. You will be receiving, under separate cover, a copy of the letter from them addressed to the cable industry's continued untrue remarks about their findings.

The truth is the significant economic results of our project do not appear in the balance sheet of the Glasgow Electric Plant Board. They appear in the pockets of local citizens and in the retail economy where they live and work. As a result of our project, the average monthly cable television bill in Glasgow is about $20. The average bill in Ashland is probably about $37. We sell unlimited T1 speed access to the Internet for $11.95 per month for residential customers. If such a service were purchased from the phone company in Ashland it would likely cost over $400 per month. The difference in cable rates for the roughly 6000 homes in Glasgow means that the people of this community save over $1.2 Million per year. Over the life of our project, we have saved the people over $10 Million. If you agree with "Chamber of Commerce economic theory," that money turns over four or five times in the local economy producing a benefit of over $50 Million. That is not even counting the savings in Internet access. That $1.2 Million per year gets spent in Glasgow. It produces jobs. It increases the tax base. It creates new businesses. Those businesses pay taxes and use electricity. These are the factors that cities use to decide what services they will provide. They differ considerably from the models that the cable industry uses, as they should!

Finally, let me address the language they attributed to me in a direct quote. I am sure I have uttered those words. I have uttered a lot more words about the cable television industry and the people in it, but apparently they have chosen not to forward those comments to you. Perhaps the most useful quote for your purposes would be one attributed to the late Senator George Norris. He was having to battle the greed of the private electric utilities to create the Tennessee Valley Authority when he said, "A free people cannot permanently submit to the private monopoly of a necessity of life." The battle against the cable television operators today is just as fierce, and just as important as the decades old battle to establish publicly owned electric utilities.

If you have any further desire to hear the facts about the Glasgow project, please let me know.


Tennessee Valley Authority, Post Office Box 20260, Bowling Green, Kentucky 42102-6260

March 16, 1998

Extra Space

Extra Space

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Mr. William J. Ray, Superintendent
Glasgow Electric Plant Board
Post Office Box 1809
Glasgow, Kentucky 42142-1809

Dear Billy:

During recent discussions you mentioned leaders from various communities have asked questions about accounting and other aspects of the cable television, communications, and internet services being provided by Glasgow Electric Plant Board (GEPB).

GEPB is to be commended for its creative and innovative approach to customer service, consistently demonstrated during the last decade, through offering a variety of valuable energy and information services. The citizens of Glasgow, Kentucky, have certainly been primary benefactors of your endeavors. We at TVA, and other distributors of TVA power, have also gained valuable information from your efforts to prove new technology and from your knowledge of customer response.

We are pleased to join GEPB in piloting technologies related to customer use of energy management tools over an interactive communication network. The knowledge that we will gain together, regarding the depth of customer interest, will serve us well as we enter an age of expanded energy choice. With respect to accounting practices, GEPB's communications projects are being conducted in full accordance with operating and accounting principles agreed upon by GEPB and TVA.

We look forward to a continued partnership as we look for new opportunities to better serve the people of the Tennessee Valley.

Sincerely,

Extra Space

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Myron N. Callaham
Senior Customer Service Manager
Kentucky


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The Battle For Municipally Owned Telecommunications In State Legislatures

In 1998 House Bill 772 was introduced in the Kentucky House of Representatives. It was a bill very much like those introduced in many other states. It would have required that municipally owned telecommunications systems impute additional costs into the rates they charge for telecommunications services. This request, which amazingly has actually passed in a few states, is based upon the insane reasoning that city-owned services should add costs to their rates to mimic the profit and payments to shareholders that private sector services have. Even though a city elects to provide these services so that citizens can have access to them at a lower cost, the bill, introduced by BellSouth, was intended to make the rates higher. Thus, it would be easier for companies like BellSouth and GTE to compete without having to take the drastic step of LOWERING their rates. The following documents provide the reader a feel for the issues that unfolded in this fight. Ultimately, the bill's sponsor withdrew the bill for the 1998 legislative session in Kentucky.

Mr. Garrett Drakeford
Kentucky League of Cities
101 East Vine Street
Lexington, KY 40507-3700

Dear Garrett:

This letter is written in response to the draft bill you faxed me yesterday. This bill is a thinly veiled attempt by the incumbent telephone and cable companies to maintain the stranglehold they have on the people of the Commonwealth and our economy. Rightfully, it should be laughed out the door before it hits the table. Unfortunately, their money gives them the power to have pieces of trash like this actually receive consideration by our legislature.

The first confusion in the bill comes at line 16 when they infer that government entities would be selling "for profit telecommunications." This is obviously not the reason a government entity would begin to offer telecommunications services. Government offers services that are so important to a community that the community decides to band together and offer the service to themselves at a not for profit rate. This decision is not new. It has occurred many times throughout our history. You will find attached a copy of a paper I have written on this subject for the Tennessee Legislature earlier this year.

On page 2 of the draft, on line 11, the author states the intent of the bill is to require that government owned telecommunications enterprises compete on the same terms and provisions as the private sector. We can only wish that such a concept were possible. That would mean that municipally owned cable television operations would get to buy programming at the same discounted rates that the cable operators charge themselves. It would mean that we would be able to purchase T1 circuits and access to the internet for the actual cost of the service instead of the ridiculously inflated rates which the telephone companies charge us!

Much of the draft seems to labor under the illusion that municipal utilities and telecommunications operations pay nothing to local governments. The fact is that municipal utilities make in lieu of tax payments that are likely much greater than the private sector telecommunications providers pay. They also provide free or drastically reduced rate services to local governments and schools. Why should this bill be passed to restrict a local government's ability to offer essential services to its citizens at not for profit rates? Do the people who have been paying obscenely high rates for these services for years owe it to the BellSouths of the world to make sure they never have to face real competition?

I urge all members of the Kentucky League of Cities to preserve their rights to offer low cost telecommunications services to the people of the Commonwealth by defeating this attempt, and all attempts by the incumbent telephone and cable television monopolies, to protect their inflated rates for these essential services.

Respectfully,

William J. Ray, PE
Superintendent
Glasgow Electric Plant Board

Dear Representative

RE: HB 772

I am the General Manager of the Glasgow, Kentucky Electric Plant Board. We are the municipally owned utility which has brought competition to the cable television, telephone, and high speed internet businesses.

We have made amazing discoveries. We sell a 53 channel cable television package for $14.95 per month. We are able to do this and still break even on the product. We also sell high speed (4 Megabit per second) access to the internet and to the local schools networks for $11.95 per month. Likewise, we are able to do this and not lose money. At the same time, these reduced rates save the people of Glasgow nearly $2M per year. That money gets spent in our city and helps provide jobs and prosperity for local businesses and families.

You obviously realize this is a fraction of what the private cable operators and telephone companies charge for these services. We have discovered that the phone companies and cable companies have been raping us for years while we lived in the darkness of their monopolies. Our project, and others like it in Frankfort, Bardstown, and Barbourville, has illuminated that darkness and companies like BellSouth do not like the light.

They have introduced HB 772. This is an ugly little piece of work. In effect, this bill asks the legislature to override the local government's ability to set rates for services it offers. Kentucky has a long tradition both of allowing local governmental entities to provide utility service, and of not allowing the Public Service Commission or the legislature to regulate the rates charged by the local governments. For decades, the legislature has found that allowing municipal utilities to have economical sources of gas and power to serve their customers developed and promoted the public good. It is certainly reasonable that these same capabilities in the telecommunications arena will do the same. All of the people of the Commonwealth need your help in sending this bill to the grave it so richly deserves to occupy.

Many other cities, like Bowling Green, Owensboro, Hopkinsville and Murray, are considering building projects like ours and making these high technology services available to citizens at COST based rates. This bill will stop them dead. That is what BellSouth wants. Please do not give them what they want. This bill has been assigned to the Tourism Development and Energy Committee. Please do not be swayed by the rhetoric and big money of the telephone companies. The competition being delivered in some Kentucky cities and contemplated in many others is the only real way the people of the Commonwealth can receive these essential services at a reasonable, cost-based price. Please help the ratepayers of this Commonwealth defeat this bill.

Respectfully,

William J. Ray, PE
General Manager
Glasgow EPB

HB 772 ORAL TESTIMONY

Normally, I stay in Glasgow where I am the General Manager of the Glasgow Electric Plant Board. We are a municipally owned and operated utility. We buy electricity from TVA and distribute it to the people of Glasgow. The Kentucky legislature, over fifty years ago, authorized cities to perform this function and to set the rates to be charged for the service. About ten years ago the people of Glasgow also asked us to begin offering them cable television service in competition to the existing cable operator. We did that, we now offer a 53 channel basic cable package for $14.95 per month. Later, they asked us to offer competitive telephone service and high speed internet access. We did that too. We now offer internet access that is nearly 100 times faster than that offered through telephone modems in the rest of the state. We sell this service to residential customers at $11.95 per month. Thousands of people in Glasgow feel it is their constitutional right to provide services for themselves if they so choose and to set the rates for those services. Now, ten years after we began providing these services, I come here to defend our right to control our own destiny because a company like BellSouth has now decided they do not like what we are doing and the rates we are charging.

Just who are these companies that have asked you to consider this bill? GTE is a little telecommunications company that made $21 Billion last year. BellSouth, a slightly smaller company that only made $19 Billion. They are growing though. Last year their revenues grew at the one of the fastest rates in their history. Their history goes back to AT&T. They are one of the companies that was created when AT&T's profits and market dominance got so big and powerful that the federal government finally stepped in and broke them up. Now, the regional companies are rapidly approaching the size that AT&T was before the government took action. BellSouth is the kind of company that will readily talk out of both sides of its mouth if that will help them continue to set records in the revenue they take from my community and yours. For example, yesterday on the internet, I found a copy of a statement by Duane Ackerman, the CEO of BellSouth, to a group in Washington DC. I included a copy of it in my printed testimony. You will see that he was calling on the FCC and State Legislatures for a moratorium on regulation. He said,

"that unnecessary Federal Communications Commission (FCC) and state regulation has so compromised the "value equation" that shareowners often can earn more from better, less risky BellSouth investments abroad. Although BellSouth will invest some $7 billion this year, he noted, because of regulatory constraints little of that will be dedicated to providing high-capacity "broadband" communications links to the home. "

Isn't it strange that the same company that is lamenting the chilling effect that additional regulation has on the expansion of broadband networks, is also ASKING for you to pass additional regulations in Kentucky? Finally, isn't it a joke to suggest that me and my 35 employees in Glasgow or any of the services contemplated by other Kentucky cities are a real threat to these $20 Billion a year companies?

Speaking of a joke, lets take a closer look at the reasoning behind what this bill proposes. Instead of treating all entities equally, they want the Kentucky legislature to MAKE all entities equal. For example, BellSouth and GTE certainly enjoy better capital costs than a typical small business owner. Does this put the small company at a competitive disadvantage? Of course it does. Should the legislature thus determine which company has the highest capital costs and require that all other companies impute that amount into their rates to "level the playing field"? Certainly not. However, that is the reasoning this bill espouses. Since the cities in Kentucky have to comply with expensive open records requirements or expensive municipal bidding requirements, should those costs be imputed into the rates of all private companies? Again, no. The only fair way to set rates is to let the marketplace set the rates. Let the big companies use the advantages and suffer the disadvantages they possess. Let the small companies and the local governments do the same. This idea works. Look no further than Glasgow and Frankfort for proof that this scenario works. IN FACT, the existing regulatory environment in Kentucky is working VERY WELL to promote the construction of advanced telecommunications and broadband networks. Glasgow, Frankfort and Barbourville have already constructed broadband networks. Bowling Green, Murray, Owensboro, Hopkinsville, London and others are in various stages of doing the same. These are networks that would not have been constructed if the law you are presently contemplating had been in place. These networks also would NOT have been constructed by BellSouth or the other telephone companies. If you agree with me, that providing advanced telecommunications infrastructure is a good thing for the people of the Commonwealth, you need to do nothing but LEAVE THE PRESENT ENVIRONMENT ALONE.

In Glasgow people can choose between cable service from the city or cable service from a private cable company. One charges $14.95 for cable and the other charges $13.50. They can buy telephone service the same way. They can buy internet access and email addresses from the city too. They can walk in a local office and talk to real humans about their cable, telephone and internet services. They can come to public board meetings and participate in the rate making process. The people of this Commonwealth have enjoyed their right to establish such an arrangement for many years. There is no reason for this legislature to abridge that right. In summary, I am asking you to send a message to the telephone companies by burying this bill. Tell them that competition is not going to be that easy. They cannot maintain their high rates and lousy service by coming to the Kentucky legislature and hiding behind your coat tails. Tell them to take their $20 Billion a year and... see if they can use it to simply do a better job than we can in Glasgow, Frankfort, Bardstown, Barbourville and other Kentucky cities.

HB 772 WRITTEN TESTIMONY

Kentucky has a long tradition both of allowing local governmental entities to provide utility and many other services, and of not allowing competitors, the Public Service Commission, or the legislature to regulate the rates charged by the local governments. This tradition has led to municipal utilities finding economical methods of procuring gas, power, and solid waste disposal services which developed and promoted the public good. It is certainly reasonable, and it has been proven in Glasgow and Frankfort, to conclude that the decision of the legislature to allow local governments to also provide unfettered telecommunications services will also promote universal service and economic development, and the provision of affordable prices to consumers.

This Bill, in effect, regulates the rates charged for services supplied by local government. It runs afoul of the Constitution of the Commonwealth of Kentucky. It would direct local government to include expenses when calculating the rates for services that simply do not exist!

Following the stated reasoning behind proposing this legislation results in an absurd situation. For example, BellSouth and GTE certainly enjoy better capital costs than a typical small business owner. Does this put the small company at a competitive disadvantage? Of course it does. Should the legislature thus determine which company has the highest capital costs and require that all other companies impute that amount into their rates to "level the playing field"? Certainly not. However, that is the reasoning this Bill espouses. Since the cities in Kentucky have to comply with expensive open records requirements or expensive municipal bidding requirements, should those costs be imputed into the rates of all private companies? Again, no. The only fair way to set rates is to let the marketplace set the rates. This is already occurring in Glasgow and Frankfort.

BellSouth made over $19 Billion last year. GTE did even better at $21 Billion. Is it reasonable for anyone to believe that the Kentucky legislature needs to protect them from services offered by a few cities in Kentucky?

The people of Glasgow enjoy unlimited access to the internet at speeds approximately 100 times faster than that offered by BellSouth, GTE or any of the telephone companies in Kentucky for about $20 per month. They also receive a 53 channel cable television package for $15 per month. These are services that the people of Glasgow, acting through their municipally owned electric utility, decided to provide for themselves. They determined the rates. These rates adequately cover the costs of providing these services. BellSouth was not providing these services for Glasgow, neither was GTE or any other telephone or cable company. Were it not for these services being provided by the city, they would still not be available in Glasgow. But, since the cities presently have the right to determine what services they will provide for their citizens and to set the rates for those services, Glasgow has been able to attract many new high tech businesses and industries that would otherwise have not been in Glasgow. People have jobs in Glasgow that they would otherwise not have. This has been accomplished without subsidies from the Federal, State or local government. Now comes BellSouth and the other telephone companies asking that we add costs to our rates that do not exist. They want us to tell our customers that their rates are going up just because BellSouth thinks they should. They want the customers in many other Kentucky cities to simply "do without" these services since the cities will decide not to build such systems under the environment which this legislation will create.

Advanced telecommunications services are essential to the continued vitality and growth of communities in Kentucky. Without them, these communities cannot
- attract new businesses and hold on to existing ones
- correct disparities in educational opportunity
- improve the quality and contain the cost of health care
- achieve the high quality of life enjoyed by larger Kentucky cities

Without the competition brought about by the municipally owned electric utilities, electricity would cost much more and not be as widely available as it is today. The same holds true for advanced telecommunications services. The cities, acting through their locally owned and operated utilities, can act as a catalyst to cause these systems to be constructed. Every city will not elect to do so, just as every city has not decided to establish a municipally owned electric utility. But, the pressure from the residents of the cities that do will cause companies like BellSouth to spend more money in the United States and in the Commonwealth. Without such a catalyst, Kentucky will remain a high technology wasteland.

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Private Enterprise, Privileged Enterprise, or Free Enterprise

Every City Should Be Allowed to Choose

By William J. Ray

In the last couple of years, a few state legislatures have been convinced by the cable television and telephone companies to limit the rights of their cities to provide cable and telecommunications services for themselves. The state legislators were lulled to sleep by the effective lobbyists representing businesses that have found themselves suddenly providing services that the people feel are essential. They also find themselves as protected monopolies, able to charge whatever price the market will bear without regard for the essential nature of their service. They have convinced the legislators that their business is far too complicated for those foolish people in city governments to understand and thus the cities should not be allowed to let their stupidity get them into trouble.

While the cable operators of today feel that this is a new idea, created solely to bring them grief and agony, it is really a centuries old concept. Cities have been turning a limited number of formerly private businesses into public works projects for centuries. This happens only when the people making up a local government believe that the service has become so essential to the citizens that it is better for all if it is operated by the government. In the time of King James this transformation of purpose came about in the ownership of ferries. In colonial America it was all about drinking water. In the twentieth century the issue was electric power and natural gas service. Now we are facing the same transformation in broadband networks.

In Glasgow, Kentucky, and in dozens of other communities, the citizens are repeating the cycle that is now familiar to students of history. Those citizens are becoming aware that it is possible to construct bidirectional broadband networks capable of delivering them competitively priced cable television and telephone service as well as high speed LAN services and access to the internet. They get to decide if this service is essential to their life and in a growing number of cities, they have decided that these services are something they cannot live without. As a result, acting in the most grass-roots oriented way possible in this republic, those cities are electing to construct those systems as public works. This is not an affront to the existence of our republic. This ability is at the very heart of the local powers envisioned by the framers of our constitution.

The word "republic" I use as Thomas Paine, propagandist of the American Revolution, used it in his Rights of Man, to mean "not any particular form of government" but "the matter or object for which government ought to be instituted...res publica, the public affairs, the public good; or, literally translated, the public thing." Our experience in Glasgow certainly affirms that people see their cable television service and now high speed internet service as essential to their republic. In fact, they consider their ability to choose between the privately owned cable company and their municipally owned competitor as essential. The telecommunications companies often speak of making sure "the people" understand the potential dangers of cities acting on behalf of their citizens to compete with "private enterprise." The fact is that the people understand full well what the dangers are. They are able to prioritize those dangers themselves. They feel that the largest danger is in not having access to these services at fully competitive rates.

The cable operators are only the latest proponents of a laissez-faire economy. Remember that concept from Economics 101? The true believers in this concept believe that the government should stay out of business. They should "leave it alone." The cable operators present an interesting spin on laissez-faire. They, like many other corporations, want aid from the government but they do not want any interference from the government. They build their business on public property. They count on a strong city government to attract the densities of people they need. They blame the city for everything from boring programming to poor signal quality, but they sure do not want them to be able to actually participate in the business. Curiously, the mantra of the cable and phone company lobbyists has been that allowing local governments to set up their own telecommunications networks threatens the free nature of our economy and our republic. The actual truth is that the only threats to the underpinnings of our republic are the state laws which have been passed which have the effect of establishing the incumbent cable and phone companies as permanent monopolies. THAT is a threat to our republic!

The textbook for the advocates of laissez-faire is Wealth of Nations. It was written by Adam Smith and published in 1776. The cable operators consider themselves devotees of Adam Smith (at least that inference can be drawn by their testimony in many state legislatures). They say that they favor free markets and no government participation. However, Adam Smith actually was never so committed to government bashing. He viewed government intervention in the market with great skepticism but he was prepared to accept qualifications to his views in specific cases where the net effect would be beneficial and would not undermine the basically free character of the system. His exceptions included, in 1776, that government should provide public goods, such as highways, harbors, bridges and the post office. In today's terms would that not include the information highway? The modern advocate of laissez faire who objects to government participation in business on the ground that it is an encroachment upon a field reserved by nature for private enterprise cannot find support for this argument in the Wealth of Nations.

If we then discount pure allegiance to the laissez-faire doctrine as the reason for the cable and telephone company's opposition to the rights of cities, there is then nothing left but unmitigated greed. They have maneuvered themselves into a monopoly position and they are willing to do anything to preserve this comfortable state. This too is a cycle we have witnessed before. In the last two hundred years our country has experienced many ebbs and flows in the country's tide of opinion on the balance between government intervention and the unfettered course of private corporations. At both limits of the tide, we have all been quite uncomfortable. We have the examples of the failure of the Soviet Union to show us that total government ownership of any enterprise is doomed. On the other hand, we have the example of the Great Depression in this country to show us that when we fall on our knees in worship at the shrine of private business and industry we can expect that shrine to fall upon us. It was said, and accepted without question by millions of Americans, that private business could do no wrong in the 1920's. Soon, that attitude left the inherent greed of many corporations to bring us to our knees in the Great Depression.

We do have a model for a system that is at neither of these extremes. Electric power in this country provides a model for the future of broadband telecommunications that we know is workable. Seventy years ago, the great power trusts (similar to today's MSO's and RBOC's) sought to use legislative fiat to make sure they would not face competition from cities. The power trusts had glimpsed how important electricity was going to be in the economic future of a growing country. They wanted to keep this genie in the bottle for their own uses. To their chagrin, the people of the 20's were not as ignorant as the executives of the power companies had hoped. They too had seen the power of electricity and they wanted it, immediately! Full scale war erupted between the power companies and the people of cities that were unserved or underserved. This war produced heroes. One such hero was George Norris, the great Senator from Nebraska. Norris clearly stated the feeling of the cities when he said, "A free people cannot permanently submit to the private monopoly of a necessity of life."

Franklin Roosevelt felt exactly the same way. His principle of, "Where a community, a city or a county or district is not satisfied with the service rendered or the rates charged by the private utility, it has the undeniable right as one of the functions of government to set up its own governmentally owned and operated service" set the foundation for over 2000 cities and towns to set up their own municipally owned electric utilities. These systems are still relatively insignificant in size compared to the huge privately owned electric utilities of today, but the competition between private systems and municipally owned systems keeps both of them honest and efficient and results in electric power being democratized in this country. It is cheap and available to all. We should all hope that the same can soon be said for broadband networks.

And so the debate, as old as American history, continues as well it should. The alternation between affirmative and negative government corresponds to the alternations between the private- interest and public-purpose phases of the political cycle. This cycle has repeated itself for centuries but this is the first time that any industry has been brazen enough or powerful enough to convince state legislatures to defend them by taking the rights of cities away. This is a trend which should frighten everyone. If cable operators are afraid of cities competing with them, there is a defense which is impregnable. They can charge reasonable rates, offer consummate customer service, improve their product and conduct their business as if they were a guest which owes their existence to the benevolence of the city that has invited them in. That was the means employed by the privately owned electric utilities over the last several decades and it has worked for them . . . so far.

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THE PUBLIC POWER RENAISSANCE:

Utilizing Broadband Highways to Transform
Public Power Utilities into Public Technology Utilities

by

William J. Ray, P.E.
Superintendent, Glasgow Electric Plant Board
Glasgow, Kentucky

October, 1992

An American Public Power Association publication entitled Public Power In America: A History, states:

Electric power made its debut in the United States in the 1880's and, like no other force in history, irresistibly shaped the future of the American people. Public power was on hand to help usher it in. Locally owned municipal electric systems quickly became part of the new age of electricity that was to enrich lives everywhere and dramatically alter the face of the nation.

It should be noted that nothing is said about the distribution of electricity being the exclusive purpose of public power. To the contrary, it points out that public power was on hand to usher electricity into their communities because electricity was the new commodity that the community desired then.

Today, just such an opportunity comes again. Two-way communications systems operated by public power utilities have the capability of making changes in our customers lives which are just as earth shaking as the introduction of electricity. Unfortunately, most public power officials have not embraced this philosophy. I would like for this paper to accomplish two objectives. First, I would like to convince public power decision makers that our mission has yet to be fully realized as long as our communities have need for another public service. Second, I would like to fully describe my vision of what we could do for our communities by installing "broadband highways" in our 2,200 public power communities.

Public power systems were not created as simply a different way of delivering electricity anymore than the Declaration of Independence signified simply a more convenient way of governance for the colonies. Rather, public power systems are the manifestation of a lengthy common thread of fiercely independent "we can do it ourselves" spirit. That thread has wound its way through men like Christopher Columbus, Thomas Jefferson, Franklin D. Roosevelt, and on to the early founders of public power systems. Christopher Columbus really had no idea where he was going. He believed ocean covered only one-seventh of the globe and that the Western Ocean was narrow. After all, that was the conclusion of the orthodox Christian authorities. After four trips to the New World, he died believing he had been exploring the east coast of Asia. Of course, what he had really discovered was the ignorance of European man's illusion of knowledge of the world. I see many similarities today as communities gaze out upon the ocean of technology. To most people, the maze of computers, communications, software and automation provide the same level of trepidation that 15th century Europeans must have felt as they gazed to the west looking upon the unfathomable ocean.

Fortunately, there have been men willing to throw themselves into the unknown in this fashion so that the rest of us can ride the waves created by the impact of their discovery on the fabric of society. Today public power systems are uniquely qualified to provide that impact in delivering the promise of a better life for their communities through the mastery of the transportation of information. But, instead of throwing themselves into the unknown, most public power systems are standing on the sidelines waiting for guaranteed financial benefits before they bother themselves by responding to the needs of their community. Our heritage, however, is populated by pioneers who did not apply the rules of cost-benefit analysis. Columbus, Jefferson, Roosevelt and countless local public power pioneers did not really know where their missions would take them, and they did not care. Thus, our history is filled with risk takers and our communities have every bit as much need for help in navigating the ocean of technology as early Europeans did in seeking a more direct route to Asia.

The unknown that I am advocating all public power systems to throw themselves into is the addition of a two-way communications network (a broadband highway) in all public power communities. This new public service would first benefit the public power system itself. What is more important, the potential benefits to public power consumers could have a greater impact even than the initial provision of electric power! Again, our history proves that providing new public services is near and dear to our heritage. American Public Power Association's Public Power In America: A History states:

More important than just numbers was the rapid evolution of how people perceived electricity. First, it was regarded as a dazzling experiment and a convenient luxury for the privileged. It was not long, however, before electricity was rightfully recognized as an indispensable tool of the nation's growing industrial might and an essential part of everyone's daily life. Electric companies came to be regarded as more than just suppliers of a fascinating, specialized product. They were charged with public responsibility in rendering a public service. Public service was then and remains the principal mission of public power systems. (Emphasis added.)

It was public power's duty in the past, not only to deliver electricity to people, but also to educate them on how to use the product. Nothing in our history guaranteed us that this job would only need to be accomplished once. Today's challenging social and economic conditions require someone to step up to the task of supplying technology and educating about technology in the same fashion that public power systems did with electric power. Who should accomplish this feat? WE SHOULD!

The broadband communications system (or highway) that Glasgow has constructed can best be compared to a multi-lane divided highway system, or perhaps a broad river. Either the highway or the river allows many different vehicles to pass up and down and accomplish their own individual missions. It is true that, in our case, one of the first vehicles to be driven down our broadband highway was cable television. However, it is no more correct to call the system a cable television system than it would be to call the Ohio River a coal delivery system. While our system does facilitate the delivery of cable television and the Ohio River facilitates the delivery of coal, neither is limited nor well-defined by that one dimensional function.

If all public power systems constructed such an electronic highway, we could all throw out our outdated rate schedules. We would no longer calculate our consumers' bills based only upon the number of kilowatt hours used during a thirty day period. Instead, we could embrace the "smart house" concept and price electricity depending on its cost of generation hour by hour. The broadband highway would allow this exchange of information and consumption to take place continuously. Thus, we could finally make a significant impact in demand side management through real time pricing, in much the same fashion that the telephone companies have done for years. The technology is available and I believe we are doing a great disservice to our consumers by not providing it to them. We should be furnishing them with the means to save real money on their energy bills in return for alterations to their lifestyle that result in changes to the time of day that they consume energy. We could do this in the same manner that account status is available on the televisions in some motel rooms today. We could offer them a system whereby tuning to a certain television channel would give them their accumulated consumption and thus the cost of their energy takings for the month to date. This information, in itself, should promote energy conservation.

Adapting a home to take advantage of access to the information provided on the broadband highway and real time electric rates will open the door to new worlds of convenience and empowerment for every consumer. In public power systems that have broadband highways and thus can offer real-time electric rates, people will begin to install "smart house" features to take advantage of those rates and thus save money. Those features will also allow many aspects of the home to be automated and provide new levels of safety, comfort and convenience to an aging population.

The broadband highway will make whole communities look and act like a single high- rise hotel. In the same way that energy management, security, fire alarms, entertainment and other services are delivered to each room of a modern hotel facility, each building in a city served by a municipally owned broadband highway will receive the same services. Once homes have established themselves an access way to the broadband highway, lower electric bills will only be the beginning of the changes that will become possible. Active burglar/fire/health emergency systems would be a very simple and logical next step after the establishment of real time electric rates. Far superior than today's security systems, services operating on the two-way broadband highway would allow constant monitoring of the health of the security systems. These systems could be monitored directly by municipal emergency service personnel, thus removing the long distance phone call to some distant service company in the existing security system scenario. It would also make services available to all, not just the rich.

The broadband highway does facilitate enhanced entertainment (or cable television) services. Through the same wire that real time energy pricing information and home security/home automation signals pass, there are many lanes still available for classic cable television type services. In Glasgow, we offer entertainment services across our broadband highway that compete directly with the services provided by a private classic cable television operator. That does not mean that this scenario need be followed in each community. The important issue is the value of the broadband highway. One of the functions of the highway can be to deliver entertainment programming. In every city the entertainment programming may be delivered in a different fashion. Entertainment programming delivered by the public power system is certainly one possible alternative. Other alternatives would include leasing space on the municipally owned broadband highway to a second private operator or even leasing it to the existing cable television operator. Under this scenario, the cable operator could retire existing, outdated, overhead plant and thus operate an entertainment service only. As a tollpayer on the broadband highway, he would not have the bother of maintaining the plant between the programming capture point and the television set.

It is likely that soon, cable television systems as we know them today may virtually disappear. If all municipalities had the broadband highway we are discussing here, then cable television could be acquired in the same fashion as magazine subscriptions. Each home could choose which programming services they desired and deal directly with the programmers. This way they would only pay the cost of the programming and the cost of the toll (think of it as postage) for receiving that programming down the municipal highway. Allowing programmers or entertainment packagers to get into the business without having to build the expensive plant may facilitate improvements in product and price through competition that even we in Glasgow cannot imagine. It should also be noted that voice or "telephone" traffic could operate on this highway in much the same fashion as cable television does. That means there could be competition in the telephone business.

In the same way that the invention of the automobile and the resulting highway system has driven the economy of the United States for the last seventy years, I contend that the construction of the electronic broadband highways and the resulting services that will be driven down them will ignite our economy for the coming decades. The television and the computer will become one and that device will provide our access to the world, replacing much of what we use the automobile for today. Opening a business will no longer require access to high traffic property along an asphalt highway. Instead, low cost property in previously undesirable neighborhoods will suffice, as long as there is access to the broadband highway. Consumer-friendly software and high resolution graphics will replace the glitzy store fronts and broad expanses of parking lots that are necessary in the retail business today. A 40,000 square foot grocery store that wastes untold volumes of energy in its efforts to cool the foodstuffs while warming the shoppers will be replaced by a menu of groceries available on your computer or TV screen at home. To get into the grocery business, one would not need a lot. First, you would need a building from which groceries could be both received by truck and delivered by truck. Next, you would need a computer to display the inventory and keep track of orders placed and couple of people to process the orders as they come in off the printer. A delivery truck and access to the broadband highway for displaying the inventory to the consumers, receiving their orders, and conversing with the utility to take advantage of the real time price structure would round out the business. You might also wish to use the broadband highway to communicate with the bank to receive payments for the groceries as they are delivered. As you can see, anyone might then decide to enter the grocery business. It would not take the kind of money that it takes today to try to compete with Kroger and Winn-Dixie; and this scenario would not only work with the grocery business, but for many, many other businesses.

I could go on with other benefits of the broadband highway ad nauseam. I could talk about how much municipal governments could be improved by the installation of a geographic information system operating on the broadband highway. I could also talk about how traffic flow could be improved in every community by utilizing the broadband highway system. Doing business on the broadband highway would reduce the actual amount of vehicular traffic. The broadband highway could also be used to consolidate the timing of every traffic signal into one master computer system that would maximize the flow of traffic by intelligent manipulation of the red and green signals, depending on the time of day and the day of week.

Instead, I would like to concentrate on perhaps the most important reason that every public power system should be installing a broadband highway right now. That reason is the tremendous possibility that exists for improving the educational opportunities for both our children and their parents. Take a trip with me, if you will, to a city that has decided that the delivery of education is at least as important as the delivery of electricity. In this imaginary community they have realized that either they teach their children or they abandon the future to chance and nonsense. In this imaginary community, the local school board, the city government, and the public power system have united in the realization that the least common denominator to all their problems is improving the education of all their constituents. To that end, the public power system has installed a broadband highway capable of carrying data at high speeds between any two points in the community. Using that system, the public power system has offered demand side management rate incentives that allow the local school board to save thousands of dollars per year on their electric bill. This is accomplished by shifting load to off-peak times. The school board has used the resultant savings to offer new and innovative opportunities in the education of their children. For example, every classroom has a computer in it. Every one of those computers can converse with every other computer in town. When students complete assignments on their computers, either at school or at home, the work is recorded, graded and saved automatically on the school system's central file server. This removes the teachers from the role of accountant in keeping up with the myriad of test scores for each student, and thus frees them to teach. Other administrative record keeping like attendance, is stored automatically when each teacher enters the information. This activity takes place without the teacher having to leave the classroom. The same goes for information from school administrators to all schools and all teachers. It is done with electronic mail as quickly as entering it on the keyboard.

The system has also discovered tremendous savings in the way they operate their libraries. No longer does each school building require a complete library. The library is now maintained in one central location and is accessible by anyone with access to the broadband highway, either at school or at home. The card catalogue is all "on- line," and any student can search for any book from any computer. All reference materials and most books are available on the school's central file server. Access to every encyclopedia, map, magazine or periodical is as close as the nearest computer. The school system only has to buy these reference materials one time to be placed on the file server instead of having to buy scores of duplicate works that formerly had to be replaced often since they were impossible to revise. Their new electronic reference library is easily updatable as world events dictate changes to maps and other reference materials. They also use the broadband highway for distance learning. When a special subject or a special instructor is available in any building within the community, that instructor is available in every building in the community. Do you know what all this innovative technology in education has lead them to discover in this imaginary community? They have found that teachers, when unshackled from the laborious accounting and paper-pushing tasks, can really teach! They have learned that using the combined power of the computer and the television they can really turn kids on to discovering new ideas by taking the invisible and making it visible. Do you know what else they have learned? They have found that making these educational resources available at home gets the kids' parents interested in education again too. They have found that they are raising the educational level of their community. They are also learning that better educated consumers make better consumers and better communities. Also, the money that they spend on education provides more and better jobs than they were ever able to provide through dollars spent in the past on economic and community development. It is a wonderful little town, isn't it? They sure are lucky that they had a public power system capable of making these things happen.

I hope you can now see from the picture I have painted that every community is in need of a broadband highway right now. I guess the next question is, who should build this highway? Should it be the cable television companies? I don't think so. They have been sitting on top of this technology for decades and have yet to show the slightest inclination to use it for any purpose other than to extract massive profits in return for their lackluster performance in delivering entertainment programming. How about the telephone companies? Ditto. The telephone companies own billions of dollars worth of plant, which is largely incapable of acting as a broadband highway. Rather, telephone plant acts much more like a railroad in that it is only capable of carrying information in one direction at any given time, and even then it has to be a highly specialized vehicle to drive down their tracks. Furthermore, the real value of the broadband highway is that, if it is municipally owned, it can be operated in such a fashion that anyone can contrive a service (think of it as a vehicle) to be placed on the highway. This will allow for robust competition in the development of services. If the telephone companies are allowed to own all the broadband highways, we would find ourselves in a similar situation to what our automotive industry might look like today if General Motors owned all of our highways. How about the investor owned utilities? If the IOUs were community minded enough to embark on an effort like this, there would be no need for public power systems. Since we exist, there is no reason to expect IOUs to accept this challenge. No, I am afraid the job is ours. We are well suited for it. Again I quote an American Public Power Association publication (The Public Benefits Of Public Power):

Because public power systems are generally smaller and locally controlled, they are able to experiment more freely than large organizations with new and more efficient ways of producing and conserving electricity. Also, they are in a unique position as part of local government to integrate their services with other community functions - such as sanitation, water supply, and recreation - to better meet broad public service goals.

Well, I'm going to assume that you are now convinced. That leaves us with the problem of how to get this message out to those 2,200 public power systems that can do something about it. The real problem with getting public power systems to start constructing these broadband highways is the "illusion of knowledge" that exists in the upper management and legislative bodies of many public power utilities. There is a feeling that such advanced concepts in communications should be "left up to the experts". Time after time I hear remarks like, "That's just not our area of expertise", "We will wait for someone else to build it, and we will rent space on it", or "I'm afraid we couldn't make any money on this". The illusion of knowledge has been the problem of science in all ages. When Columbus sailed from the mouth of the Rio Tento in August of 1492, he began a voyage that proved the ignorance of European man about the geography of our planet at that time. Even so, it took centuries for the full impact of Columbus' encounter with the new world to develop. Glasgow's encounter with broadband communications has also highlighted the ignorance of many in public power who believe the construction of broadband highways for our communities should be left for others. I hope that the impact of our discoverey will not take nearly as long to change public power and the communities in which we live.

The automobile was not invented by the "transportation experts" of that era, the railroaders. The airplane was not invented by automobile experts. Polaroid film was not invented by Kodak. Hand-held pocket calculators were not invented by IBM. Digital watches were not invented by watch makers. Apple Computers and herbal tea are yet two more examples. The list is endless and the moral is vivid. Public power people are fully capable of embracing this technology, the message that needs to be gotten out is that public power has a job to do. We need to help the decision makers in our business to see the present in the past and the future in the present. The construction of broadband highways in all public power communities will finally point out that there is a difference between public power and investor owned utilities. Maybe when the things that I have spoken of in this paper have become realities, we will be known as public empowerment utilities, instead of public power utilities.

Back to the "Papers" Index...


THE EVOLUTION OF TECHNOLOGY:
A Wakeup Call for Public Power

by

William J. Ray, P.E.
Superintendent, Glasgow Electric Plant Board
Glasgow, Kentucky

Time Warner, Inc., calls it the "electronic superhighway". Another cable television giant, TCI, calls it their "infostructure plan". Huge regional Bell operating companies like AmeriTech and U. S. West have not been as quick to offer their versions of the overused highway metaphor for their projects. Just the same, they have recently announced their intentions to convert their thousands of miles of twisted pair plant to new, more flexible, fiber-rich broadband facilities. At the same time, the Clinton administration is asking Congress for millions of dollars to develop a national information superhighway.

Meanwhile, back in the electric utility business, the collective voices of state public service commissions, think tanks like the Rocky Mountain Institute, the Clinton administration, and the majority of electric power consumers are resonating their insistence that demand side management be at the center of all electric utility strategic planning. Indeed, the demand side management tune should become the anthem for the electric power industry. It is estimated that the United States could cut $200 billion a year from its energy bill, if it were as energy efficient as Japan and Germany. Public power should lead the way in trying to effect this savings. $200 billion a year pumped into the economy of the United States would go a long way in solving many of our socio-economic ills.

How are these two issues related? How can public power and local governments use the coming "information highways" to implement advanced demand side management and start saving their share of that $200 billion a year for their communities? Municipalities can utilize this technology to bundle information with electric power to create the first significant enhancements to electricity since its appearance as a commercial product.

"The farther backward you can look, the farther forward you are likely to see" - Winston Churchill

If we try looking backward in order the see the future, we will find that public power has dealt with this dilemma before. In fact, public power was born of just such a conundrum after the introduction of the new technology of that era, electric power.

The sense of wonder and confusion that many feel today when considering the tidal wave of information and entertainment that will soon wash into our living rooms through the information highways contemplated by the telecommunications giants is very similar to the way our grandparents felt when electric street lights were first installed on their courthouse squares. Electric power made its debut in the United States about a hundred years ago and, like no other product in our history, it shaped the future of the American people. In the coming years, today's new force of information power will, if made universally available in the same fashion as electric power, become this country's economic engine for our children and grandchildren.

It is certain that whomever builds these "highways" will be looking to extract as much "toll" as possible from the potential users of the highway. If public power systems choose to take advantage of these highways, when constructed in their communities, they will find themselves able to add value to their electric power product in a multiplicity of ways. The concept of a demand side management program that adds value to electricity stands in stark contrast to the regressive nature of most demand side management programs that have been implemented by electric utilities up to now.

Demand side management programs utilizing broadband communications will be far different from all demand side management initiatives the electric utility industry has undertaken in the past. Electricity can become the product known for the abundant choices available to the consumer in how the product is priced and purchased. Utilizing their television as the interface between the customer's residence and the electric utility, customers may choose several different forms of service from their electric utility. They may elect to purchase "interruptible power" for their residences in the same fashion that many large industrial customers purchase interruptible power today. They may use their television to determine what hours of the day that electricity costs the most, and thus alter their lifestyle and their energy consumption habits to avoid using power during those peak times. The flow of information itself could add a tremendous value to the use of electricity. The ability to tune to a channel on one's television set and receive information regarding electric consumption so far this month and a projection of what consumption may be for the month if present usage patterns continue may be all the incentive necessary to help lower consumption.

The constant flow of information from the electric utility to the consumer will allow value to be added to the product in ways that we could not have even imagined five years ago. In addition, the increased value and choices we will offer our consumers will make marketing our product and services a breeze. In the past many electric utilities have struggled with programs to encourage the installation of electric water heaters that can be cycled on and off through a load management program in return for a $3.00 per month credit on the consumer's electric bill. In the coming information age, the electric utilities' incentive could instead be free HBO in return for the manageable electric water heating load. For electric utilities taking advantage of the possibilities of the information age, the tools available to them for solving their problems will multiply exponentially.

What barrier stands in the way of public power systems offering these choices to their consumers today? The only barrier is access to a high capacity information highway within their communities. It is certain that this highway will be constructed by someone in the very near future. If this highway is constructed by public power systems, it can be used to reduce the overall cost of electricity and the other services made possible by the provision of the highway. If it is constructed by others, public power will become one of the main toll payers to the owner of the highway, since these enhancements to the electric power product will be a necessity whether the communication system is owned by the public power system or not.

If the cable television system in your community upgrades their system to one of the communications highways envisioned by most of the large cable MSO's, their monopoly for providing cable television entertainment will be solidified. Public power systems will also be adding to the wealth of the cable giants by paying toll on the cable- owned highway in order to provide the enhancements to electricity mentioned above. On the other hand, if public power creates a system that brings competition to their local cable television marketplace, it will likely provide the most significant positive economic impact on their community imaginable.

Cable television systems, when subjected to competition, historically have reduced their rates by 40-50%. To see how this may impact your community, get out your last cable bill and take 40% of it. Multiply that number by the number of cable television consumers in your community (this figure should be available from City Hall, since they must report it annually to satisfy franchise requirements). The resulting number of dollars will show the additional dollars that would remain in the local economy each month instead of leaving your community to go to the stockholders of some cable MSO. Can you think of any other economic development initiative that holds the promise of improving a local economy to any extent even remotely approximating this number?

Again, the barrier to providing this benefit to every community across the country is the construction of a community-wide broadband communications network.

The technology becoming available today will also make it possible to inject competition into one of the most deeply entrenched monopolies of our time, the telephone business. The electronic highways being announced and constructed by both the telephone companies and the cable giants will allow each of these players to participate in the business of the other.

One of the first indications of how technology will change the telephone business is already manifesting itself in large metropolitan areas in the form of competitive access providers (CAP's). CAP's simply provide an alternate way for long distance phone calls to find their way from an individual office building or home to a point of presence (POP) of a long distance carrier. Roughly $0.50 out of each dollar spent on long distance phone calls goes to the local exchange carriers for carrying the traffic a short distance from the long distance POP to the end user location.

A little farther down the line with today's technology will be the ability to provide PBX's for individual businesses that make buildings and homes spread out across a community act like they are all in one office building. This can be done very inexpensively on a sophisticated community-wide broadband network. It is easy to see how such capabilities will enhance the attractiveness of communities with such capabilities to many new businesses and industries looking for communities in which to locate.

The information age will also make it possible to reduce the numbers of government bureaucrats. Robust competition in the telephone business could allow telephone rates to be regulated by the free market. Thus, public service commissions could find themselves without telephone companies to regulate anymore.

Not only will the information age bring changes to existing services like electric power, cable television, and telephone service, but it will also demand the creation of a new utility - "the information utility". In today's information age, we have the ability to drive our economy through the transportation of information rather than the transportation of bodies. This ability should not be thought of as a novelty, but rather as the salvation of our economy. While most electric utility executives fully understand the concept of demand side management, most fail to realize that the same principals apply to vehicular traffic management, schools, libraries and scores of other services. In the electric utility business, we have learned that the most cost-effective way of meeting growing energy supply demands is not to construct more generating facilities, but rather to manage the demand on the facilities we already possess. The same is true for highways.

Today's communication technology will allow us to reduce the basic demand for travel instead of squandering our grandchildren's potential prosperity by saddling them with an ever growing debt for constructing bigger bridges and wider highways. The best way to do this is to make more effective use of communication technology. The information utility will be the economic engine of the information age the same way that electric utilities became the economic engine for the industrial age. New government buildings will become neighborhood centers close to the public they serve and linked via the broadband highway to bring government services within walking distances of everyone's home.

Grocery stores will consist of modest warehouse style buildings with their goods displayed via home computers and orders taken via on-line communication with those home computers. Instead of a grocery store gobbling up acres of prime real estate to allow thousands of cars per hour to visit them, thousands of orders will come in to the facility and only a few vehicles will leave delivering those orders to the home. For far less than the cost of continually widening urban streets, broadband highways could be constructed and reduce the demand on urban streets.

Public power finds itself in a unique position to construct these broadband highways for our communities. Both the telephone companies and the cable television companies find themselves with billions of dollars worth of communications plant that is largely incapable of functioning as a broadband highway. Both of these concerns must find ways to raise the capital necessary to abandon their existing plant and replace it with new fiber optic-rich systems capable of serving the needs of the information age. Electric utilities, on the other hand, find themselves unfettered with the load of existing communications plant and can start building such systems with a "clean sheet of paper". This is proven in the past to be the most direct route to success. Electric utilities could, and should, be successful operators of the communications highways of the future based upon their level of expertise and their vast abilities to raise the needed capital. In much the same fashion that West Germany and Japan have become the manufacturing juggernauts that they are, the electric utilities have the same capacity to dominate the telecommunications future. Japan and West Germany had all of their manufacturing capacity destroyed during World War II. That left them with the ability to "start from scratch" with the very latest in manufacturing technology. Public power systems will enjoy that same advantage.

Electric utilities, especially public power systems, can easily justify the construction of broadband systems based upon the needs of the two "anchor tenants" for this electronic shopping center: demand side management and cable television. Starting from scratch and utilizing poles and cable ways already owned and installed by the electric utilities, such a system can be constructed for $500 per customer passed. Such a system would easily allow an average peak demand reduction per customer passed of 2-3 kw. That would equate to installing capacity at a rate of $167-250 per kw. It is certain that numbers such as these would surely rise to the top of any utility's integrated resource plan. It is the possibility of uncovering such shocking numbers as these that is causing public service commissions and governments to insist that integrated resource plans be filed. And, while investor owned utilities may be driven to implement this technology based only upon the "carrot and stick" incentive offered by public service commissions, public power should be driven in this direction by the incentive of freeing up these billions of dollars of capital that would be reinvested in the economies of our public power communities.

Marrying cable television to demand side management through such a broadband network is a union made in heaven. We have already discussed the tremendous economic impact of introducing competition into the cable television marketplace and the resultant cash injection which flows to the retail economy of a community blessed with such competition. Cable television also fits hand in glove with a utility's demand side management program. Nearly each satellite delivered programming service such as CNN, TNT, The Discovery Channel, etc., offers 2-5 minutes per hour of local commercial "avails". That means the electric utility can insert commercials designed to market electricity and market the demand side management program for only the cost of producing a videotape. Discounts can be offered to customers who participate in demand side management programs on their basic cable services or premium channels which cost from $3-$5 at wholesale can be offered as incentives for participation. The retail value of such services may be $10-$12 per month and is thus a much more attractive incentive than any this writer is aware of in present utility DSM programs.

"The republic of technology ruthlessly egalitarian, will accomplish what the prophets, political philosophers and revolutionaries could not. Already it assimilates times and places and peoples and things - a faithful color reproduction of the Mona Lisa, the voice and image of Franklin D. Roosevelt, of Winston Churchill or of Ghandi. You too can have a ring side seat at the World Series, at the Superbowl, at Wimbledon, or anywhere else, without a Constitutional Amendment or a decision of the Supreme Court, technology forces us to equalize our experience. More than ever before, the daily experience of Americans will be created equal - or at least evermore similar" -- The Republic of Technology and the Limits of Prophecy, Daniel J. Boorstin

Public power systems may be the only institutions capable of fully integrating the benefits of the information age into the fabric of our daily lives and creating the "Republic of Technology". This "republic" is used in the same context as Thomas Paine, propagandist of the American Revolution, used it in his Rights of Man, to mean "not any particular form of government" but "the matter or object for which government ought to be instituted, res publica, the public affairs, or the public good; or, literally translated, the public thing." This word describes the philosophy that provides the very foundation of public power.

Public power has a heritage of mastering a technological force and packaging it so that the benefits are available to one and all, even if they do not understand the intricacies of what makes the force work. In the 1920's and 30's, electricity held public's imagination in much the same way that computers and communication technology does today. Electric utilities quenched the public's thirst for this new technology by holding "electric fairs" and setting up displays at other public gatherings to slowly chip away at the public's fear and ignorance of the product. Public power demystified electricity and eventually weaved it into the fabric of our daily lives. The industrial age and the prosperity we have all experienced for the last 50 years would not have been possible without the efforts of the electric utilities (and public power systems in particular) to tame electric power for the use of our society.

The same job can be accomplished by public power systems with respect to the technology associated with the information age. The same electric utility demonstration kitchens that were used to teach the public about the benefits of cooking, cleaning and lighting with electric power, can be recycled to teach our consumer-owners how to use computers and broadband highways to bring about the new prosperity promised by the information age. With the construction of broadband highways owned and operated by the people that they serve, public power can create the Republic of Technology. If public power lives up to its heritage, the people of this Republic will enjoy an increased standard of living just as our forefathers enjoyed with the introduction of electric power into their lives in the 1920's. Information technology can be democratized in the same fashion as electric power was. If this happens, more than ever before, the daily experience of Americans will be created equal -- or at least ever more similar.

Back to the "Papers" Index...

Questions? Comments? Email Billy Ray or the EPB.


The Tennessee Valley Authority: Still A Revolutionary Idea

by William J. Ray

This is a book about tomorrow. My purpose in writing it today is to try to cut through the fog of uncertainty and confusion about tomorrow that envelops us. The fog is caused largely by words, words without reality in the world as it actually is; to dispel this murkiness we must see the reality behind the words...I believe that through the practice of democracy the world of technology holds out the greatest opportunity in all history for the development of the individual, according to his own talents, aspirations, and willingness to carry the responsibilities of a free man."
David E. Lilienthal, Preface to TVA, Democracy On The March

This document is designed to act as a simple and direct agent for re-ordering the march of democracy orchestrated by the original proponents of the Tennessee Valley Authority (TVA), like David Lilienthal. The observations and conclusions drawn herein result from the experiences of the team at the Glasgow Electric Plant Board in their “voyage of discovery” in the realm of the new world of broadband telecommunications. The message here is revolutionary, possibly as revolutionary and controversial as the initial creation of TVA. The result of following the course recommended here should be equally as important to our country in the next century as the creation of TVA has been to this one.

Whether, to you, the term "revolution" has to do with the circular motion of celestial bodies or if it instead means great change, the time has come for the Tennessee Valley Authority to undergo a revolution. Conveniently, both meanings of the term apply to what needs to occur at TVA for this great agency to maintain its value to our country.

Political Revolution

First, TVA is in need of a political revolution. By this it is meant that they need to simply "come around again" to the thinking that Franklin Roosevelt and George Norris employed when they brought this "corporation clothed with the power of Government but possessed of the flexibility and initiative of a private enterprise" into being in 1933. Political revolutions are well defined. We well understand the whole gamut of political possibilities and some of the most successful political revolutions have been counterrevolutions! That is to say, while political dogma changes continually, that change is represented by an arc that is always destined to return to its point of origin. This is the traditional wisdom of political theory as espoused by "John Adams' Law," namely, that political wisdom does not substantially progress.

The forces that brought TVA into existence are also cyclical. Nearly two hundred years before the creation of TVA, electric power was being experimented with in Europe and later in colonial America. As Benjamin Franklin and others sought to understand the new technology, the prominent Methodist preacher, John Wesley, proclaimed electricity “the soul of the universe.” By the 1880's a young Thomas Edison and his assistant Samuel Insull were busy trying to make sure that if the “soul of the universe” had been discovered, they would have an exclusive franchise to make it available to people in as many cities as possible. Soon they realized they could electrify street car lines and sell energy to themselves during the day for the streetcars and at night to others for lighting.

Watching the early growth of combined streetcar and electric street lighting systems, many entrepreneurs began to see the business potential Edison had dreamed of. Uncountable millions of dollars were to be made selling electricity. The keys to success were secure relationships with banks and Wall Street firms for a steady supply of capital, with manufacturers for credit and patent rights, with fuel companies, and with local politicians who granted the essential franchise to operate.1

For a while fierce competition erupted between a few companies striving to build the electric facilities and establish their systems in the most lucrative neighborhoods around the country. Soon the predictable arc of history began to take shape and the competition began to be replaced by consolidation and the entrenchment of monopoly businesses protected by the exclusive franchises granted by most cities. After establishing monopoly conditions, the early electric utilities charged rates purely dependent on what the market would bear. Still, other cities and towns and rural areas which were not as attractive were expected to just “sit and wait” for the “soul of the universe” to be made available to them.

So smug were the private power companies that they demanded the nation’s rivers be entrusted to them also. They wanted to build dams on great rivers so they could produce power more cheaply so that they could make even GREATER profits! The first such fight over a river occurred in New York over the development of the St. Lawrence River. The new governor of New York, Franklin Roosevelt, felt the St. Lawrence should not be given away to individuals or private companies. He began a three-year long fight to defend his belief. During the fight he sent his personal associate, Louis Howe, around the country to collect comparative data on electric bills from private and public power systems. What Howe found was that even within New York in 1929 prices had an absurdly wide range. A home consuming 250 kilowatt hours of electricity in Manhattan paid $17.50 while the same consumption in Buffalo cost $7.80! 2 These were the conditions that led Franklin Roosevelt to support the idea of public ownership of electric utilities when he was later elected President.

The creation of TVA was proposed by the great Senator from Nebraska, George Norris. He saw it as a simple solution to the growing problems of economic depression and the widening gap between the people able to afford the improvements in their life made possible by electricity and those who could not. The creation of TVA has certainly served to democratize “the soul of the universe.” Although it was bitterly opposed by the private power companies of the day and is still under attack today, it has been largely responsible for making electric power available to ALL at a rate that is appropriate for what has become a necessity of life. “A free people,” Norris once wrote, “cannot permanently submit to the private monopoly of a necessity of life.” Luckily, he found a friend in the newly elected President Roosevelt and, within the first one hundred days of his first term in office, they ramrodded the TVA Act through the Congress and into being.

Without a blinding flash, but with more like a blur, high-bandwidth telecommunications have become a necessity of life in the same fashion that electricity achieved that status early in this century. The flow of "bits" into the appliances in our homes and businesses should probably have its own name, maybe "infotricity" is appropriate.

Now, the arc of TVA’s history returns to its point of origin. Today, nearly the same conditions exist with respect to the delivery of infotricity that formerly existed with respect to electric power. Samuel Insull, J.P. Morgan and Thomas Edison have been replaced in this revolution by Bill Gates, Raymond Smith and John Malone. Cable television and the telephone company mergers mimic the creation of the huge electric utility holding companies of the 1920's. Those rate disparities discovered by Louis Howe are also back again. The same cable television and high speed Internet access service offered in Glasgow, Kentucky for $27 a month is sold in other areas for over $85 a month. With every newscast and newspaper come announcements of the consolidation of the forces intent on monopolizing infotricity. LG&E combines with KU, Microsoft purchases massive interest in ComCast Cable, At&T seeks to recombine with its progeny, the Bell Operating Companies, these are only the headlines of the last two weeks! One does not have to be blessed with divine vision to see where all of this is leading. One only needs to understand the cyclical path of history to realize that our economic well-being is threatened by this progression. It is 1933 again and we need a strong government and a strong TVA to help democratize infotricity like it did electricity!

Technological Revolution

While political history conforms neatly to one definition of revolution, technology history is represented by the other. Political revolutions are made by men who urge known remedies for known evils, technological revolutions by men finding unexpected answers to unimagined questions.3 Technological revolutions proceed in straight lines and they never stop or go backwards. Nothing can be uninvented. While any device can be made obsolete, no device can be forgotten, or erased from the arsenal of technology. While the currents of politics and of culture can be stopped, deflected, or even reversed, technology is irreversible. In recent years, Germany, and many other eastern European countries have gone from democracy to dictatorship and back to democracy. However, we cannot go back and forth between the kerosene lamp and the electric light.

TVA has an opportunity to bring about just such a technological revolution today. TVA, working in concert with its distributors, can bring broadband telecommunications to each home and business they serve. Today’s computers have not fulfilled their promise of improving our daily lives because of the limited capacity of the telecommunications facilities in our cities and towns. The telephone companies provide bandwidth roughly akin to a dirt driveway. Cable companies provide bandwidth comparable to an interstate highway, a one-way interstate highway. They can fill your yard with traffic but there is no way to turn it around and make good use of it. What we need is the equivalent of an interstate highway with on and off ramps at each of our houses!

With such a telecommunications system in place, we can all have infotricity. We can have the cable television services that we really want at the sort of rates that are available when someone in the marketplace is determined to price their product competitively. We can all have access to the Internet and to each other’s computers at speeds now available only to the rich and powerful. With this sort of infrastructure in place, our lives will be enriched in a fashion comparable only to the way our parents' and grandparents' lives were revolutionized by the initial provision of electricity to their homes.

This technological revolution will set in motion the next round of irreversible changes and improvements in our society. Adequate bandwidth to the home will give rise to adequate bandwidth within the home. This will enable TRUE competition in all of the remaining monopoly services. The days of the one electric and gas meter on the home will give way to the ability to monitor the energy uses of discreet appliances. Energy will be sold as a total end-use product. We will likely see the dawn of an era when we will subscribe to hot water, air conditioning and other services from vendors that have particular expertise in these services and can deliver them to the homeowner while purchasing the energy for their services from the new “technology utility.” Telephone service, as we know it today, will become one of the many services riding into our homes on the that robust broadband connection.

TVA largely created the electric utilities in the TVA region. They can now do the same in creating their natural descendants, the “technology utilities.” The "information river” can be managed just like the Tennessee River. They can build dams (caching servers) to tame this river, creating vast reservoirs of information that will serve to enrich the lives of the people of the region just the same as in the past. They can build transmission lines (OC-48, DS-3 circuits) to connect their distributors to the grid. The distributors will build the connections to the homes and pay cost based rates for the ultra high speed connectivity provided by TVA. The men and women of TVA can use their massive reserves of talent to teach the dreamers and farmers in the communities they serve how to be a technology utility. They can create standards for the design and construction of broadband networks. They can use their size and market influence to convince the private sector to build the sort of hardware and software necessary to exploit this new product, infotricity. In other words, they can democratize this technology like they did electricity before and cause another renaissance in the way we live our lives.

The Return Of TVA

Will this technology then become the exclusive domain of the Tennessee Valley region? Far from it, this technological revolution will spread in all directions just like low cost electric power did. The stockholders of telephone and cable television companies will then undergo a revolution in the ways they think about their investments, much the same as the Morgan interests did after the success of TVA began to mount in the 1930's. They will respond by building similar infrastructure in other communities to act as a safeguard against another community rising up and casting them out of town for not providing this sort of technology to them. They will begin charging cost-based rates, lest they suffer the same fate that their predecessors did with respect to electric power in over two thousand communities.

As TVA nears the end of its first revolution, it is losing momentum and is an easy target for the detractors that have always camped outside its gates. Those detractors are normally offset by throngs of fans that are thankful for the job TVA has done in democratizing electric power. As the first revolution ends, however, low cost electricity is an assumed given. People are no longer particularly impressed by the provision of electric power. It is deemed to be a birthright and it is simply expected to be there. That leaves the detractors free to attack the TVA without being offset by any positive force. The time has come to restore equilibrium to the system by starting the next revolution by democratizing infotricity.

These initiatives need not wait for a catastrophic event like the Great Depression to be set in motion. TVA possesses most of the pieces necessary to bring all of this about already. They own a massive fiber optic network covering much of the region it serves. This network is vastly underutilized in today's TVA. The same fibers being used for little but controlling valves and switches in hydroelectric plants can be used to provide blazing fast connections to the Internet for distributors who are already building the distribution networks to complement these connections. TVA has many existing employees with the knowledge needed by its distributors to help them build modern broadband computer networks. They can clone these employees and make more of them.

These revolutions would, of course, be considered horrific by those with deep rooted interest in maintaining the telecommunications status quo. In fact, it would be much the same as the feelings of the monopoly electric power companies when the agency was created in 1933. One can almost hear the cries of “creeping socialism,” “Bolshevism,” and “communism” forming on the lips of the likes of Raymond Smith, John Malone and Bill Gates right now. Fortunately, those, like George Norris, that gave birth to TVA blazed us a path through this jungle of greed, wealth, and misinformation.

Norris used to remember how his mother, on a warm spring afternoon asked him to help her plant a seedling. She had dug a hole; and she wanted the boy to hold the tree upright while she shoveled the dirt around its roots and packed it all tightly. George looked up at her. He saw the sweat running down her face, saw how worn she was and how tired she looked, and asked her finally why she worked so hard. “We now have more fruit than we can possibly use. You will be dead long before this tree comes into bearing.” As he recalled it many years later, her answer was slow to come. She measured her words and finally said, “I may never see this tree in bearing, but somebody will.”4

This concern for the future, this understanding that as we act today, we act not just for our own time but for all subsequent generations, this perception that we are the trustees for our descendants--this was the heart of the reasoning behind the creation of the TVA. We owe much of our modern day prosperity to those that planted trees that they would never see in bearing. Let us honor their heritage by producing these two kinds of revolutions that will plant orchards for future generations beyond our wildest imagination.

References

1 Richard Rudolph and Scott Ridley, Power Struggle, The Hundred Year War over Electricity (New York: Harper and Row, 1986)
2 Id.
3 Daniel J. Boorstin, Hidden History, Exploring Our Secret Past (New York: Vintage Books, 1987)
4 George Norris, Fighting Liberal: The Autobiography of George Norris (New York: Macmillan, 1945)

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