The Charlotte Observer, June 10, 2007

If Mecklenburg-Iredell consortium fails, residents will pay

As the residents of Cornelius, Davidson, Mooresville, Troutman and parts of unincorporated north Mecklenburg County consider their involvement in the Mecklenburg-Iredell cable consortium this week, it is important to consider the costs, benefits and risks associated with municipal ownership of a telecom operation.

For 10 years, I have done research on the economic performance of municipally owned telecommunications systems. In the course of my research, I have looked at the financial track record of approximately 60 municipally owned operations. My most recent research report, "Wi-Fi Waste: The Disaster of Municipal Communications Networks," was published by the Pacific Research Institute and is available as a free download at www.pacificresearch.org/technology/.

My research shows that 77 percent of the systems, after their start-up years, fail to generate sufficient revenue to cover their operating, debt service and annual capital reinvestment costs. I believe that this "permanent subsidy" is the result of:

• The failure of the municipal decision-makers to run the operation as a business. Municipal leaders typically price their telecom services below cost to perpetuate the illusion that they are delivering "cheaper" services than competitors. These municipalities are able to keep up the charade because they can borrow from their monopoly utility business. During its first four years of operation, Bristol Virginia Utilities' telecom operation did not generate sufficient revenues to pay its costs of operation, let alone its debt service and capital reinvestment costs.

• The difficult, competitive environment that municipal telecom systems operate in. Typically, the municipal system is the fifth competitor in the market (phone company, cable company, two direct broadcast satellite providers and themselves). Municipalities find themselves competing with national players who have substantial cost advantages.

The Mecklenburg-Iredell cable consortium is marginally better than the typical municipal telecom system since it will be the incumbent cable company, and, hence, the fourth competitor in the market. MI will enjoy this advantage until a competitor decides to "overbuild" them. Of course, all of the existing competitors in the market will enjoy lower costs than MI. One key risk that MI will have is that none of the communities in the consortium has a monopoly utility business that can be used to subsidize the telecom operation. Hence, if telecom revenues are insufficient to pay operating, debt service and capital reinvestment costs, then the communities will have to cut essential public services (fire, police, street repair) or raise taxes in order to keep the telecom operation afloat.

The residents in the consortium communities need to realize that the financial track record for municipal telecom systems has been that of Cash-a-Gator rather than a Cash Cow. Furthermore, the residents need to appreciate the fact that if MI-Connection's revenues are insufficient to pay all operating, debt service and capital reinvestment costs, then it becomes the obligation of the residents of these communities to repay -- through tax revenues -- the $74 million that MI plans to borrow to buy, upgrade and operate this telecom business.

Guest Column | Ron Rizzuto