Capitalism Magazine, November 16, 2007

The development of municipal wireless broadband networks has been popular with local government officials across the country, including the city of Portland. However, a closer look at a southern Oregon city reveals "Muni Wi-Fi" could be the latest losing gamble for taxpayers.

Lauded by thespians and patrons for its Oregon Shakespeare Festival, Ashland has been at the forefront of the performing arts scene for more than seventy years. But in the last decade, city officials have set their sights to be at the forefront of telecommunications, laying miles of fiber-optic cable in a rash attempt at job creation and economic diversification. In 1998, the Ashland City Council voted to create the Ashland Fiber Network (AFN), a telecommunications network run by the local electric utility to provide wholesale data transport, as well as cable and broadband service to residents. Financed by $5.8 million in bank loans, AFN began operations in 2000. However, government planning quickly spiraled out of control, as original estimates for network profitability had to be drastically redrawn just a year after AFN's launch.

As the Associated Press reported in May 2001, AFN "boosted its request for loans from other city departments from $1.6 million to $4.5 million," as cable and broadband subscriptions failed to meet expectations. A report released to the City Council later that fall showed that AFN would bleed $6.6 million over five years, rather than make a $3.8-million profit network managers previously projected. Moreover, the cost-shifting utility subsidies needed to prop up the languishing network were estimated to continue until 2014, a red flag for fiscal hawks. After widespread public concern over the excessive borrowing to cover the network's budget shortfalls, the City Council refinanced AFN's debt, taking out $15.5 million in bonds. But when revenue was still not covering operating expenses, local government officials took drastic action.

In 2005, the City Council passed a controversial measure to tax electricity users to pay off AFN's debt and operating costs. Facing a whirlwind of public outrage over AFN mismanagement, city officials rescinded their electricity tax, but in 2006 they continued to seek out additional ways to make AFN debt payments, including higher property taxes, a tax on utility bills and a "ticket tax" on theatergoers. Not surprisingly, the city transferred control of the AFN cable division to a private company in fall 2006, which may soon become the first piece of an entire network sell-off.

Ashland's experience with the telecom business is all too common throughout the country. This February, the Pacific Research Institute (PRI) released a major study that reviewed more than fifty government-run telecommunications networks that compete against private providers in the broadband, video and telephone markets. This analysis demonstrated that these public systems are overwhelmingly financial disasters. Many received their initial funding through suspicious means, including insider loans at special rates. Muni networks are revenue-hungry, demanding constant reinvestment; the ones in PRI's sample have raided more than $840 million from taxpayers and utility ratepayers over twenty years. Analysis of the total track record of these municipal systems shows that 77 percent of the time they don't pay their way, and often unfairly undercut private sector competitors in attempts to monopolize the marketplace.

Many local governments have learned their lesson after fiddling with fiber optics, but will sadly endure the same woes with Wi-Fi technology. Because revenues have often not come in at the high rates Muni Wi-Fi operators expected years ago, they now seek virtual exclusive use of local unlicensed radio spectrum through special government agreements, thwarting a competitive marketplace by degrading the quality of rival services. Furthermore, wireless network providers habitually require local governments to agree to become their indefinite customers of "anchor tenant" services, committing millions of future taxpayer dollars to use what many industry experts now consider to be an obsolete technology.

Though the business models and technologies of municipal telecom networks may be different from city to city, the results are the same: distorted market forces and over-reliance on political forces to raise revenues and maintain marketplace control. Rejecting big-government solutions and adopting market-friendly policies is more likely to solve the policy problems Muni Wi-Fi and fiber networks are intended to address. Moving forward, Portland officials should weigh the merits of suspending local red tape such as rights-of-way restrictions, franchise taxes and pole fees to encourage new investment and competitive choice in the broadband market, which can lower prices and increase the quality of services in a more sustainable way.

Oregon consumers are right to expect greater high-tech investment in their neighborhoods, but they shouldn't expect taxpayers to pick up the bill. When telecom businesses are allowed to freely thrive and compete in the marketplace, all Americans will be brought into the digital frontier.