San Francisco Examiner, February 22, 2007

SAN FRANCISCO - This month, San Francisco city government partisans are advocating a government-controlled fiber-optic network as the solution to bridging the digital divide. Entering the broadband business, however, would be a major municipal mistake, easily confirmed by a look across the Bay.

Nestled on an island, the quaint town of Alameda was one of the first municipalities in the Bay Area to venture into city-run communications services. Fearing private competition in face of the electricity deregulation of the late 1990s, the city’s public utility Alameda Power & Telecom (AP&T) looked for a way to make a quick buck in the marketplace. Like fiber advocates in San Francisco, they came to the conclusion that building a city-run fiber-optic network that provides cable and Internet services will be a multimillion-dollar “cash cow,” a serious miscalculation Alameda officials would soon regret.

With more than $20 million in borrowed public funds, AP&T launched its cable television service in 2001 and broadband service in 2002. But absent private-sector practices such as disciplined accounting, prudent cost-cutting and a lean labor force, AP&T bureaucrats created a municipal monster, draining public dollars to operate an inherently costly technology. As reality set in, lofty network revenue projections were slashed, and an outside consultant brought in to tell local officials the bad news — the network has never been profitable since it first launched, mired in debt and poor management.

Most notably, CCG Consulting found from their analysis that AP&T quietly made intra-utility fund transfers and loans for six years, propping up its failed fiber network to the tune of $43 million — contrary to public promises that a “firewall” would be set to prevent shady borrowing schemes. Now, as AP&T also owes an additional $39 million in bonded debt, with payments due in a couple of years, there has been open talk of creating new taxes to clean up the utility’s mess in the communications marketplace.

Unfortunately, some San Franciscans have belittled the importance of network economics. A coalition of community groups known as “Public Net San Francisco” recently called for the Board of Supervisors to deep-six Mayor Gavin Newsom’s well-publicized Wi-Fi network agreement with Google and Earthlink in favor of a city-run fiber system. Supervisors Tom Ammiano and Jake McGoldrick appear receptive to the idea, but San Francisco would be foolish to step into the same fiber-optic quagmire from which Alameda is now struggling to emerge.

Network bureaucrats will merely borrow and spend as they please, passing a bloated bill onto every resident, regardless of subscribership. Like Alameda, San Francisco already has a strong cable and Internet market that can offer rates to most paying residents that are cheaper than a monthly bus pass.

What’s truly needed is a re-focus on the core policy objective: bridging the digital divide in local neighborhoods where industry investment is sparse and poverty is high. Serious consideration should be given for a stronger “voucher” model that protects competitive benefits and extends access to the have-nots — all in a shorter amount of time it takes to build out a city-run fiber network.

San Francisco public leaders can offer Internet service providers limited exemptions from local red tape, such as costly pole and rights-of-way fees, giving them a grace period from government mandates that too often discourage market entry. Additional legislation can be passed to significantly reduce these fee rates for all service providers who build out infrastructure in targeted underserved neighborhoods, and agree to provide a certain number of vouchers for broadband subscriptions at low, nominal rates. Working through public assistance agencies, local leaders can then reach out to at-risk residents, particularly poorer families with children, with donated computer equipment and vouchers.

By adopting a voucher model, city officials across the country can create a vibrant communications marketplace that expands the reach and lowers the cost of Internet access for all. A high-fiber government lifestyle, on the other hand, remains unhealthy for municipalities.

Vince Vasquez is a policy fellow in technology studies at the Pacific Research Institute, a think tank based in San Francisco.