The Great Broadband Heist

Federal regulators and state legislators are robbing localities of control over high-speed access to the Internet.
by | August 2002

You'd think Plano, Texas, would be leading the rush into the new era of ubiquitous, high-speed Internet access. Home to information technology giant EDS, it has more than its share of affluent and Internet-savvy residents. It also boasts a disproportionate number of telecommuters; as far back as 1996, the magazine Home Office Computing dubbed it "the best city in the U.S. for home-based businesses," thanks largely to the quality of its telecommunications network. And it is virtually free of geographic barriers that might hinder deployment of advanced telecommunications infrastructure. "We're as flat as a board," says City Councilman Steve Stovall. "Our mountains are our highway overpasses."

Yet despite these favorable conditions, high-speed, or broadband, communications have been coming at an agonizingly slow pace to the city of 240,000. Stovall estimates that 60 percent of city residents still have no access to broadband connections. Verizon, the dominant telephone company, refuses to upgrade much of its Plano network for high-speed services. And while AT&T, which holds the local cable franchise, offers cable modem service to a growing number of residents, its system crashes almost daily in some parts of town, and slows to a crawl whenever Internet traffic gets heavy--as happens most afternoons when children get home from school and go online.

City officials fear that unless these problems are solved soon, Plano may lose high-tech residents to places such as Dallas, which lies 20 miles to the south. But they feel hamstrung when they try to speed things up. In 1999, the Texas legislature sharply reduced their leverage by saying telephone companies no longer had to obtain local franchises. And in March, the Federal Communications Commission eliminated local authority over cable modem service as well. "Cities no longer have a say-so," says Julie Fleischer, the city manager's assistant for telecommunications. "At the state and federal level, across the board, everybody thinks they can do a better job."

The battle to deploy broadband services isn't turning out to be quite the contest that policymakers, economists or business leaders anticipated. Six years ago, when the last major federal telecommunications legislation was enacted, commentators expected that scores of competing companies using several different technologies would vie to span the "last mile" that links millions of homes, small businesses and nonprofit organizations to the Internet. But so far, most of the competition has involved different levels of government, not private companies. And the power plays appear to be producing an unlikely loser: local governments. While cities and counties are closest to the action, they are on the brink of being stripped of any role in breaking the deployment bottleneck and regulating the new generation of information services.

Local governments have a big stake in broadband. In many places, they are among the largest network users. A growing number of them see high-speed communications as a key to effective government, economic development and healthy communities. And despite the Internet's global reach, local communities account for a substantial portion of its traffic. In a survey last fall, the Pew Charitable Trusts found that 28 million Americans--more than one quarter of all Internet users in the country--go online to get more involved with people in their own towns. University of Toronto sociologist Barry Wellman has even coined a term--"glocalization"--to describe how many people often use this global communications tool to connect with people close to home.

"While many in the telecommunications industry, and in state and federal government, say that local government has no role to play, the reality is that local government is the key actor in telecommunications infrastructure," says Miles Fidelman, president of the Center for Civic Networking and a member of Newton, Massachusetts, Mayor David Cohen's Telecommunications Advisory Board.

At the moment, the biggest threat to local prerogatives is coming from the FCC. In March, it ruled that cable modems are an "information service," not a cable service. With that simple redefinition, the commission effectively removed Internet connections provided by cable television companies from the jurisdiction of local cable franchising authorities. The commission separately has indicated that it believes the telephone version of broadband--DSL, or "digital subscriber line"- -is an information service, too; that would exempt DSL from state and federal regulations that apply to telephone service.

The ruling has been highly controversial, and many interested parties have gone to court to challenge it. If upheld by the courts, the FCC's actions will leave the FCC solely in charge of regulating broadband services. "They are federalizing the local loop," says Brad Ramsay, general counsel for the National Association of Regulatory Utility Commissioners, which represents state utility regulators.

The FCC says its goal is to spur competition between broadband providers. That will be difficult to achieve, it says, as long as telephone and cable companies operate under two different sets of rules that are administered by different levels of government. But even if the FCC ruling survives its court tests, critics question whether the commission's solution will work. For one thing, telephone and cable companies have shown little inclination to compete so far. In city after city, they generally have carved out separate niches for their broadband offerings rather than go against each other head to head. Telephone companies, concentrating primarily on downtown areas and other commercial districts, control 90 percent of the business market for broadband services. Cable companies, on the other hand, have focused on residential areas, where they control 70 percent of the broadband market. Perhaps as a result, prices have seemed anything but competitive. In Plano, for instance, local officials were frustrated when Verizon and AT&T last year announced identical price increases--from $39.95 to $49.95 a month--within weeks of each other.

"Competition would be wonderful, but nobody has it," says Jane Lawton, cable communication administrator for Montgomery County, Maryland. "In fact," she says, citing AT&T's recent decision to merge with Comcast and America Online's merger with Time Warner Cable, "we're getting farther away from it." One of the wealthiest localities in the country, Montgomery County has more broadband competition than most jurisdictions. In some neighborhoods, households can choose between three separate broadband providers. But that is an exception. And it's likely to remain so for the foreseeable future, Lawton says, because the stock market's disillusionment with telecommunications has left "overbuilders"--companies that are trying to install their own networks on top of existing ones--hard up for capital.

City and county cable administrators such as Lawton fear that eliminating regulation now in hopes that competition will take hold later jeopardizes consumer protections they have spent years developing. Under the FCC ruling, for instance, local governments won't be able to enforce customer-service standards--rules for how quickly a company must answer the telephone or respond to a service request, for instance--or try to resolve customer complaints about cable-modem service. (With broadband deployment off to a rocky start in many jurisdictions, there have been plenty of complaints.) Local authorities also may no longer be able to require cable companies to help build high-speed networks linking government buildings, hospitals and schools at low cost, or to deploy cable-modem service throughout their jurisdictions rather than just in upscale neighborhoods. Such requirements have been common provisions in past cable franchise agreements.

Eventually, cities' ability to support public-interest programming may be at risk. Over the years, local governments have won agreements from cable companies to help establish and support 2,000 public access, education and government channels on cable television. These stations, which offer local television programming created by schools, government, churches and everyday citizens, depend heavily on franchise fees that cities collect from cable companies. But in the wake of the FCC's March ruling, cable companies have stopped paying any fees on revenues from their cable-modem services--a decision that will cost cities $300 million this year and almost certainly much more in the years ahead. "We are starting down a slippery slope," warns Lauren-Glenn Davitian, director of CCTV, a government access channel in Burlington, Vermont. "We're saying to cable companies that even though they are using public rights of way, they have no public interest obligations."

Local governments base their claim to a role regulating the broadband rollout on a simple fact: They own and manage the rights of way that telecommunications networks must use to reach customers. "The rights of way are publicly owned assets," says Kenneth Fellman, the mayor of Arvada, Colorado, and chairman of the FCC's Local and State Government Advisory Committee. "We hold them in trust for the public, and the public is entitled to a reasonable share of the profit."

But what exactly is a "reasonable" share? Cities say the market should dictate the answer to that question. That could guarantee local governments a considerable sum, since the market value of public rights of way has soared in the last 15 years. The National Oceanographic and Atmospheric Administration, which is required by law to charge market rates for use of federal lands it controls, estimates that the telecommunications boom sent the price for using 5 or more miles of contiguous right of way soaring from around $8,000 per mile in 1987 to over $100,000 in 1997.

Not surprisingly, communications companies aren't eager to pay that kind of money. They argue that the national interest in building an effective communications system requires that local governments be allowed to charge companies just for their actual costs to maintain rights of way. "The ownership rights that local governments have are very different from what private landowners have," says Kevin Gallagher, director of the network and facilities legal team for the troubled long-distance company WorldCom. "When you hold the public right of way in trust, your compensation is limited to cost recovery."

WorldCom is a member of the Telecommunications Industry Rights of Way Working Group, or I-ROW, which contends that local governments are impeding broadband deployment. "We're all trying to build our networks, always under a lot of time pressure, but many cities require us to enter into franchise agreements or something similar that make us do things like pay a percentage of gross revenue, open offices in their cities, open our books to audits, disclose our customers--all of which are unrelated to managing the right of way and are illegal," Gallagher says.

Gallagher says a fee of 5 percent of gross revenue would exceed any city's actual costs. But there is no accepted methodology for determining the cost of maintaining and managing rights of way. Many cities haven't even tried to make the calculation since a web of state laws controls what they can charge telecommunications companies, and federal law caps what they can charge cable operators (5 percent of gross revenue). It is clear, however, that their costs have soared since the telecommunications boom began. "We have had an onslaught of communications companies, and every one wants to cut the street itself and lay in its own conduit," notes Darryl Anderson, executive director for the District of Columbia's Office of Cable Television and Telecommunications.

Coordinating and supervising the plethora of companies is a challenge. In Plano, 42 separate telecommunications companies have sought access to the rights of way for telecommunications--mainly to lay fiber-optic cable in hopes of selling it to whoever wins the broadband war, not because they have any intention of serving customers, city officials say. On top of that, all the digging in city streets has taken quite a toll. A highly regarded San Francisco study in 1995 found that cutting pavement between three and nine times--a rate that has become quite common--reduces the useful life of a road from 26 years to 18 years, or by 30 percent.

The telecommunications companies are taking their cause to state legislatures. "Local governments have to understand that they are in a battle," says Gerard Lederer, a Washington, D.C., attorney who represents local governments on telecommunications issues. But, he adds confidently, "When they become engaged, they don't lose." There may be a bit of bravado in his remarks, however. Telecommunications companies have a great deal of clout in state capitols. What's more, states have very different interests than cities. Like the federal government, they are eager to establish a level playing field that will foster more competition between broadband providers. Many state lawmakers say that will require harmonizing franchise fees for telephone and cable companies.

As a result, cities have not fared well in many recent legislative fights over right-of-way charges. Of the 20 states that have approved bills since 1996, eight explicitly limited local governments to recovering their costs, and several others imposed formulas that significantly restrict what local governments can collect. One of the most recent states to take up the issue, Michigan, may be a harbinger. Earlier this year, it established a new, uniform franchise fee for telephone and cable companies alike. In one sense, it was a breakthrough for Michigan cities: It enabled them to start collecting from telephone companies as well as cable companies. But in the legislative wrangling that preceded enactment, lawmakers set the fee at just 5 cents per foot, and they approved a number of exemptions. As a result, the Michigan Municipal League estimates, the new law will bring in just $30 million--far less than the $86 million the league estimates cities must bear annually in management and pavement- degradation costs.

Sometimes cities can't even win on their own turf. In June, the Boston City Council rejected a proposal by Mayor Thomas Menino to impose a 5 percent tax on the annual earnings of telecommunications providers.

Ultimately, the battle for control of the last mile is much more than a jurisdictional dispute between cities, states and the federal government. It is a contest between two very different models for the kind of broadband communications system Americans want for the future. But once again, local governments may end up on the sidelines when the decision gets made.

One model is the telephone, or "telecommunications" system. In it, all information providers have equal access to the network, and information flows freely from any one point to any other point without preferential treatment. The other model is the cable television system. In it, network operators don't have to be neutral. Through a variety of devices--such as limiting customers' choices of Internet service providers, restricting the amount of data some information providers can transfer, and providing menus and navigational aids or managing traffic in ways that give preference to certain information providers--they can influence, if not control outright, what consumers actually see.

For consumer groups, the preferred approach is obvious. They say "open access," the telecommunications approach, would keep consumers in the driver's seat, and encourage competition, innovation, diversity and democracy. "Closed access," or the cable approach, would tend to do just the opposite, favoring commercial information over public- interest information and inhibiting such values as diversity and democracy. "Sweetheart deals with selected content providers will effectively push owned and affiliated online programming to the fast lane, while competitive and nonprofit content is relegated to the slow lanes and far margins of the Internet," says Jeff Chester, executive director of the Center for Media Education, a Washington, D.C.-based advocacy group.

Many local governments share Chester's concern. Indeed, some see their own self-interest at stake. Local governments have invested enormous sums in establishing electronic government services--services that increasingly will require that users have broadband connections. It is virtually impossible, for instance, to watch an archived video of a city council meeting or take full advantage of a graphics-rich Web site with a traditional dial-up connection. If private monopolies control people's access to the Internet, government information could be "ghettoized," or given secondary status to information the network owners are more eager to promote, argues David Olson, director of the Mt. Hood Cable Regulatory Commission in Portland, Oregon.

"The government and nonprofit sector have had considerable success holding onto a portion of the traditional cable television platform through the PEG [public access, education and government] channels," Olson says. "But it's a very different question whether we can set aside electronic green space in the new [broadband] platforms."

Officials such as Olson view the open-access debate with a certain sense of helplessness, though. Their despair is born partly of a painful dilemma that has split local governments on the issue: If they take the consumer side and say cable modems are a "telecommunications service," they risk losing the ability to collect franchise fees on cable services. The prospective loss of revenue is enough to make even some devoted advocates of open access, let alone some mayors or city councilmembers with numerous other priorities, reconsider their positions.

Up until a few years ago, some cities, including Portland, tried to have their cake and eat it, too--that is, they asserted both that cable modem is a cable service and that cities had the right to require open access. As is usually the case in the world of telephone and cable regulation, the case wound up in court. In 1999, a federal appeals court, ruling on an AT&T challenge of Portland's interpretation, returned a mixed verdict. It said cable modem was a telecommunications, not a cable, service. In the eyes of that court, at least, cable-modem services should allow open access, but cities such as Portland had no business forcing them to do so.

Since that decision, local governments have backed away from the open access fight. In part, they fear the court's decision sets them up for a Pyrrhic victory at best--one in which they win on open access but lose cable franchise revenue in the process. Moreover, many are reluctant to risk getting locked in a long battle with the cable industry, since the FCC has given every sign that it intends to preempt whatever they do anyway. "We figured we just can't win," says Olson.

How will this many-sided intergovernmental brawl be settled? Don't look for any answers soon. In the complex and convoluted world of telecommunications and cable regulation, it probably will take several years for the current round of FCC decisions to work its way through the courts. Along the way, Congress may well intervene, although federal lawmakers are divided over what to do. The Republican- controlled House has passed legislation to federalize and largely deregulate broadband services, but the measure is stalled in the Senate.

Whether the issues ultimately are decided at the FCC, the courts or in Congress, it would be a mistake to count local governments out, though. For one thing, their expertise in enforcing consumer rules is unrivaled. Shortly after the FCC decided that cable-modem service should not be a local regulatory concern, for instance, the commission's own staff had second thoughts. Inundated with questions about who would help unhappy customers, they started referring callers back to local cable offices.

For another thing, while the details are in dispute, everybody agrees cities have some role and powers to police local rights of way and collect fees for doing so. What's more, cities are only starting to get into the fight over rights of way. For years, mayors and city councilmen took their cable television franchise fees for granted, but the FCC's move toward preemption has energized them. The National League of Cities, U.S. Conference of Mayors, National Association of Counties, International Municipal Lawyers Association and National Association of Telecommunications Officers and Advisors have joined together to challenge the FCC action in court. And local officials also have formed a coalition with the clever name "TeleCommUnity Alliance" to press their right to charge rent for use of rights of way.

The battle over franchise fees may even help cities reengage on other issues. In particular, to the extent franchise fees become disentangled from cable franchise agreements, cities will have more freedom to get back into the battle for open access. In Portland, for instance, cable administrator Olson has no fear that cable modems might be redefined as a telecommunications service because his revenue base is not at risk: some years ago, the state of Oregon established a uniform franchise fee for both cable and telecommunications companies.

There's a final lesson in that. One way or the other, the current regulatory scheme will be reshuffled. The question is whether local governments will tie themselves so tightly to the old system that they won't be able to find political allies and develop new ways to achieve their traditional objectives in a changing technological and regulatory world. While rearranging regulatory roles may require giving up some things to gain others, cities have no alternative. Still, it's a bit scary. "It's like wing walking," says Nicholas Miller, a Washington attorney who represents local governments on telecommunications and regulatory issues. "We have to get from the wing of one airplane to another--in mid-flight."


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