Tuesday, September 18, 2018 1:00 am
Municipal service fails to yield cost savings
For the last couple of decades, Silicon Valley and the Democratic Party have been closely connected. More recently, however, progressive politics has been turning against several big tech companies.
Part of that movement has been aimed against internet service providers, such as Comcast and Frontier. Most Americans have only one or two choices for internet service faster than 25 mbps, the accepted standard for broadband internet.
I have always been sympathetic to these arguments against internet service providers. I thought that internet service is a natural monopoly, similar to water, electricity or natural gas. Much of the cost is in building the wires (or pipes, for gas and water); having multiple companies build them is wasteful. Realistically, only one company builds the network. If no one stops the company, however, it will charge excessive fees to use the network. I thought that a single entity would do a better job and only something people had control over, like a local government, would keep prices down.
Those news sources that were also sympathetic would frequently cite the Chattanooga, Tennessee experiment as a model for municipal internet. The city's electricity company, Electric Power Board of Chattanooga, built a fiber-optic network in 2008. It now provides service to many homes and initially provided legendarily fast speeds.
It was with those thoughts that I found a report by the University of Pennsylvania's law school on municipal internet. The authors reviewed 88 cities that, like Chattanooga, provided fiber-optic internet service. Their conclusion, unfortunately, is that most were unsuccessful financially. The expenses and revenue worked out that most cities were likely going to have to contribute extra money to support their projects.
The authors went through each city's electric company financial statements between 2010 and 2014. Most cities provide internet service through their electric companies because the electric companies already have the right-of-way for building wires around homes. Only 20 cities provided finances for internet services separate from electricity services. The size of the projects was mostly between 10,000 and 60,000 homes. Chattanooga was the largest at 155,000 homes.
As a side note, the authors spent a surprising amount of the report on Vernon, California. Vernon is a 5-square-mile area near Los Angeles. Its internet service was for 27 homes and 100 residents. However, there are 1,800 businesses and 55,000 people who work there. It sounds like this place is unlike any other and corruption in the city runs rampant.
More usefully, the authors examined the bond issues for each project to understand the costs associated with laying the fiber-optic networks. The average cost per home was about $2,200. The range, however, was quite wide: $770 to $5,500. The authors report that Verizon's fiber-optic network cost about $750 per home, although they don't cite a source for that important comparison.
The authors, again using the financial statements, calculated each project's annual cash flow per home. Typical numbers were between a $200 loss to a$100 gain. Those numbers, on average, were not enough to pay the initial cost of the fiber-optic network. The authors estimated the time required to pay back the initial cost and, in most cases, it was far longer than the fiber-optic network's lifespan.
That surprised me. I thought a municipal internet service would be a relatively easy win. That is probably not true, since there are very few success stories to be found. This frustrating study makes me think again of the turn against some technology companies. We should be very careful about blazing a new path because there are probably many ways it could go very wrong and be very expensive.
Christer Watson, of Fort Wayne, is a professor of physics at Manchester University. Opinions expressed are his own. He wrote this for The Journal Gazette, where his columns appear the first and third Tuesday of each month.