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Dollars GON down the drain

By Katie McAuliffe, Celeste Arenas | February 17, 2017

The experiment of government owned broadband networks (GONs) is over.  The experiment failed.  A failed experiment isn't a failure if we use the information to pursue another path. Continuing down a path of wasted dollars, however, is a failure.

Over 450 municipal broadband networks spread across the states have not delivered effective broadband for unserved Americans and they continue to lose taxpayer dollars. Four hundred and fifty is a more than adequate sample size to judge the ineffectiveness of GONs.

The manifold problems they present include: duplication of pre-existing market services; prevention of market providers to compete fairly against heavily subsidized and protected networks; and unsustainable, wasteful practices that are paid in hidden higher taxes. 

At the core, GONs, also sometimes referred to as municipal broadband networks, are not sustained with a successful business model. They cannot provide cutting edge connectivity due to the need for constant network upgrades and low cost services in the same way that industry can.

The TPA recently commissioned a map with over 200 municipal broadband networks that are currently under some level of “debt status.” No shareholder would voluntarily invest in such an unprofitable broadband network, therefore it has become incumbent on taxpayers to foot the bill.  

The TPA further published an extensive report detailing specific failures of 12 municipal broadband networks with a combined cost to taxpayers of $2 billion that have not delivered their promises of better broadband for all Americans.

State funded broadband failures in detail have included: 

Kentucky-wired,  Kentucky

A $350 million dollar fiber optic cable was built in Kentucky in 2015. This was created irrespective of the data which shows over 93% of Kentucky residents already have some level of internet access. Proponents claim that Kentucky-wired “inserts market competition” yet they ignore 163 private broadband providers who already service the area. This severe case of expensive duplication costs the state $11 million dollars per year in bond payments, which will most likely be shifted to Kentucky residents in the form of a tax hike. Funds that could have been used for tax-relief or more useful public goods were instead used to provide a service that most already have, but will pay for twice.

Burlington Telecom, Vermont

Traditional advocates of state-funded broadband found themselves admitting that Burlington Telecom is a disaster leading to the resignation of the city’s Chief Financial Officer. After CitiBank financed a $33.5 million dollar loan to kickstart the project, Burlington lawmakers ran Burlington Telecom at a loss just one year later, using $17 million in unsolicited cash reserves to prop up the network. A CitiBank lawsuit led to the sale of Burlington Telecom for $6 million, leaving the city with a debt of $7.3 million to be paid for per subscriber at a cost of $1,825. Little wonder that in a city with 39,000 residents, only 11% of residents have chosen to subscribe to the program.

Tacoma Power,  Washington

Taxpayers funded a $100 million-dollar fibre optic network in the 1990’s that is now obsolete, unprofitable and still a liability for the citizens of Washington state. Cable TV, one of the primary services provided by Tacoma Power’s Click Network, quickly became redundant as Washington customers turned to private industry competitors for alternatives. Between 2009 and 2015, Tacoma Power lost 25% of its customers leaving it with only 18,000 subscribers in the state. It has been running into debt at a cost of $9 million a year with a projected deficit of $37.4 million over the next five years. If Tacoma Power failed to adapt to changing technology on the private market, it would swiftly cease to exist. As of August 2016 however, taxpayers are paying higher electricity prices and another bailout to the public network that will cost anywhere between $6.3 - $14 million dollars.

Despite the negligible benefits and huge taxpayer cost of municipal broadband networks, state governments have continued to push for their implementation. This is why Americans for Tax Reform wrote the following letter to oppose the proposal for taxpayer-funded internet service plan in Grand Junction, Colorado at the cost of $70 million.  

It points out the similar problems of duplication and waste of GONs in other states:

“More than 20 private Internet service providers currently serve the Grand Junction area, and have poured millions of dollars into their broadband infrastructure over the years. Thanks to their investments, 99% of residents living within the city limits can choose from 2 or more wired providers, and nearly all of them have access to Internet speeds significantly faster than the Federal Communication Commission’s recently reported national average. As such, a city-provided Internet service would be pointless.”

...

“Along with underestimated costs, demand for GONs is often grossly overestimated. Despite access to a GON, consumers often do not see a need to change providers and choose to remain with their trusted private sector providers. Underestimated costs and overestimated demand is a recipe for deficits that taxpayers will be forced to fill. This scenario has played out in a number of cities and towns across the U.S.”

...

“GONs unfairly compete with private providers because government entities can subsidize costs with tax dollars, and thus charge consumers below the cost of service. Private sector providers cannot do this, because it would drive them out of business. This discourages private providers from expanding and investing in areas where GONs are present, as their odds of success are hindered by unfair competition from an entity that doesn’t need to turn a profit. Since it is vigorous competition between providers that spurs innovation, improves quality of service and drives prices down, GONs leave consumers at risk for fewer choices, outmoded technology and deteriorating service.”

Municipal broadband networks fail to deliver their promises of low-cost, broadband access for all Americans. It's not just the customers of the GONs that are paying for the fallout, all taxpayers in the GON jurisdiction pay for the service whether they use it or not.  They are paying for failed services that would not be allowed to operate in a private market. 

Duplication of existing competitors, the rapid advance of high tech private providers and the deteriorating impact of subsidized, protected services are only a few of the many problems with GONs. 

States and localities considering building their own GON should look to the experience of other states that have gone before them, so as not to repeat this failure.  Existing municipal broadband networks must be reviewed for their effectiveness, sustainability and impact before state legislators decide to continue their expansion. In most cases, the best course would be to shutter the network and look for avenues that encourage free-market competition.