Digging into H129: Another Bill in NC to Limit Local Authority and Broadband Competition

As we predicted, Time Warner Cable is pushing a new bill in North Carolina to limit competition and local authority to build broadband networks (Save NC Broadband is alive again). H129 purports to be An Act to Protect Jobs and Investment By Regulating Local Government Competition with Private Business - [download a PDF of the bill as introduced].

This bill is another example of state legislators refusing to allow communities to make their own decisions -- imposing a one-size-fits-all policy on communities ranging from the metro area of Charlotte to small communities on the coast and in the mountains. Many of the provisions in this bill apply tough constraints on the public sector that are not applied to incumbent providers, but this analysis focuses only on a few.

Let's start with the title:

An Act to Protect Jobs and Investment by Regulating Local Government Competition with Private Business

There is no support anywhere in this bill to explain what the impact of community networks is on jobs. Nothing whatsoever. There is a claim that "the communications industry is an industry of economic growth and job creation," but ignores the modern reality that that the communications industry goes far beyond the private sector. In fact, the recent history of massive telecommunications providers is one of consolidation and layoffs. It is the small community owned networks that create jobs; larger firms are more likely to offshore or simply cut jobs.

Certainly all businesses depend on communications to succeed. Unfortunately, they are often limited to very few choices because the of the problem of natural monopoly. This is why many communities have stepped up, including three in North Carolina (two of whom offer the offer the most advanced services in the state).

So what is the result of the community networks on jobs? Community Networks obviously create jobs merely by existing - they hire managers, sales staff, customer support reps, technicians, and etc. They create competition, which market theory tells us will result in lower prices for everyone in the market. And to date, no one has suggested that TWC or any other competitor in these communities has laid employees off. To the contrary, they are likely to hire more sales staff to go door-to-door to retain subscribers.

The effects of this bill will be to lower the number of jobs in North Carolina. Existing businesses will be less efficient because they have fewer choices. Companies like CenturyLink and TWC will have fewer incentives to invest in faster technologies or improve customer service.

A city-owned communications service provider shall meet all of the following requirements:

Provide communications service only within the jurisdictional boundaries of the city providing the communications service

If the purpose of this bill is to protect jobs and investment, it is hard to see how restricting competition will promote those goals. As much of the bill is concerned about cities abusing their inherent power as the local government, it is not clear why it is unfair for them to operate where they do not have of the supposed advantages of a local government.

Shall not price any communications service below the cost of providing the service… The city shall, in calculating the costs of providing the communications service, impute (i) the cost of the capital component that is equivalent to the cost of capital available to private communications service providers in the same locality and (ii) an amount equal to all taxes including property taxes, licenses, fees, and other assessments that would apply to a private communications service provider…

Requirements to impute costs are a goldmine for lawyers -- the costs included here vary and require judgment calls that will undoubtedly be challenged by lawyers employed by those opposed to the project. The entire process is an impractical accounting nightmare that is not meant to restore balance to the market but rather to discourage any community from even trying to comply. The Georgia Public Service Commission explained why this notion is poor policy:

Preventing anticompetitive practices, unfair competition, and abuse of market position does not mean that the Commission must impose conditions on every applicant which has some advantage not shared by every other applicant. The Commission is required to treat all LEC's [Local Exchange Providers – i.e. phone companies] equally, not make all LEC's equal. BellSouth and the large cable companies certainly enjoy better capital costs than a typical small business owner. Does this put the small company at a competitive disadvantage? Of course. Should the Commission determine which LEC has the highest capital costs and require that all other companies impute that amount into their rates to level the playing field"? Certainly not. If Marietta has to comply with expensive open records requirements or expensive municipal bidding requirements, should those costs be imputed into the rates of all private companies? Again, no. Similarly, if BellSouth has a large tax write-off one year, it would be ridiculous to require that they impute into their tax rates the taxes they did not have to pay merely because some other company may not have had a tax write-off that year.

The requirement not to price below the cost of providing the service is similarly hard to calculate - how does one calculate the individual charges in a bundle? Do subscribers have to pay $1500 for the first month to cover the cost of connecting the house to the network pass or can that fixed cost be spread across one year, two years, three years?

Monopoly board game

Requirements like these make the bill's true intent obvious: cripple any competition to TWC. Time Warner Cable is free to charge as it pleases -- it can use predatory pricing against competitors because it cross-subsidizes from its vast customer base (largely in uncompetitive areas) and has the many advantages inherent in incumbency.

A city-owned communications service provider shall not be required to obtain voter approval under G.S. 160A-321 prior to the sale or discontinuance of the city's communications network

This is a stunning overreach. Not only are communities effectively barred from building competitive networks, the community has little power to ensure an irreversible decision actually has public support. It is hard to understand how shutting down a popular network will save jobs.

The provisions of G.S. 160A-340.1, 160A-340.4, and 160A-340.5 do not apply to the provision of communications service in an unserved area.

This is undoubtedly a smart preemptive move against the argument that this bill will prevent communities from building their own networks where the private sector is not interested. The result is perverse -- a community with no private sector provider may choose to build its own network but a community with a deadbeat provider offering expensive, unreliable connections with technology from the last century cannot make that choice.

A city or joint agency subject to the provisions of G.S. 160A-340.1 shall not enter into a contract under G.S. 160A-19 or G.S. 160A-20 to purchase or to finance or refinance the purchase of property for use in a communications network or to finance or refinance the construction of fixtures or improvements for use in a communications network. The provisions of this section shall not apply to the repair or improvement of an existing communications network.

Recalling that I am not a lawyer, this section appears to be an attempt to prevent communities from using public-private partnerships (perhaps with a nonprofit organization) to build a network. Anyone with a better understanding of this section should comment below to clear this up.

handcuffs.png

We received a one-sheet [pdf] explaining the provisions of the bill, which states the bill "permits cities to provide phone, cable and broadband services in competition with private providers, subject to certain requirements…" Unfortunately, those "certain requirements are sufficiently onerous to ensure any community attempting to build a competitive network has the steepest possible hill to climb. Under present law, communities are already disadvantaged due to the inherent advantages of an incumbent. This bill greatly increases the power differential, protecting lazy incumbent providers while handcuffing communities.

Another talking points one-sheet [pdf] has a heading saying "Level Playing Field / Local Government Competition" and starts by saying cities can provide services on "roughly equivalent" terms as private providers. It then lists 4 things communities have to do, conveniently ignoring that the private sector fails to meet each of these. We have tackled the Level Playing Field Canard previously but here we go again:

  • Comply with laws and regulations applicable to private providers -- including the payment of taxes. - Of course, it is hard to calculate exactly how much these private providers actually pay in taxes due to the variety of tax breaks and their use of tax havens to avoid paying the taxes that normal non-massive companies have to pay.

  • Not cross-subsidize their competitive activity using taxpayer or other public monies - If we would ban cross-subsidies, that would be something! But no, this bans a specific form of cross-subsidization that the public sector may use while allowing the private sector to cross-subsidize at will. TWC can lower prices in Wilson while raising prices in Raleigh. AT&T can use profits from its wireless network to invest in U-Verse. But the community networks are limited to resources from their boundaries. Regardless of its merit as a rule, to suggest it levels the playing field is to ignore reality.

  • Not price below cost, after imputing costs that would be incurred by a private providers - Again, the private providers are not limited in their ability to price below cost (predatory pricing) and have little reason not to as they can cross-subsidize from nearby non-competitive areas.

  • Not discriminate against private providers in access to rights-of-way - Once again, we have a rule that should be applied to both sides. No entity should be allowed to delay the other in access to poles. But it is the private providers who have obstructed community networks from the poles.

This legislation will hurts jobs, investment, and the general competitiveness of the state in a digital economy. The General Assembly is doing Time Warner Cable a massive favor by shutting down the only threat of competition and the source of the best broadband networks in the state -- community networks.

I encourage readers to look in on Philip Dampier's long discussion about this bill and Karl Bode's shorter take on it.

Anti-H129 Graphic designed by Eric James. Monopoly photo used under creative commons license, courtesy of Jenn Vargas (foreverdigital) on flickr. Handcuffs also under creative commons, courtesy of nigel view on flickr..

Comments

Umm...but...

Ok. So I agree with you that if TWC is asking for a level playing field, then they should *get* one, meaning that all rules that they're asking to apply to the muni network should also apply to them.

But the fact that TWC is skirting the rules does not justify setting up a publically funded muni network that gets funds by taxation. That's not competition. That's forcing those who don't subscribe to pay for a service through taxes that subscribers get for less money. Unless you're arguing that TWC should also get subsidized by tax payers in order to lower the prices for their subscribers.

I'm a big fan of competition for TWC. I'm a huge fan of taking away all the tax breaks that they get. But I'm not a big fan of replacing tax breaks for TWC with tax breaks for greenlight. There should be no tax breaks or incentives for any of them. They should live or die based not on how much tax revenue they can generate but on how much sales revenue they can generate through customer satisfaction alone. If TWC is getting advantages, the solution is NOT to give those same advantages to greenlight, it's to take them away from TWC.

Maybe this is more clear

One problem is the difficulty of creating a level playing field.  TWC has inherent advantages that go far beyond the ability of the state to solve.  

The second problem is the idea of competition.  I heartily agree that more competition would be better than what we have.  However, we need to consider where the competition occurs.  This is a deeper issue beyond the laws discussed above and it goes to the heart of some assumptions you are making.

Should we have multiple gas companies laying multiple gas lines to compete for residential customers?  Very few people think yes... this is a utility and the last-mile infrastructure is a natural monopoly.  The efficient solution is not competition.  However, this is not a 1:1 comparison with broadband.

If we could build all the broadband infrastructure over again right now, starting totally from zero, the best solution, IMHO, would be a single full fiber-optic network connecting everyone upon which any service provider could operate.  I take issue with your idea of competition in the infrastructure layer because it is not possible to get beyond a few small players competing there due to the expense and difficulty of building the physical network.

So I think we agree that H129 leans too far in penalzying communities.  What I am pushing you on is the assumption that policy should encourage the fallacy that competition in the infrastructure layer is a good solution.  This has very little to do with the facts in NC aside from the idea that as more networks are focused first on the needs of the community, they are more likely to be opened to independent ISPs to actually create the competition we all agree would be the good solution.

Still not convinced... but maybe

I understand your point re: competition in the last mile. And you might be right. But I'm not convinced. Because with gas/water/electric, the infrastructure required to provide those services is enormous and extremely expensive. But apart from the last mile cabling, the infrastructure required to produce an ISP is tiny. You can fit several of them into a single rack in a single room on a single floor of a data center. That really opens the door for lots of competition.

Of course, the point that you want to make is that the last mile of cable is the really hard thing to deal with. OK. Fine. 

I have basically two positions on this. One that is more moderate and one that is more libertarian. My moderate position would be for the municipality to own the fiber/coax/utp, but then charge a fixed fee to private ISP's to use it to serve customers. And make the rules identical for all ISPs to access.  I can concede that *some* public involvement might be good in resolving the last mile issue. But owning just the last mile cable is a smaller amount of government involvement compared to government running the ISP that serves it. 

My more libertarian position on this would be for homeowners to own the last mile from their house to a point that is large enough to support competitive entry by ISPs. The homeowner would then be responsible for it's maintenance from their house to the central location. Ideally the central point where all this runs to would also be privately owned, earning revenue from the ISPs who pay for access to it... or possibly directly from consumers who pay for access... or maybe both. But again because the infrastructure required to build this space is tiny compared to utilites, the cost is just not going to be so high as to preclude it existing privately.

I prefer the libertarian position because then the homeowner can replace their cabling when something better comes along without having to convince a legislature to do it. (E.g. going from coax to fiber, or fiber to ... whatever is next.)

I'm not convinced that the *only* way to offer competition in the last mile is municipalities owning tax subsidized ISPs. I think that's replacing one non-accountable demon (TWC) with one that only has accountability every election cycle (the municipal government). Only the latter of which has a right to jail you if try to withdraw your funding.

 

re

Yes, we agree that I argue the last mile of access infrastrastructure for Internet is a natural monopoly - as is gas/water/electric.

Do you believe that the roads should be privately owned?  Some do, most don't.  I don't ask to discredit you, just to look at an issue where I think public ownership works better than the alternatives.  

Some have called your solution of homeowners owning their fiber "homes with tails."  I don't like it from a policy level for a number of reasons

  1. Universal access has been tremendously successful for phones and electricity.  The network effect means there is much greater value in the network the more people join - a significant positive externality.  We all benefit when the network is larger.
  2. The transaction costs of your solution are significant.  Who fixes the cable when it is cut?  The costs of maintaining the rights-of-way increase dramatically the more unique entities have cables in it.  The costs of this system are unnecessarily high compared to something more like the approach used historically for gas lines.

You are right that my solution is not the *only* way to offer competition.  Some have said the federal government should force telecom carriers to unbundle.  I think this is a bad choice because they will only cheat and lobby to remove the regulation.  I suspect you would oppose that solution on the grounds of it being bad policy for the gov to interfere with private property owned by a corporation.As for something better coming along... copper worked well for 100 years.  There is no reason to think fiber will not last even longer - lasers and glass (perhaps plastic) is the future for decades at a minimum.  I'm not saying your solution wouldn't work - I just think it leads in the direction away from the American dream where all children have a shot at success. I argue we should pursue policies likely to keep everyone connected. Access to the Internet offers tremendous positive externalities - markets will not provide the "appropriate" amount on their own.

Ok. Well I understand your

Ok. Well I understand your position, although I don't agree with it.

While it's true that I would oppose the federal government forcing unbundling on the grounds you cite, those aren't the only reason I'd oppose it. I also oppose it for the same reason you oppose it: concentrated power breeds attempts to purchase that power by wealthy people. You only bribe those who have power. There's no point in bribing those who don't have power. So when you concentrate the power in the federal government, you're just asking for wealthy interests to try and buy off some of that power for their advantage. IMHO better to not concentrate the power. E.g. the solution to the ills that go along with concentrated power is to reduce or distribute power.

To that end, if you asked me a choice between concentrating government power in cities vs states vs federal, I'd choose cities in a heartbeat. Because that kind of power is much more distributed than states or federal government. But I'd like power to be distributed even further than municipal governments - to the individual. Let the individual make individual spending decisions for their lives rather than cities, states & federeal governments spending on their behalf. Which is why, of course, I"m not in favor of municipal broadband. But I'm more in favor of it than state or federal broadband. I dislike concentrated power and I think individuals making their own purchasing decisions is the best.

On that topic, I'm not an idealogue. Where I've seen it work, it works well. But I can be convinced that some situations exist where it doesn't work well. Roads seem to be one. But then again, there have been some experiiments in private roads that are working very well, too. The thing is that if you want to convince me that broadband is one of those situations where public provision owrks best, you also have to convince me that you can establish limits to the exercise of the power you've concentrated. How, for example would you ensure that a municipal broadband provider continued to provide consistently good service at a competitive price to both its customers and taxpayers? In a non-subsidized market, competition provides this assurance. But in a municipal environment where one competitor gets subsidies, competition is reduced. Do you really trust politicians to ensure this? Those same politicians who you agree are too susceptible to taking bribes. I don't. Hence my position.

I don't know of a force nearly as effective at regulating service providers as the market. 

If you agree that public education provides positive externalities, then you're probably going to agree that there are positive externalities to public broadband. But I think the argument for the positive externalities is weak in both cases. Those positive externalities - if they exist -are tiny compared with non-external benefits that the individuals who consume both of those receive. In other words, the positive externalities really don't need public funding in order to be realized.

I certainly agree with the goal of increasing oppurtunity for all. However, when I look across the political spectrum, what I see is that nations with free economies tend to produce more oppurtunities than those with more highly regulated economies. Which leads me to believe that your fear that markets won't provide the "appropriate" amount is probably not right. They seem to me to have done the best so far at maximizing oppurtunities.

Ensuring quality

This is a great question, and one I wrestle with frequently:

How, for example would you ensure that a municipal broadband provider continued to provide consistently good service at a competitive price to both its customers and taxpayers?

Ensuring is a hard word.  I believe public ownership is the best route because the public is very much interested in have the best service at competitive prices.  However, there are competing needs and a set amount of resources that have to distributed around those needs.  Community ownership is the one solution where the public is responsible for ensuring the network remains sufficient to meet their needs, and if they don't, they have no one to blame but themselves.  Trying to design a network arrangement that cannot fail is impossible.

In a non-subsidized market, competition provides this assurance. 

There is no competition in a "non-subsidized market."  In situations of natural monoply, there is no market.  There is monopoly, or if the community is lucky, a duopoly.  Probably the two biggest natural barriers are the extremely high cost of building a network vs the power of the incumbent to price sufficiently low that one can never pay off the overbuild.  I am not accusing you of being an idealogue, but I do not think you fully grasp the economic problems inherent in natural monopoly.  

As for politicians, they should no more be involved in decisions about running a network than they are over running gas lines and setting the price of a kwh.   

The positive externalities are extremely large - networks create economic development, educational opportunities, and much higher quality of life -- many of these gains cannot be monetized.  And when carriers attempt to monetize them, the price for the services gets sufficiently large that the network is of less use, creating fewer postiive externalities.  

nations with free economies tend to produce more oppurtunities than those with more highly regulated economies.

I wonder how you define free economies.  Somalia and Yemen have very few regulations.  Throughout the world, the U.S. has taken the most de-regulated approach to broadband delivery and gone from #1 in the world to somewhere in the low thirties depending on the metric.  Households in France, Sweden, Japan, Korea, Latvia, and more have far more choices in broadband service providers, they pay less, and get faster connections -- all of them have much more regulation of broadband. 

The US grew at its fastest rate and had far fewer economic dislocations in the decades where the banking sector was heavily regulated and our marginal tax rates were incredibly steep.  Since we have decided to engage in constant de-regulation, we have seen illusory gains (bubbles - wiped out by the inevitable pop) and a rapid growth in income disparity with most people having fewer opportunities for success.  

Our organization believes we are all better off when decisions can be made locally and those making the decisions have to take responsibility for the result.  

While I have enjoyed going back and forth with you, I'm afraid I won't be able to keep it up any longer.  Best of luck - I'm glad to see you giving these issues serious thoughts rather than assuming everyone else is simply a big-government bozo.

Two things: I define free

Two things:

  1. I define free economies this way: http://www.heritage.org/Index/ranking
  2. Natrual monopolies may be a myth.
    "The theory of natural monopoly is an economic fiction. No such thing as a 'natural' monopoly has ever existed. The history of the so-called public utility concept is that the late-nineteenth and early-twentieth-centry did not like competition. They first secured government-sanctioned monopolies, and then, with the help of a few influential economists, constructed an ex post rationalization for their monopoly power"
    https://mises.org/journals/rae/pdf/RAE9_2_3.pdf

Thanks for the great discussion.

 

Thanks

I have heard the natural monopoly myth claim and it does not have good support among economics.  It is true that private industry sought the protection of official monopoly from the gov and proceeded to capture the regulators.  But that does not discredit the fact that those markets quickly consolidated due to the rational decisions of the involved actors.  If the choice is between a government sanctioned monopoly under the power of feckless, captured regulators and one that simply does what it wants (buying or predatorily pricing any market entrant out of business) without oversight, I'll take the former.

And I'll take the latter

And I'll take the latter because, at the worst, if I really dislike the corporation and withdraw my funding, no one comes around to take me to jail. The same is not true of the former.