Carolina Beat

Our Experiment With Municipal Broadband Has Failed

General Assembly should bar cities from competing with private telecoms

Mar. 24th, 2011
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RALEIGH -- Can we call North Carolina's experiment with so-called "municipal broadband" a failure yet? And is it too early to say, "I told you so?"

Starting in 2007, a handful of North Carolina municipalities decided that the time was right to go into direct competition with private providers and offer their citizens competitive cable services, including Internet, voice, and cable television. First came Greenlight in Wilson, then came MI-Connection, owned by the cities of Mooresville and Davidson. Most recently, Salisbury has gotten in on the act. These cities decided they could do a better job providing communications services to the public and -- of course -- make a lot of money doing it.

They were wrong.

The cities involved with MI-Connection, for example, took on $92 million in debt to purchase the local cable system out of bankruptcy, even though a private provider was willing to buy and operate the system. Citizens were promised that the system would "pay for itself," yet the operation has bled money from the start. Today it has fewer customers than when it started, and in 2010 taxpayers had to fork over $6.4 million just to keep the system running.

The result: citizens of Mooresville and Davidson are on the hook for this liability they neither asked for nor got a chance to approve. What happened to the provision of the North Carolina Constitution which says local governments cannot incur debt secured by a pledge of its faith and credit, unless approved by the voters? The cities got around the constitution by promising to raise taxes to repay the debt -- not to the lenders, but to the Local Government Commission, which approved the debt.

This is no way to run a railroad, as they say.

In Wilson, the city already had cable TV, phone, and broadband services, provided by private providers. Yet the city thought it should compete with these businesses. Greenlight, the city's public cable company, has been bleeding red ink since it began service in 2008. It lost more than $1 million in 2009 and nearly $1.5 million in 2010.

According to its financial statements, Wilson has taken more than $11 million from its electric and gas funds to subsidize its competitive foray into the cable business. No wonder Wilson's electric rates are 50 percent higher than that of Progress Energy and its natural gas rates are 30 percent more than PSNC Energy rates.

North Carolina has been down this road before with electric services. In the 1970s, the state permitted cities to get into the electric business. As a result, many cities (the Electricities) incurred hundreds of millions of dollars of debt. They still are struggling to repay this debt today, and citizens in these towns pay rates that are between 30 percent and 50 percent higher than citizens serviced by investor-owned utilities.

Local governments simply should stay out of the way of private business. Their job is to serve citizens, not to compete in the private market. This is especially true in an area like the communications industry, where today's technology will be out of date tomorrow and continued investments are necessary to keep up.

The General Assembly currently has a bill before it aimed at restoring some sanity in this area -- although it probably does not go far enough. House Bill 129 would allow cities like Wilson and Salisbury to provide competitive communications services, but they must have a vote of the people before incurring any debt. They also would be prohibited from cross-subsidizing this competition using their utility funds, as well as be required to comply with the same laws as private providers.

These are reasonable measures, but it would be better if the General Assembly banned cities from competing against private business altogether. After all, the Umstead Act prohibits the state from competing against privates businesses; why should this same principle not apply to cities?

It is the General Assembly's job to ensure that cities stick to their knitting. Government-run cable is an idea that has run its course and at a minimum, the legislature needs to ensure that cities stay out of competition with private business.

Ed McMahan is a former state representative from Mecklenburg County and a former member of the Republican National Committee.