By Alan Seals *
Since the end of the Great Recession, just twenty counties generated half of the new businesses and the better part of economic growth for the entire country. Most of these counties are home to tech-intensive industries that employ skilled labor, such as around Silicon Valley in California. Several cities, most notably Chattanooga, TN, have attempted to attract hi-tech industries by providing municipal broadband network.
The city of Opelika has contributed over $40 million—an enormous financial commitment for a town of less than 30,000 persons—toward becoming Alabama’s first “Gig City” as a municipal provider of high-speed Internet. But as of late 2016, the network, provided through Opelika Power Services (OPS), had managed to sign up only one customer for its gigabit service.
Now, the state legislature is considering bills that would extend the OPS network to include all of Lee County and perhaps beyond. Before doing that, the legislature should evaluate how other municipal systems have fared and use the lessons learned from those experiences to inform their efforts. While the Internet certainly has benefits, it is costly to provide, making private firms reluctant to serve high-cost areas with low demand. The spillover benefits of better paying jobs and economic growth have been the justification for municipal broadband services to step in where private industry cannot justify the costs, though many of these municipal systems serve areas already covered by the private sector – an inherently anti-competitive act.
The “success story” of Chattanooga, TN, often does not mention that an enormous subsidy, $111 million from Federal grants (approximately $2,000 per subscriber), was required for that system to be financially viable.
Other municipal broadband systems have not fared as well. For example, the city council of Provo, Utah sold its $39 million fiber network to Google for $1. In Groton, Connecticut, the city’s residents are still paying for a $38 million network sold for $550,000. Four city officials in Bristol, Virginia, home to the latest spectacular failure of a government Internet system, are serving time in the penitentiary.
Even when Google installs and manages a fiber network in a new city, economic growth is lackluster. In 2012, Kansas City was the first city in the nation to deploy Google’s fiber network – Google has since stopped fiber deployment – and the city’s GDP growth has still lagged behind the national average. Chattanooga has not outgrown its peers.
Super-high-speed Internet is no panacea for economic woes and just because the rich tech hubs of the country all have it, does not mean that is the only ingredient needed to energize an economy. Four bills (HB 375, SB151, SB192, and SB228) before the Alabama legislature seek to extend Opelika’s municipal Internet service, provided through Opelika Power Services (OPS), to include all of Lee County and perhaps beyond.
As a citizen of Lee County, I have some concerns about the proposed bills. Is the network financially viable within its existing boundaries? OPS shows a sizable loss on its publicly available financial statements; however, the lack of financial detail in these documents concerning the telecom aspect of Opelika Power’s business, and the shifting of costs (already $28 million of debt) onto its electric ratepayers, precludes a measured assessment of future viability.
If it is determined the existing municipal system is unable to pay for itself going forward, a situation eventually realized by all these municipal systems, then proposals to increase its coverage area should be met with skepticism. How much will it cost to provide new fiber lines to these rural areas of Lee County that have a lower population density than Opelika? Will these rural customers absorb these extra costs through some extra-jurisdictional transfer? Is such a thing legal? Will the captive electric and sewer ratepayers in Opelika – already subsidizing the money-losing telecommunications division there – bear this additional burden and temporarily or perpetually subsidize the rural residents of the county, the city of Auburn, and perhaps beyond?
Until these questions are answered, any changes to state laws allowing city officials in Opelika or elsewhere to further bury their constituents in debt trying to compete with private companies in the telecommunications business should be tabled. Saddling customers of OPS with higher future rates to try to catch lightning in a bottle with high-speed Internet in rural Lee County sounds like a risky bet.
* Dr. Alan Seals is Associate Professor and Director of Graduate Studies in the Department of Economics at Auburn University.