How big telecom smothers city-run broadband

Introduction

Janice Bowling, a 67-year-old grandmother and Republican state senator from rural Tennessee, thought it only made sense that the city of Tullahoma be able to offer its local high-speed Internet service to areas beyond the city limits.

After all, many of her rural constituents had slow service or did not have access to commercial providers, like AT&T Inc. and Charter Communications Inc.

But a 1999 Tennessee law prohibits cities that operate their own Internet networks from providing access outside the boundaries where they provide electrical service. Bowling wanted to change that and introduced a bill in February to allow them to expand.

She viewed the network, which offers speeds about 80 times faster than AT&T and 10 times faster than Charter in Tullahoma according to advertised services, as a utility, like electricity, that all Tennesseans need.

“We don’t quarrel with the fact that AT&T has shareholders that it has to answer to,” Bowling said with a drawl while sitting in the spacious wood-paneled den of her log-cabin-style home. “That’s fine, and I believe in capitalism and the free market. But when they won’t come in, then Tennesseans have an obligation to do it themselves.”

At a meeting three weeks after Bowling introduced Senate Bill 2562, the state’s three largest telecommunications companies — AT&T, Charter, and Comcast Corp. — tried to convince Republican leaders to relegate the measure to so-called “summer study,” a black hole that effectively kills a bill. Bowling, described as “feisty” by her constituents, initially beat back the effort and thought she’d get a vote.

That’s when Joelle Phillips, president of AT&T’s Tennessee operations, leaned toward her across the table in a conference room next to the House caucus leader’s office and said tersely, “Well, I’d hate for this to end up in litigation,” Bowling recalls.

The threat surprised Bowling, and apparently AT&T’s ominous warning reached her colleagues as well. Days later, support in the Tennessee House for Bowling’s bill dissolved. AT&T had won.

“I had no idea the force that would come against this, because it’s just so reasonable and so necessary,” Bowling said.

AT&T and Phillips didn’t respond to emails asking for comment.

A national fight

Tullahoma is just one battlefront in a nationwide war that the telecommunications giants are fighting against the spread of municipal broadband networks. For more than a decade, AT&T, Comcast, Time Warner Cable Inc., and CenturyLink Inc. have spent millions of dollars to lobby state legislatures, influence state elections and buy research to try to stop the spread of public Internet services that often offer faster speeds at cheaper rates.

The companies have succeeded in getting laws passed in 20 states that ban or restrict municipalities from offering Internet to residents.

Now the fight has gone national. The Federal Communications Commission in Washington, D.C., is considering requests from Chattanooga, Tennessee, and Wilson, North Carolina, to pre-empt state laws that block municipalities from building or expanding broadband networks, hindering economic growth, the cities argue.

If the FCC rules in favor of the cities, and the ruling survives any legal challenges, municipalities nationwide will be free to offer high-speed Internet to residents when they aren’t satisfied with the service provided by private telecommunications companies.

To better understand the municipal broadband debate, the Center for Public Integrity traveled to two southern cities. Tullahoma, which has a broadband network, and Fayetteville, North Carolina, which doesn’t.

City-provided broadband widespread

More than 130 cities from Norwood, Massachusetts, to Clallam County, Washington, currently offer fiber or cable Internet connections to their communities, according to the Institute for Local Self-Reliance, a group that supports municipal broadband. The municipalities are mostly small to mid-sized cities that critics say large Internet providers avoid because the return on investment is too low.

Cities build broadband networks to support businesses, improve health care and education, and attract jobs, they say. About 89 cities offer gigabit speeds, a rate that can download a 4.5 gigabyte movie in 36 seconds. The same file takes an hour at 10 megabits per second. Slower DSL or dial-up connections, which are common in rural areas, would take many hours longer.

Source: National Broadband Map, the providers

Instead of investing in improving infrastructure in these communities, the telecommunications companies have spent millions of dollars lobbying lawmakers in 20 states to pass laws restricting or banning municipal networks, according to research conducted by Jim Baller, of the Baller Herbst Law Group, which is representing Chattanooga and Wilson.

When Tullahoma began planning its fiber optic network in 2004, “it got unpleasant real fast,” said Steve Cope, who was mayor at the time. “When you get into broadband you begin stepping on the toes of some of the big boys, the AT&Ts and Charters of the world. They don’t want the competition, and they’ll do anything to keep it out.”

Most of the telecommunications companies say they support municipal broadband, but only for those areas that they don’t serve.

“The idea of private capital competing with taxpayer-provided capital just feels inconsistent to us with what a free-market system looks like,” AT&T Chief Executive Officer Randall Stephenson said at a U.S. Senate hearing in June. “But where it’s unserved, it seems like a logical place for government to step in and provide a solution.”

By far, AT&T is the company with the most political influence in states, say statehouse watchers.

“On a scale of 1 to 10 on who is the most powerful lobbying presence in Tennessee, AT&T is a 12,” said a long-time lobbyist in Nashville who asked not to be identified so he could speak candidly about lobbying in the state. “They are the big horse in the race, and they are unstoppable.”

AT&T spent between $250,000 and $300,000 this year hiring 15 lobbyists, ranking it among the largest spenders, according to the Tennessee Ethics Commission.

AT&T’s political action committee is also the biggest donor among telecommunications companies to state campaigns nationwide. Since 2000, its donations more than tripled to $13.6 million in the 2012 election cycle, according to the National Institute on Money in State Politics, which tracks campaign contributions in the states.

In Tennessee, AT&T’s giving in the 2014 election cycle was more than $370,000, almost five times what it was in 2000. In North Carolina, AT&T’s total campaign giving in the 2012 election cycle, including 2011, when the General Assembly passed a bill to restrict municipal broadband networks, was more than $404,000, 60 percent higher than in 2000.

AT&T didn’t respond to requests for comment. Stephenson said during the Senate hearing that he wasn’t aware that AT&T had spent millions of dollars on lobbying for laws that restrict municipal broadband.

“I’m not saying we haven’t,” Stephenson said. “I just don’t know.”

Comcast, the second-largest campaign contributor among telecommunications companies in Tennessee, also has upped its PAC giving from about $3,200 in the 2004 election cycle to a record of more than $270,450 in the 2012 cycle, according to the money in state politics institute.

Going to court

Telecommunications companies aren’t hesitant to spend millions of dollars on lawsuits to kill municipal broadband.

Lafayette, Louisiana, population 123,000, considered building a network in 2004 when city leaders couldn’t convince BellSouth or Cox Communications Inc. to install a fiber network for residents. For the next three years, Lafayette spent $4 million responding to three lawsuits and subsequent appeals from BellSouth, which AT&T bought in 2006, and Cox. The city eventually borrowed $125 million to build the network.

Terry Huval, director of utilities for the city, told a U.S. Senate committee in 2010 that the companies’ actions were “grossly excessive.”

The companies have also used traditional campaign tactics such as newspaper ads, push polls, direct mail and door-to-door canvassing to block municipal networks. And they’ve tried to undermine the appetite for municipal broadband by paying for research from think tanks and front groups to portray the networks as unreliable and costly.

In a June 19 op-ed in The Wall Street Journal, Thomas Schatz, president of Citizens Against Government Waste, and Royce Van Tassell, vice president of the Utah Taxpayers Association, wrote that an effort by Utah cities to build a municipal broadband network “has caused a spectacular financial failure.”

The authors cited a study by Joseph Fuhr Jr., an economics professor at Widener University in Chester, Pennsylvania, who gave examples of municipal broadband networks that were failing.

Schatz and Tassell did not mention the study was paid for by the Coalition for the New Economy, which says it consists of “businesses, associations, and individuals who are concerned about wasteful duplication of existing or planned Internet service.”

The group’s IRS Form 990 for 2012 shows it gave between $5,000 and $15,000 to each of seven conservative groups, including Americans for Prosperity and the 60 Plus Association, which are backed by billionaire industrialists Charles and David Koch; the Center for Individual Freedom, which has been funded by Crossroads GPS, the nonprofit political outside spending group co-founded by Karl Rove; and the tea party-backed FreedomWorks Inc.

Thad Nation, a former staffer to two Democratic governors who is listed as executive director on the form, didn’t return calls or emails asking for comment.

Impact on business

The success of these tactics worries Ted Hackney, executive director of the Industrial Board of Coffee County, who’s in charge of attracting businesses to the Coffee County Joint Industrial Park, a 400-acre development five miles outside Tullahoma.

The site is home to just four businesses, including a tool and die shop and a food processor. A visit in July revealed that it consisted mostly of acres of tall, green stalks of corn.

Hackney is trying to attract technology companies including a large data center, but the Internet service from Charter won’t support such data-hungry businesses. The only network that can provide robust capacity at an affordable price is LightTUBe, the municipal Internet run by the Tullahoma Utility Board (TUB).

If the park can’t get the service, “it certainly would be disappointing,” Hackney said. “It wouldn’t completely wipe us out, but we need it if we are really going to make a go of this.”

Hackney is partial to LightTUBe because it’s a local business and it’s financially stable. In its first year, LightTUBe reported a positive cash flow, but showed losses due to the depreciation of assets.

Today, it has 3,250 customers, about 35 percent of the market, with Charter claiming about the same, estimates Brian Skelton, TUB’s general manager. The utility has paid off more than $3 million of the $16.9 million in bonds it issued to build the network, and it projects it will report its first profit this year — $200,000 — one year behind schedule.

Its success rebuts one of the arguments telecommunications companies have made against municipal broadband systems — that small cities don’t have the technical expertise to operate complex networks or the financial experience to manage the funding. Tullahoma, population 18,700, is one of the smallest cities in the nation with a gigabit network.

To be sure, several cities have had financial difficulties. They include Ashland, Oregon; Burlington, Vermont; and the 11-city Utah Telecommunications Open Infrastructure Agency. Some, such as Provo, Utah, and Groton, Connecticut, have sold their networks.

But proponents of municipal broadband say the successes outnumber the failures. And for Tullahoma officials, the characterization is insulting.

“It wasn’t like everyone in Tullahoma was barefoot and dumb,” said Cope, who works for Avion Solutions Inc., a major engineering defense contractor and is chairman of TUB. “We do have a fair amount of sophistication in the community, despite what many people think.”

LightTUBe’s Internet packages are lower-priced than Charter’s or AT&T’s when speed is accounted for.

TUB’s annual customer turnover is low, with less than 1 percent leaving compared with the industry average of 1 to 2 percent. The low rate is surprising, Skelton said, because if a customer moves out of the city limits, “we can no longer serve them because of the state law.” About 80 percent of the customers who leave TUB do so because they have moved out of the city, with most of the other 20 percent leaving for promotional offers like a $200 credit card from AT&T, he said.

“We’re cheaper than anyone, but we can’t compete with the teaser offers,” Skelton said.

Service serves hospital

LightTUBe’s customers include big manufacturers, insurance agents, car dealerships and doctors’ offices, as well as “mom and pop shops,” Skelton said

Lisa Hayes, owner of 1st Choice Realtor, which employs 15 people, said LightTUBe’s reliability has helped her triple her sales this year since she moved to a Web-based listings service. She switched from Charter because her Internet connection would frequently crash and response times were slow.

“We just can’t afford to be down at all, and we can’t wait for two weeks to get something fixed, or we’ll lose customers,” Hayes said.

Agisent Technologies Inc., which provides online records management for police departments and city jails, moved to Tullahoma in 2011 because it needed a fast reliable broadband network that had a backup if the connection failed, said David Lufty, the company’s president.

Charter and AT&T couldn’t offer redundancy, but LightTUBe could.

“Since we’ve been here, we haven’t had more than five minutes of downtime in almost three years,” Lufty said.

Charter didn’t respond to phone calls and emails seeking comment.

1st Choice and Agisent are examples of what fast and reliable broadband can do to encourage economic growth, according to Robert Litan, a senior fellow at the Brookings Institution who has researched the economics of technology. In a 2007 study, Litan and his colleagues found that for every one-percentage-point increase in the availability of broadband in a state, the number of jobs increased up to three-tenths of a percent per year. Faster broadband speeds likely have the same effect, he said.

“I don’t know what the magnitude would be, but I am convinced you can show there is an incremental benefit,” Litan said.

Employment in Tullahoma lagged statewide job growth before theLightTUBe was turned on. Since the recession ended in 2009, two years after the city began offering broadband, the city has outpaced job growth in Tennessee. The city added 3,598 jobs from April 2009 to April 2014, a 1.63 percent annual growth rate, about double the statewide rate, according to the Bureau of Labor Statistics.

Arnold Air Force Base and its flight simulation development complex, as well as a regional medical center, are the primary engines for employment, officials say, but “if the city of Tullahoma can offer to businesses high-speed Internet at a reasonable price as part of the city’s overall infrastructure, we think that’s a huge advantage for us and one that businesses look for,” said Thom Robinson, executive director of the Tullahoma Area Economic Development Corp.

Meanwhile, in Fayetteville

In Fayetteville, the story is different.

Like Tullahoma, the North Carolina city is adjacent to a military base: Fort Bragg. But Fayetteville’s economy has been struggling for years. Unemployment has been reduced since the depths of the recent recession, but not as quickly as in the rest of the state. The unemployment rate in Cumberland County, where Fayetteville serves as county seat, was 7.6 percent in June, placing it 78th out of the 100 counties in North Carolina and a sharp drop from 21st just five years ago, according to the Bureau of Labor Statistics.

Job growth has been anemic in the last five years, with employment increasing 0.55 percent a year compared with 1.27 percent statewide.

It was the struggling economy, combined with his own experience that led Eric Mansfield, a soft-spoken physician in Fayetteville and a former Democratic state senator, to fight a law that would restrict his city from providing fast Internet to its residents and businesses.

The city’s Public Works Commission operates a gigabit network of more than 200 miles of fiber-optic cables throughout Fayetteville that connect computer systems to monitor its electric, water and sewer systems, and provide Internet access to local government buildings, fire stations and the city’s hospital.

But residents and businesses can’t hook into the network. Mansfield’s Cape Fear Otolaryngology pays $359 a month to Time Warner Cable for a slower connection that frequently crashes trying to manage the load from the practice’s electronic medical records and CT scans, Mansfield said.

“It’s just horrible,” he said.

Time Warner told Mansfield it would cost $500 a month for a faster line.

Mansfield said as a businessman he understands Time Warner Cable’s refusal to upgrade its network in Fayetteville, because the return on its investment is just not there.

“But we still need a fast, affordable network,” Mansfield said. “They have a monopoly, and they act that way. I just think a little competition from the city would go a long way in getting better service for everyone.”

Time Warner Cable said it couldn’t respond to Mansfield’s experience unless they knew the facts of his situation.

Friend of telecoms

Less than four months after Mansfield was elected to the North Carolina General Assembly in 2010, Rep. Marilyn Avila, a Wake County Republican, introduced a bill that would prevent cities from building or expanding existing broadband networks, by requiring them to follow prescribed and time-consuming procedures and financial requirements. The bill became law in May 2011.

Avila’s colleagues in the General Assembly describe her as a friend of telecommunications companies. Before heading to Raleigh in 2006, Avila worked for the John Locke Foundation, a free-market public policy think tank founded by Art Pope, who while a college student also helped establish the Libertarian Party of North Carolina.

Pope, who amassed a fortune in the family retail business, is a prolific donor and is described as a close ally of Charles and David Koch. He is a former board member of the Kochs’ Americans for Prosperity.

A few months after her bill passed, Avila spoke at the 2011 meeting of the North Carolina Cable Telecommunications Association in Asheville, in the scenic Great Smoky Mountains, where Avila’s and her husband’s expenses of $1,045 were paid for by the association.

In the 2012 election cycle, when her bill passed, Avila’s campaign received $9,000 from CenturyLink, AT&T and Time Warner Cable, four times more than the previous cycle, according to the National Institute on Money in State Politics. Fayetteville’s Internet provider Time Warner Cable gave $6,000 of the total, 12 times the $500 the company gave in the previous cycle. Avila was among the five North Carolina lawmakers who received the most from the telecommunications industry that year.

Avila didn’t return phone calls or emails asking for comment.

‘We should be so powerful…’

Numerous lawmakers and lobbyists said they suspect the bill was heavily influenced by Time Warner Cable, if not written by the company. Gary Matz, senior vice president of government relations for Time Warner Cable, laughed at the accusation.

“We should be so powerful,” Matz said. “It was a bill that had bipartisan support. It was certainly a bipartisan effort.”

When Avila’s bill hit the Senate floor, Mansfield tried to exempt Fayetteville from the requirements. Colleagues had already been able get exclusions for four other North Carolina cities that operated their own networks: Wilson, Salisbury, Davidson and Mooresville. Mansfield knew he had the votes to pass his amendment.

But Sen. Thomas Apodaca, a Republican from Hendersonville, in the western part of the state, used a procedural maneuver to block Mansfield’s proposal, introducing an amendment of his own that would prohibit city-owned cable companies from providing adult entertainment channels. If it passed, it would kill Mansfield’s effort. But a vote against it was a vote for pornography.

The debate turned nasty when Apodaca suggested that if Mansfield, a part-time Baptist pastor, didn’t support his proposal, that perhaps meant he wanted his young daughters to have access to pornography, Mansfield recalls. The statement surprised lawmakers so much they called a recess. Apodaca eventually apologized, but Mansfield was still stung.

“I told him ‘I know how this works, but your light is a little bit dimmer with me now,’” Mansfield said.

Apodaca and the telecom companies won. Fayetteville wouldn’t be offering residents access to its network.

Apodaca, chairman of the powerful Rules Committee, is a big beneficiary of telecommunications company largesse. He received $16,750 from AT&T, CenturyLink, Time Warner Cable and Verizon Communications Inc. in the 2012 election cycle, the third-largest amount among North Carolina lawmakers, according to the National Institute on Money in State Politics. Since he was first elected in 2002, Apodaca has received $62,000 from the telecommunications carriers, the second most of any lawmaker in North Carolina.

Apodaca didn’t return phone calls and emails asking for comment.

For Steven Blanchard, chief executive of Fayetteville’s Public Works Commission, prohibiting Fayetteville residents from using the fiber network that’s already there doesn’t make sense.

“Why shouldn’t we be allowed to sell fiber if it runs by everyone’s house?” Blanchard said. “They are already paying for the fiber to be there, so why not allow them use it for telephone and Internet and capture back a lot of the cost they put in to have it there?”

Time Warner Cable said this summer that Fayetteville is on a short list to get faster Internet next year.

Seeking federal help

In spite of the laws, cities like Tullahoma and Fayetteville may end up being able to expand their networks.

On July 24, the Electric Power Board in Chattanooga and the city of Wilson, which both operate fiber networks, petitioned the FCC to pre-empt their respective state laws that restrict them from expanding service.

Both cities said towns and businesses outside of their areas have asked for Internet service. Chattanooga said cities wanted it for economic development and to replace dial-up modems.

Wilson, which serves six counties with electricity but provides broadband services to just one, said it “stands ready, willing and eager to expand the scope of its broadband capabilities into neighboring communities.”

FCC Chairman Tom Wheeler has vowed numerous times, including during testimony to Congress, that he would pre-empt the state laws if the agency is asked to do so. Rep. Marsha Blackburn, a Republican who represents a district just west of Tullahoma, inserted an amendment in the fiscal 2015 funding bill for the FCC that would prevent the agency from pre-empting state broadband laws, saying to do so would “trample on our state rights.” Some Democratic lawmakers have come out to support the pre-emption.

The National Conference of State Legislatures, a nongovernmental organization that promotes the interests of states in Congress, has threatened to sue the FCC if it voids the state laws.

The outcome may, however, come down to a footnote. In January, in a federal appeals court ruling on a related issue, U.S. Circuit Judge Laurence Silberman laid out in a minority opinion the FCC’s regulatory powers in deploying broadband as stated in the Telecommunications Act of 1996.

Silberman, who was appointed by President Ronald Reagan, noted that Congress granted the FCC the ability to “remove barriers to infrastructure investment.” In a footnote, he wrote that a definitive example of such a barrier “would be state laws that prohibit municipalities from creating their own broadband infrastructure to compete against private companies.”

The footnote “is a powerful argument” for the FCC to block the state laws, said Blair Levin, a former lawyer who oversaw the FCC’s National Broadband Plan in 2010, which laid out a road map for providing universal Internet access. The policy goal as outlined in the Telecommunications Act has always been to provide “abundant bandwidth,” he said.

If there were no restrictions, “it is very likely new networks creating such abundance would be deployed,” Levin said.

The FCC has set Aug. 29 as the deadline for comments on Chattanooga’s and Wilson’s petitions, and Sept. 29 as the deadline for replies to comments. No date has been set for when the five commissioners will vote.

In the meantime, the tide in states may be turning against the telecommunications giants. Kansas and Utah, where Republicans control the legislatures, defeated bills this year that would have restricted or banned municipal broadband networks. Republican-led Georgia defeated similar bills in 2012 and 2013.

What it comes down to for communities is self-determination, and even self-preservation, said Baller, the attorney representing Chattanooga and Wilson. He, said officials want to provide fast Internet to their communities for the same reasons they provided electricity a century ago.

“Local officials want to give their businesses, institutions and residents, particularly their kids, a reason to remain in and thrive in the community,” he said.