Regulation - What is it Good For?

Our Uneven Regulatory System

The Florida Legislature recently passed a bill that brings poles under state jurisdiction for any electric cooperative that elects to enter the broadband business. That would be a change from current regulatory rules that exempt cooperatives and municipally-owned electric companies from federal and state oversight of pole regulation.

This blog isn’t going to debate the pros and cons of this specific legislation but will instead point to our uneven regulatory environment in the U.S. Over the years, State legislatures have passed laws that create regulatory rules that apply only to specific entities and not to everybody.

Laws affecting electric cooperatives related to broadband are a good example. Over the last several decades, a lot of states passed laws that prohibited electric cooperatives from entering the broadband business. These laws were clearly prompted by telephone and cable companies that didn’t want a new competitor. In the last few years, a lot of legislatures reversed these laws due to pressure from the public to allow their local electric cooperatives to bring them fiber broadband. These new laws have been effective, and a Google search tells me that 250 of the 900 electric cooperatives are either offering broadband or have plans to do so.

Most of the legislation that created exceptions has been aimed at squelching broadband competition. A lot of states have laws that either prohibit or restrict municipalities from entering the broadband business. It’s a little hard to get a precise count these days because there is a wide range of laws against municipal broadband that range from outright bans to rules that only create a few hurdles for a municipality to enter the business that aren’t faced by other competitors.

Most of the restrictions against municipal broadband are written in such a way as to make it seem like there is a path for cities to provide broadband. But most such laws often have a kicker that makes it extremely difficult for a municipality to comply.

As an example, North Carolina imposes a long list of requirements on a municipality that wants to offer broadband. A public entity must impute phantom costs into their rates, conduct a referendum before initiating service, forego popular financing mechanisms like bond financing, refrain from using typical industry pricing plans, and must make their commercially sensitive information available to their incumbent competitors. These rules collectively make it nearly impossible for a municipality to launch a broadband business.

As the new Florida law shows, it’s a never-ending battle with incumbents trying to legislate away competition. Last year there was a major push in Ohio for new legislation that would prohibit municipalities from providing broadband. The law was ultimately defeated, but it seems that several laws that create hurdles to market entry are introduced around the country every year.

Because of the push to get broadband to everybody, some restrictions have been relaxed in the last few years. It’s now a bit easier for municipalities in Arkansas to offer broadband. In Washington, there was a law prohibiting the municipal Public Utility Districts (county-wide electric companies) from offering any broadband except open-access. Last year, in a bizarre legal move, the Washington legislature passed two conflicting laws that allow PUDs to offer retail broadband. The Governor simultaneously signed the two bills rather than choose one of them, and now it’s unclear what the law is. Colorado just lifted the requirement that municipalities must hold a referendum before entering the broadband business.

It’s not surprising that there are laws that restrict some entities from becoming ISPs. Every textbook about monopoly power and abuse predicts that monopolies can’t resist the temptation to quash competitors.

Regulation - What is it Good For?

Should Rural Fiber be a Utility?

I’ve heard or read half a dozen people in the last month say that the way we get rural fiber everywhere is to make fiber a regulated utility. This idea certainly has appeal for the many rural places that don’t have fiber today. On the surface this sounds like a way to possibly get fiber everywhere, and it’s hard to see a downside to that.

However, I can think of a number of hurdles and roadblocks to this concept that might be hard to overcome. This blog is too short to properly explore most of these ideas and it would require a 40-page whitepaper to give this topic justice. With that caveat, here are some of the big issues to be solved if we wanted to create rural fiber utilities.

What About Existing Fiber? What would we do about all of those who have already built rural fiber? There are small telcos, cooperatives, and rural communities that have already acted and found a way to fund a rural fiber network. Would we force someone who has already taken the commercial risk to somehow convert those existing fiber properties into a utility? Most small companies that have built rural fiber took on a huge debt burden to do so. Rural communities that have built fiber likely put tax revenues on the line to do so. It seems unfair to somehow force those with vision to already tackle this to somehow transform into a regulated utility.

What About Choice? One of the most important goals of almost every community I have worked with is to have broadband choice. One of the key aspects of a fiber utility is that it will almost certainly be a monopoly. Are we going to kick out WISPs in favor of a fiber utility? Would a fiber monopoly be able to block satellite broadband? .

The Definition of Rural. What areas are eligible to be part of a regulated fiber utility? If the definition is defined by customer density, then we could end up with farms with fiber and county seats without fiber. There’s also the more global consideration that most urban areas don’t have fiber today. Do we ask cities that don’t have fiber to help subsidize rural broadband? It’s impractical to think that you could force city networks to become a utility because that would financially confiscate networks from the big cable companies.

Who Pays for It? Building fiber in rural America would probably require low-interest loans from the government for the initial construction – we did this before when we built rural electric grids, so this can be made to work. But what about keeping fiber utilities solvent for the long run? The rural telephone network functioned so well because revenues from urban customers were used to subsidize service in rural places. When the big telcos were deregulated the first thing they did was to stop the internal subsidies. Who would pay to keep fiber networks running in rural America? Would urban ISPs have to help pay for rural broadband? Alternatively, might this require a tax on urban broadband customers to subsidize rural broadband customers?

Who Operates It?  This might be the stickiest question of all. Do we hand utility authority to local government, even those who are reluctant to take on the responsibility? Would people favor a fiber utility if the government handed over the operations to AT&T, Verizon, CenturyLink or Frontier? What do we do about cooperatives where the customers want to own their fiber network? Do we force existing fiber owners to somehow sell or give their networks to a new utility?

What About Carrier of Last Resort? One of the premises of being a utility is the idea that everybody in the monopoly service area can get service. Would we force fiber utilities to serve everybody? What about a customer who is so remote that it takes hundreds of thousands of dollars of construction to reach them? Who gets to decide who gets service? Does a fiber utility have to build to reach every new home?

What About Innovation? Technology never sits still. How do force fiber utilities to upgrade over time to stay current and relevant? Upgrading infrastructure is an expensive problem for existing utilities – as I found out recently when a water problem uncovered the fact that my local water utility still has some of the original main feeder pipes built out of wood. The common wisdom is that fiber will last a long time – but who pays to replace it eventually like we are now doing with the wooden water pipes? And what about electronics upgrades that happen far more often?

Government’s Role. None of this can be done without strong rules set by and enforced by the government. For example, the long-term funding mechanisms can only be created by the government. This almost certainly would require a new telecom act from Congress. Considering how lobbyists can sideline almost any legislative effort, is it even possible to create fiber utility that would work? Fiber utilities would also require a strong FCC that agrees to take back and strongly regulate and enforce broadband regulations.

Summary. I’ve only described a partial list of the hurdles faced in creating rural fiber utilities. There is no issue on this list that can’t be solved – but collectively they create huge hurdles. My biggest fear is that politics and lobbying would intervene, and we’d do it poorly. I suspect that similar hurdles faced those who created the rural electric and telephone companies – and they found a way to get it done. But done poorly, fiber utilities could be a disaster.

The Industry

Ending Bans on Broadband Deployment

The big telcos have been successful over the years in squashing competition. When there’s been an opportunity, they’ve marshalled through legislation to block local governments and cooperatives from entering the broadband business. There is no better way to protect legacy revenues than by legally barring those entities that might decide to compete by building better broadband.

A number of states have laws that ban electric cooperatives from offering broadband. It amazes me how such laws came into place. Some legislator wrote and got enough votes to enact a law that tells customer-owned companies that they can’t put fiber on the poles and the rights-of-ways that they already own. I find it hard to believe that politicians would directly oppose the rural citizens who own cooperatives. The only explanation for such laws is the lobbying and donations made to politicians by the big telcos.

If you’ve never looked at the locations of electric cooperatives, most are extremely rural – they were created to build bring electricity to the places where no commercial electric company would make the investment in infrastructure. It’s not a coincidence that these are the same rural areas where the big telcos stopped making investments decades ago, and these are the many of the same rural places with poor or nonexistent broadband.

The tide is turning, and a number of states are reversing these laws to enable electric cooperatives to get into the broadband business. Last June the state of Indiana passed the Facilitating Internet Broadband Rural Expansion (FIBRE) Act that enables electric cooperatives to build and operate fiber networks. Since that act, several Indiana Cooperatives such as Jackson County Rural Electric Membership Corporation, South Central Indiana REMC, and Orange County REMC have decided to deploy fiber networks to reach rural customers. A number of other cooperatives are considering broadband deployment.

In January of this year the legislature in Mississippi unanimously approved the Mississippi Broadband Enabling Act that allows the 25 electric cooperatives in the state to build broadband networks.

In Texas, Senator Robert Nichols introduced SB 14, legislation modeled after Indiana’s FIBRE Act to enable the electric cooperatives in the state to provide broadband.

It’s clear to me why the tide has turned in favor of electric cooperatives and municipalities building fiber networks. In the numerous rural counties I have visited in the last year the local politicians have been telling me that lack of broadband is the number one issue in their jurisdiction. Homeowners without broadband are demanding that local politicians find a broadband solution. Members of rural electric cooperatives are begging their Boards to build fiber.

I think it’s starting to dawn on many rural communities that nobody has plans to bring them broadband. I’ve talked to numerous rural households and farmers in the last year who describe the agony of raising school kids in a home with no broadband or in operating a farm that’s at an automatic disadvantage to farms that have broadband. Rural communities are starting to realize that they must find their own broadband solution.

It’s easy to draw a parallel between what’s happening today and what happened a century ago when these same rural areas figured out a way to bring electricity to their communities. They looked then in envy at the towns with electricity in the same way that rural residents today can see broadband just out of their grasp.

We recently conducted a survey for a rural electric cooperative where every respondent to the survey was in favor of bringing fiber – even those households who didn’t own a computer or want broadband in their own homes. I’ve never before seen a survey where everybody supported fiber broadband.

These laws are passing because rural residents are fed up with the inaction of the big telcos. It’s just as extraordinary to see the Mississippi law passed unanimously to oppose the big telcos as it is to see every resident of a community support broadband. The tide has definitely turned.

The Industry

Why I Am Thankful – 2018

It’s Thanksgiving again and I take a pause every year to look at the positive events and trends for the small ISP industry. This year was challenging in some ways because we have a current FCC that clearly favors the giant ISPs over the rest of the industry. But there are still a lot of things to be grateful for here at the end of 2018.

Local Governments Opening the Purse Strings. Local governments are listening to their constituents who are demanding broadband, and a surprising number of local communities are finding ways to help pay for broadband networks. In Minnesota alone there are a dozen counties that have agreed to make million dollar plus contributions to help fund local broadband efforts. These are de facto public-private partnerships with small telcos and rural cooperatives using that public funding to help bring broadband to rural areas.

Electric Cooperatives Have Awoken. All over the country we see electric cooperatives planning to bring broadband to their members. These cooperatives own electric grids in many of the same rural places that don’t have broadband. With existing pole lines and rights-of-way these cooperatives have a natural advantage for stringing fiber, particularly if they put the cabling into the electric space on poles and avoid costly make-ready. The coops also enjoy the natural advantage of being customer-owned and customer friendly, meaning that they are likely to see far higher penetration rates than an outside commercial operator building a broadband network.

We Finally Have the Next Big Product. I know numerous small ISPs who have seen instant success selling managed WiFi. I have clients that have achieved penetration rates north of 50% in just one year for the new product (and a few considerably higher than that). Bigger bandwidth requires an efficient and effective WiFi network and customers seem to be glad to have their ISP make this work for them.

Politicians Outside of Washington DC Get It. State legislatures all over the country are listening to constituents and are creating state broadband grant programs. Many of them are doing it the smart way and are mimicking successful grant programs like the one in Minnesota. The grant programs are coming from both red and blue states, demonstrating that broadband is not a partisan issue – almost all of rural America needs better broadband and state legislators are listening to their voters. Federal politics continue to be mired in partisan infighting and we probably won’t see anything out of them for the next few years.

FCC Holds out Possibility of New Spectrum. For the most part the FCC has been giving spectrum to the 5G industry and has not been creative in finding ways to also use spectrum to help solve the rural broadband gap. However, the FCC is looking at spectrum that would significantly benefit rural broadband. Of massive importance is the 6 GHz band being considered as the next swath of WiFi. This would double the amount of mid-range spectrum available for WiFi. The FCC is also considering other frequencies such as C-Band spectrum between 3.7GHz to 4.2 GHz. There are proposals in front of the agency to allow for 5G use in urban areas while allowing use for broadband in rural areas. The FCC may yet give this all to 5G carriers, but there are reasonable ways to share most bands of frequency to benefit both urban 5G and rural broadband.

Urban Broadband Speeds Improving. The big cable companies have unilaterally improved broadband speeds in urban areas, increasing the speed for their base products to between 100 Mbps and 200 Mbps. You might ask how this benefits rural ISPs. The increases in speed are in response to demands from customers, and the cable companies are redefining acceptable broadband – something the FCC is never going to be realistic about. These new urban speeds were easily predictable by anybody that understand that customer demand for broadband speed and total downloads has continued to double ever three years. Fast urban broadband resets the expectation for acceptable rural broadband.

The Big Telcos are Walking Away from Rural America. This has actually been quietly happening for decades as the big telcos have refused to invest in their rural networks. CenturyLink made it clear in 2018 that they are no longer interested in ‘infrastructure returns’ like what is earned on last-mile networks. They now join Verizon, which has been furiously selling rural properties and AT&T that keeps pestering the FCC to tear down rural copper. The door is open even wider for those ISPs that want to fill the broadband gaps.

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