March 1, 2015
RALEIGH — The Federal Communications Commission made a mistake when it approved the city of Wilson’s petition to overturn a North Carolina law limiting municipal broadband services. A new John Locke Foundation Spotlight report explains why.
Based on official comments JLF submitted to the FCC in 2014, the new report arrives as U.S. Sen. Thom Tillis, R-N.C., has announced plans to pursue legislation preventing the federal regulatory agency from overturning state or local broadband laws.
“The city of Wilson’s petition sought an end run around constitutional constraints to allow it to act independently of the legislature that created it,” said report author Jon Sanders, JLF Director of Regulatory Studies. “Granting the petition allows the city to continue to make questionable decisions beyond the reach of voters. Those decisions negatively affect Wilson voters’ taxes and electricity rates.”
The FCC ruled Thursday in favor of Wilson’s petition. The city had pursued federal action in response to North Carolina’s 2011 Level Playing Field Law. The N.C. General Assembly, with Tillis as state House speaker, approved that law to protect taxpayers across the state from municipal governments entering the municipal broadband business and putting local tax dollars and electricity ratepayers’ payments at risk, Sanders said.
“At the time the legislature approved the law, lawmakers had ample evidence from Wilson, Salisbury, Mooresville, Davidson, and Morganton that local governments’ entry into the municipal broadband business was leading to operating losses that required subsidies from taxpayers and electric utility ratepayers,” Sanders said. “In addition, these local governments were using certificates of participation to finance debt associated with their municipal fiber-optic networks. Unlike general obligation bonds, these COPS are not subject to a vote of the citizens.”
Despite those funding concerns, the Level Playing Field Law mostly exempted existing municipal broadband systems, including Wilson’s Greenlight system, from its provisions. While new cities entering the municipal broadband market would face additional safeguards, Wilson and other existing systems faced only limits to their service areas.
Potential funding problems for the Greenlight network became clear as early as January 2009, when the John Locke Foundation issued a report warning about the potential for anti-competitive effects and unanticipated negative consequences.
“By 2011, with Greenlight’s losses mounting, Wilson had already done as JLF researchers foresaw two years earlier,” Sanders said. “The city had begun borrowing from its electric and gas funds — $11 million already by 2011, when the Level Playing Field Law was passed, even though Wilson’s electricity and gas rates were already higher than others.”
The state’s other existing municipal broadband services had similar records of operating losses by 2011, according to Sanders’ official comments to the FCC. “Such negative consequences playing out without even municipal voter (or ratepayer) say were clearly making an impression on the General Assembly.”
Sanders reminded FCC commissioners that N.C. cities and towns “are constitutionally the creations of the state legislature,” and the General Assembly has constitutional authority over N.C. local governments, including local taxation and debt.
A federal commission overriding the legislature’s constitutional authority sets a “precedent [that] creates untold fissures in North Carolina government,” Sanders warned.
Wilson’s apparent rationale in petitioning federal regulators to overturn the Level Playing Field Law is its “anti-competitive” nature, Sanders said. The law limits Greenlight to a service area of Wilson County.
“City officials seem to think this limit prevents Greenlight from competing, but this rationale has the idea of competition backward,” Sanders said. “A private company cannot legally take money from others involuntarily. A private company that cannot stop its losses or cease bleeding money soon ceases to be.”
“In contrast, a government entrant into the market comes with the guarantee of its losses being borne by taxpayers or electricity ratepayers,” he added. “This guarantee conveys a significant competitive advantage, one that can be leveraged even further to offer heavily discounted rates to serve the government’s want for an incentive to offer businesses for economic development purposes.”
Sanders disputes the notion that Wilson’s broadband customers lack alternatives to Greenlight. His official comments also reminded FCC commissioners that the Level Playing Field Law had a limited application to Wilson.
“Where the law does apply only serves to underscore the problems with a municipality getting into the broadband market,” he said. “As evident by its borrowing from other municipal funds, Greenlight still needs customers, and the system apparently cannot attract enough within the entire county.”
That’s a political problem, not a problem for federal regulators to address, Sanders said. “The FCC’s ruling makes poor local decision making more likely, not less,” he said. “It will be harmful to competition as well as to service consumers and nonconsumers alike because of the subsidy schemes.”
The Level Playing Field Law aims to protect taxpayers, ratepayers, and competition, Sanders said. “Citizens and competition are harmed when municipal officials who know little about an industry nevertheless go into debt financing without voter approval to enable their city’s entry into that industry, then rely on taxpayer and ratepayer subsidies to keep the endeavor afloat, while pulling some consumers away from private providers and distorting the market. The FCC should have rejected Wilson’s petition.”
Jon Sanders’ Spotlight report, “The FCC’s Anti-competitive Greenlight: Commission is wrong to override North Carolina law for municipal broadband,” is available at the JLF website. For more information, please contact Sanders at (919) 828-3876 or [email protected]. To arrange an interview, contact Mitch Kokai at (919) 306-8736 or [email protected].