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Utility Diversification: Munis Find Cable TV a Costly Business

Fortnightly Magazine - September 15 1998

THE OLD ADAGE ABOUT INNOVATION STILL HOLDS TRUE: "You can tell the pioneers by the arrows in their backs." More than 70 municipal utilities have either built or plan to build telecommunications systems with fiber-optic and coaxial cable to compete against local cable television, data communications or telephony providers. Profitability for these ventures has been abysmal, but their customers and regulators are happy. Now large, investor-owned electric utilities are stumbling down the same trail marked with cast-off bandages of these early pioneers. Moreover, the recent merger of AT&T and TCI will bring an unprecedented level of competition to the cable business, making such ventures even more risky.

Losses tracked by the Cable Telecommunications Association (CATA), the cable television trade group, have been horrendous. Glasgow, Ky., one of the first munis to build a competing telecommunications system, has lost more than $1.4 million since 1989 on the effort - subsidized by ratepayers, Glasgow electric officials and the Tennessee Valley Authority, according to CATA. Paragould (Arkansas) Light & Water built its system in 1990 at a cost of $3.2 million, and two years later began raising taxes to cover losses.

Similar horror stories can be found in Cedar Falls, Harlan and Waverly, Iowa; Morgantown, N.C.; Elbow Lake, Minn.; Daleville, Ala.; and Coldwater, Mich. Municipal utilities in these towns built CATV systems even though a private company already provided cable TV service. (CATV, which first appeared as an acronym for Community Antenna Television, is used here to describe a traditional, coaxial cable TV system.)

Jim Paxton, editor of the Paducah Sun, which covers Glasgow, framed the issues in an editorial: "But what are the ethics of cities such as these awarding cable franchises to private companies in a competitive bidding process, collecting large annual franchise fees from the operators who also invest tens of millions to build a system and a market, and then destroying their business by building a city-owned system with artificially low rates?" Paxton questions the ethics of forcing utility customers without cable TV to subsidize those who do via higher electric rates. Paxton asks: "Beyond the question of pure ethics, there is also this issue: What is the proper role of government?"

In this debate, the government's role is the largest issue to resolve. Why did regulators approve such expensive ventures fraught with risk to taxpayer and ratepayer funds? As costs continued to escalate, what sort of oversight and control did regulators exercise? How will regulators respond as the larger, investor-owned utilities do battle with CATV systems, as seen in today's fight between Boston Edison Co. and Cablevision System Corp.?

Regulators and elected officials say they approved these public sector CATV ventures for a simple reason: to improve service.

In any small town or mid-size city, ask the mayor, the city council members, or even a university economics professor appointed to a regulatory board why they approved municipal CATV operation. Invariably, they will cite the disregard for the community shown by the incumbent operator as a major factor. They will plead exhaustion from citizen complaints about the cable operator. The regulators