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Utility Diversification: Munis Find Cable TV a Costly Business

Fortnightly Magazine - September 15 1998

interviewed say they intended to bring higher-quality, lower-cost CATV service to their citizens even if it meant subsidization of nonessential entertainment through essential electric service.

Glasgow: Arrows in the Wallet?

Glasgow was one of the first munis to enter the CATV business. Its superintendent has gained national attention even as the cable industry criticizes the Glasgow system's poor financial performance. Nevertheless, its regulators, customers and the 14,000 citizens of the municipality have continued to expand its funding, allowing it to grow. Glasgow even has begun experiments in telephony.

During the late 1980s, the Glasgow Electric Power Board approved installation of 120 miles of broadband cable for management and control of the electrical system. At that time, William "Billy" Ray, board superintendent, advocated using the broadband network to provide cable TV service as well. He had no trouble gaining approval from the Glasgow board of directors, the mayor or the city council. The city attorney found no legal prohibitions and gave the go-ahead.

"The prior system was high-cost, poor in quality and deaf to our complaints," says Charles Honeycutt, Glasgow mayor. According to Allie Morgan, a telecommunications consultant in nearby Paducah, Ky., animosity against the cable system dated back to 1981, when technical problems with outdated equipment forced the cable company to change programming. It took University of Kentucky basketball games off the air, and the public outcry was deafening.

To offer competing service, however, the Glasgow EPB needed approval from TVA, wholesaler of power to the town. TVA wanted to ensure that electric ratepayers would not subsidize municipal CATV service. Allocating costs of the system became an issue. Ray wanted to allocate four-sixths of the cost to electrical operations. "But TVA says no," according to Ray. "The utility could only charge electric operations [with] two-sixths of the cost, as that is all the bandwidth electric operations use."

A price war ensued, forcing the city to drop its CATV base rate to about $6 a month. Federal and state suits and countersuits followed. Did the city have authority to enter the cable business? Had it used ratepayer assets to compete against a private business? Did it breach its franchise agreement? Would CATV service violate the Sherman Antitrust Act? Eventually, the parties settled. The city's base rate for cable recovered to $14.95, but the financial damage was done.

In 1995, Glasgow began offering telephone and Internet services. In 1996, BellSouth lobbied for a bill in the Kentucky legislature to prohibit municipal utilities from competing against private telecommunications providers. "We asked for a bill to do two things: To account for the cost of telecommunications to the ratepayers and to price services either at or above cost," says Dave Weller, BellSouth regional director in Frankfort, Ky. "We don't want to stop them, we only want to put the service on a baseline for comparison." But the bill died.

According to CATA, Glasgow has had to issue three revenue bonds to finance the CATV operations. CATA estimates that the cable operation has lost from $1.4 million to $1.6 million, despite electric ratepayer subsidies of more than