Tales of the Sausage Factory: “Return of the Telco Legislation” Now Playing in Indiana

Hardly has the new year begun when new legislation has been introduced to squash local municipal systems. This time in Indiana. Like any good nemesis, the incumbent telcos and cable cos have learned from the Pennsylvania fight and have “improved” this bill to include more noxious features and to try to hide them better. But fear not, gentle reader, all such machinations shall be revealed below.

When I was but a wee lad, a fellow by the name of Al Capp was still writing a comic strip called L’il Abner, which featured a creature called the shmoo (plural: shmoon). The Shmoo (if you didn’t follow the link) provided basic necessities to all mankind. In doing so, it undermined the power of big business, who convinced the population to eliminate shmoon because they hurt industry and caused people to lose jobs (which they had no longer needed, because they had shmoos). Ultimately, everybody in Dogpatch (Li’l Abner’s home town) is poor and undernourished again, but happy because they saved the American way of life.

I keep thinking of the shmoo in the context of municipal networks. Municipal networks offer to bring broadband — an increasingly necessary commodity for business, education, and generally participating as a citizen in society at large — at an affordable rate to places that otherwise couldn’t get it or can’t afford the $50/month subscriber fee. So telcos and cable cos have aggressively fought to kill munie systems by getting state legislatures comfortably removed from the municipalities in question to pass laws prohibitting such systems (and usually including huge subsidies to get the telcos and cable cos to provide worse service as an added bonus).

When asked to justify this, the telcos and their supporters argue that it is axiomatically bad, unfair and not nice for municipal governments to compete with the private sector. They usually assert that munies can tax and regulate in a discriminatory fashion (not true, due process prevents such discrimination) or that munies enjoy special privileges (although incumbents are not shy about special privileges and subsidies for themselves). Mostly, they argue that it is just _wrong_ for the public sector to provide things that the private sector can provide (other than education, water, electric power, and the occassional donation of land or tax breaks to bring in a private business). Like Al Capp’s “big businessmen,” the telcos and cable cos see the munie-shmoo as unpatriotic and unamerican and a threat to society as we know it becuase their very existence challenges the status quo.

The latest Shmoo Killer comes to us from Indiana. As you know, Indiana has two of the best munie wireless stories to date: Auburn and Scottsburg, both small cities that saved jobs by creating municipal wireless networks. I would wager that none of the bill sponsors come from these towns.

What’s interesting about this bill is its demonstration of how the industry lobbyists adapt. The industry folks got blind-sided by the PA fight. In addition, they have seen that some of the bills they got passed in the 1990s don’t prohibit broadband networks, just telecom networks. The new bill is therefore carefully crafted to (a) be as sweeping as possible and (b) hide the provisions that resonated with the public and replace them with things that look better, but are actually worse.

Lets peel this rotten onion back section by section.

Sec. 1-3 are definitional. Sec. 3 provides as broad a sweep as possible for any services a municipality might wish to offer by referencing every relevant definitial section of the Communications Act — so no offering broadband as an “information service” if the statute only prohibits “telecom service!”

Sec. 4 starts to get nasty. First, Sec. 4(a) provides a grandfather clause to “protect” pre-existing systems. Under this guise, it freezes systems in place as they exist today. No expansion to any unserved area within the municipality after June 30, 2005. And no system upgrades to provide new services after June 30, 2005. Hope you’re in the right neighborhood to be covered…

Sec. 4(b) prohibits any municipality from providing any cable, telco or other vaguely internet-like service after June 30, 2005 unless the municipality jumps through a number of hoops vaguely reminiscent of the quest for a shrubbery and cutting down the tallest tree in the forest with a herring. Sadly, munies don’t get to say “we’ll do no such thing.” They must:

1- Send certified mail to anyone who either provides the service in the municipal area or might be able to do so in the next 9 months. If anyone responds that they (a) provide service in that area, or (b) intend to provide service in the next 9 months, the municipality is prohibitted from providing the service. (Sec. 4(b), Sec. 6).

Please note that the statute makes no comparisons regarding price, quality or speed the way the PA law does. It merely requires that the “services” be of the same type. So if a municipality wants to provide internet service at 45 mbps (both ways) for free to a poor inner city neighborhood or to a business district to keep jobs, and the local telco or cable co offers 1.5 mbps (downstream) for $49.95, the municipality is out of luck.

Also note that this pretends not to give a private actor a “veto” over a municipality. It is merely an “investigation” by the city to make sure that it only provides municipal systems where needed, and does not “rob” already existing private businesses of potential customers by “competing with the private sector.” The nasty details get overlooked and the bill is spun by its supporters as a “reasonable” protection of private enterprise rather than a transfer of rights from citizens of a locality to a private company.

We’ll skip over for a moment that this is only “reasonable” if you buy the basic premise that municipal systems should only offer service if there is no possibility of a private entrant. But even if you like that rule, the fact that a company can say they “intend” to provide service of some sort to the designated area in 9 months has the same effect as a right of first refusal in PA. This bill is in fact worse than the PA law, because the PA right of first refusal actually required the private company to offer a comparable service on a reasonable time table.

Happily for telcos, cable cos, and their wholly owned subsidiaries in the legislature, few people read through a statute.

But lets say a municipality gets past that hurdle and no one wants to provide even lousy service at inflated prices. The municipality must still:

2- Compile an incredibly detailed report projecting costs and benefits over three years. (Sec. 4(b)) The bill’s drafters clearly anticipate the cost of compiling the report will be prohibitively expensive. What makes me say that? Sec. 4(c) requires the municipality to use the first revenues from the muni system to pay for the report. So not only is this viewed as expensive, it guarantees that the system is born in debt.

3- After compiling the report, the municipality has to hold a public hearing on the proposal.

Again, note the ability to spin and defend against PA-style attacks. The Shmooicide Squad will defend the requirement for a cost benefit analysis and a public hearing, without mentioning the unusually high cost of the analysis required in the bill. If this is about local citizens controlling their own resources (an argument that resonated well in PA), how can anyone object to a public hearing and the prudence of a cost benefit analysis? Again, since few folks will read the actual bill, and the mechanism of muni intimidation is devious, it provides splendid spinable political cover.

As if this were not enough, the bill drafters want to insure that any surviving shmoon are starved at birth. The statute prohibits financing the system in any way except by subscriber revenue or by bonds (Sec. 5(b)) (cable cos and telcos, it should be noted, subsidize their system expansions with rate increases on video and voice subscribers respectively as well as accessing private capital in the form of stock sales or private debt instruments, but watch how this gets defended as creating a “level playing field” and preventing municipalities from “unfairly subsidizing their own systems at the tax payers expense”). Note that this effectively kills any sort of free service to stimulate job growth or bridge the digital divide. (Another difference from the PA law, which had an exemption for any free service. Under this bill, a city can’t even provide a public hot spot in the park.)

But a city can still fund with bonds, right? Sure, but the Shmooicide Squad have gutted the cities ability to raise bond revenue for the new system. Sec. 7(b) requires that financing the bonds can only come from revenues raised from subscriptions to the muni system, and if the city doesn’t bring in enough revenue the bonds are void. How many of the financially conservative institutions that are among the biggest investors in municipal bonds are likely to invest at that level of risk?

And again, we have completely eliminated the possibility of offering any kind of free or low cost service as a public benefit or job stimulus.

And again, notice how politically spinable. How many reporters or members of the public understand the bond market or will dig that far into the statute? Defenders of the bill will say “they can finance through municipal bonds, while poor private companies must put private capital at risk.” Meanwhile, in reality, the telcos and cable cos can cross-subsidize the new system with existing rate payers (look, your phone and cable bills just went up again) and the municipality has to issue what amount to junk bonds.

Oh well, too bad. But the city can still support local non-commercial community wireless networks and give grants to communities to provision themselves, right? Wrong again! Once more, the clever shmoo killers have thought ahead. Section 5(c) prevents any “subsidy” to any private party unless the municipality goes through the same process of making sure no one else is providing the “service” as broadly defined or intends to in 9 months. While subsidy is not defined, it is likely to be construed broadly to exclude things like donations of dark fiber use and free use of light poles for wireless nodes.

Ah, you will ask, but aren’t the incumbents being too clever? They love subsidies as much as the next free market capitalist.

Yes, but _their_ subsidies are protected. Sec. 5(d) provides that the municipalities or the state can still provide “incentives or tax credits” to companies that qualify under a long string of pre-existing statutes.

So you can still subsidize the telcos or the cable companies with universal service fund bribes, free use of rights of way, eminent domain to plow through other people’s property without paying, or whatever else the incumbents want. But no helping poor people or volunteers!

As the final icing on the shmoo killing cake, the bill does something remarkable. Section 9 creates a private right of action for any private party that believes the city is violating the statute, and awards attorneys fees to any private party that wins. So a city risks potentially hundreds of thousands of dollars if it tries to defend itself from a lawsuit by a private company. Even if the city thinks it will win, how many small municipalities will want to put that much money at risk?

Could Auburn or Scottsburg have created their job-saving networks under these conditions? I don’t think so. Yet each provision is carefully crafted to be spinable and defensible against the criticisms of the PA bill.

It forever puzzles me when people would rather be serfs than free. That a state legislature should wish to reduce its political subdivisions to beggars seeking crumbs from entrenched monopolists saddens me. That a population of voters would willingly abide by such a thing appalls me. I sincerely hope that the voters of Indiana decide to remain citizens rather than serfs. Learn from the fate of the fictional Dogpatch — when folks from far away tell you that protecting free enterprise and the American Way requires you to get poorer and them to get richer, don’t bite. Protect your shmoon and vote ‘em the Hell out of office.

Stay tuned . . .

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4 Comments

  1. Rich Tehrani
    Posted January 11, 2005 at 7:52 pm | Permalink

    This is a great and funny article. Thanks for writing it. I linked to it at http://voip-blog.tmcnet.com… I suggest you have RSS/XML feeds from your content as well if possible. Keep up the fantastic work.

  2. Posted January 11, 2005 at 8:36 pm | Permalink

    Harold,

    What an astounding bit of analysis, what a depressing story, what a galling state of affairs for a “free” people. Thank you for this work. It’s an honor to host it here.

    Rich:

    This site has an rss feed although I can’t remember the url for the moment. I’ll update the site soon with a more convenient and obvious feed.

  3. Laura A. Arnold
    Posted February 2, 2005 at 7:06 am | Permalink

    Just in case you are interested in following the antics of the Indiana Sausage Factory, HB 1148 is scheduled to be heard by the House Local Government Committee on Wednesday, February 16.

    For more details please contact me at laura.arnold@thearnoldgroup.biz

  4. Laura A. Arnold
    Posted February 17, 2005 at 6:09 pm | Permalink

    I thought folks would like to know that Rep. Jack Lutz (R-Anderson), author of the anti-municipal broadband bill, requested that no vote be taken on HB 1148 for the duration of the 2005 session of the Indiana General Assembly. Rep. Lutz made that announcement 02-16-05 during his opening remarks to the House Local Government Committee on HB 1148, however, over one hour of testimony was taken from proponents and opponents of the bill. Although the proposal may be dead for the 2005 session it is likely to remain under discussion and possible re-introduction in 2006.

    For more information e-mail laura.arnold@thearnoldgroup.biz

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