Community Broadband
Public Versus Private Cable System Ownership: A Tilted Playing Field?
By: Cathy Swirbul
Private telecommunication companies often claim the playing field has tilted away from them toward municipal providers. Two industry executives in Iowa– Darrel Wenzel and Dave Fyffe —have been on both sides of the public/private ownership equation. Their professional experiences lend perspective to a subject that has garnered a fair share of editorials and headlines in the past year.
Wenzel, manager of Independence, Iowa, Light and Power, worked for incumbent TCI in Independence until 1998. Fyffe, manager of communications at Muscatine Power and Water, worked for Cablevision, managing three different regions in the south. Subsequently both men worked as consultants and helped build municipal telecommunications systems. Once the municipal systems were functioning, each was asked to join the municipal utility staff as managers. Wenzel and Fyffe offered their thoughts.
Question: Is there a place for public ownership of cable systems?
Fyffe: Yes, if they have a market that is underserved. In Muscatine, we have five corporate headquarters. Two of those companies—Bandag, Inc. and HNI Corp.—are Fortune 1,000 companies. The other two—Monsanto and H.J. Heinz—are Fortune 500 companies. Their phone systems were running off a radial fiber spur from the regional quad cities area of Davenport and Bettendorf, Iowa, and Moline and Rock Island, Ill. One fiber cut, and these companies would be without service. That was unacceptable. A task force sponsored by the Chamber of Commerce and the Muscatine Development Corp. approached the phone and cable companies to see if they were planning to update their infrastructure and provide advanced services. They were not, so the task force asked Muscatine Power and Water to get into the business.
Wenzel: When you have a monopoly situation and the private sector has proven it is not going to step up and meet the need in the community, then I’m in favor of the public sector providing competition. I don’t think the majority of the United States has competition line for line, wire for wire for cable TV or telephone service. Competition—what [Adam Smith] called “the invisible hand”—should regulate the market and keep prices down for consumers. Public competition is giving the desired results of lower rates and better service in the cable business.
Question: Critics claim that publicly owned systems often aren’t financially feasible because they are costly to build. They claim that cities are then forced to raise electric rates or property taxes to cover costs. What is your response?
Wenzel: It is very capital-intensive to get started in the cable-TV business. The financial industry likes to have a payback on a project within five years. If you can’t meet that payback, it doesn’t look like a good investment. Municipals, however, are here for the long term, not to turn a five-year profit.
The majority of municipals disprove the contention that they aren’t financially viable. Independence Light and Power has the majority of the cable market—more than 1,400 customers. When I managed the TCI system in town, we had 1,250 customers at most. Mediacom, which bought out TCI, now has about 100 customers. Independence Light and Power hit positive operating income in its 33rd month of operation. If you look at all the successful municipals, you realize the critics are full of hot air. The municipal systems do pay for themselves.
Fyffe: My main focus is providing the service that our customers expect and doing it at a price adequate to cover expenses. We don’t need to have a lot of money in the bank. I don’t need to worry about what I need to do this quarter to make the stock go in the right direction. Even though we launched our CATV basic/expanded basic service at $2 more than service provided by our competitor, AT&T, and continued our service at prices higher than our competitor, we acquired 60 percent of the cable market in a three-year period. We were then approached by a third party asking if we would be interested in purchasing the Mediacom system, and we did. Today, we have about 8,500 cable TV subscribers.
Some people try to compare the private sector with municipals. They are trying to paint us with the same brush, without taking into account that we have a totally different goal in mind than the private sector. We don’t need to generate profits for stockholders.
Question: Why does Independence Light and Power have a majority of the market?
Wenzel: We believe most customers go with us because of service. When there is a service call, we are usually there within an hour of the call. We are more customer- and community-oriented than our competition.
Question: Should municipals pay taxes on their communications systems?
Wenzel: I don’t think so. We offer consumers lower rates on cable TV and high-speed Internet. Based on Mediacom’s rates, we saved consumers approximately $425,000 in 2004. That money is then put back into the local economy, back into local businesses. We provide five additional high-tech jobs in the community and income tax for the state. I’ve tried to tell state legislators that instead of trying to tax municipal systems, they should offer economic incentives to have private companies come to town to provide competition. They could do away with property tax, if that is the proper incentive. Rather than blocking municipal competition, they should be encouraging it.
I attended a subcommittee hearing in the Iowa Legislature recently to discuss whether municipal cable systems should be taxed. I told them that taxing municipals would force us to raise our rates for Iowa consumers. Mediacom always follows our rates so they would also raise theirs. If I must charge $3 more to recoup that tax to the state, Mediacom would also charge $3 more but their $3 would go straight to their profit margin.
Question: Critics say that municipals don’t pay a franchise fee. Is this true?
Wenzel: That claim is bogus. The municipal system does pay a franchise fee and follows the same franchise agreement as our competitor. Every municipal I know of in Iowa pays a franchise fee.
Fyffe: We pay a city fee that mirrors a franchise fee. We have three utilities under one management group in Muscatine but we are totally separate. I buy my power just as the incumbent cable company did. I pay for pole attachments at the same rate as they were paying.
In terms of franchise fees, we actually went above and beyond what the incumbent did because Muscatine Power and Water pays the fee for customers who live in the county as well as the city.
Question: What about the argument that the playing field isn’t level when municipals own a cable system?
Wenzel: There will never be a level playing field between the privates and municipals. Different synergies exist for both entities. Private companies have bulk buying power. When Mediacom, which has nearly two million subscribers in the region, buys programming, it can get a lower rate than a municipal with 1,400 customers. Companies that sell programming offer exclusive programming deals for large private companies, not small municipals. Also, the large private companies have the benefit of greater operating and technical experience. They can go below cost to support a system in a competitive market.
Without strict government regulations to control telecommunications providers’ monopoly power, competition from municipal telcos is the only viable option available to many communities.
Fyffe: When I’m writing a check for programming services, it goes to another company. A large, private company does the work internally so they are writing a check to themselves.
Question: Are there other benefits to consumers of a municipally owned system?
Wenzel: Local ownership can make a difference in the programming that is offered. When I worked for TCI, the corporate office decided to remove the two Chicago stations from the programming even though the Chicago Bulls were getting ready to play in the basketball championships. Those of us in the field fought corporate on this but they went ahead and dropped the channels. That decision broke the dam on customer losses for TCI. Customers were tired of corporate America deciding what type of programming they were going to get. In Independence, we have a local programming committee. The citizens’ requests go before the committee and that’s how our programming is chosen.
Fyffe: The bottom line is that a municipal can provide service to a community that a private company wouldn’t touch because it wouldn’t make sense for them. Muscatine Power and Water also provides head-end service to an independent telephone company in the city of Wilton, which is 12 miles away. Wilton has just 1,000 subscribers. We are able to leverage head-end expenses associated with launching new services. For example, Wilton was able to launch VOD (video on demand) when we did. This is a service they would not have been able to afford on their own. When we launch high-definition TV (HDTV) later on, they will get HDTV. Another small town has approached us about doing the same thing for them.
Question: Any closing thoughts?
Wenzel: What is really ironic is that when I worked for TCI, I came to an Independence town hall meeting in 1997 and told the light plant’s board of trustees that they shouldn’t build a municipally owned system. I didn’t think it would be economically viable. Now I can’t stress enough how successful Independence Light and Power has been not only with cable TV but also with Internet service.
Municipal telecommunications providers are legitimate, self-sustaining and real competitors. Municipals have won customer loyalty through responsive customer service, timely deployment of technological advances and reasonable pricing.
Back to Top
Copyright © 2004-2010, American Public Power Association
