Georgia Cities Gear Up to Compete with Private Telecom, Cable TV

By Betsey Weltner

At a time when state government is downsizing, privatizing services and deregulating utilities, relieved Georgia taxpayers have a new threat on the horizon — municipal development of telephone, cable and Internet services. The high-tech, high-risk telecommunications industry is no place for local governments to be, but the power of cities to tax and regulate the private industry “competition” has created an uneven playing field in Georgia. Further, while dozens of Georgia cities are either planning or implementing costly telecommunications systems, they are doing so without public approval of any kind.

Consider a Georgia statewide poll taken in September 1998 on the subject of municipal “competition” with private telecommunications industries. 500 registered voters across the state were asked two critical questions, and the response was clear and overwhelming. When asked, “Do you think it is fair for local governments to provide non-essential services that compete with private business?” — 73 percent said no. When asked, “Do you think that local governments should use city and county tax dollars to provide their citizens with services such as cable TV, telephone, or fiber-optic wiring to the Internet?” — an astounding 84 percent said no. It’s a good thing for cities venturing into the telecommunications business that Georgia law does not require cities to obtain public approval. Public opinion is definitive on the subject.

Over the past year, the Municipal Electric Authority of Georgia (MEAG) has been planning a statewide government-owned fiber-optic network which, if completed, would have become Georgia’s second-largest information network. Moving outside their legally empowered mandate as the facilitator for cities wishing to develop municipal electric authorities, MEAG has pursued its new agenda with zeal. Denied approval by the Georgia Public Service Commission (PSC), MEAG appealed the decision to Fulton Superior Court, which similarly denied their efforts. In a strongly worded opinion, the court made clear that MEAG’s plan to directly compete with private industry would “open up a Pandora’s box which the General Assembly could not have intended. . . .”

The court noted that “[t]here are numerous legitimate concerns that private industry has when confronted with the addition of a competitor who has different tax treatment by the various taxing bodies, exemption from antitrust laws, the power of eminent domain, and the ability to raise funding through bonds. None of the private competitors have been bestowed with these tools. . . .”

Representatives of the telecommunications industry, who have been warning for years about the dangers of municipal power to enter private sector industries, greeted the court decision with favor, noting cautiously that more than 20 Georgia cities are currently developing telephone and cable TV systems. “While we recognize that this decision does not stop cities from moving ahead with their own, independent plans, the court has raised appropriate concerns about a level playing field when cities do compete with private sector industries,” said Nancy Horne, President of the Cable Television Association of Georgia (CTAG). “State lawmakers should be aware that real problems still remain for taxpayers and the private sector alike.”

In a free market system, the telecommunications industry should theoretically be fair game for anyone with a sufficient cash supply and entrepreneurial drive. The problem is that city governments have boundless supplies of public cash, without the requirement to be accountable to boards or stockholders. Where a private investor must put up hard-earned capital or pay interest on a loan, a city can simply float a bond issue and – voilà – instant money at far below market interest rates.

This approach should create heartburn for taxpayers. Tax dollars are being put into play in the high-risk, volatile telecom industry in which cities are inherently unprepared to compete. Ask any CPA about the advisability of taking out a 30-year loan to finance a car that will be junk metal in 10 years. Dozens of Georgia cities are currently taking that short-sighted financial mismanagement approach when they publicly finance telecommunications systems that could be obsolete in 10 years or less, given the rapid pace of technological development.

As MEAG-member cities face the prospect of diverted revenues due to utility deregulation, we can expect to see local governments positioning themselves to introduce a host of new taxes and fees in addition to the development of city-owned telecom services. The knotty issue of franchise fees, for example, is facing a legislative study committee, which is charged with making recommendations to the 1999 General Assembly.

At the apex of the discussion is the application of the franchise fee, which is one of 12 taxes or fees currently levied on Georgia businesses for the use of municipal-owned rights of way. Franchise fees are paid by telephone, cable television, electricity and natural gas companies. Fees are paid to cities and, in the case of cable television, to both cities and counties. According to an August 1998 report by Georgia State University’s Dr. Bruce Seaman, the combined franchise fees, based on a percentage of gross revenues, are approximately $200 million a year.

As deregulation becomes a reality, maintaining tax/fee revenues has been a top concern for cities and counties, which depend on the traditionally predictable franchise fee revenue stream. Last year, the Georgia General Assembly passed SR 544, which created the study committee to examine local franchising authority and “the impact of fees assessed for the use of the public rights of way on the development of competition.” Unlike some study committees, the Joint Study Committee on Franchise Fees and Conditions, Rights of Way, and Tax Implications of a Competitive Marketplace promises to live up to its big name.

A major concern of the study committee: Municipal franchise fees are neither assessed uniformly nor are they based on a single formula. Deregulation efforts for the energy and telecommunications industries in Georgia have made many of the various franchise fee arrangements obsolete or administratively difficult and expensive.

The effort by MEAG-member cities to build their own cable TV and telecommunications systems further compromises to some extent the cities’ case for increased or new fees. Existing telecommunications and cable TV companies are then placed in the untenable position of being taxed and regulated by their competitors.

If the State of Georgia is sincere in its efforts to downsize, privatize and deregulate traditional government services, state lawmakers should heed the dangerous signposts of municipal competition with existing private industries, particularly costly, high-tech industries such as telecommunications and cable TV. The risk to existing private industry is real — there are inherent conflicts of interest when a government competitor can tax and regulate private competitors. Widespread municipal competition in these key industries will surely discourage out-of-state companies who are looking at Georgia as a place in which to do business and bring jobs. Most importantly, Georgia taxpayers overwhelmingly oppose the risk to their tax dollars.

Betsey Weltner is president of Weltner Communications, an Atlanta-based public and government affairs company. The Georgia Public Policy Foundation is an independent, nonpartisan organization dedicated to keeping all Georgians informed about their government and to providing practical ideas on key public policy issues. The Foundation believes in and actively supports private enterprise, limited government and personal responsibility.

Nothing written here is to be construed as an attempt to aid or hinder the passage of any bill before the U.S. Congress or the Georgia Legislature. © Georgia Public Policy Foundation (October 30, 1998). Permission is hereby given to reprint this article, with appropriate credit given.)

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