James Sposto and his wife, Caroline, moved their Web design company to this rural Pennsylvania Dutch town, drawn by its bucolic surroundings and its ambitious plan for its own state-of-the-art communications network.

Kutztown, with a population of 5,000, had grown frustrated that its local telecom providers were slow to offer residents, and especially businesses, the kind of high-speed Internet access commonly available in urban centers.

So Kutztown launched its communications network in 2002, financed by a bond offering and a loan from its municipal electric utility. The Spostos’ firm now buys business-class Internet service for $40 a month. That is about half the price paid by businesses in neighboring communities for comparable service, but at a slightly slower speed, provided by regional Service Electric Cablevision.

Kutztown uses a broadband fiber-optic network that allows faster connections than those customarily available from either DSL or cable modem.

But if the country’s telephone and cable TV companies have their way, cities and towns eager to emulate Kutztown will find it difficult, if not impossible, to establish municipal communications utilities.

This spring, telecom giants SBC Communications and Verizon Communications, along with cable providers such as Comcast and Mediacom Communications, lobbied 12 state legislatures–including Illinois’–to urge passage of laws restricting municipalities from building such networks. Fourteen states, including Wisconsin and Missouri, limit or prohibit cities and towns from pursuing such enterprises.

Belief in better service

Industry opposition to municipal broadband is rooted in the belief that the private sector delivers services better than government and that government-owned businesses discourage private-sector investment, said Adam Thierer, a senior fellow at the Washington-based Progress & Freedom Foundation, a think tank funded by telecommunications companies.

Thierer argues that even in rural towns, where it is not feasible to build a broadband network, telecoms want to preserve the opportunity to enter such areas once it becomes cost-effective.

Link Hoewing, a Verizon policy director, added that municipalities also can raise money in ways private companies cannot. Any municipal project, Hoewing said, “undermines the market.”

Municipalities can offer Internet access at lower prices than most telephone and cable TV companies because they are not under the same financial pressures as public companies, which often are owned largely by institutional shareholders, said Jim Baller, a Washington-based attorney representing municipal utilities.

But for communities without access to affordable broadband services, municipally owned communications networks are seen as a compelling option.

“Local governments want to bring real high-speed Internet to their towns, and rather than agree to compete, incumbent telephone and cable companies are saying, `No, we won’t allow it,'” said Gerard Lederer, a lawyer representing the National League of Cities.

Municipal broadband initiatives have been increasing at a time when the U.S. has fallen to 13th among industrialized nations for broadband access per capita, according to the International Telecommunication Union, a United Nations organization.

Enticed by the potential of wireless “go-anywhere” networks, commonly called Wi-Fi, a growing number of cities, led by Chicago, Minneapolis and Philadelphia, are exploring ambitious projects that would create hundreds of “hot spots,” or areas where the Internet can be accessed wirelessly.

In Chicago, Ald. Edward Burke (14th) and Ald. Margaret Laurino (39th) have proposed a citywide Wi-Fi network. Burke estimates the network would cost $18 million.

Though Wi-Fi generally carries less capacity than fiber-optic lines, it also requires far less construction. For that reason, Western Springs, Ill., Chaska, Minn., and Addison, Texas, are among a growing number of communities building networks.

Illinois state Sen. Steve Rauschenberger (R-Elgin), who opposes such projects, introduced a bill that would have barred municipalities from establishing a communications utility. It died in committee this year, as did a similar bill in Indiana.

According to Rauschenberger, “Municipalities do a good job on low-tech operations, but the expansion into volatile high-tech networks may not be in the best interest of municipal taxpayers.”

But Jaymes Vettraino, Kutztown’s city manager, bristles at the suggestion that municipalities can’t decide for themselves.

Vettraino argues that a Pennsylvania law, passed in December at the urging of Verizon and Comcast, hurts the very rural areas that could be helped by owning and operating communications systems. The new law gives local phone companies the right to scuttle a city or town’s broadband plans provided that they agree to build a sufficiently extensive network within 14 months. A city could build its own network only if a telephone company declined.

Municipalities, Vettraino said, do not take on a project such as broadband simply to save local residents a few dollars. More important, he said, is the ability to tailor the system to recruit new businesses, enable existing ones and help speed government services.

“People in state capitals shouldn’t be able to come down on a community claiming they know better than local residents what is best for a local community,” he added.

Web designer Sposto agreed.

Making towns `attractive’

“A rural town like this one has a responsibility to make itself attractive, and communications is a great way to do it,” he said.

The new Pennsylvania law grandfathered Kutztown and also established a side agreement that allows Philadelphia to move ahead with a plan to cover its 135 square miles with a wireless network. The network would be free in public areas and available for a fee in homes and businesses.

Much of industry’s opposition to municipally owned communications systems centers on the use of surplus money generated by other city-owned utilities, such as electricity.

At a recent Senate hearing on its planned $14.7 billion purchase of AT&T Corp., SBC Chairman Edward Whitacre Jr. said of municipalities, “They’re the ones that make the laws, the rules, charge franchise fees, etc., etc., and then to compete against us makes it an unfair competition.”

But Betty Zeman, marketing manager for Cedar Falls Utilities, which oversees that Iowa city’s broadband network, calls Whitacre’s charges “typical overstatement.” States and the federal government are the main regulators of telecom providers, not municipalities. While cities and towns set franchise arrangements, municipally owned systems adhere to those same requirements.

“The idea that we have all these advantages not enjoyed by private companies is simply untrue,” she said.

Cedar Falls, like Kutztown, owns its electricity utility. Both are rural towns that built electricity and water systems about 100 years ago to serve communities ignored by the large electricity operators of the day.

Cedar Falls decided to build a broadband network in 1995 after the existing cable TV provider balked at extending fiber-optic lines to a fledging industrial park. To finance the network, the city issued $3 million in general obligation bonds and borrowed $3 million from its electric utility. Zeman said the communications utility is paying both debts on schedule at market rates.

But bills before the Iowa legislature, promoted by Qwest Communications and Mediacom, would preclude municipalities from issuing non-taxable general obligation bonds for a municipally owned communications service, thereby making it difficult if not impossible for cities to launch a communications utility. Financing would be limited to revenue bonds that would require a 60 percent supermajority in a public referendum. The Iowa House recently passed the bill, but it is considered unlikely that the Senate will vote on the legislation before the legislature adjourns for the year later this month.

“As it stands, the playing field is tilted toward municipal utilities,” said Jon Koebrick, Mediacom’s senior director of government relations.

Zeman chuckles at such allegations, noting that private companies such as Mediacom regularly raise non-taxable funds by selling company stock.

“The phone and cable companies would rather enjoy their monopolies than compete,” she said.