Tennessee Government-Run Internet: An Expensive Failure

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Posted on Thursday, August 8th, 2019, 1:41 PM PERMALINK

For the past several years in Nashville, state lawmakers have faced the same question: Are government-run broadband networks an appropriate use of taxpayer resources?

Americans for Tax Reform released an infographic showing several unsuccessful Government-Owned broadband Networks (GONs) in Tennessee. 

On its face, this may sound like a good idea, as proponents of big government typically sell GONs as more competition in the industry and additional choices for Tennesseans. In reality, however, this nice-sounding idea never works as planned. 

In addition to the initial construction cost of building out a basic fiber network, frequent and expensive technology upgrades are necessary in order to remain current in such an innovative field. Government entities rarely consider this fact, however, and thus grossly underestimate the true costs of a GON.

Government entities also overestimate the demand for a GON. Despite having access to a government-owned and operated network, most consumers choose to remain with their trusted private sector provider. Overestimated demand and underestimated costs is a recipe for a financial gap that taxpayers will always be forced to fill. 

In addition to the financial risks at stake, GONs also jeopardize access to new technologies. Unlike government, private sector providers cannot charge below the cost of service because it would drive them out of business. As if control of the permitting process and possession of regulatory authority were not enough of an advantage, government entities would also able to charge consumers below the cost of service since they can subsidize costs with tax dollars.

This manufactured “competition” with government would discourage private providers from expanding and investing in areas where GONs are present, as their odds of success would be hindered by competing with an entity that does not need to turn a profit. Since it is vigorous competition between private providers that spurs innovation, improves quality of service, and drives consumer prices down, GONs would lead to fewer choices for consumers, outmoded technology, and deteriorating service.

Tennessee alone has had several GONs that have either failed outright or are currently being propped up by tax and ratepayers. The details on these cautionary tales (and the GON failure in nearby Bristol, Virginia) can be found on the infographic linked here and on the list below.

 

Fayetteville, Tennessee:

Fayetteville Public Utilities rolled out its broadband network in 2000, spending more than $11 million. While it is technically cash flow “positive,” Fayetteville’s GON would take more than 60 years – as much as double the useful life of the network – to make money.

 

Memphis, Tennessee: 

In 2001, the Memphis Light, Gas, and Water Division’s GON, Memphis Networx, was made available to the public. Fewer than 5 years later, it was clear that this undertaking was a big financial mistake, and by 2007, the GON was sold off to a private company at a $20.5 million loss on its $32 million investment.

 

Bristol, Virginia:

The Bristol Virginia Utility Authority began is GON, OptiNet, in 2002. Despite being improperly subsidized by BVU’s electric revenues, it still failed to turn a profit and was eventually sold at a loss of more than $80 million. A federal criminal investigation was launched into OptiNet, revealing that along with the improper subsidies, BVU officials also illegally saved the network hundreds of thousands by undercharging it for pole attachments, and also falsified invoices and took kickbacks. 

 

Pulaski, Tennessee:

In 2005, Pulaski Electric System poured around $8.5 million into building out its GON, PES Energize. Despite being a cash flow positive project, its rate of return is so poor that it would take somewhere between 450 and 500 years to break even.

 

Morristown, Tennessee:

In 2006, Morristown Utility Systems rolled out its GON, MUS Fibernet, for more than $25 million. Over the years, interest in this GON has been so low that it cannot cover basic operational costs, and will never break even.

 

Tullahoma, Tennessee: 

The Tullahoma Utilities Authority started its municipal broadband network, lightTUBe, in 2007 for around $17 million. Since there were already numerous private providers serving this small town, it is unsurprising to learn that lightTUBe has not attracted many subscribers. LightTUBe’s rate of return is so low that it would take more than 100 years to pay off its debts.

 

Clarksville, Tennessee:

In 2007, the Clarksville Department of Electricity rolled out its fiber network, which was originally projected to cost $40,200,000. Between construction cost overruns and basic operation expenses that it could not afford to cover, CDE was forced to borrow an additional $20 million. Clarksville’s GON has lost so much money over the years that it will never be able to stand on its own.

 

Chattanooga, Tennessee:

In 2008, Chattanooga’s Electric Power Board began its fiber-to-the-home service. Including a $50 million loan from the EBP’s electric power division that was used to finance initial planning, $162 million in local revenue bonds that were used to finance the construction, and a one-time $111.5 million subsidy from the federal government, it would take more than 680 years – well beyond its useful life – for this GON to break even.

Photo Credit: Jhkang1517

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