[Jesse H. is a professional computer nerd and political activist, particularly in telecommunications. While I may be one of the "limited-government types in Utah" that Jesse is referring to below, I felt like it was appropriate to give him the space to defend UTOPIA, a project he supports. Jesse's intelligent, articulate, and witty, and I hope we can look forward to other thoughts from him here on Publius Online. You can learn more about Jesse's work at freeutopia.org]

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A pretty common target for limited-government types in Utah is UTOPIA, an interlocal agency formed by 16 member cities for the purpose of building a next-generation fiber optic network to every address in its footprint. The common refrain is that government should stay out of the private sector, a general sentiment that I would agree with. There are many cases where government may usurp a function better handled by private companies, and many more instances were government decides to support a politically connected entity to the detriment of others. Upon a closer inspection, there are all arguments that actually supports UTOPIA’s existence.

To understand the basis of this rationale, you have to go back almost a century. Way back in 1913, AT&T agreed to abide by the Kingsbury Commitment, a deal with the federal government that allowed them to operate as a legal monopoly. This legal monopoly persisted until the famous breakup of Ma Bell in 1984. Even then, the AT&T behemoth was broken into 7 regional monopolies and the only competition that was allowed for was in the long-distance space. Obviously, this approach had numerous failings. The regional monopolies still enjoyed significant market dominance from over seven decades of government support and still had a number of political connections they could use to keep new entrants to the market at bay.

To correct this, the federal government enacted the Telecommunications Act of 1996. It required that the incumbent operators allow outside companies to lease their lines at competitive rates and provide competing service. In exchange, telecommunications companies received significant tax benefits (to the tune of $300B and growing) and promised that they would be rolling out advanced fiber optic networks to everyone in the country. As time wore on, though, nobody remembered the promises of the Baby Bells, and they often undermined the competitors on their networks with repair delays, customer poaching, and rate-fixing. In 2005, the requirement to offer competitive rates was dropped by the FCC. Several years later, Verizon, AT&T, and Qwest (now CenturyLink) unilaterally declared that the line-sharing requirements did not apply to any new fiber-based facilities, effectively killing off most of the few companies that had survived the other shenanigans. The phone companies had gotten away with the perfect crime: they had used almost a century of government-backed monopoly power to entrench themselves and now were free of most regulations that prevented them from abusing this power.

Cable companies haven’t been too much better. When most cable systems got started, they often required exclusive franchise agreements just to build. Cities eager to have the service would agree to these terms even knowing that they’d be a captive market for it. By the time competition was allowed, many cities had build-out requirements that required more capitalization than new market entrants were able to secure. Just like the phone company, being first to the market had allowed them to be shielded from competition, then set the rules by which they could compete.

The short version is that the government created and furthered the position of market dominance that cable and phone companies currently enjoy. A lot of libertarians will say that the solution is to walk back regulations that prevent new companies from providing service. That’s only half of the picture. Even if you eliminated every regulation on telecommunications infrastructure, the 800-pound gorillas still have a variety of tactics at their disposal to ensure they are the only game in town. This includes nuisance lawsuits over pole attachments and offering below-cost rates in competitive areas. Both are designed to slowly bleed competitors dry, and both are the result of being propped up by government power. Elimination of regulation only enhances the power built up via crony capitalist means.

There’s a limited number of options that are available. One option would be to go after the telecoms, but that would require a decade or more of lawsuits and wouldn’t be a guarantee. Another option is to break up the retail and wholesale operations to eliminate vertical monopolies and allow facilities-based competition, but that runs into the exact same problems as the first solution. While citizens could try to form their own cooperative to try and break themselves free, financial institutions are unwilling to provide the financing needed to get started because of the significant hurdles involved. It’s a bad situation which appears to be almost intractable. Where can we look for inspiration on how to solve the problem?

“Why won’t anyone listen to me?!” Ron Paul

Naturally, I think we can look to the godfather of libertarian thought, Rep. Ron Paul. In particular, his measured approach to Social Security provides some insight as to how we extract ourselves from the situation.  When asked if he would abolish social security, Rep. Paul said the following:

Yes, but not overnight. As a matter of fact, my program’s the only one that is going to be able to take care of the elderly. I’d like to get the young people out of it, just the younger generation, because there’s no money there, and they’re going to have to pay 50 years and they’re not going to get anything.

It’s a rather stark acknowledgement that in order to resolve a situation that’s far-gone, it’s going to require some long-term financial pain, pain that we’ve been trying to put off for a very long time. Paul also acknowledges the reality that government simply cannot walk away from the problems it has created. After a century of being propped up, it shouldn’t be a surprise that the pain of moving from crony capitalism to a free market would be significant. So how does UTOPIA facilitate the transition to a competitive free market?

The immediate benefit is the open-access model. While UTOPIA builds, operates, and maintains the physical network, it doesn’t actually provide any services directly to users. Private companies choose to participate on the network and sell services directly. At current, four companies are providing residential services and almost a dozen more are offering business services. Each of these companies offers a variety of service plans and prices, and then all compete very heavily on customer service, an area where the telecommunications industry has typically performed poorly. While the Telco Act of ’96 hyped the benefits of competition, a true open-access network realizes it.

It helps to understand how they are currently structured. Right now, UTOPIA employs a model where new subscribers pay to build the network to their home or business. This includes the cost of deploying from the curb into the building as well as a piece of the shared infrastructure. It’s amazingly cooperative-like except that the loans are backed by municipalities. Eventually, UTOPIA could easily move from city-controlled to subscriber-controlled. The municipal governments backing it are merely acting as seeders to get the market correction started.

While there is a lot of anger being directed towards UTOPIA over missed goals and costs, the anger should be directed squarely at the companies that necessitated its existence through government-backed market manipulation. Realizing that a truly competitive platform could end their gravy train, they’ve thrown everything but the kitchen sink at it to try and end it, a common tactic of an industry that gets a glimpse of its own demise. If you want to see a free market in telecommunications, support efforts like UTOPIA and push them towards a cooperative model.

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