I am Marcus Trathen of the Brooks Pierce law firm. I am speaking today in my capacity

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1 Statement of Marcus Trathen as prepared for delivery to the House Select Committee on High Speed Internet Access in Rural and Urban Areas November 23, 2009 I am Marcus Trathen of the Brooks Pierce law firm. I am speaking today in my capacity as counsel for the NC Cable Telecommunications Association. I am pleased to accept Chairman Faison s invitation to talk with you today about the issue of local governments who are getting into the telecommunications business in competition with private providers. Background Let me first say a word about how we got to where we are now. As you know, North Carolina has a law called the Umstead Act that generally prevents the State from competing against private business. The reason for this goes to the heart of our economic system our shared belief that private business is better suited than the government to engage in business, as opposed to governmental, activity. Cities and counties are exempted from the Umstead Act. The reason is not because local governments are deemed free to compete as they wish, but because cities and counties are creatures of the legislature. They are only permitted to engage in activities expressly authorized by the General Assembly. Therefore, the General Statutes have a section specifically listing the activities in which cities and counties can engage. Nowhere on this list is telecommunications or, for that matter, broadband. Cities, however, are authorized to operate cable television systems. This provision is consistent with federal law, which permits cities to operate cable systems where an incumbent provider is determined, after a formal process, not to be meeting the needs of the community. In 2005, the NC Court of Appeals issued a decision in a case called BellSouth v. City of Laurinburg saying

2 that if cities can provide cable television service then they also should be permitted to provide telecommunications and broadband service. Basically the court said the legislature s use of the phrase cable television system was the same thing as a broadband or telephone system. We and others believe this decision was wrong, but that s what the court said. The effect of this decision opened up to cities a whole new range of activities previously not authorized for cities including provision of telephone and broadband service. My point is simply that the General Assembly did not intentionally create a structure under which cities would be permitted to compete against private companies in a whole range of communications services rather this situation was created by virtue of a court decision. Current State of Competition Several cities are now exploiting the court s decision. For example, the City of Wilson has borrowed some $28 million to construct a fiber system and is providing video, telephone and broadband service in direct competition with Time Warner Cable, CenturyLink and other providers. The City of Salisbury has borrowed some $36 million and is in the process of building exactly the same network for the same purpose to compete against Time Warner Cable, AT&T, and other private providers. Davidson, Mooresville and Cornelius formed a joint municipal enterprise operated under the name MI Connection to purchase a cable television system formerly owned by Adelphia Cable out of bankruptcy. They borrowed some $90 million to do this. They are now using the system to provide telephone, broadband and video service in competition with private industry. The Town of Morganton has provided cable TV and Internet services for a number of years

3 We believe many other cities across North Carolina are actively considering similar projects. The Problem Let me be clear these are not situations where private business was failing to provide these cable TV, broadband and telephone services and the cities stepped in to fill the gap. Instead, in each case, private business was already present and offering service and the cities stepped in to compete against private business. Our opponents try to paint this as an issue relating to the provision of broadband services to those that don t have it an issue this Committee obviously is concerned with. We have never said that local government does not have a legitimate role to play in those situations where private industry is unable or unwilling to step forward and provide services. Our concern is not with unserved areas rather it s with the government s direct competition with private business. Our concern is based on the numerous inherent and unfair advantages when competing against private business. Cities don t pay taxes that private businesses do. They don t pay fees that private businesses do. Cities have the ability to subsidize their retail communication services from other taxpayer supported monopoly sources. Each of these exemptions means local governments have fewer costs than private businesses, the net effect of which creates price disparity between government providers and private providers. Additionally, the temptation to discriminate against private business when the government acts as both a regulator and a competitor is irresistible. For example, cable companies must attach their lines to power poles in order to provide services to customers. In - 3 -

4 cases where a city owns those poles and where the city competes with the cable company the opportunity for abuse is clear and present by either denying access to the poles or increasing rates substantially for access to the poles. In such a case the cable company is subsidizing the city s competition. The City of Wilson recently notified Time Warner Cable the 2009 pole attachment rate will be triple the rate of In other words, the City is asking Time Warner to fund the city s competition against it through excessive increases in pole attachment rates. The same possibility for abuse existing with respect to the use of a city s public rights-ofway. Ultimately, with local government competition, taxpayers are the ones at highest risk, whether they know it or not. Cities are free to cross-subsidize their competitive activity with their non-competitive governmental services like electric service or gas service. In effect, subscribers of private providers who take other city services are subsidizing the city s competitive forays. Even individuals who don t subscribe to service with either competitor will end up subsidizing the city s service through taxes, water-sewer rates and in the case of Wilson, electric and gas service. The person who has lost a job or who is scraping by on social security and doesn t subscribe to cable or broadband service is still subsidizing the city s competitive efforts through electric rates. This is occurring today. According to its financial statements, Wilson has taken $11,927,080 from its electric and gas funds i.e., revenues it has received from its electric and gas customers and plowed that into competing with Centurylink and TWC. (When you consider that Wilson has some of the highest electric rates in the state this seems manifestly inappropriate.) - 4 -

5 Morganton has taken $2,932,388 from its electric fund and transferred it to its cable operations. Why? Because its cable operations are not self-supporting, even though the city has been operating a cable system since 1993! Its latest financial statements show that the system is still losing money after 16 years in business. Wilson is currently losing money. MI Connection is currently losing money (it lost over $6 million this last year). If they keep losing money like Morganton, captive ratepayers and taxpayers will be on the hook. This is not right for consumers, it s not right for taxpayers, but more importantly it s not right because it is bad public policy. If cities are permitted to unfairly compete against private business, private business will not make the investments required to generate jobs and stay current with technology. This is a reality of free enterprise. North Carolina is fortunate to have some of the most sophisticated and well-capitalized communications companies in the world investing here, creating jobs, and providing advanced services. These companies are required to make choices every day about where to deploy their capital. If North Carolina cities are permitted to unfairly compete against them, North Carolina risks being perceived as a hostile ground for the technology industry and potentially retarding the growth of a vibrant industry so necessary to our state s future economic good heath. I hope you agree that this would be a very harmful result for our state. * * * * * The idea starts of innocently enough: Wouldn t it be great if the city provided a broadband alternative to its citizens we can help bright prices down and spur economic activity. And we ll probably rake in the money by also offering video and telephone services

6 The reality is much different: massive debt; propped up by cross-subsidizing the competitive activity from captive ratepayers and dependent on unfair competitive tactics; diminishment of the state and local tax base; and, in the end, the entry does not substantially affect pricing. Moreover it s simply unseemly for the government to compete against private business, it creates political problems, and it raises constitutional issues with respect to the government s delivery of content. In the last election, largely due to dissatisfaction with the MI Connection project, the people in the Town of Mooresville voted out the incumbent Mayor and council member who were primarily responsible for the MI Connection project in the first place. But what recourse do the citizens have now? They own the cable system and they are obligated for $90 million in debt. Obviously it would have been preferable for there to have been meaning citizen input on the front end, not after the projected has been undertaken. You may be surprised to learn that cities can borrow $90 million without anything more than a city council vote. In MI Connection s case, the deciding vote was cast by the now-former mayor of Mooresville after the council had deadlocked because the project was so controversial in the community. The current system is horribly flawed. Public officials can make decisions with virtually no public input or state oversight. Private competitors have no recourse against unfair competition. Local taxpayers have no protection against being forced to subsidize proprietary as opposed to governmental activities. There is precedent in North Carolina for regulating these activities. Cross-subsidies Electric co-operatives are prohibited from cross-subsidizing competitive activities from electric ratepayers funds. They are subject to all taxes, specifically including federal and State income taxes, levied against business entities of the same structure and engaged in - 6 -

7 the same activities. They must fully compensate the electric membership corporation for the use of personnel, services, equipment, or tangible and intangible property. The NC Utilities Commission regulates this activity by, among other things, requiring annual reports. [G.S & ]. Joint Municipal Power Agencies are required to make payments in lieu of taxes to the appropriate governmental body. [G.S. 159B-27] Annual Reports & Financial Recordkeeping Cities operating utilities are required to file annual reports with the NC Utilities Commission. [G.S ] Joint Municipal Power Agencies are required to file annual reports with the NC Utilities Commission. The report is to include a complete operating and financial statement. [G.S. 159B-30] This is not a problem of your creation or ours --- this problem has been created by a court decision. The legislature has never directly addressed how and under what protections cities should be permitted to compete against private businesses in providing telecommunications and broadband services. Many other states have acted to prevent unfair competition, and we believe it essential for North Carolina do the same. We believe that the following principles should apply with respect to a city s competitive activities: Regulations that do not apply to government entities but which do apply to private industry should either be abandoned or enforced uniformly. Local governments that supply services in competition with private industry should lose their tax exempt status and other privileges with respect to such activities. Local governments should adopt accounting practices and management approaches that reveal more closely the true cost of the services provided. Captive ratepayers should be protected from paying for projects they don t support. Ful disclosure should be made to the public before such projects are undertaken

8 * * * * * As always, on behalf of our industry we are grateful for the opportunity to outline our concerns and look forward to working with you on these and other issues