CLECs, ILECs, and now…the 'CitiLEC'
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    Copyright Davies and Starr/Stone  
    February 4, 2002
    CLECs, ILECs, and now…the ‘CitiLEC’
    TNE Web Exclusive

    Municipal power and water boards are stepping in where startups fear to tread: offering carrier’s carrier service in metro areas. Competitors say cities have an unfair advantage.

    While the rest of the competitive telecommunications sector has faced the worst retrenchment in modern history, one part has quietly kept growing: The municipally owned power and water boards that also offer data services.

    These public institutions have not only not backed off their multi-year drive to offer data, cable and phone service to their citizens; one of the largest such boards, the Los Angeles Department of Water and Power, or LADWP, is evolving into its own class of competitive service provider, which I’ll call a “CitiLEC”.


    The LADWP not only offers electric and water service to over 1.5 million households and businesses in Los Angeles County, it also provides “carrier’s carrier” service to such companies as MCI, Telseon and smaller ISPs like MediaNet.

    “The idea is to sell Sonet transport to others so they can offer services,” says Bruce Hamer, an official at the LADWP. In a boon to taxpayers, the board uses the money they make from their 260-route-mile fiber-optic plant to support the city’s Municipal Area Network (MAN).

    According to Hamer, the department has a robust vision for its network and the future of competitive services in Los Angeles. “We defer to each community to find its way, but I dream of establishing a true open-access system,” he says, “Where each of our electric customers is offered a true high-speed network and can choose from say, five cable companies, 10 ISPs and a dozen phone providers. Imagine how compelling a place L.A. would be to live and work.”

    Hamer’s vision of pure competition has sparked bitter controversy from private service providers. These players claim that public municipalities are unfair, un-competitive and, in a certain sense, un-American.

    “These municipal boards have gold plated their networks using consumer electric bills,” says Mark Smith, a spokesperson for the National Cable and Telecommunications Association, a trade group that represents cable interests in Washington. “Not only do we feel these funds should go straight back to the ratepayer, the network they built also creates an unlevel playing field for private enterprise.”

    Cable companies agree. They argue that they are being doubly regulated by the cities that offer services. Not only must they compete with the city, they must obey regulations from this same entity. A kind of double burden.

    “Don’t forget that they (the city) make us carry unnecessary community channels, they force us to provide local infrastructure and can set higher tax rates for us in some cases,” says Andy Morgan, a spokesman for Charter Communications. “To then turn around and compete for our customers…that is tough to take.”

    Perhaps the bitterest pill of all is cost. Municipal power boards can offer service at a fraction of the price of a private competitor. Cities use existing rights of way from the power grid to lay their networks, they face a reduced regulatory burden to get the license to operate and they do not have to run at a profit, opening their operation up to all sorts of options closed to a private player. “At the end of the day it boils down to, do we want the government being in this business,” says Smith. “Because if we do, there is no way for a private company to compete.”

    The public power community, however, remains unbowed. Officials and trade representatives here like to frame the CitiLEC debate in historical terms. They like to recall a rough-and-tumble period in American business history that did not take it for granted that private enterprise was the best answer for all business situations. They point to a time at the turn of the century, when the Edison companies would not offer power to the entire country, preferring to stay in lucrative larger markets.

    “At that time, local towns took it on themselves to offer services,” says William Ray, superintendent of the Glasgow (Ky.) Power Board, which also offers cable, data and phone services. “And now is just like then, the genie is out of the bottle. Consumers know just how cheap these services are to offer and they revolt against high prices. It happened in my town, and it will happen in LA.”

    Though Hamer steadfastly denies that his board has any plans to compete directly with private companies for retail customers, he ruefully remarks, “What a lot people don’t know is Mulholland Drive was not named after a film executive. He was the first head of the Water and Power board, so ours is a dynamic body that is expected to provide robust service in whatever area serves our taxpayers.”


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