Minnesota Telecommunications Guide
January, 1998 
Issue No. 2 
 

Should It Be Easier for Municipalities to Enter Telecommunications? 
Sen. Steve Kelley has introduced a bill (S.F. 2098) that would make it easier for municipalities to enter the telecommunications business. Current law, dating to 1915, allows local governments to provide phone service if 65 percent of voters approve. Kelley's bill would lower this threshold to a majority vote by a city council or other government body. 

The bill leads to three questions the Legislature must answer. 1. Now that local phone companies' monopolies are ending, is it good public policy for the state to let all tax-exempt municipal ventures compete with private companies? 2. If the answer to that question is yes, is it good policy to make it easier for all municipalities to provide telecommunications? 3. If the answer is yes again, what should the competitive conditions be? 

Still Good Public Policy? 
The intent of the state's 83-year-old law is that local governments can set up phone service if they don't have any. That need has been met. Today, with local telephone competition, it may not be in the public's best interest to make it easier for municipalities to enter the high-cost, high-risk telecommunications market. 

"Municipalities think the current threshold allowing them to provide telecommunications services is too high," says Jerry Knickerbocker of the Minnesota Telephone Association. "The state has very adequate phone service, so the Legislature's original intent worked. Before we think about lowering the bar so municipalities can get into telecommunications, I think the Legislature must first determine what should be public policy and second, how to implement that policy." 

Kelley, vice-chair of the Senate Committee on Jobs, Energy and Community Development, and Steve Downer, of the Minnesota Municipal Utilities Association, frame their support of municipal phone companies in economic development terms. Both are concerned about municipal electric and natural gas companies losing customers when deregulation brings competition in those areas. 

But Downer says municipalities' primary concern is that citizens and businesses have access to advanced services, however it's accomplished. "Municipalities are being told by schools, businesses and citizens that they need modern telecommunications services," he says. "The ability to do it themselves may be the only leverage municipalities have to get local companies to act." Both Downer and Kelley think few municipalities will enter the telecom business. "They won't do it unless they're dissatisfied with the current company's service," says Downer. 

The Risk Factor 
"Everybody wants advanced services," says Knickerbocker, "and nearly the entire state has them. But there are areas without the critical mass to justify these services. If private companies can't break even providing them, should the public pay for something that can't support itself?" That's why Knickerbocker advocates no change in the current threshold local governments must meet before going into telecommunications. "It requires municipalities to substantiate a need before proceeding," he says. Because any municipal phone service would involve significant financial risk, he thinks a community should be thoroughly informed, especially when it could result in higher taxes or affect a bond rating, which could imperil local governments' ability to provide other necessary services. 

He is also concerned that municipalities would not be required to do the detailed cost-benefit analyses private companies must do. "I think municipalities are naive about telecommunications," he adds. "It's very expensive and you must keep up with federal mandates and changing technology." (As an example, central switches, which cost around $1.5 million each, must be replaced every 3-5 years.) Kelley and Downer think the financial risks are manageable. "There's some risk," notes Downer, "but the country was built on risk. Municipalities risked money a century ago building electric utilities and it was worth it." Kelley notes that municipalities can sell telecom businesses once they're operating. On his bill's lower threshold Kelley says, "Given the competitive environment, it's a very important decision for officials to make," he says. "I think they will be fully apprised of the risks." 

Fair Competition 
If municipalities are allowed to enter telecommunications, Knickerbocker says competition must be fair. All companies should follow the same rules and regulations and have the same oversight, he says. Municipal utilities should have no tax advantages and local governments must treat all telecom companies equally concerning permits and rights-of-way. Current municipal utilities couldn't subsidize municipal telecom companies and accounting and labor would be completely separate. New telecom ventures would also have to serve an entire area; they couldn't "cherry-pick" the best customers. 

Kelley and Downer agree that utilities should abide by the same rules private companies must follow. Kelley feels his bill addresses many of these concerns. But the two sides have differences. Downer says municipalities should be able to use or lease the infrastructure they have in place. He also thinks city personnel should be able to work on any city project, that cities should operate "without a lot of red tape," and that they should pay no taxes unless new ventures take a form that's normally taxed. Kelley says municipal telecoms should pay no income tax, but says he will consider whether they should pay property taxes. He also says the bill's ban on cross-subsidies might need to be clarified. 

The most important policy issue is creating a level competitive playing field. "If the Legislature decides it's good policy for local governments to operate telecom companies," Knickerbocker says, "then they should be completely separate, free-standing organizations. They should receive no subsidies and there should be "firewalls" between them and other municipal entities. Everything has to be the same for all competitors. If legislation doesn't do that, we have to oppose it." 

Profile: Consolidated Telephone Company 
Jennifer Lydeen, a student at Pillager High School, took her first airplane flight -- and experienced the awe of Arlington National Cemetery -- after her winning essay earned her a trip on the Washington Youth Tour. Every year, high school seniors from seven different school districts win partial scholarships for college. A school orchestra takes lessons via video conference from members of the St. Paul Chamber Orchestra. And the state Court of Appeals heard testimony at the same video conferencing center, which is open to schools, businesses and the public. The thread sewing everything together? The financial support and facilities of Consolidated Telephone Company. 

Serving nearly 8,000 customers in rural Brainerd and towns such as Randall, Motley, Leader, Pillager, Merrifield and Outing since 1950, Consolidated is a cooperative that returns net earnings to members. It also helps area economic development. Its guarantee of a $400,000 USDA Rural Utilities Service loan will help Clow Stamping Co., the largest employer in Consolidated's service area, expand and add jobs. 

Completely digital and offering all the latest services -- including Internet access to customers in its service area as well as Brainerd, Little Falls, Staples, Nisswa and other cities -- Consolidated and its 25 employees look to a bright future. "We're preparing for and looking forward to the competition that's coming," says Marvin Nicolai, general manager. "Our hope is that our competitors will be playing by the same rules." 

Minnesota Fact: To serve the estimated 2.8 million access lines in the state, Minnesota local telephone companies continuously upgrade network facilities and switching equipment. In fact, for the most recent fiscal year, Minnesota local telephone companies collectively invested nearly $326 million in new construction and equipment upgrading.