A Federal Communications Commission decision allowing two cities to construct broadband systems without state regulation may set a precedent for risky local municipal infrastructure spending, credit analysts said.
The FCC board voted 3 to 2 last month to preempt state regulations in Tennessee for Chattanooga and in North Carolina for Wilson. This decision went into effect Thursday. In both cases the states had ruled the cities could not expand their broadband Internet systems to neighboring communities.
The United States Congress has instructed the FCC to aid the expansion of broadband across the nation, FCC chairman Tom Wheeler said Thursday. The expansion of broadband services to communities by private, public-private, or government entities, is yielding benefits across the country, Wheeler said.
"In Chattanooga, large companies like Amazon and Volkswagen have invested in new facilities, citing the city's world-leading network as a reason why," he said. "And Chattanooga is emerging as an incubator for tech start-ups." Wilson is also benefiting, Wheeler said.
Some government-run networks, however, have proven to be money losers, prompting rating agencies to slash the governments' bond ratings.
For example, in 2008 Salisbury, N.C., government started construction of a fiber optic network using certificates of participation and bank certificates. The system's revenues disappointed and the city has been left raiding other resources to subsidize the system.
In April 2014 Moody's Investors Service downgraded the city's COP and bank certificates five notches to Baa3, citing the financial impact of the network. Moody's also imposed multi-notch downgrades of the city's general obligation and revenue bonds.
Burlington, Vt., used a lease-purchase agreement to finance a broadband system. When the system's revenues came short of projections, Citibank sued for the de-installation of the system and return of the money Citi and a predecessor had given for the construction of the system.
In June 2012 Moody's dropped Burlington's GO rating to Baa3 from A3, citing the struggle with Citi. The city's COPS were downgraded to junk ratings of Ba1 or Ba2.
Only earlier this month did Moody's upgrade Burlington's GO to Baa2, citing a positive resolution with Citi.
In 2008 Alameda, Calif., defaulted on $33 million in bond debt that had been used to construct a cable television system for the city. The system had more costs and less revenue than expected.
"These sorts of projects highlight the risk of government taking on noncore projects subject to private sector competition," said Fitch Ratings managing director Amy Laskey.
News sites have reported that from 19 to 21 states restrict municipal governments from constructing broadband systems.
Before the FCC could release last month's decision the majority on the FCC board had to respond to the minority dissents, a spokesman said. In this case, the release of the decision brings it into effect.
After the FCC decision, organizations representing state governments released announcements bemoaning it.
"The nation's governors are disappointed by the FCC's decision to preempt state authority regarding the deployment of certain municipal broadband networks," the National Governors Association said in a written statement. "Last August, the NGA filed comments arguing that the FCC should reject petitions seeking preemption because the Telecommunications Act of 1996 prohibits the preemption of state laws absent express authority."
The National Conference of State Legislatures said in a statement it "takes the pre-emption of states very seriously and will continue to pursue options to ensure that any action taken by the FCC on municipal broadband networks is overturned by the courts."
The FCC's decision only applies to Tennessee's regulation of Chattanooga and North Carolina's regulation of Wilson. However, the decision may lead to other cities successfully challenging state regulations of broadband networks, an FCC spokesman said.
For its part, Chattanooga embraced the decision. Mayor Andy Berke said, referring to its internet system as the Gig: "I often talk about how the Gig has changed the idea of what our city could be. Our gigabit infrastructure has positioned us as leaders in the innovation century and we are now a midsized southern city at the front of the technological curve.
"People understand that access to high speed internet is as vital to our infrastructure as the highway system and is critical for participating in the new economy. The FCC decision will open up these incredible opportunities to those residents who live closest to Chattanooga. By removing artificial barriers to high speed internet access, we can help ensure digital equity and improve quality of life for so many of our neighbors in Southeast Tennessee and beyond."
