Municipal and Co-Op ISPs Raise ‘Anti-Competitive Concerns,’ Says Duke Professor

WASHINGTON, December 8, 2022 – The presence of municipal and cooperative internet service providers discourages prospective entrants to the markets in which they operate, argued Michelle Connolly, professor of the practice of economics at Duke University, at web panel hosted Wednesday by the American Enterprise Institute.

Many industry experts say such providers benefit consumers by vesting network control in local communities, through either a government-owned ­– municipal – or member-owned – cooperative model. Local control shields consumers from potential fickleness from profit-driven commercial providers, those experts argue. The National Telecommunications and Information Administration, in the guidelines its landmark $42.45 billion fund for broadband deployment, encourage states – the middlemen in the funding process – to “ensure the participation of non-traditional providers,” citing as examples local governments and cooperatives.

However, such providers raise “anti-competitive concerns,” Connolly argued, referencing a paper she published earlier this year that examined the competitive effects of municipalities and cooperatives in Illinois broadband markets. In census blocks with two competing providers, if one is a municipal provider, the average probability of a new entry decreased from 46 to 32 percent, according to the paper. There is a higher likelihood of market disturbance in census blocks with up to four private firms, it found.

The paper says the presence of a cooperative reduces the probability of a new entry to a census block with two providers by about two percentage points.

At the AEI panel, Connolly explained that municipals and cooperatives enjoy extra-market advantages. “Both municipalities and cooperative internet service providers are insulated from regular market forces,” she said. “They may have access to income from other areas and aren’t going to necessarily respond in terms of entering based on market forces nor exiting based on market forces.”

Municipal providers have “a regulatory conflict of interest,” Connolly argued: “If a municipality is providing internet service, they are also regulating any other internet service providers in their footprint.”

Some experts have argued that municipally-owned, open-access networks — which allow multiple ISPs to ride on the same network — stimulate competition while providing the benefits of local control. In September, Christopher Mitchell, director of the community broadband networks Initiative at the Institute for Local Self-Reliance, argued that open access is critical to broadband innovation: “We need to have millions – ideally tens of million – of Americans in thriving areas that have open access to kind of see what we can do with networks,” he said.

Internet service providers pay federally regulated rates to attach to utility poles. Municipalities and cooperatives that own utility poles are exempt these regulations, Connolly said, which, if they are also service providers, allows them to raise rates on their competition.

“In Illinois, we observe that the average pole attachment rate charged by Munis and Coops are respectively 8 percent and 27 percent higher than those charged by privately owned poles,” Connolly’s paper reads. “While, this is significant, it is much smaller than the average national ‘premium’ charged by Muni and Coop pole owners of 217 percent and 225 percent, respectively, compared to privately owned poles”