Letter to Governor Engler Opposing the “Michigan High-Speed Internet Plan”

Governor John Engler

P.O. Box 30013

Lansing, Michigan 48909

Dear Governor Engler:

The expeditious rollout and adoption of high-speed Internet transport service is an important goal for the state of Michigan and the nation as a whole. Some studies place the potential economic benefits from high-speed Internet penetration at $500 billion for the nation, which could translate to nearly $17 billion annually for the state alone. This is not an economic issue to be ignored.

High-speed Internet transport, or broadband, is a consumer service provided by many competing businesses and technologies. It is a critical 21st century infrastructure, but not one that can only be provided by government, or by exclusive contract or monopoly franchise. While the promise of broadband is compelling, new government programs aimed at accelerating its deployment, or subsidizing its cost to consumers, would dislodge needed resources from other sectors of the economy, raise taxes on traditional telecommunications services, and potentially trap Michigan into the lowest cost technology of today at the expense of future flexibility.

It is for these reasons that on behalf of 7,000 members of Michigan Citizens for a Sound Economy, I write to express our opposition to the “Michigan High-Speed Internet Plan” as embodied in SB 880 and SB 881. Not only would this plan subvert state financial markets and harm other Michigan industries by providing sub-market interest rate loans for broadband deployment, it would also assess between $70 and $100 million in new taxes to be paid by existing cable and telecom services. To make matters worse, the plan would create a new state bureaucracy responsible for the collection of taxes and administration of loans to offset deployment costs.

This new tax on rights-of- way, or government designated areas for utility poles, underground passageways, and other areas wires are located, would take money from one pocket of consumers – as industry-wide fees are always passed on – to be put in the other through greater broadband deployment. But for consumers who already have access to cable modem or digital subscriber line (DSL) services, the plan will have only negative consequences as they would pay higher phone and cable bills for nothing in return.

Furthermore, even when new parts of the state are wired – such as southwest Michigan where deployment is sparse at best – there will be no guarantee that consumers will see value in the service. Not only are rural customers the most expensive to serve, they are typically the most price-sensitive to new technologies. Nationally, only 50 percent of Americans have Internet access of any kind and only 9 percent have broadband. In a market-based system, no new technology can succeed if forced down consumers’ throats; questions of demand and consumer reluctance to adopt new technology should be addressed through natural market processes before millions of tax dollars are reallocated towards deployment.

Broadband deployment has been compared to 1930s New Deal universal electrification and telephone programs, as well as Michigan’s decision to invest in superhighways in the 1950s. But such comparisons are specious; cable, telephone, and satellite companies all realize that their future revenues will come from broadband and are using current cash flow to invest in new services. This is not like building toll-free public highways, where the private sector could not be expected to fill the void, or like the universal service utilities, where private capital would not be committed unless the government guaranteed a profitable return and defended incumbents against competition.

While the plan’s statewide standardization of right-of-way fees is preferable to the current balkanized system, a better idea would be to eliminate such fees altogether, as firms already pay property taxes on networks. In addition, the state should deregulate phone service and eliminate the current universal service cross-subsidies that inhibit competition and artificially raise the cost of broadband relative to local phone service. This would allow consumers to judge the cost of the services in light of their value and encourage technological alternatives to capitalize on any rate increases.

Finally, the state should act within its power – as defined by the text and subsequent litigation of the Telecommunications Act of 1996 – to limit the amount of unbundled network elements (UNEs) available to competitors and allow the market, not regulators, to set the rates of resale for DSL. While these moves may be labeled “anticompetitive,” they are without doubt the most pro-competitive actions the state could take because they would force competitors to invest in new technologies to bypass the local exchange and encourage rivals to market to a customer base where DSL is either not deployed or prohibitively expensive (typically rural areas where homes are over 1800 feet from a central office).

There are indeed government policies that can be implemented to speed broadband deployment, but they would involve less government involvement in this crucial sector, not more. The pervasive government regulation of telephone service and electric transmission and distribution should be a constant reminder of the perils of government-directed network development.

Thus far, broadband’s rate of adoption has surpassed that of the television, VCR, and microwave. While more deployment and subscribers could provide great benefits to economic growth, if accomplished through state-sponsored monopolies – which would certainly arise in unprofitable areas where only the firm that secured the state loan would deploy – the benefits could be more than offset by the known negative consequences of such action. Michigan CSE applauds your interest in this critical economic issue, but urges you to reconsider your strategy.


Paul Beckner

cc: State Senator Mat Dunaskiss