WASHINGTON D.C. - Amid concerns about municipal entry into broadband, what's clear is that state regulators are best equipped to address difficult issues such as cross-subsidization, says Progress & Freedom Foundation Regulatory Counsel Adam Peters. The House Small Business Committee held a hearing at 2 p.m. EDT today titled "Anticompetitive Threats from Public Utilities: Are Small Businesses Losing Out?" Peters testified that this is a critical question for regulators, as a PFF study found that local governments entering the communications space are normally backed by municipally owned electric utilities.

Peters argued that utility entry into unregulated or competitive markets puts regulators in an unenviable position. "On the one hand, such entry may serve to increase competition in the unregulated market, driving down prices and fostering innovation," he said. "On the other hand, the incentive may exist for a utility to cross-subsidize the activities of an affiliate through its captive rate base."

"Regulators must therefore try to balance the benefit of efficiency with fair competition through the use of a cost allocation formula," Peters testified. While a "right" answer on cost allocation may be unattainable, it remains critical because it sets the equilibrium in the market, he said. Allocating most of the cost to the regulated electric customers could make a new technology such as broadband-over-powerline (BPL) extremely viable at the disadvantage of those captive customers, while allocating most costs to the BPL side helps electric rates decline but makes BPL less able to compete.

"The risk of cross-subsidization and its resulting market distortions is enhanced" by municipal entry into broadband, Peters said. Such entrants may be exempt from taxation, can raise capital through guaranteed tax-exempt bonds, enjoy unfettered access to utility poles and rights-of-way, and are often exempt from antitrust laws and thus are immune from the cost allocation requirements applied to privately owned counterparts. "The ability of a municipal entrant to tap into an endless stream of subsidies from their electric rate base includes both short run costs -- through higher electric rates or other social programs -- and potential long term costs, opening the door to predatory pricing, which would drive private capital from the market and result in supracompetitive prices."

Regulators must keep all of this in mind when utilities enter the broadband market, Peters said. "With careful oversight by the states, competitive entry by public utilities is part of this equation, a level playing field between these entries can exist, and consumers can benefit from the efficiencies and innovations these companies bring to the market."

The Progress & Freedom Foundation is a market-oriented think tank that studies the digital revolution and its implications for public policy. It is a 501(c)(3) research & educational organization.