Albeit inadvertently, the Iowa Supreme Court handed
Tele-Communications Inc. a major victory in its ongoing battle against municipal
overbuilds in the state.
Experts said that by barring city governments from offering
local telephone service over municipally owned telecommunications networks, the court
essentially pulled the plug on a spate of cable overbuilds that had been threatening to
overrun the industry.
The consensus is that without the additional revenues
generated from phone service, such community-owned networks would become financial drains
on the cities.
For example, it was estimated that one community would have
to rake in the equivalent of $200 in cable revenues from every household in town --
whether it took the service or not -- just to cover its costs, said Tom Graves, head of
the Iowa Cable Telecommunications Association.
"There's no way that they're going to get by
on just cable," Graves said. "Any town thinking about building one of these
networks is going to have to rethink its business plan."
That was particularly good news for TCI.
The state's dominant MSO was already vying against
municipally funded overbuilds in three Iowa towns, with at least one-dozen more eyeing the
possibility of offering cable, local and long-distance telephone and Internet-access
On Oct. 21, the state Supreme Court dealt those towns a
setback, ruling that Section 23A.2 of the Iowa Code prohibits municipalities from
operating telephone systems as public utilities. The court ruled that a 1993 law allowing
cities to offer telecommunications services, including cable, did not extend to telephone
because the word did not appear in the statute.
The result: Hawarden -- the community of 2,500 on
Iowa's northwest border that was named in the action, and one of the towns already
competing against TCI -- has been precluded from also offering phone service over its new
$4.6 million network.
Moreover, Hawarden will have to get by on revenues
generated from its estimated 800 cable subscribers, most of whom are former TCI customers.
"This doesn't mean that the issue is
closed," said Deb Blume, regional communications director for TCI of Iowa. "But
it is an affirmation of what we've been saying since 1994 -- that government does not
belong in competition with the private sector."
Hawarden Mayor Mose Hendricks admitted that the city will
have to put its telephone plans on hold, but he agreed that the issue is far from closed.
He said the city will join with the Iowa Association of Municipal Utilities and the Iowa
League of Cities to ask state lawmakers to change the law.
Their reasoning will be that by placing municipalities
under the Iowa Utilities Board -- which granted Hawarden a certificate of convenience to
offer telephone service -- lawmakers implicitly intended to allow the cities to offer
Moreover, they'll argue that if the ruling is allowed
to stand, small communities like Hawarden will be deprived of the same advanced technology
being rolled out in larger communities, Hendricks said.
"We were told [by U S West and TCI] that they were not
going to put that technology in here," he said. "I don't think that any
Iowa community should have to stand for that."
ICTA executive vice president Kent Jerome said lawmakers
did not do their homework before placing the cities under the IUB. Jerome added that the
cable industry will be ready to go before Iowa lawmakers in January to argue that
government shouldn't compete with "existing" private entities.
"There have been instances where a telecommunications
service has not been offered in a rural community, and a city has had to offer it,"
he said. "But the whole state of Iowa is covered by telephone service."
Some observers admitted being caught off guard by the
court's decision, believing that the Home Rule provision in the Iowa Constitution
would "carry the day."
That provision states that unless specifically precluded by
law, it is assumed that municipalities have been granted the authority to provide any
service that they want.
Even so, it's apparent that the cities will face
"tremendous resistance" when they go to the legislature in January.
"From a lobbying standpoint, the telephone industry
has been very effective in pleading their case about how they need protection from the
big, bad cities," said Tom Bredeweg, executive director for the ILC.
Reaction among some of the other towns presumably affected
by the court ruling has been mixed.
In Cedar Falls -- which has been operating the state's
largest municipal cable system since 1994 -- officials said telephone service was never
part of the original business plan.
As such, its municipal system is almost at the breakeven
point, thanks to 6,200 cable subscribers augmented by another 2,000 high-speed-data
customers, said Rick Giarusso, Cedar Falls' manager of communications services.
Nevertheless, Giarusso conceded that communities that
don't have 36,000 residents to draw from will have a tough time if they are not
allowed to generate revenues from telephone services.
"We're a large town, and it's still nip and
tuck," he said.
One such community may be Denison, a town of 6,700 in west
central Iowa, where residents voted last November to create a telecommunications network.
Although insisting that it was too early to determine how
badly those plans have been hurt by the Iowa court ruling, Denison general manager Brad
Rose admitted that he "wouldn't disagree with that statement" when asked if
the network would need telephone revenues to supplement cable service.
However, Rose said, the situation had already been altered
by AT&T Corp.'s pending acquisition of TCI -- a deal that could potentially bring
the same technology to Denison that the city was pursuing.
Hendricks, however, was not convinced that even if the
court ruling is allowed to stand, the cities will be completely shut out of the telephone
In the case of Hawarden, the city still has the option of
leasing its network to an outside telephone-service provider, which could then offer