Eastern Tennessee: Where Broadband Goes Bust | Citizens Against Government Waste

Eastern Tennessee: Where Broadband Goes Bust

The WasteWatcher

Despite the costly failures of government-owned broadband networks across the country, local officials in Knoxville, Lenoir City, and Johnson City, Tennessee built their own systems anyway.  Next up on the road to broadband or bust are Cleveland, Elizabethton, and Greeneville.

In September 2009, Chattanooga, Tennessee through its local municipal utility, the Electric Power Board (EPB), became the first city in the state to complete a large-scale broadband project.  It cost almost $400 million, including a $111 million smart grid grant from the U.S. Department of Energy (DOE), to deploy a fiber-optic broadband network that now offers internet, telephone, and television services in direct competition with the private sector.  The original intent of the project, which began in the 1990’s, was for the EPB to monitor and control the city’s electric grid, but the city decided to go further and build an entirely new and government-owned broadband network. 

With a population of 182,000, Chattanooga’s $398 million expenditure amounted to more than $2,100 per resident in construction costs, including those residents who chose to retain their existing internet providers.  EPB’s electricity ratepayers see these costs reflected in their monthly energy bill, but the utility generates revenue at such a glacial pace that a 2022 Americans for Tax Reform analysis estimated that without a taxpayer bailout, it would take EPB 680 years to realize a return on its investment.

Seeing Chattanooga as a success rather than a warning of financial distress, other Tennessee municipal utilities have sought to duplicate this effort even though their cities and surrounding areas already have access to high-speed broadband service with several private broadband providers.  While residents of Chattanooga may be satisfied with their internet service thanks in no small part to the multi-million dollar taxpayer subsidy to build their network, city leaders elsewhere should recognize Chattanooga’s example as yet another showy public project that will fail to pay for itself.  

In Knoxville, which is larger than Chattanooga, the Knoxville Utility Board (KUB) adopted a business plan in March 2021 to offer internet, phone, and television using its electric utility grid as the entry point to provide fiber-to-the-home (FTTH) services.  According to USA Today affiliate Knox News, KUB’s plan received permission from the Tennessee Valley Authority (TVA) to provide fiber internet “to every customer in KUB’s electrical footprint.  That’s approximately 210,000 households in mostly Knox, Grainger and Union counties.”  

Even though construction began in 2022, KUB estimated it would take until 2029 to expand its service to every neighborhood in that zone and projected this expansion to cost more than $700 million by the end of the decade.  That equals more than $3,300 per household in Knoxville and the surrounding counties over 10 years.  

Not wanting the broadband bandwagon to pass it by, in February 2022 Lenoir City gave the Lenoir City Utilities Board (LCUB) the authority to build and operate its own government-owned broadband network (GON), even though, according to BroadbandNow, more than 95 percent of the area’s residents were already served by one or more of the 18 broadband providers, with at least two of the providers offering download speeds of 1 Gbps or more, and one provider offering up to 5 Gbps speeds.  And there are between eight and 10 providers that offer residential services in the two zip codes serving the area. 

The LCUB financed construction by having its electric division loan $21.7 million to its new broadband division.  Like Lenoir City, Cleveland, Tennessee would also move money from Cleveland Utilities’ electric division to its new broadband division by making an $8 million “inter-divisional” loan to be paid within 20 years at 6 percent interest.  Because the public utilities serving both Lenoir City and Cleveland plan to subsidize their new broadband divisions with the revenue from their electric divisions, the cost for the new broadband infrastructure will fall on all residents through higher electric utility costs, whether they subscribe to the new network or remain with their existing provider.

CAGW described in its 2021 report, The Folly of Government-Owned Networks, how several other cities, not just in Tennessee, but around the country, have also tried to create broadband networks using their public utilities.  Financially disappointing broadband forays include Bristol, Virginia; Johnson City, Tennessee; Provo, Utah; and Traverse City, Michigan.  Perhaps the most egregious example is Provo, where the system was such a financial disaster that Google gave the city $1 to take it over, but the deal did include paying off the $39 million outstanding debt that still haunts local taxpayers.

Given the litany of inefficient public bureaucracies challenging experienced private providers only to find themselves outcompeted on cost, innovation, and quality, political leaders who continue to tout their utilities’ odds of thriving in a competitive marketplace are over-promising at great cost to taxpayers.  Making matters worse, guidance on broadband spending issued by the Department of Treasury, the Rural Utilities Service, and the National Telecommunications and Information Administration are preferencing GONs.

GONs also crowd out what many local taxpayers would consider to be higher priorities.  KUB’s $70 million annual cost for fiber expansion is equal to 23 percent of the city of Knoxville’s entire $304 million general fund budget for fiscal year 2023, which pays for everything from emergency services to parks and libraries.  When local governments build broadband networks, they are diverting resources not only from other services but also opportunities to improve the local community to attract new businesses and residents to their towns and cities. 

Municipal officials may promise internet service of such quality that users switch in droves from their current providers and shower their public utility with enough revenue to finance its debts, but history shows time and again that when the government tries to compete on a level footing with the private sector, legislators hear calls for a bailout before long.  Should LCUB’s or Cleveland Utilities’ commercial broadband divisions fail to repay their loans on time, they will need to raise electric rates to recoup their losses. 

If local politicians decide to prioritize broadband development over keeping energy costs low, rural Tennessean electricity ratepayers may find themselves bearing the brunt of their urban neighbors’ mistake through higher energy costs and increased taxes.  While municipal leaders in Elizabethton and other towns have expressed interest in applying to the Tennessee Valley Authority (TVA) for permission to construct municipal-owned networks, the costs of these plans cannot be calculated until the TVA receives and publishes their applications.  Thankfully, there is still time for many of these local governments to step back and rethink their proposals.  If city or county leaders want to truly help bridge the digital divide for those without high-speed broadband access, they should reduce and streamline the application process for new buildouts by local private sector providers and work with their state broadband offices to leverage newly available federal funds to encourage those broadband providers to expand coverage in rural and unserved communities, rather than starting from scratch to construct their own costly and likely to fail network in an already-competitive marketplace.