With the CLEC threat seemingly extinguished, most communications analysts have focused on the impending battle between RBOCs and cable companies in a competitive environment that seems sure to feature price wars between the incumbent providers' bundled packages.

But another competitor is emerging on the horizon that could threaten to spoil the duopoly: municipal governments, especially those that own utility companies. Once considered merely niche players in smaller telecom markets incumbents didn't care about, municipalities are announcing fiber buildouts with greater regularity in increasingly larger markets already served by telcos and cable operators.

Incumbent providers downplay the big-picture threat but are adamantly lobbying against municipal entry into the telecom market at every level of government, with good reason. In addition to philosophical arguments regarding governments competing against the private sector, the last thing the struggling telecom industry needs is to have to match prices with deep-pocketed competitors that have access to cheap capital and — most importantly — no requirement to turn a profit.

But municipal proponents claim these advantages are overstated and note that their open networks may prove to be the last vestige of true telecom competition in a fiber-driven world. Regardless, the recent announcements during the last month in Utah — Provo preparing to offer services and the 11-city Utah Telecommunications Open Infrastructure Agency (UTOPIA) project getting its first round of funding — appear to be part of an emerging trend.

“The point is that these are not isolated instances,” said Mike Devine, president and chief financial officer of VIBTV, which is providing triple-play services over several municipal networks. “This is a growing movement.”

Can it spread nationwide? It's a possibility, according to UTOPIA Executive Director Paul Morris. “We think so,” he said. “I'm not saying that it's for every community — I'm not sure fiber to the farm works economically — but as a general rule, yeah.”

Nor is it unprecedented, according to Jim Baller, an attorney for The Baller Herbst Law Group who has been involved in just about every significant municipal telecom project announced during the last decade.

There are “remarkable parallels” between the electrification of America in the 1890s and the transition to “true broadband” in the United States during today's information era, Baller said. In the 1890s, private electric companies focused their investments on urban areas that offered greater profit opportunities. Many municipalities that didn't fit this criteria eventually decided to establish their own electric companies.

Baller said the arguments against the creation of municipally owned electric companies were similar to the arguments posed by critics of today's municipal forays into telecom — most notably, that cities lacked expertise in the field and that the governments should let the free market run its course. History proved those arguments wrong, Baller said. Today, there are more than 2000 municipally owned power companies that have withstood the test of time much better than cities that literally were left in the dark, he said.

“Many cities that waited for the private sector to serve them became dust,” Baller said. It's a lesson not lost on officials in the city of Danville, Va., a 42-square-mile municipality in a rural region of the state that traditionally has tied its economic fate to the tobacco and textile industries, both of which have experienced significant downturns in the last decade.

Some Danville officials hope high-speed telecommunications can change the town's fortunes by revitalizing economic development and by making educational opportunities more available than they have been in a city where high school diplomas historically have not been a prerequisite for gaining employment, according to Paul Kalv, director of Danville Power & Light.

This week, Danville is scheduled to begin offering high-speed connectivity and Internet services to its schools and municipal buildings — a deployment aided significantly by funding from the universal-service program, Kalv said. City fathers have not decided whether to extend the network to offer fiber to the home in the future, but they are certain that no private incumbent will provide such service in the foreseeable future.

“They have not invested in fiber-optic infrastructure in our area,” Kalv said. “If I were Verizon, I would invest my money in Richmond, not in a small city in a rural region.”

Although incumbents maintain their opposition to government entering the telecom market on philosophical grounds, many grudgingly acknowledge that municipal fiber buildouts may be appropriate in situations such as Danville, where carriers don't believe they can get a return on their broadband investment. Another similar case was Grant County, Wash., one of the earliest and best-known fiber-to-the-home projects deployed by a government entity.

“On a practical basis, [incumbent providers] were never going to put fiber in Grant County,” said iProvo CTO John Moore, who came to Provo after working on the Grant County project.

But that's not the case with Moore's latest project, and that's where the legitimate comparisons with the 1890s' municipal electrification collapse, according to telecom incumbents.

Municipal electric companies of 110 years ago were monopolies offering a service that was unique for the era, but today's municipal fiber builds in cities like Provo — a college town with an educated population of more than 100,000 people — faces broadband competition from telcos, cable companies and emerging wireless technologies.

“We think it's improper for local government to gamble with tax dollars to compete with the private sector — especially where telecom services, including broadband, are already being offered,” a Qwest Communications spokesman said. “We believe the role of government is to provide services that the private sector won't provide.”

Baller echoed that fundamental premise with one very important caveat: DSL offered by incumbent providers is a “limited technology” that is not comparable to the fiber-to-the-premises (FTTP) technologies being deployed by municipalities. Indeed, Kalv said the difference between DSL and 100 Mb/s Ethernet is comparable to the difference between candles and electric lights.

Incumbent carriers' representatives disagreed. “What is the market for 100 Mb/s for?” said Paul Mancini, SBC Communications' assistant general counsel. “Who are your customers going to be? I don't see the economics.”

Even if municipally owned FTTP is superior to DSL and cable modems, private-sector advocates said it's very doubtful the incumbents will lose all of their broadband customers. Yet that's what one RBOC representative said essentially would have to happen for UTOPIA to even approach its “borderline comical” take rate of 34% necessary to make its business model work.

Progress & Freedom Foundation President Ray Gifford called UTOPIA's projected adoption rates “another order of magnitude of wishful thinking.” More important, he believes many municipal FTTP projects including UTOPIA and iProvo are making a mistake in their technology choice of active Ethernet. Telecom carriers considering FTTP favor passive optical networks (PONs) because it drastically reduces operational costs associated with maintaining active electronics in the network.

“We have many respected analysts who say the notion of carriers deploying PONs is questionable, even though it reduces future operational costs,” Gifford said.

Meanwhile, the risk that all FTTP providers should consider is the possibility that there will be a breakthrough in an ever-evolving broadband technology that will make their huge investments obsolete almost overnight, Gifford said. That's why the capital in question should be guaranteed by private investors familiar with the risk-reward ratio, not captive taxpayers or utility customers, he said.

“Given the state of compression technology, you could find yourself not needing 100 Mb/s,” Gifford said. “And with WiMAX, fiber to the home could look incredibly stupid because wireless can do it much better.”

Numerous examples of such misjudgments exist. While the downfall of many CLECs and long-haul companies was chronicled in business publications, there also are many examples of governments being forced to either cross-subsidize with taxpayer/ratepayer money or sell a network at a fraction of the amount invested, according to private-sector proponents.

“Municipalities have tried this, and a lot of them have lost their shirts,” SBC's Mancini said. “If it was so easy to do this profitably, don't you think the telco and cable company would be doing it? What makes you think [a government entity] can do it better?”

Many of the so-called financial failures cited by private-sector advocates are exaggerated or simply incorrect, according to Baller. In many cases, while the dollar amounts government-owned networks were sold for were less than the amount invested, the sales often have stipulations that are very beneficial to the communities, such as assurances for low telephone rates to the citizens of Lynchburg, Va., he said.

Furthermore, critics' constant attention to the bottom reflects the difference in the success-failure paradigm between a private-sector project and a public-sector investment, Baller said. While municipal governments hope to make money from fiber buildouts as a commercial venture, the fact that the network generally is leveraged to enhance education, public-safety communication, citizens' quality of life and economic-development efforts can make even a money-losing project worthwhile, given the circumstances.

“If you don't have high-speed connections to the Internet, businesses won't move here,” Kalv said of Danville.

But that flexibility also makes it hard for private-sector providers to compete in a territory where there's an effective FTTP deployment, according to Bill Oliver, president of BellSouth's Louisiana operations.

“It's like, which math course did I miss?” Oliver said of the accounting for some municipally owned telecom ventures. “It looks like they're losing money, and they still haven't paid for a truck to roll or someone to answer the phone.

“It makes it difficult for a private company like BellSouth to compete with a governmental entity that's only goal is to break even.”

Yet private-sector competition actually is one of the main reasons many municipal fiber builds are done using active components that make it easier to provide open access to the network for a variety of service providers. With cable and telco incumbents pressing government officials to not require them to share their networks, municipally owned networks with open access could become a haven for competitive providers.

In fact, some argue that such networks may be the only way for policy-makers to realize the oft-conflicting goals of private competition while ensuring universal service to all consumers.

But don't expect incumbents to jump on government-owned networks any time soon. Verizon Communications Executive Vice President of Public Affairs and Communications Tom Tauke said only in “very rare circumstances” could he imagine the RBOC offering services over a municipally owned network. Meanwhile, Qwest officials have steadfastly stated they will not abandon the carrier's $1.2 million investment in Utah to offer services when the UTOPIA network is opened.

UTOPIA's Morris hopes Qwest eventually will change its mind.

“[Qwest's] corporate stance has been, ‘We must kill this project,’” Morris said. “I keep telling them, ‘I still see you as a potential customer,’ even though they say they will never offer services over a network they don't own. You never know what will happen in the future.”

Indeed, the future of municipally owned fiber networks is filled with questions. For instance, if a municipally owned fiber network offering triple-play capability is deployed, expect incumbents to seek deregulation in those areas. And several sources on both the public and private side acknowledged it may be difficult to require a telco to fulfill its existing “carrier of last resort” obligations when a municipally owned provider greatly fragments the market in a given city.

Meanwhile, with the Supreme Court this year upholding states' rights to limit or prohibit municipalities from entering the telecom market, many believe RBOCs will be lobbying state legislatures heavily to increase the number of states with significant restrictions on municipal entry into telecom. Earlier this year, BellSouth proposed legislation that would have made it “impossible” for the Lafayette Utility System to pursue an FTTP buildout it is considering, according to LUS director Terry Huval.

Huval said there's no timetable for LUS to make a decision, but he said the organization would only make the investment if it offers a voice-video-data triple play. In addition, Huval said he does not believe the LUS would make its network open to all service providers.

“The idea of open access is nice, but does it pay the bills?” Huval said. “The problem with open access is that the driver of [broadband] penetration isn't the entity that has to pay the debt service.”

And whether municipal entities can at least break even on their fiber buildouts remains the biggest question. Incumbent providers are skeptical, but Baller said adoption rates for some community networks offering triple plays have legitimized the UTOPIA projected take rates. But both public and private proponents agree that it's too early to estimate the impact municipally owned networks will have on the telecom market.

“We have a lot of talk and theory, but we don't have a lot of proof,” Baller said.