Sunday, March 27, 2005

What's wrong with teleco funded "research"

The American Public Power Association (APPA) has just published a white paper that carefully documents the ways in which "research" (and I use the word advisedly) done under the sponsorship of the nation's telephone and cable companies misleads its readers about the economic facts of municipal telecom utilities.

What is indisputable, and no research, pro or con, that I have seen tries to disputes this, is that the people in towns and cities that have public telecom utilities love them and are convinced that they have better services at cheaper prices because of them.

What the teleco-dependent researchers have to accomplish is to convince people in cities that do not yet have such utilities that people in towns that do have them are wrong. It's a tough sell.

This particular paper, "Paying the Bills, Measuring the Savings" examines the granddaddy of all such papers, dissects its mistaken assumptions, points out the inadequacies of the data set selected, and finally shows that its conclusions that the utilities were secretly losing money are wrong. Even more devastating for the hopes of its corporate sponsors, the APPA study shows that dire predictions for the future of the utilities examined were wrong. The targets of the original study remain viable, valuable, and respected parts of their communities.

We in Lafayette will be only mildly surprised to discover that the lead author of the original study, Ronald J. Rizzuto, is the same Rizzuto we are familiar with from the the "Academic Broadband Forum" sponsored over at the Holiday Inn Holidome in August by BellSouth and Cox. We reported on the event and on the background of the panelists earlier. That event was a textbook case of disinformation about municipal utilities and much of the dubious "research" presented there relied heavily on the model developed in Ruzzuto and Wirth's original paper.

The APPA paper should be studied by anyone who would like to understand the current debate over public and private ownership of municipal utilities. People too often assert with perfect confidence that all (all!) municipal telecom utilities lose money (as was done at our "Academic" forum). These flawed studies are the only basis (other than raw ideological certainty) for asserting something that seems otherwise so incredible.

The chief problem with the industry-sponsored studies is their assumption that what makes a private for-profit company successful is the same thing that makes a public utility successful. But of course, that isn't true.

Private, for-profit companies exist to make money. They hope to extract the maximum return from each account and that is what motivates them to provide any services they offer the public. Success is measured by how much money they return to their owners. A private company is most successful when its profit is large.

Public utilities also exist to serve their owners well. The difference is that the owners of public utilities are the same people as their customers. Public utilities have to return value to their owners as well. But typically they are motivated to leave dollars in the pockets of their customer/owners rather than to charge them the maximum that the market can bear. That, along with ensuring local control of the quality of the product, is what motivates communities to build utilities. A utility's motivation is close to the opposite of that of a private company. It wants to leave the maximum amount of money in the pockets of its customers (because that is the way to best benefit its owners). Put dramatically: a utility is most successful when its "profit" is very small.

Rizzuto and Wirth's study simply misses this crucial distinction and the most critical of their errors are a result of misunderstanding what makes a utility successful. The APPA study works you through the fine points in excruciating detail. But I recommend doing just that. The mistakes are so obvious when explained clearly that it is hard not to feel that they are willful. And almost every study I know of that purports to show that utilities have any financial problems as a class cite the Ruzzto and Wirth study and rely on its mistaken analytical model.

The slow walk through the three very concrete cases compares the image put forward in the original paper with the reality of the utility's success and its popularity with the local community. The thoughtful analysis goes a long way toward allowing reasonable people to simply dismiss arguments based on the idea that utilities are usually or even often financially unsound.

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