A Collision On The Iowa I Way

A state telecom network for schools slams into Big Business

It was billed as an investment in the information revolution and a landmark strategy for economic development. Seven years ago, Iowa Governor Terry E. Branstad won support for construction of the nation's only statewide, publicly funded fiber-optic telecom system. Now the $300 million Iowa Communications Network is delivering much of what Branstad promised. Kids in rural areas can videoconference into Russian language classes with a professor in Des Moines. Students and teachers get zippy Internet connections and cheap school-to-school long-distance phone service.

Yet not all is well in the heartland's cyberstate. Telephone companies and Internet service providers gripe that the government-subsidized network threatens to swipe their customers. State legislators agree, and in April, they voted to limit new access to the network. Branstad vetoed that measure, but increasingly finds himself arguing with voters who object to footing the $37 million-a-year tab for services that private companies could offer.

INCENSED. Indeed, most Iowans now agree that the state simply shouldn't be in the phone business. In June, Iowa's legislators are expected to authorize a study of alternatives for disposing of the ICN, according to House Majority Leader Brent Siegrist. Even Branstad is starting to show signs that he's willing to let the network be privatized or sold. "I don't particularly want to see the state own this for the long term," he says.

The controversy stems from the popularity of the Internet. Students and teachers who enjoy fast Net access at school have been pushing the state to allow them to dial into the ICN from their homes. Their request seemed reasonable--the ICN has more than enough capacity to absorb additional users, and a third of the state's 300 towns don't have local commercial Internet service.

But the idea infuriated private phone and Internet companies, which accused the state of encroaching on their markets. Giving students and teachers--and probably parents, friends, and neighbors, too--free Internet access would rob telecom businesses of potential customers, they say. Worse, it would set a dangerous precedent. "We've told the governor we can't compete with a taxpayer-subsidized ICN," says John Flannery, director of governmental affairs for GTE Corp. in Iowa.

To drive the point home, GTE and other communications companies have threatened to curb investments as long as ICN poses a competitive threat. GTE, for one, said it would drop plans to invest $5 million in a project that would have given customers in towns without a local Internet provider access to the Net for a flat rate of $15 a month.

That was enough for the state legislature, which had never supported the ICN as enthusiastically as had Branstad. In late April, it voted to ban extending ICN access to homes. "The question was whether the state-owned and operated phone company should be taking away these potential markets," says House Majority Leader Siegrist.

But Branstad vetoed the ban, on the argument that it would have kicked off some university teachers and students who now dial into the ICN. GTE lived up to its word and dropped its planned investment. And now the governor, like the legislature, recognizes there's a big problem with the network: As long as it's owned by the state, the potential for conflict with private operators will prevent it from living up to its potential.

While a consensus is forming for disposing of the network, both selling and privatizing pose problems. The state likely would not recoup its investment in a sale, since no private operator would pay full price for a system that extends to lightly trafficked areas. And while rivals say they favor ICN's privatization, such a transaction would create a new heavyweight in a market already divided among 150 phone companies, more than in any other state.

Even if Iowa decides to sell or privatize the network, it can't do so until 2001. ICN was built with tax-free bonds issued by the state, and a change in ownership would cause problems with the Internal Revenue Service. Iowa could still decide what path to pursue sometime this year, though. Ultimately, it's likely to turn its superhighway into a toll road.

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