Government is thinking always of the consumer. How can our services be expanded to benefit members of the public? Is there any dysfunction in the marketplace that we can step in and correct? Might we offer a service and, competing with other players, win market share so everyone in our city will be a winner?Such benevolent sentiments are behind great government companies such as Fannie Mae, which has put federal taxpayers on the hook for F$116 billion in losses. They are behind lesser lights as well on the national and local scene.

In Chattanooga, it’s not the mortgage business into which government has extended its charity, but the Internet business. EPB, formerly known dully as the Electric Power Board, is a city-owned middleman for TVA electricity plant smokestacks and customers. It also provides Internet and phone services through its EPB Fiber Optics division.

THE POWER OF EPB as a market actor is troubling to David Snyder, who runs VolState, an Internet service provider in Dayton, Tenn. The small company provides phone services, Internet connections and it has 150 IT management clients.

VolState’s biggest competitor is a Dallas behemoth. “We can deal with competition with AT&T. It’s been difficult, but we’ve been able to cope with that. Recently, the major source of competition for us is a great irony — it’s the local governments, and in case of our area it’s been the government of Chattanooga.”

EPB has created a system in which the cost of Internet access has been subsidized by the ratepayers, Mr. Snyder says, and so its retail pricing is below the cost of what it would take to provide services in a free and open marketplace. VolState does not attempt to compete in Internet in EPB’s 600-square-mile service area, so has refrained from competing for voice services, as well. Mr. Snyder says his cost to provide ISP service is double EPB’s retail price.

EPB is using F$290 million in bond revenues and a F$111 million federal grant for its smart grid hardware. “What they have essentially done is subsidized the cost of Internet access through the bond issue and through the smart grid grant *** that has artificially deflated the actual price points in the marketplace” for Web services. “So it’s a marketplace-disrupting event caused by a government entity.”

Miss Dwyer says legal complaints of free market players — Comcast in Hamilton County and the Tennessee Cable and Telecommunications Association in Davidson County — were rebuffed in court.

EPB can draw revenues from rate hikes, Mr. Snyder grumbles. “Increase in rates since 2007 has been a little over 14 percent — electric rates, that’s beyond the fuel surcharges. That’s not fuel surcharges; that’s EPB’s portion, where they’ve gone and said, ‘We’ve got to have more money.’ And the reason they’ve got to have more money is they’ve got a $300 million bond sitting out there that has to be paid for. So it requires more money.”

The power board’s PR supervisor, Deborah Dwyer, says the company got into the business with state and city approval, followed the rules for obtaining capital and pays the taxes or payments-in-lieu of taxes as the same rate as corporate players. “We believe that public utilities like EPB exist to help improve the quality of life in our community, and the fiber optic network was built to do just that. One of government’s key responsibilities is to provide communities with infrastructure, and fiber to the home is a key infrastructure much like roads, sewer systems and the electric system.”

Small businesses should consider a local Web ISP and phone company rather than a national company or a government player, Mr. Snyder says. He praises EPB’s reputation for service. But choosing an independent supports local economy and lets business operators live out a principle.

“I am a small business. So when I go in to talk to another small business, I know the issues. I know a lot of the the issues the owner is facing. They are facing a regulatory burden. They are facing the same kinds of things I am. Payroll. They’ve got to carefully manage customer expectations, make sure they’re delivering superior service.”

VolState competes against huge businesses “that keep getting bigger bigger and bigger and they’re going after customers on price, price price,” he says.

ANOTHER PROBLEM: EPB refuses to interconnect with ISP services such as VolState, Mr. Snyder says. “It should be an open access network, but it’s a closed access network. It’s not open to competition to all; it is not neutral in any way.” Government is not trying to provide infrastructure for competitors, but to have taxpayers subsidize the infrastructure and then compete at retail as a cartel, he says.

We bring up this assertion with Miss Dwyer. EPB sells bandwidth to competitors, she says. “We have several wholesale agreements with competitors such as Covista and CenturyTel, just to name a few. If a competitor is interested, they should contact us to discuss the details.”

Mr. Snyder says in light of these comments he is doing so today after having had his proposals ignored for two years.

The government utility justifies its entry into the Internet business on market failure. “Companies in the private sector weren’t bringing reliable, reasonably priced, innovative connectivity,” Miss Dwyer says. “We believe it’s our responsibility to provide critical infrastructure when the private sector won’t.”

Free market data servicers in the area are VPNtranet, America Inter.net, AISGnet.com in Cleveland, Tenn. Big telecoms include Comcast and AT&T.

“If you are a free market capitalist and you believe in free markets, you need to do business with VolState,” Mr. Snyder says. “And if you’re highly principled, every time you buy from a government competitor, what you’re voting for with your dollars is, you’re saying, ‘It’s OK for the government come in to private enterprise and start to take over a vast part of what we used to operate in as a free market.’”

Miss Dwyer brushes off free market arguments; government interventions are commonplace: “EPB is hardly unique as a government entity in the communications business. About 600 municipal utilities are involved in some way in the business. And we committed to this project only after overwhelming public support.”

She attributes the potential economic growth in the city to EPB’s work: “The 100% fiber optic network is doing much more than providing communications services to our customers. It’s proving to be critical for Chattanooga’s economic development as we compete globally, it’s attracting new talent to the area, and it’s helping private businesses grow and compete.”

Mr. Snyder is unconvinced of such benefits. “Right now it’s Internet access and telephone service *** .  What’s to stop them, then, from the next step being telephone systems, for example, or hosted PBX? Then they might get into Web hosting and Web design. And so what we call that is ‘The march.’ *** They are going to keep slicing off a little bit more of the private market and they are going to try to fold it into their network of services that they offer as a government competitor.” In principle, there’s nothing to stop EPB from getting into the hamburger business for a perceived public benefit, he says.

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‡ Fitch downgraded the strength of the power board’s promises to repay in March to AA partly on account of its reliance on nonelectric revenue and “ weaker than projected financial metrics.”