The local telephone company in an 11,000-person Minnesota town objected when the town decided to lay its own fiber optic network. The telco filed a lawsuit, and then suddenly rolled out its own fiber network while the case was tied up in courts. Today, a state appeals court ruled in the city's favor (PDF); Internet access was certainly a "utility," the court said, and the city was well within its rights to finance the project as it did.

But is it too late to matter?

Fiber + bonds = lawsuit

Not satisfied with current DSL and cable offerings, the town of Monticello hatched an ambitious plan to wire up the entire community with fiber, build an interconnect station, and allow ISPs to link up to the site and offer Internet access over the city-maintained fiber links. After a vote on the measure passed in 2007, Monticello quickly moved to raise money and break ground—but was promptly sued by the local telephone provider, Bridgewater, a unit of TDS Telecom.

TDS had one main complaint: the project should not be financed with city bonds. Under Minnesota law, cities can only issue revenue bonds for certain specified reasons, including the building of "utilities." TDS charged that the project was not a utility and was instead an unfair use of government power to compete with private business. Critics charged that TDS just wanted to delay the project long enough to kill it.

A district court eventually tossed the case in 2008, but not before Monticello's bond money was locked up in an escrow account and the bitter Minnesota winter descended.

Today, an appeals court ruled that the decision was proper and that public utilities certainly include Internet access. From the ruling: "Bridgewater concedes that telephone services are utilities and that television services are gray area, but steadfastly denies that Internet services qualify as a utility. Therefore, according to Bridgewater, the project in its entirety lacks statutory authority to be funded by revenue bonds because Monticello intends to provide Internet service... [but] the definition of municipal public utilities appears broad enough to contemplate Internet service."

The court shot down Bridgewater's argument that Internet service could not yet be considered a utility because it doesn't have the "near universal usage common to a utility."

The court said that "this argument is flawed. As noted by Monticello, 'it would be absurd to conclude that the Minnesota Legislature [allows revenue bonds] to be used only to fund the creation of systems that provide services that are already in universal or near-universal use'... It is illogical to conclude that something is or is not a utility based on the number of people who have access to it."

The lawsuit has never been about whether the city has the right to build and operate such a service; it has only been about whether revenue bonds could be used to finance it. So, while the money raised from the bonds sat idle in an escrow account, the city of Monticello has already built a headend for housing the main communications gear and constructed a short fiber loop that serves the downtown—all out of its normal operating budget.

Monticello's new headend

With the appeals court decision, the city can go forward with the rest of the project. Or can it? TDS now has 30 days to appeal the case to the state Supreme Court; if it does so, and the courts do not move to dispatch it quickly, the case might well drag on through another summer building season and into the fall.

Drew Petersen, who heads up corporate communications for TDS, was predictably disappointed with the ruling. "The Appeals Court decision sends a chilling message to the private business community operating in the state of Minnesota. The decision will likely discourage other private enterprises from doing or expanding their business in Minnesota. Further, the decision endangers the appropriate relationship between municipalities and private enterprise; it also allows municipalities' tax-free financing to enter into competition with tax-paying businesses," he said.

While the case was going on, TDS installed fiber of its own throughout Monticello, and Petersen says that today, "Every resident in the city can receive TDS' Internet service, via fiber, at speeds of 25Mbps at value-based prices. The neighboring townships also enjoy speeds above 10Mbps."

TDS did win the partial support of one appellate judge, who disagreed with the majority decision. But the company can't take too much comfort from the dissent; as Judge Natalie Hudson noted, "I concur with the majority opinion‘s conclusion that the Fiber Project is a 'utility or other public convenience,'" though she objected to the way some of the money was being used.

Winning battles, losing wars

According to Chris Mitchell of the Institute for Self-Reliance, several other Minnesota communities are considering similar fiber projects of their own but are waiting for a resolution to the Monticello legal battle before proceeding. Mitchell admits to Ars that the TDS decision to build out fiber in Monticello does change the financial case for the entire project and that it's much more difficult to justify a fiber overbuild with an incumbent in place.

That may be exactly what TDS had in mind. As Petersen noted in his statement, "In view of TDS' development of a robust broadband platform in Monticello during the past year, it is questionable whether or not the City's feasibility study supporting its own fiber project, which was premised on no broadband competitors and on which the revenue bond purchasers relied when they secured the bonds more than a year ago, is still accurate, and whether the city fiber project is feasible today."

For Monticello's fiber backers, the whole situation may turn out to be a textbook definition of "Pyrrhic victory."