but in this scenario the city itself holds a privileged position as the provider of the infrastructure—by far the largest part of a local ISP's capital investment.
I would argue that in this kind of a situation, the physical plant is about as close to a natural monopoly as it can get. It isn't beneficial to the citizens to have multiple water mains, multiple sewer mains, or multiple electrical distribution systems. The optimal response to that situation, then is to have a well regulated monopoly that is responsible to the people it affects, not just those it serves, or some faraway shareholder. Back in the days of copper it made sense to have a phone system, and a cable distribution system. In the modern era, to me it doesn't make sense to have more than one fiber plant.
Now, I'm not going to argue that this should prohibit the deployment of other technologies. The satellite network I operate out of that region is dual-homed, one connection on the PUD fiber, the other on a cable modem on the old physical CATV plant.
I'm not going to argue politics here, it's just that I have seen it work very very well for the consumer and taxpayer in those regions. Those counties also have amongst the lowest power rates in the nation, because they also own and have well maintained a couple of hydro-electric power plants over the decades. Part of their incorporating papers is that the profits earned from selling power to the outside is plowed back into a) maintaining and improving their own infrastructure and b) subsidizing local rate payers. They were also able to use those profits to build out the fiber network.