Utah's UTOPIA fiber network was already established, but blocked from growth for over a decade by incumbent lobbying. Conveniently the Wikipedia page has no mention of the Comcast and Qwest/CenturyLink meddling in Utah state and municipal politics that derailed funding and subscription.

That isn't really how it works. The cities don't have a say in the state level government. The state level senators or assembly members make the laws.

Yes, I know how it works.

I'm not claiming that there is a formal legal obstacle here. I'm hypothesizing that a state government would be less interested in banning something which has popular support in a medium-size city in that state.

Maybe. The municipalities have no money and some small city council has no leverage over a US senator. How can they compete against the bankroll of Comcast in court, PR, etc. ?

The municipalities agree to these rules to subsidize those who live in unprofitable areas. Those people don't want to pay for the actual cost of their service, so the town grants a monopoly and subsidizes the cost for those who live in the outskirts.