Study Sees Risks in Telecom Utilities

Heartland in Print

Des Moines Register (circ. 150,907)

September 20, 2005

The state’s three largest municipal telecommunications utilities lose money, and communities in Iowa and elsewhere would take on similar risks if they built their own telecommunications networks, according to a Chicago analyst’s report.

The study, scheduled to be released today, analyzes the finances of communications systems in Cedar Falls, Muscatine, and Spencer.

“None of these municipal systems has achieved a payback of its original investment for the municipal utility, let alone a positive return on investment,” wrote the report’s author, Ronald Rizzuto, a University of Denver finance professor and critic of the city-owned utilities.

Iowa municipal utilities officials said they could not comment on the Heartland Institute’s report without seeing it, but they questioned whether it correctly analyzed the data.

The report’s release comes amid growing debate in Iowa and across the country about whether cities should offer Internet services. Cedar Falls, Muscatine, and Spencer have the largest systems in Iowa, which Rizzuto cited as a reason for studying them. Now, 27 Iowa cities offer communications services ranging from Internet access to cable television, the Iowa Association of Municipal Utilities said.

This fall, about two dozen Iowa communities plan to vote on whether to form their own municipal communications utilities. These communities are members of nonprofit OpportunityIowa, a group organized by former McLeodUSA executive Clark McLeod. The group launched last year touting fiber-optic systems as a driver for economic development, particularly in rural Iowa, and it has since expressed support for wireless broadband as well.

Richard Johnson, co-chairman of Project Taxpayer Protection and former state auditor, said municipal telecommunications utilities carry the risk of becoming financial burdens.

“Taxpayers are going to have to pick up the bill,” he said.

Rizzuto’s study was conducted for the Heartland Institute, a conservative policy organization that seeks to promote individual rights, free markets, and limited government.

In his study, Rizzuto pointed to a figure called “free cash flow,” a measure of whether a business makes enough money to pay its bills. Using annual reports compiled from the three municipal utilities, Rizzuto lists negative free cash flow for each utility in nearly every year in operation.

According to Cedar Falls’ most recent annual report, the communications utility had $1.03 million in net income. Financial information from the other utilities was not available.

Analysis Challenged

John Kelly, director of economics and research for the American Public Power Association, questioned Rizzuto’s analysis. Kelly said it appears Rizzuto is not adding back the depreciation for the equipment and other investments the utilities have made. If depreciation is added, free cash flow becomes positive.

Rizzuto’s methodology applied to any private company would also produce a negative number, Kelly said. “If you applied that concept to Home Depot, Home Depot would never make it,” he said.

Rizzuto also says municipal communications utilities rely on subsidies to support operations. Utilities officials say that water, electric, and communications operations maintain separate books and that any loans from one operation to another are given at market rates.

A Dubuque study this summer found that a wireless system would be a more affordable option. In a member to the City Council, Dubuque City Manager Michael Van Millegen said if voters approved creation of a municipal wireless utility in the November election, taxpayer money would not be at risk.

Any financial commitment would require 60 percent voter approval in a second referendum. The council voted this month to support creating a wireless system.

Change in Marshalltown

One community that won’t be pursuing a voter referendum is Marshalltown.

In June, Marshalltown became the first Iowa city to offer free wireless broadband. Last month, the city announced a partnership with Mediacom in which the cable company would take over the wireless operations and provide new tiers of business and residential broadband service.

In exchange, the city had to drop its plans for a municipal communications utility.

Frank Vinluan is business writer for the Des Moines Register.