A Mixed Month for Muni Broadband

July 27, 2005
Steven Titch

Supporters of municipal broadband were pleased when the citizens of Lafayette, Louisiana voted on July 16 to allow Lafayette Utilities System (LUS) to proceed with plans to build a $125 million citywide fiber-to-the-premises (FTTP) system. The scale of the Lafayette plan--the largest and costliest municipal FTTP proposal to date--drew nationwide coverage from USA Today and NPR.

But the vote in Lafayette was bookended by two developments that should give municipal proponents pause. Earlier in July, an unsettling report from Jupiter Research, an independent market research firm, predicted one of every two municipal broadband systems will lose money. The thrust of the report was largely on wireless systems.

Then, 11 days after the vote in Lafayette, the Acworth, Georgia city council voted to raise property taxes to cover a $1 million bond payment due on Acworth CableNet, its municipal broadband system. Acworth's sole retail partner, UTI Broadband Holdings, charged with operating and managing the system, is experiencing severe revenue shortfalls and can't make the payment. As a result, the debt responsibility falls back to the town's taxpayers.

The tax increase will amount to an additional $40 on a house valued at $200,000, according to a report in the Atlanta Journal-Constitution. In addition, the town will need to reallocate funds once earmarked for other city services to service the CableNet debt. UTI President Allen Davis told the Atlanta Journal Constitution in a July 7 article that the company was unable to compete with the commercial sector.



A Domino Effect?

Acworth is the second municipal broadband system in the Atlanta area to experience financial hardship. Last year the town of Marietta sold its eight-year-old company for a $23 million loss. In March, Newnan Utilities in nearby Newnan began the process of selling its own municipal system, which is $37 million in debt.

In all three cases, the municipalities got out in front of commercial providers in terms of broadband services. As population began to grow in these "exurban" communities, and the telecommunications industry began to emerge from its financial slump, cable companies began to invest with newer technologies and services that are outpacing the offerings of municipalities.

Finally, just as Lafayette was going to the polls, word came from Provo, Utah that HomeNet, the sole commercial partner for its municipal fiber system, iProvo, was withdrawing from the market, according to the July 12 edition of the Deseret News, a local Provo newspaper. During the Lafayette campaign, LUS pointed to Provo as an example of a successful municipal operation, and Provo Mayor Lewis Billings traveled to Lafayette to endorse municipal broadband before local officials.

The financial picture is not good. The iProvo business plan called for $683,000 in revenues from transport and service-switch fees for the year ended June 30, 2005. Those fees are an established percentage of money Provo would collect from HomeNet for each subscription it sells. Year-end figures weren't immediately available, but the Deseret News reported December's figures show Provo had collected only $76,129 in transport and switch fees.



Trouble Ahead

Given these developments and the national visibility of the Lafayette vote, LUS will be under tremendous pressure to make its FTTH network a success. It is likely to have a difficult time competing against BellSouth and Cox Cable for telephone, Internet, and cable TV customers.

LUS has loudly and publicly promised to deliver a 100 Mb/s fiber link to every home and business in Lafayette, to fund construction and debt interest exclusively from revenues, and to keep prices at 20 percent less than cable or telephone companies without cross-subsidies or conditions for minimum purchases.

We can't help but notice that already the local Lafayette press senses the enormity of the challenge and has begun to hedge on its once-uncritical support. Rather than congratulate the winners, a post-election editorial in Lafayette's Daily Advertiser pointed to the low voter turnout (only 26 percent) and asked if that means 73 percent of registered voters are satisfied with the current state of broadband services in Lafayette.

LUS, the newspaper said, must be prepared to mount a "major educational and motivational campaign" if it is to succeed in building a viable operation. "Success depends on commercial realities," the Advertiser wrote. "There is a vast difference between the world of politics and the world of business competition."

Of course, critics of municipal broadband have been saying that all along.

Steven Titch

815 Spring Mist Court

Sugar Land, TX 77479

home 281/571-4322

cell 312/925-0464

titch@heartland.org


Steven Titch (titch@heartland.org) is senior fellow for IT and telecom policy at The Heartland Institute and managing editors of its monthly publication, IT&T News.