A Mixed Month for Muni Broadband

For both supporters and opponents of municipal broadband, the glass is either half-full or half-empty, especially after a tumultuous July.

Supporters have every right to be pleased as citizens in Lafayette, Louisiana voted overwhelmingly to allow Lafayette Utilities System (LUS) to proceed with plans to build a $125 million citywide fiber to the premises (FTTP) system that will compete alongside BellSouth and Cox Cable for telephone, Internet, and cable TV customers.

Support was bipartisan. Local Democrats and Republicans endorsed the measure, as did the local Chamber of Commerce and both area newspapers. The scale of the Lafayette plan–the largest and costliest municipal FTTP proposal to date–drew nationwide coverage from USA Today and National Public Radio. Even a newspaper from the Netherlands took an interest.

But the July 16 FTTP vote in Lafayette was bookended by significant developments that should give the proponents of municipal broadband pause. July began with an unsettling report from Jupiter Research, an independent for-profit market research firm. While the focus of the report was broadband wireless, it predicted one of every two municipally owned systems will fail to break even. The report instead urged cities to look to partnerships with commercial providers.

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. Although municipalities often promise equivalent services at much lower prices, Acworth CableNet’s rates are only marginally less than Comcast’s, as the table below shows. Moreover, Acworth has no HDTV offering.

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, taking a $23 million loss on its investment. 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 … and now they are outpacing the municipalities.

The Acworth experience is not isolated. Ashland, Oregon is debating whether to sell Ashland Fiber Network (AFN), one of the country’s first municipal fiber systems. The company required a $200,000 subsidy to make a debt payment in July. The city’s finance department projects a $3.8 million deficit through 2011. Buildout has been stalled pending a final decision.

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. HomeNet gave no reason for the decision.

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, however. 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 mid-year figures show Provo had collected only $76,129 in transport and switch fees.

Billings is up for re-election this November, and his opponent has made the ailing municipal fiber system a campaign issue.

A Lafayette “sister city” in fiber, Palo Alto, California, pulled the plug on its long-delayed municipal fiber project and, following Jupiter Research’s advice, said it would seek a private industry partner to shoulder the risk.

Pressure’s on LUS

Given these developments, the national visibility of the Lafayette vote, and the 62 percent majority that LUS won, the utility will be under tremendous pressure to make its FTTP plan work. It 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.

Already the local Lafayette press senses the enormity of the challenge and is hedging on how much editorial capital it wants to spend boosting this proposition. Although it had been gung-ho on the idea in the months leading up to the election, within days of the victory its editorial writers had turned more skeptical.

Rather than congratulate the winners, a follow-up editorial in the Lafayette Daily Advertiser pointed to the 26 percent voter turnout. Both sides regarded this as higher than expected, but the Advertiser found it “troubling.” The newspaper suggested 73 percent of voters apparently were satisfied with the current state of broadband services in Lafayette and that LUS 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 editorialized. “There is a vast difference between the world of politics and the world of business competition.”

Critics of municipal broadband were saying much the same thing all along.

Steven Titch ([email protected]) is senior fellow for IT and telecom policy at The Heartland Institute.

Steven Titch

Steven Titch is a policy analyst focusing on telecommunications, Internet and information technology. He is also a policy advisor to The Heartland Institute.

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