City-owned fiber optics a mixed bag

What is success? Some say that profit is not the only way to gauge whether a system is worthwhile

In Spanish Fork, the city-owned $7.5 million telecommunications network sports all the trappings of success.

By Steven Oberbeck
The Salt Lake Tribune

http://www.sltrib.com/business/ci_2397755

The system, which offers high-speed Internet and cable television connections, is operating well ahead of projections, with nearly 60 percent of residents subscribing to at least one service over the hybrid network of fiber-optic lines and coaxial cable.

"This will be the first year that we are fully built out," said John Bowcutt, director of information services for the city. "And this year, the network will cover all of its debt service, operating budget and management expenses."

Proponents of the Utah Telecommunications Open Infrastructure Agency (UTOPIA) frequently point to the 3-year-old Spanish Fork Community Network to support the proposition their own project – a $340 million fiber-optic-to-the-home venture in 11 Utah cities – will meet with similar success.

"The acceptance in Spanish Fork is so far beyond anything UTOPIA needs to be successful that it is extremely encouraging," said Arthur Brady, executive director of Utahns for Telecom Choices, a pro-UTOPIA lobbying organization.

Yet across the country, community-supported telecommunications networks have experienced varying results.

Some are stunning successes. Others are abysmal failures.

Varied success: In Marietta, Ga., the city’s Board of Lights and Water is poised to sell its 7-year-old FiberNet system. Built to provide high-speed data services to business, the network has lost $2 million a year. It is scheduled to be sold this week to the privately held American Fiber Systems Inc. for 2.2 million, an estimated $20 million less than the project’s cost.

In Iowa, the legislature is debating whether the state should unload the Iowa Communications Network, a statewide infrastructure built on a 3,100-mile, fiber-optic backbone that supports more than 770 video classrooms and carries all of the telephone services for state government.

Supporters of the $356 million network conceived in 1989 say it is an invaluable tool for Iowa’s education system and has brought worldwide recognition to the state. Detractors describe it as a boondoggle.

"The system has never supported itself," said Bill Dix, chairman of the Appropriations Committee in the Iowa House of Representatives. "It has never been fully utilized the way everyone thought it would be."

This year, Dix projects the network will need 5 million in taxpayer subsidies to continue to operate. "What we’re hearing now is that the network will be self-supporting in 2008, but that is only if we don’t need any additional expensive upgrades."

Interested buyers for the Iowa network, though, are scarce, Dix said, and the price the system might fetch is expected to be only a fraction of the original development cost and could be as low as 10 cents on the dollar.

UTOPIA’s supporters, which include the city councils in 11 Utah cities that have pledged to use taxpayer money to back a significant portion of the $340 million in bonds the network will need to complete development, discount any suggestion their network will be anything less than an overwhelming commercial success.

Half empty or half full? However, Roger Black, UTOPIA’s executive director, said other system operators may have a different view of what constitutes success.

"Success is usually taken to mean that a [municipally owned] system is self-supporting," Black said. "Yet a system can also be defined as successful if it achieves the objectives that were set out for it."

In Florence, Ala., the city-owned FloWeb Internet service launched in 1999 cost that community’s gas company more than .2 million before it was shut down nine months later.

The system was organized at a time when Florence residents did not have access to high-speed Internet services and were desperate to get it, said Jack Hilliard, Florence’s general manager of utilities.

"It wasn’t a profitable venture but it did get the cable and telephone companies off of dead center. Shortly after we launched our system, they began providing broadband and we were able to discontinue our services," Hilliard said.

For Paragould, Ark., the goal was to provide residents with low-cost cable television and telecommunications services, said Rhonda Davis, chief financial officer for City Light Water & Cable. "We could easily charge rates to show big profits, but that is not why we are here."

The city’s system, which was founded in 1992 and for next six years was partially supported by a $2 a month tax on each customer, is now profitable. Last year it generated net income of $500,000, Davis said.

Paragould’s system, however, operates as a monopoly. It is the town’s only provider of cable television, dial-up and broadband services.

UTOPIA will not have that luxury.

Ready to fight: Comcast and Qwest, which offer many of the same services UTOPIA wants to provide, have indicated they will not surrender their market share without a fight. Both companies have invested hundreds of millions of dollars in recent years to upgrade their Utah networks.

Qwest’s Utah President Jerry Fenn has said that if the UTOPIA network becomes a reality, Qwest will defend its market share for digital subscriber lines and other services. "Unfortunately, that will put us in the position of trying to make sure UTOPIA isn’t successful."

Kutztown, Pa., which two years ago was the first incorporated community in Pennsylvania to offer telecommunications services directly to its residents over fiber-optic lines, ran into similar competitive pressure after it built its $6 million network.

Competition from Service Electric Cablevision has slowed the growth of Kutztown’s Hometown Utilicom network, said Frank Caruso, director of technology. "From the start the incumbent [Service Electric] came in blasting away, cutting prices and claiming we were going to fail in a couple of years. We’ve had a lot of people sitting on the fence as a result."

Kutztown’s system has an operating profit but is posting a loss of about 1,000 a month because of debt service costs, he said.

The Fiber-to-the-Home Council, a nonprofit educational organization established in 2001, estimates 128 communities in 23 states are delivering broadband services to customers using fiber-optic technology, a 36 percent increase from September 2003.

It is far too early to condemn the new wave of municipally owned broadband networks as failures or hail them as successes, said Ray Gifford, the president of the Progress and Freedom Foundation that studies the digital revolution and its public policy implications.

"A lot of the networks we’ve looked at don’t appear to be covering their capital costs," Gifford said. "It is hard to tell, though. Many of the new entities are being organized as extensions of municipal electric systems and it is difficult to tell specifically how they are doing because of the potential for cross-subsidization."

Once UTOPIA is up and running it will be far easier to tell how it is doing, Gifford said, indicating he believes the proposed fiber-optic network is a terrible idea in part because it will duplicate the networks already run by Comcast and Qwest.

"UTOPIA won’t have anyplace to hide," he said. "I’ve mentioned to Qwest and Comcast that I’m a little puzzled by their opposition [to UTOPIA]. I’ve told them that in three or four years they should be able to pick up a hell of a nice fiber optic network for 10 cents on the dollar."

Qwest and Comcast are members of the Progress and Freedom Foundation, but so are a number of large businesses that UTOPIA’s proponents have identified as supporting the deployment of fiber-optic-to-the-home technology.

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Tribune researcher Becky Hodges contributed to this story.

About UTOPIA

What it is: The Utah Telecommunications Open Infrastructure Agency is a consortium of 11 Utah municipalities that have pledged taxpayer support for the development of a $340 million fiber-optic network.

Who is involved: Brigham City, Centerville, Layton, Lindon, Midvale, Murray, Orem, Payson, Perry, Tremonton and West Valley City.

Where it stands: Earlier this month, UTOPIA closed on $85 million in short-term revenue bonds that will be used to fund construction of the first phase of its network.