Municipals, incumbents battle over fiber to home

Dec. 1, 2004

Long before Verizon, municipalities and municipally owned utilities were at the forefront of the fiber to the home (FTTH) movement. While advances in FTTH technology have been key enablers of this trend, mastering the technology has been the easy part for municipalities. Funding the projects and battling the incumbent cable TV and telephone providers have proven to be the more daunting challenge.

Two high-profile city-owned FTTH projects that have been abandoned or put on hold illustrate the difficulties that municipalities face getting such projects off the ground. The Marietta (GA) Board of Lights and Water opted to sell its 450-route-mi fiber-optic network, Marietta Fibernet, to American Fiber Systems (Rochester, NY) rather than continue to maintain the network on its own. And in Palo Alto, CA, the city council voted to put a halt to its plans for a citywide fiber-optic network; the council plans to monitor the success of other communities before relaunching the project.

Meanwhile, the experiences of Lafayette, LA, illustrate how heated the battles between utilities and incumbents can get. Lafayette Utilities System (LUS) went public with plans for a $100-million FTTH network last April. Three-quarters of the community’s citizens have said they will take services if those services are affordable, reports Frank Ledoux, engineering and power production manager of LUS.

While he admits that the municipality “expected prohibitive legislation from the incumbents,” Ledoux claims that Lafayette was forced to “go to war with Cox [Communications].” The cable operator launched a multimedia “scare campaign,” as Ledoux calls it, which included radio advertisements, TV spots, and full-page ads in the local newspapers. Cox developed a Website to educate citizens on what it believes are the risks of what it termed a “government-controlled” cable, telephone, and Internet system-including the risk of failure, potential tax hikes, and rate increases and the possibility that the government will have access to subscribers’ private information. The municipality then launched a Website of its own, touting the benefits of a municipal network.

BellSouth took action as well. The carrier proposed a bill based on the American Legislative Exchange Council (ALEC) model. ALEC is a Washington, DC-based special interest group that promotes what it believes are the best interests of large corporate entities. BellSouth’s ALEC-based bill attempted to discourage municipalities from entering the retail communications market by imposing stringent requirements. For example, the bill states that any municipality hoping to provide retail services must first complete a feasibility study-for which it cannot use public funds-proving that for the first year and first five years of operation, revenues for each communications service separately will exceed annual costs by an amount sufficient to cover the municipality’s bond obligations. According to the LUS, this provision alone would prohibit its entry into the market.

With both sides lobbying fiercely and no resolution in sight, Louisiana Gov. Kathleen Babineaux Blanco stepped in. “Governor Blanco literally locked representatives from BellSouth, Cox Communications, the Lafayette Utilities System, and other industry and municipal organizations in her conference room and told us not to come out until we had negotiated a compromise legislation that she could sign,” recalled Jim Baller, senior principal of the Baller Herbst Law Group (Washington, DC) in his keynote address at the FTTH Conference in Orlando, FL, in September. Baller Herbst represented LUS in the negotiations.

The negotiations took nearly a month to complete, with the group examining the ALEC-based bill line by line to determine even if private sector companies comply with the same requirements it demands of municipalities. Eventually, the two sides reached a compromise, a bill known as SB 877, which states that a municipality can do everything that private sector companies can lawfully do.

Baller does not endorse the compromise. “Given the huge challenge that we face to deploy advanced communications networks in as many communities as possible as rapidly as possible, I don’t believe that any law that restricts public entities in any way is a good law,” he contends. “To the contrary, I believe we should be going the other way and giving public entities every possible incentive to get involved.”

For their part, the cable TV and telephone providers argue that municipally owned utilities enjoy special benefits and privileges not given to private sector companies. Utilities do not have to pay federal, state, and local income taxes, nor do they have to pay property taxes. They raise most of their capital through bonds that are tax-exempt and guaranteed by local governments. They also own the utility poles and rights of way.

The municipalities and public utilities “are not playing with their own money,” notes Thomas Leonard, senior fellow and vice president for research at the Progress and Freedom Foundation, a Washington, DC-based think tank that studies the public policy implications of increased digital communications. Its members include Verizon, BellSouth, Qwest, SBC, Sprint, Comcast, TimeWarner, and the National Cable and Telecommunications Association. “The people who head these [municipal] ventures are playing with other people’s money, basically the taxpayers’ and the cities’,” he says. “I think there’s a problem when the taxpayers are forced into a position where they are forced to buy shares in a venture just by virtue of being citizens of that community. It’s not like making an investment in a regular telecom venture.”

Such arguments are being batted back and forth in Truckee, CA. The Truckee Donner Public Utility District (PUD) began planning its network in 1999, drawing inspiration from Truckee’s success following its connection to the railway system in the 1860s and the interstate highway system in the 1960s. Says Alan Harry, director of telecommunications for the Truckee PUD, “Our board of directors saw a real need to have this small community of ours connected to the outside world.” When the PUD began exploring a fiber-optic network, neither the incumbent telephone company nor the cable TV operator had any intention of providing high-speed data services.

The municipality first had to clear local regulatory hurdles. In California, each county has a Local Agency Formation Commission, or LATCO, composed of representatives from town councils and special district boards. Whenever a PUD wants to add an additional service, it must be granted permission from its LATCO. Truckee presented to LATCO its risk mitigation plan, asserting that ratepayers of its electric and water services would not be harmed if the broadband project doesn’t succeed.

As soon as LATCO granted permission, “the incumbent cable operator filed an action within the county to try to invalidate all that LATCO had done,” reports Harry. “One week you would read in our local paper that they were not going to fight us, but rather compete with us in the open market because they think their products are much better. Yet a week later, they are filing an action to stall us again. Much like other communities across the country, the cable TV operators are scared to death of us.”

At press time, the Truckee Donner PUD was still embroiled in a bitter battle with its private sector counterparts, though Harry is confident that Truckee will succeed, “because we are building a community network for the community, not for private shareholders.” Truckee has established a financing mechanism that will enable the network to support itself. Palo Alto, for example, raised funds through bonds based on their electric rates. “If you do that, you have divisions other than the broadband division that you created being responsible for paying the debt,” explains Harry. “You really don’t want to have your debt supported by anything other than…the money you are raising through rates on your broadband system. You may possibly use your fiber-network facilities as collateral, but you don’t want to put anything else at risk.”

According to Harry, the Palo Alto City Council is following Truckee’s success with great interest. “Palo Alto is looking at us and saying, ‘If you can make that work, we’re going to do the same thing.’ ”

For his part, Harry just wants the chance to prove the network’s viability. “If those that are out there fighting us would give us the opportunity to just compete with them on the open market-they always say that they will win, that we will never get the penetration rates that we need to make our financials work. If they would just give us the opportunity to compete, I would be thrilled,” he says.

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