Privatizing Public Networks

Cities are generating revenue and offering improved telecommunications services through private partnerships.

/ August 31, 1998
More than two years after the Telecommunications Act of 1996 was signed into law, cities have tested the competitive waters created by the landmark legislation. A key provision of the act cleared the way for municipal utilities to provide telecommunications services, and cities across the nation, facing revenue slumps and fierce competition for new industry, are forging partnerships with the private sector to bring high-speed, high-bandwidth network capability to their communities.

Building Public/Private Partnerships

Cities operating their own electric utilities are positioned to enter the telecommunications arena. Many have already replaced decades-old copper-wire communications systems, used to monitor and control their electric facilities, with fiber-optic cable. With fiber-optic cable costs coming down, cities have put extra capacity into the ground, which, under the Telecommunications Act, they can lease to private-sector communications companies.

Several cities are already reaping the benefits of such strategic planning. The city of Anaheim, Calif., home to Disneyland and a growing corporate base, installed extra fibers when it replaced its 30-year-old copper communications system with a 50-mile, 96-fiber ring. The city kept a third of the fibers to operate its public utilities department's communication system, but it leased the remaining 60 fibers to FirstWorld International (formerly SpectraNet International), a San Diego-based private telecommunications firm.

FirstWorld is under contract to use the leased fibers as the backbone of its
Universal Telecommunication System, a broadband network that will ultimately provide voice, data and video services to the entire Anaheim community. FirstWorld will operate an open-architecture, neutral network, allowing communications providers to offer competitive services at a lower cost.

Under the $75 million first phase of the project, expected to be completed in December, selected city facilities and large businesses will be connected to the network. Based on the results of a feasibility study in 2000, a second phase, estimated to cost up to $200 million, would extend the network to all residents and remaining businesses in Anaheim.

A few miles north of Anaheim, the city of Burbank, the hotbed of the television industry, has used its fiber backbone to meet the high-speed, multimedia demands of local entertainment companies. The city has kept two-thirds of its 12-mile, 240-strand fiber backbone for internal use, but it is leasing the remaining third to entertainment giants Disney and Warner Bros. and telecommunications carrier companies like ICG.

"We've tried to address the unmet, unique needs of our industries that go well beyond the bandwidth and speed capability of standard telephony science," said Fred Fletcher, assistant general manager of Burbank Water and Light. The city leases dark fiber to Disney and Warner Bros. for their wide-area networks, which the companies use extensively for special-effects development.

Other cities with infrastructure in place are now looking to establish those same types of partnerships. In Longmont, Colo., a Denver suburb, city
officials continue to meet with several potential service providers to negotiate a partnership for developing and delivering competitive communications services to the community over the city's new 17-mile fiber network.

Economic Development Tool

For years, cities hoping to attract new businesses brought traditional marketing cards to the table: location, transportation and available work force. Today, the reliance of American industry on information technology has made telecommunications an equally critical criterion.

Anaheim used its fiber backbone to help lure MedPartners, the nation's largest physician-management company, to town. The Birmingham, Ala.-based company, with daily operations involving large amounts of data transfer, was looking for a strategic location that could support those needs with a high-speed, high-bandwidth fiber-optic ring.

"It was an economic-development specialist's dream," said Anaheim official Ray Merchant. "Our move into telecommunications clearly allowed us to meet their technology needs."

Economic development spurred by improved service was a motivating factor in Longmont's decision to pursue telecommunications. Located near the high-tech industries of Denver and Boulder, the city felt it needed an advanced system to compete with those communities.

"We saw telecommunications as a valuable tool to retain existing businesses and help attract new industry," said Bill Ewer, customer-services and marketing manager for Longmont Power and Communications. "Our citizens and businesses were asking for these types of services, but the telephone companies weren't overly anxious to put fiber in the ground."

The Revenue Factor

For cities that make the investment in a marketable telecommunications infrastructure, the payoff can be lucrative. Under terms of its agreement with FirstWorld, Anaheim will receive 5 percent of the system's gross revenue, 35 percent of its net revenue, and lease payments totaling $6 million over 30 years. City facilities and schools will receive a reduced government rate for their telecommunications services. The city's electric utility will be given network access to implement an energy management system for its customers.

Burbank is earning $175 per fiber mile per month from companies leasing its fiber, which generates a total annual revenue of $300,000. The system is expected to pay back its $1 million installation cost in about three years, ahead of the four-year payback period forecast in the city's business plan.

The Retail Service Option

Some smaller cities have put their telecommunications backbones to work at the retail level, choosing to be both provider and carrier. In Harlan, Iowa, the city utility department has been offering retail cable TV and Internet service since August. According to Jerry Quick, utility general manager, the decision to provide services came after nearly 75 percent of the town's voters approved the plan.

"We realized that if a small town is going to have the same types of communications benefits as a larger community, we would have to provide them ourselves," Quick said. "Our existing service had deteriorated, and we were concerned about the quality of the product we were getting."

Like most cities, Harlan was in the planning stages of a new hybrid fiber/
co-ax system for its electric supervisory control and data acquisition system when utility planners realized that medium would also support cable service. Today, in addition to CATV service, the city provides 1.54Mb-per-second Internet access, with unlimited use, for $29.95 per month. In its second year of operation, the system boasts a community penetration of 72 percent, or about 1,155 homes. Harlan has a population of 5,300 people and is located about 90 miles west of Des Moines.

However, recent studies have shown that cities stand to reap the most benefit with the least amount of cost by leasing excess capacity to service providers rather than providing those telecommunications services themselves.

Breaking the Status Quo

City officials who have caught the wave of telecommunications competition admit the endeavor can be rough sailing at times. Not surprisingly, cities have encountered opposition from existing telephone companies that have enjoyed market domination for years. It's important, municipal utility officials say, for a city to stick to its business plan and not be intimidated by big-name telephone companies.

"Obviously, cities are a tremendous user of telecommunications services, and the incumbent carrier is not going to be happy about losing such a large customer base," said Shana Epstein, telecommunications project coordinator for Anaheim, "but it's important to keep the city focused on the objectives: to encourage competition, open access and create better rates for users."

In Harlan, utility officials encountered initial opposition from longtime provider TCI, but they have seen the company drop prices and improve service in response to the city's service, moves that have brought additional economic advantages to the community because residents now have extra money to spend.

"They've certainly become a good competitor," said Quick. "We've seen that translate into about $500,000 in benefit to the city from increased disposable income of our residents."

Burbank has taken a different approach, preferring to lease its dark fiber to telecommunications companies rather than compete with them directly. The city has no plans to become a service provider.

"We want as many players in town as possible to provide state-of-the-art telecommunication services," said Burbank's Fletcher. "We're different from other cities in that we don't see a need to do what local telephone companies or cable providers are doing already."

While cities may be taking different approaches to telecommunications, officials agree that, to create a successful telecommunications partnership, a city must have well-defined objectives backed by residents and policy-makers.

"It's vital that you assess those values important to your community and set up guiding principles," said Anaheim's Epstein, "and you need to have buy-in from city departments as well as elected officials. Everyone must be committed to making it work."

"Stick to the plan and keep installed costs down," Fletcher suggested. "There's a temptation to make a network too big, too fast, and that will drive up the costs quickly."

For additional information, contact Fred Fletcher, assistant general manager, Burbank Water and Light, 818/238-3550; Shana Epstein, telecommunications program coordinator, Anaheim Public Utilities Department, 714/765-4106; Jerry Quick, general manager, city of Harlan, Iowa, Municipal Utilities Department, 712/755-5182; Bill Ewer, customer service marketing manager, Longmont Power and Communications, city of Longmont, Colo., 303/651-8793.

Tom Byerly is a Sacramento, Calif. based writer.

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