The public wants broadband Internet and, in true American fashion, people want it now. Google is launching fiber in cities across the country, evidently content with the economics revealed from its pilot in Kansas City. In areas where the market has not provided service or a public-private partnership hasn't been forthcoming, municipal networks are popping up from within government — and many of them are failing. Utah’s incomplete municipal broadband network, led by the Utah Telecommunication Open Infrastructure Agency (UTOPIA), exemplifies the typical struggle of government to get such a project into flight. Now 10 years old, UTOPIA’s network is less than half complete and, by some estimates, has a net worth of negative $132 million.
To hear Gary Jones talk about UTOPIA, one would think the network is doing great, though he admits funding has been difficult. Jones is the director of sales, marketing and public relations for UTOPIA, and he sounds optimistic when discussing the network’s future. “The goal and vision still remains for us to provide fiber to the premise for the citizens and businesses and commercial properties that exist within all of our cities,” Jones said. “We certainly had our fits and starts in terms of doing that.”
Today, some place the network’s status at about 40 percent complete. Last year, UTOPIA completed construction of the network’s backbone that brought fiber to each of the member cities, but the fiber doesn’t yet run to all the neighborhoods or properties, Jones said. The challenge, he said, is funding, and also getting the 11 member cities' elected officials to agree on a path forward. If getting one city to agree on something is difficult, he said, imagine what it’s like with 11.
In February, UTOPIA got an offer from an Australian company, Macquarie Capital, that specializes in making public-private partnerships on infrastructure projects. The exact details of the offer won't be revealed until the end of April, but some are hoping this could be the break from financial worries that UTOPIA was waiting for. The deal would essentially lease the network to Macquarie for 30 years while the company builds it out and takes on financial responsibility, and at the end of the deal, ownership would go back to UTOPIA.
Whether or not this deal ends up happening is a decision that will be made by the end of the year, Jones said.
Where municipally run networks go wrong, Jones said, is that they try to be the market rather than to support a market, which is what UTOPIA wants to do. Broadband is infrastructure and should be treated as such, he said – the agency wants to be a wholesaler for broadband service and allow the market to compete to drive down prices and provide better service for citizens. “Quite frankly, [that model] is more true to a government structure, which supports its infrastructure and tries not to get into the retail world,” Jones said.
The one thing people need to know about broadband in Utah is that the demand is there, said Jones. The percentage of users who would have access to the service and actually buy it, called the take rate, is at about 18 percent overall and 25 percent in residential areas, he said. “In a city like Lindon, which is one of our cities with higher education and higher mean income, we’re at almost 45 percent take rate,” he said.
“In the beginning, there was this attitude of ‘nobody needs that.' The market is running toward 100 meg, and nobody’s blinking an eye anymore. The one thing I’m certain of is that there will be more information that you want to push faster and faster.”
Jones admitted that UTOPIA has had its growing pains. One mistake was not doing better research from the start on the take rates of various cities, he said. Had the agency done that, it’s possible some of the lower-income cities — where take rates were around 9 percent — wouldn’t have been included in UTOPIA.
One positive trait of UTOPIA, Jones said, is that sharing resources across cities enables them to attract financing they couldn’t have attracted individually, and it allows savings in economy of scale. For example, the 11 cities will share just one network operating center.
Jones also admitted that UTOPIA is in a tough spot, partially due to a lack of city involvement early on. The feeling was, he said, that it was a technology project and should just be managed by a vendor. “Since then, [the cities] have definitely inserted themselves and managed the project more closely and tightly, and there’s been a great deal of improvements in that,” he said. “Early on that wasn’t the case. They had a very small staff, turned it over to a contractor and let them go.”
While Jones supports the idea that a consortium of cities that plays its cards right is a good formula for a successful municipally run broadband network, Royce Van Tassell does not. Van Tassell is vice president of the Utah Taxpayers Association and said he’s been against the idea of UTOPIA from the beginning.
“They have, from a financial perspective, demonstrably failed repeatedly,” Van Tassell said. “They have never had a positive net operating revenue in any year, and their net assets have plummeted. Today, their net assets are somewhere around negative $132 million. So, if you sold everything today, you’d still owe creditors that much. They’re in a very difficult position.”
At the end of the month, Macquarie is expected to come forward with the details of its proposal, but unless that's drastically different from the deal previewed two months ago, it’s not going to fix the situation, Van Tassell said.
In addition to leasing out the network for 30 years, UTOPIA is considering collecting a utility fee from every business and residence in all 11 member cities. Van Tassell said the new fee would be collected from everyone, including non-UTOPIA users, and would have to be between $180 and $250 per year to meet the costs of the network. It’s not an ideal situation, he said.
Financially failing municipal telecoms are easier to find than successful ones, Van Tassell said. “This was a bad idea from the get-go. Cities across the country are failing when it comes to municipal telecom systems,” he said. “Whether you’re talking about Lafayette, La., or Alameda, Calif.”
Some states have in recent years attempted to ban municipally run broadband, including Georgia in 2013, Kansas earlier this year and Minnesota in 2012. Legislators in those three states were not able to get enough support to pass those bills, possibly because they sometimes included provisions that would have blocked a provider like Google from offering services.
Utah is now faced with a difficult decision. “There are no good options left,” Van Tassell said. “If they decide to sell the system to a private provider, as Connecticut recently did, or as Alameda has done, or like Marietta, Ga., or any number of others, you inevitably incur some litigation costs probably in the $70 to $100 million range. That is a lot of money, but it’s obviously quite a bit less than the hundreds of millions, if not billions of dollars, that Macquarie may end up costing.” Van Tassell added that the deal he’s talking about is two months old and a new proposal could change things, but he’s not holding his breath. “Let’s say it’s $100, even $200 million in litigation costs, it pales in comparison to the $900 to $1.2 billion that those residents would pay over the 30 years.”
Looking at 10 years of financial struggle, it’s curious that the people running UTOPIA don’t just give up — they press forward, looking for a way to make their vision come true. While there are success stories, like Chattanooga, Tenn., and cities that have broken even financially, like Danville, Va., they seem to be the exception when it comes to municipal broadband.
Van Tassell said he doesn’t know what happened that allowed cities like Chattanooga to succeed where so many have failed. “A lot of people are saying it’s because they’re tied to the power department; others say it’s tied to the borrowed money that they got. On some level those are both very unsatisfying explanations,” he said. Neither of those factors are guarantees of success.
“The instinct of wanting to have a better telecommunications infrastructure in your community is a good one,” Van Tassell said. “The better solution, rather than trying to go it your own and create a system that your city will run is instead to say, ‘Let’s find ways to make it easier for the private sector to deploy next-generation telecommunications in our city.’
"If we have open trenches, let’s make sure everyone knows in advance we’re going to have open trenches so they can come through and lay conduit and pull fiber," he added. "If someone wants to make a cut in the road to lay conduit or fiber, let’s make the process as painless and quick as possible, because more and more people are consuming more and more bandwidth. It’s critical that we make it possible for people to succeed in a 21st-century economy.”