Municipal Networks

The Lake County (MN) board of supervisors recently unanimously voted for a Lake Connections sale, offering the municipal broadband network up to what they hope is the highest bidder. Lake Connections was formed seven years ago and obtained $66 million in funding to build the municipally owned broadband network serving Lake County in Minnesota. The sale process will “… be a highly structured, collaborative process between the county and the US Department of Agriculture’s Rural Utilities Service (RUS), the lender that provided the majority of the funding for the network’s construction.” The county promised to kick in $15 million to fund the “drops” for the FTTP network. The Federal Communications Commission also provided a $3.5 million grant, according to the news report. On the one hand, the Lake County government feels strongly that this was the only way to bring advanced broadband services to their community, and apparently, would do it again if given the chance. On the other hand, it also reveals the financial commitments building and operating broadband networks requires, and the risk associated with it. Some argue that local governments shouldn’t take on that risk. The leadership of Lake County seems to think the private sector is better suited to finish and operate the network, probably due in large part to the financial obligations it requires.

Thanks to an “extraordinary” response to an RFP issued earlier in 2017, a Pennsylvania broadband aggregation group called the Monroe Gigabit Project, which unites more than three dozen public agencies and private companies, will continue through 2017. Four local and national providers submitted bids to 44 organizations across Monroe County, AcceleratePA — a statewide pro-business and technology organization — said after the close of business on Wednesday, June 7.

As a result, the project, which likely would have wrapped before the end of the year, will instead continue through Dec. 31 so consultants can help participants — including the Monroe County 911 Call Center; a regional police force; several townships, boroughs and hospitals; East Stroudsburg University; and Pocono Raceway — shape the best possible deals on broadband.

As with many past industry-supported attacks on municipal broadband, it will take some time for interested readers to dig into the details of the University of Pennsylvania Law School professor Christopher Yoo’s study and fully understand its strengths and weaknesses. That will occur in due course. There are, however, a number of serious problems with this study that leap out at once.

For one thing, almost immediately after releasing their report, the authors issued a press release acknowledging that they had “erroneously stated that the bonds used to finance the projects in Chattanooga, TN; Lafayette, LA; and Wilson, NC; call for balloon payments toward the end of their bond terms.” While the authors claim that this error did not affect their financial analysis, one wonders how many other serious errors exist in the study—and how many other times the authors took shortcuts instead of reviewing the full available data. Perhaps if they had contacted the cities at issue to verify the data, they could have caught this mistake in advance. Apparently, they skipped that step as well. A particularly important shortcoming of the study is that the choice of 2010 through 2014 as the study period introduced significant selection bias. Another problem with the Yoo study is that the boldness of its conclusions is undermined by the many caveats and qualifications set forth at various points in the study.

Too often, reports on the feasibility of municipal broadband networks in smaller markets are sponsored by large telecom companies with a financial stake in the game. Many communities with muni networks wonder if these researchers are measuring success the wrong way.

The authors conducted an analysis of every municipal fiber project in the United States based on the authoritative documentation issued by the cities, specifically the official legal disclosures filed with securities regulators when issuing municipal bonds and their audited financial statements.

We identified 88 municipal fiber projects. Of these only 20 of them report the financial results of their broadband operations separately from the financial results of their electric power operations. We then apply the conventional tools of financial analysis to determine the likelihood that municipal fiber projects will remain solvent. Specifically, we focus on Net Present Value (NPV), which provides a more accurate picture of the cash flowing into and out of an organization than do analyses based on a project’s operating profits and losses.

We also take a closer look at seven projects that either have been successful or have received substantial publicity: Bristol, Tennessee; Vernon, California; Chattanooga, Tennessee; UTOPIA, Utah; Burlington, Vermont; Lafayette, Louisiana; and Wilson, North Carolina.

An examination of the NPV covering the five-year period from 2010 to 2014 reveals that of the 20 municipal projects that report the financial results of their broadband operations separately, 11 generated negative cash flow. Unless these projects substantially improve their performance, they will not be able to cover the costs of current operations, let alone generate sufficient cash to retire the debt incurred to build the project. For the nine projects that are cash-flow positive, seven would need more than sixty years to break even. Only two generated sufficient cash to be on track to pay off the debt incurred within the estimated useful life of a broadband network, which is typically projected to be 30 to 40 years. One of the two success stories is an industrial city with few residents that is unlikely to serve as a model for other cities to emulate.