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Summary:

Municipal fiber may the fastest way for smaller communities and those in areas without competition to bring better broadband to their community. But these networks generally aren’t popular with incumbent communications providers, which have a history of suing to stop them. But their tactics have changed.

Municipal broadband networks may the fastest way for smaller communities — and those in areas without much competition — to bring better broadband to their businesses and residents. These networks aren’t generally popular with incumbent communications providers, which have a history of suing to stop them. However, their tactics have changed.

In 2005, the main goal of large incumbent telcos and cable companies was to try for an outright ban on municipal networks. As the public vigorously fought back, incumbents switched to creative assaults on communities’ ability to find or use money to pay for networks. Eighteen states have restrictive muni network legislation (see map) that makes building a community-owned network impossible or difficult, especially when it comes to funding them.

In some of these states, municipalities can’t cross-subsidize their networks to take money from one city department (public works, for example) to support the network, something cities often do on the sly. This type of legislation ignores the fact that incumbents can cross-subsidize to their hearts’ content. In Utah, communities can use no more than 50 percent of their sales tax revenue to cover their general obligation (GO) bonds for networks. Utah and other states enable communities to build the network, but the laws do not allow them to sell services directly to the public, cutting off a source of revenue that could help operate the networks.

There often appears to be a great deal of inconsistency among the various states’ stipulations. In Maine, the legislature recently fought to prevent communities from using bond measures to fund broadband projects (read my previous article to learn how municipal bonds work). In North Carolina last month, the state legislature killed a bill that would have made general obligation bonds mandatory for funding these projects. Another tactic is implementing legislation designed to trigger referendums. Triggering referendums work in incumbents’ favor because they can bury an election with truckloads of money and false claims.

There often appears to be inconsistency among the various states’ stipulations. In Maine, the legislature recently fought to prevent communities from using bond measures to fund broadband projects (read my previous article to learn how municipal bonds work). In North Carolina last month, the state legislature killed a bill that would have made general obligation bonds mandatory for funding these projects.

Peel away the covers a little and you discover these are another incumbent tactic of making rules that trigger local referendums, which work in incumbents’ favor because they can bury an election with truckloads of money and false claims. Alabama, as another example, forces cities to hold a full referendum just one week after introducing a network proposal to the city council, which Opelika, Ala. will do on Aug. 10.

However, increasing public pressure is forcing governors and state legislators to look at removing barriers and preventing new ones. Here are some financing approaches that can help communities skirt legislative restrictions and increase their political capital.

Offense is the best defense.

Execute a preemptive strike in the state capitol. Google’s campaign to bring gigabit fiber to communities motivated and harnessed incredible grassroots-level broadband planning in hundreds of communities. This type of motivation can push legislation that scales back or removes legislative barriers, and give communities the right to determine their broadband future without incumbent interference. For example, even as North Carolina was trying to erect hurdles for municipal fiber networks, the bill that laid down those hurdles had an explicit exemption for Google Fiber.

Turn the rules upside down. If state law requires a referendum, conduct a massive needs assessment project that builds community-wide support for a broadband network before putting the measure on the ballot. Seeds well-planted during the assessment produce results on election day.

Be creative with the rules. Utah Telecommunication Open Infrastructure Agency (UTOPIA), a regional effort involving many cities, was stymied by Utah’s various restrictions, including prohibiting sale of services directly to consumers. Building and operating the network was problematic until UTOPIA brought out a trick borrowed from Comcast and other incumbents.

UTOPIA’s CEO Todd Marriott says it used a contractual utilities enhancement, which uses a specific type of financial instrument that enables the city to hook up subscribers without having to put a lien on their homes. Subscribers receive a bill each month for $22 that pays for the buildout, and another $24 that goes to the networks’ operations costs. Marriott says Comcast puts a similar charge on its bills. Private sector companies offer services over the network. This workaround allows the cities to finance the network and indirectly support services going to consumers without violating the law.

Let’s work together.

Communities can expect pushback on even their participation in public-private partnerships (PPP), despite the presence of private companies (including ISPs). The trick is to wield a big stick of public and political support for the project to keep incumbents at bay while dangling revenue as a carrot. Once it becomes clear that a PPP is going to be a reality, expect incumbents to play nice (relatively) in an open-access network environment.

OpenCape Corp. is a PPP that received a $32 million broadband stimulus grant. It plans to own the infrastructure and license much of it to for-profit entities. CEO Dan Gallagher expects to provide fiber to cellular service providers, develop regional area networks with local cable companies for municipalities, school districts, and libraries, and aggregate bandwidth using a regional colocation center.

“We have built-in discounts for the public organizations, but they will still have to pay for the services they use. There are many ways to generate revenue using this infrastructure beyond Internet access, and we hope to exploit them all,” Gallagher said.

Self-financing: If you’ve got it, flaunt it.

Many communities may want to consider the self-financing approach taken by Santa Monica, Calif., a moderately sized city of 88,000 people. Santa Monica had no money in the city budget for broadband, which is exactly where a lot of communities sit today. The city’s CIO Jory Wolf looked at what city departments and schools were paying for antiquated technology and determined that a city-owned fiber network would save money. His team built the fault-tolerant fiber ring in the central area of the city close to where planners expected to find future businesses, re-development projects and the biggest commercial centers. Wolf said:

We built out fiber for $530,000 for City and school use. This effort helped us look five years into the future. We could calculate future benefits, see how we would replace other technology, and project future costs for adding additional infrastructure. The telecom master fund [that] the savings created allows us to implement new technology such as video surveillance, parking control alarms and parking advisory signage to derive those benefits.

Wolf’s team saw businesses as a separate revenue stream via infrastructure leasing, which went into the master fund to be used to fund expansion of the network and additional applications. Five years later, it’s still working that way. It’s a true self-funding model. The city has never had to borrow money and it’s still running in the black. The team started by generating an initial $200,000 worth of savings, then progressed to $350,000 savings in each of the first three years, and $450,000 in the past two years.

Editor’s note: This column is the second in a two-part series on financing municipal fiber networks. The first column can be found here.

Craig Settles is an industry analyst, broadband strategy consultant and Co-Director of Communities United for Broadband who often holds webinars & talks on the business of municipal broadband. Follow him on Twitter (@cjsettles).

  1. I live in one of the three telecom red states–Missouri. Very disheartening. Note that AT&T home is Texas, which it moved its headquarters to from Missouri (where it keeps a sizable presence as home of the former Southwestern Bell). Texas and Missouri are two of the three telecom red states. Not hard to see how these state legislatures were manipulated into stripping rights from their own local governments to benefit AT&T and Charter (headquartered in Missouri).

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