SNL Kagan: Sobering results from study of 88 municipal fiber networks in U.S.

By  Sarah Barry James

There is a dearth of good data around municipal broadband networks, and the data that is available raises some tough questions.

A new study from University of Pennsylvania Law School Professor Christopher Yoo and co-author Timothy Pfenninger, a law student, identified 88 municipal fiber projects across the country, 20 of which report the financial results of their broadband operations separately from the results of their electric power operations. Municipal broadband networks are owned and operated by localities, often in connection with the local utility.

Of those 20, during a five-year period from 2010 to 2014, 11 were cash-flow negative, meaning they did not generate enough cash to cover their current operating costs. Of the nine that were cash flow positive, five were generating returns so small that it would take more than a century to recover project costs.

In his report, Yoo and Pfenninger called the results “sobering.”

“Many cities managing these projects have faced defaults, reductions in bond ratings, and ongoing liability,” the pair wrote, noting that city officials considering a municipal broadband project must “carefully assess all of these costs and risks” before moving forward.

Yet Christopher Mitchell, director of the Community Broadband Networks Initiative at the Institute for Local Self-Reliance, argued that Yoo’s study did not present an entirely accurate or up-to-date picture of U.S. municipal networks.

“When I looked at the 20 communities that he studied — and his methodology for picking those is totally reasonable and he did not cherry pick them — I was not surprised at his results because many of those networks are either in very small communities … and the others were often in the early years of a buildout during a period of deep recession,” Mitchell said.

Image result for pic EPB lays fiber

An EPB crew lays fiber in Chattanooga, TN         Image Courtesy of EPB


As an example, Mitchell pointed to Electric Power Board‘s municipal broadband network in Chattanooga, Tenn. — one of the five networks Yoo identified as having positive cash flow but at such a low level that it would take more than 100 years to recover project costs.

Specifically, Yoo found EPB’s fiber operations were cash-flow positive by roughly $2 million from 2010 to 2014, whereas the city had used $162 million in local revenue bonds to fund the fiber build-out. Given the costs versus the cash flow, Yoo estimated it would take 412 years to repay the project cost, though he noted EPB’s fiber network is “relatively young, and revenue grew at a healthy 41% annual rate from 2010 to 2014.”

EPB, however, disagrees with Yoo’s calculations. To begin, the company notes the fiber build-out was largely done to support the electric utility’s smart grid project. As a result, the debt for that project was divided between the electric business and the fiber business. Importantly, earlier this month, EPB CFO Greg Eaves announced the fiber business had fully paid down its debt to zero.

“Our fiber-optic portion of the debt is, in fact, paid. There is additional debt related to the smart grid project that’s still within the electric system to pay, but … the fiber-optic system generates enough revenue on an annual basis to more than cover the debt service for the electric system,” J.Ed. Marston, EPB’s vice president of marketing, said in a May 25 interview.

He noted that the fiber-optics business’ repayment had happened much faster than anticipated as consumer acquisition rates exceeded expectations. The company currently counts more than 90,000 residential and business customers, well above the 35,000 fiber-optics customers that had been projected.

“We were very, very conservative in the business plan,” Mike Kaiser, EPB assistant vice president of finance and controller, said in an interview.

Kaiser also noted that the fiber-optic business will pay $13.5 million in access fees to the electric business in 2017, in addition to $24.3 million in expense allocations. As a result, all electric system customers benefit from revenue generated by fiber-optics subscription sales.

In fact, without the revenue generated by the fiber-optics business, EPB estimated it would have had to raise electric rates by 7% this year.

According to Mitchell, Yoo’s study captured the Chattanooga network when it was still “small and growing,” but misses “what’s going to happen for the rest of the life of the network, which I think is the more important part.”

In an interview, Yoo explained the time frame of the study, 2010 to 2014, had been determined by the most recent data available when the study began. Further, he noted that the municipal networks included in the study covered a range of ages.

“The oldest one was 14 years old as of 2014, so we have real world performance from different ages of projects, from brand new to 14 years old. And we will continue to get more information about them as we go,” he said.

Yoo also noted, “Every paper can’t be everything to everybody.” In the case of his study, he decided to target it toward mayors and city council members who may be considering whether to build a fiber-optic network.

“So a lot of it is focusing on the financial impacts on city budgets,” he said, adding that he is not telling local officials what they should or should not do, but rather trying to provide as much information as possible so that officials can make informed decisions.

Yoo’s study also intentionally does not include the impact of higher tax revenues or job creation, which might offset project costs. But that, he said, is something municipalities should consider.

“There are benefits of broader economic activity that don’t accrue to the city — that’s good for the citizens, but the city is still going to have to finance that debt,” Yoo said. “So if I were a city council person, if the benefits really go to the city generally, we should be financing [the debt] through general revenues such as through sales tax, property tax and income tax.”

At a May 24 presentation of Yoo’s study at Penn Law’s Center for Technology, Innovation and Competition, former Pennsylvania Gov. Ed Rendell said he viewed Yoo’s “wonderful paper as a springboard for a national discussion” on how to best to expand access to affordable high-speed broadband to all corners of the country.

According to Rendell, Yoo’s study gives “one side of the dilemma” — namely, the cost associated with doing something. The other side of the dilemma, he noted, is the cost of doing nothing.

“The cost of doing something, meaning building your own municipal fiber network, is almost prohibitive and incredibly risky,” he said.

But the cost of doing nothing, he noted, could be equally high.

“What business … is going to go to a town that doesn’t have internet access?” Rendell said, noting that balancing these costs is “not so easy.”