Mediacom Battles Overbuild
By JOE ESTRELLA -- Multichannel News, 9/11/2000
A $16 million municipal overbuild in Spencer, Iowa, became the focus last week of a legal battle waged on two fronts.
Lawsuits were filed in Clay County District Court on behalf of Justin Campbell, a Spencer resident, and Mediacom Iowa, the town's incumbent cable operator.
Campbell is employed by Mediacom Communications Corp. in Spencer. The city plans to launch a municipal telecommunications network that would compete for 5,000 area cable subscribers.
The twin lawsuits came after county attorney Michael Zenor cited scheduling reasons for not acting on allegations that the city and Spencer Municipal Utilities were putting captive electric rate payers at risks by entering a competitive telecommunications market.
Campbell wants permission to sue on behalf of the state, while Mediacom is asking for a declaratory judgment halting the project.
Both alleged that SMU and the city violated the Iowa code by building a network that would operate without a franchise comparable to Mediacom's and without the same regulatory burdens. In fact, the city allegedly reduced the regulatory burden on its own network by exempting it from certain zoning requirements.
Both also alleged that SMU financed the project through an $8 million "interfund" transfer disguised as a loan to the new telecommunications utility. The loan was made at a below-market interest rate of 4.5 percent by an electrical utility that pays up to 5.75 percent on funds it borrows.
"It's like loaning money to a relative. You're never going to see it again," said Eric Breisach, an attorney with the firm of Fleischman and Walsh, which filed both actions.
The suits went on to allege that a second $8 million was raised in electric-utility revenue bonds that would be used to fund the actual fiber and coaxial cable, while the first $8 million went to cover electronics and operating costs.
"At the end of the day, there was $16 million flowing out that would otherwise be spent on the electric utility," Breisach said.
If the telecommunications venture failed, the cost to the electric utility would amount to $3,200 for every household in Spencer.
"Certainly, Mediacom is injured. But the residents of Spencer are also injured because SMU has taken up to $16 million of their money," Breisach said.
Both Campbell and Mediacom are asking that the city and SMU be enjoined from proceeding with the project or from using electrical funds to support the telecommunications utility.
They also requested that no future interfund transfers be allowed and that funds already loaned to, or spent on, the telecommunications utility be repaid within 90 days. The telecommunications utility would also be required to obtain financing from private sources.
Breisach said the two lawsuits were designed to address the damage being done to the public and Mediacom. "There's a public harm and a private harm," he added. "The Campbell lawsuit is going after the public harm. The Mediacom lawsuit addresses the private harm to it as a business."
Spencer officials, meanwhile, were playing it close to the vest. "Our attorneys have reviewed the complaint and they believe all Iowa laws have been followed," SMU spokesman Curtis Dean said.
One interested observer said Spencer had adhered to safeguards imposed by the state when it held a public referendum on the proposed overbuild.
"The question was put to the citizens-who would ultimately be asked to pay for this-before any money was expended," said Brian Grogan, a partner with law firm Moss & Barnett. "A referendum was held where citizens were asked whether to proceed, and they decided to proceed."
