Cable and Towns Forge Partnerships

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After years of being at odds with each other, cable
operators and small-town governments may have finally hit on an idea that makes it worth
beating their swords into plowshares.

The two sides are discovering, albeit slowly, that by
partnering, they can jointly build advanced telecommunications networks capable of serving
both their needs.

Experts said that if the two can get past years of strained
relations, it's a cost-effective way of bringing a new generation of enhanced
services to small communities that would otherwise be left off the information
superhighway.

Presumably, the benefits to the city are obvious: It gets a
technically savvy, well-heeled partner that can assume a share of the risks involved with
building the new network.

"Many times, a cable company or telephone company will
say that it is not economically viable to upgrade their local plant," said David
Martin, telecommunications manager for NMPP Energy, a cooperative venture between 145
municipal utilities serving more than 650,000 consumers in eight Midwestern states.

"So, some of these cities will build these networks,
partnership or no partnership. But assuming that a cable operator has a decent plant,
it's to the town's and cable provider's advantage to team up on this
thing."

For cable operators, meanwhile, public-private partnerships
can mean avoiding expensive upgrades of their local systems, while removing the threat of
the towns using their municipal electrical utilities to launch overbuilds of the
incumbent.

"Why should they [local governments] spend a lot of
money reinventing the wheel, when it already exists?" asked Russ Gifford, general
manager of a 5,000-subscriber Jones Intercable Inc. system that is currently exploring a
partnership in South Sioux City, Neb.

Under the most widely touted scenario, the city would build
a fiber optic backbone around the community. The operator would then interconnect its
network with the new system to provide such services as Internet access, telephony and
high-speed-data transmission.

And the city would use its share of the combined network to
deliver such new municipal services as electrical-load management, remote meter-reading
and home-security systems.

Surveys conducted by NMPP for its members -- which serve
towns with populations as large as 200,000 and as small as 345 -- have turned up
predictable results.

"They're very interested," Martin said.
"They want to see if there is an opportunity to work with a provider to improve the
quality of life for their citizens. If they [cable operators] sat down with all of these
cities, I think that they'd be hard-pressed to keep up with all of the activity in a
timely fashion," he said.

Another advocate of the partnering concept is Robert
Duchen, a vice president with Denver-based municipal consultant River Oaks Communications.

Duchen recently urged members of the National Association
of Telecommunications Officers and Advisors to sit down with their telecommunications
providers and explore "the mutual interest that the various entities have with one
another.

"There may be a realization that this may make sense,
both politically and economically," he said. "It's something that cities
and MSOs should take a look at, because there are all sorts of ancillary benefits that can
be derived from a strategic alliance."

THE HURDLES

Duchen conceded, however, that there are hurdles that must
be cleared to forge such alliances. One can be the operator's desire to control the
system. Another is concern that the city might lease a portion of its capacity to a
competing video provider.

Not surprisingly, most cities with municipal utilities see
such partnerships as a way of protecting their share of the local electrical market, which
figures to become a national free-for-all once the industry is deregulated and consumers
are free to purchase cheap power from providers located hundreds of miles away.

A partnership between the city and a local
telecommunications provider would produce a bundled package of essential and nonessential
services that would help the city to avoid having its customers pirated, Martin said.

"If that customer is getting three services from one
provider -- it may be three providers operating under one name -- they'll feel more
of a sense of loyalty," he said, "especially if the provider has been offering
good service at a reasonable rate."

TWO IN THE WORKS

The first two of these public-private ventures are already
on the drawing boards in South Sioux City and in LaGrange, Ga., with populations of just
12,000 and 27,000, respectively, making them unlikely candidates for the latest in
telecommunications services.

Even in Iowa, where Tele-Communications Inc. has been
besieged by municipal overbuilds, MSO officials said the town of Indianola has indicated
that it would rather talk partnership than assume the risk of building its own municipal
network.

However, each community has its own ideas on how to
structure its partnership.

In LaGrange, a community some 60 miles southwest of
Atlanta, city officials are within weeks of "pulling the trigger" on a unique
partnership with Charter Communications Inc., the St. Louis-based cable provider for 7,000
local residents.

Under a deal being finalized last week, LaGrange will
acquire Charter's network for between $2 million and $3 million. After paying for an
upgrade to 750 megahertz, it proposes to lease 619 MHz back to Charter, which will use it
to offer cable television, along with a host of other enhanced telecommunications
services.

Meanwhile, Charter's lease payments will be enough to
repay the $9 million in taxable bonds that the city will issue to finance the project, and
it will also continue to pay a 5 percent franchise fee to LaGrange, up to $170,000.

For its part, LaGrange's allotment of 24 MHz will go
for monitoring electrical, water and natural-gas usage; remote meter-reading; and home
security.

And the two sides will share in the expense and profits
from leasing the remaining 107 MHz to other service providers that may want to use the
network to offer Internet-access services. Other likely candidates are the long-distance
carriers, which could use the network to compete with BellSouth Corp. in the local
telephone business.

THE BENEFITS

Beyond the obvious benefit of having an experienced cable
operator using a state-of-the-art system to deliver enhanced services, there are financial
considerations for the city.

While Charter will make its lease payments monthly, the
city will make its bond payments every six months, which means that LaGrange is guaranteed
to earn some $30,000 per year on the money.

"We're not doing this to be a model," said
Joe Maltese, LaGrange's director of commercial and economic development. "In
fact, we're wondering why it hasn't been done before. This way, Charter wins and
the city wins. But the bottom line is that the consumer has to win, through increased
service, lower rates and better alternatives."

A different scenario is being pursued in South Sioux City,
where local officials want to build an eight-mile fiber optic ring around the community
that would be linked to the local cable network owned by Jones.

"We need each other," admitted city administrator
Lance Hedquist. "We need their links to the home, and they need our fiber optic
ring."

However, cities will find that there are common issues that
will always need to be resolved, Hedquist said. For example, who will provide what
service? Will the city agree not to bring in a competing service provider? Will both sides
have ample capacity available for their use? And which entity is going to be responsible
for the upkeep of the new network?

Nevertheless, Gifford believes that such partnerships can
ease the per-subscriber costs of delivering new services to smaller markets.

"If a piece of equipment costs $40,000 for a
100,000-subscriber system, and the same piece of equipment costs $40,000 at a
5,000-subscriber system, you can do the math yourself," he said. "The payback on
the first system stretches over months. But at the second system, it's measured in
years. But if you can partner with the city, the cost is not that great to make it
happen."

Research tends to support the view that cable operators
would be better off teaming up with municipalities than trying to go at it alone.

According to a survey by ICR Research Corp., 22.8 percent
of consumers would prefer to get their telecommunications services from their electrical
provider, while just 8 percent wanted the services delivered by their cable operator.

Meanwhile, research by Opinion Dynamics Corp. revealed that
17 percent of consumers would switch to an alternate electrical provider for a 5 percent
discount on price, while 36 percent would jump for a 10 percent rate cut.

This makes it advantageous for a municipal utility to
partner with a cable operator, Martin said, since a bundled package of telecommunications
services would keep consumers from bolting. In fact, statistics indicated that 44 percent
of consumers would prefer that their packaged telecommunications services be delivered by
their electrical company.

Gifford believes that if these early partnerships succeed,
they could lead to a rapprochement between cities and cable operators, which have spent
years bickering over service and rates.

"You'll have cities asking their cable operator,
'Why aren't we doing this?'" he said. "And the cable operator
will be thinking, 'Maybe if I do this, the city will stop hammering on
me.'"

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