Report: Municipal Telecom's in the Red

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Municipal telecommunications operations subject local taxpayers to “large negative returns” and are unlikely to ever operate in the black, according to a recent report by the Progress & Freedom Foundation, a Washington think tank supported by the telecom industry.

To meet their expenses each year, municipal operations receive subsidies of $350 to $1,000 per subscriber from other sources, such as the general tax base or grant monies, according to an analysis, written by foundation senior fellow and vice president for research Thomas Lenard. That's despite operating under conditions more favorable than those of the incumbent telephone and cable providers, including tax exemptions, easy access to public rights-of-way and other preferences, the report said.

MUNYS SEE BIAS

Municipal telecom executives criticized the report as biased.

“I've read it and I don't put a lot of value in it,” said Wes Rosenbalm, president and CEO of Bristol Virginia Utilities, which launched a telecom operation in 2003. The report was generated by an “Astroturf think tank,” he said, adding, “It's obvious they have an agenda.”

PFF's financial supporters include incumbent telephone companies, direct-broadcast satellite providers and the National Cable & Telecommunications Association.

Bristol launched its telecom operation only after state legislators passed two bills specifically authorizing the city to expand its utility services, the report noted.

“Both laws prevent cross-subsidy,” Rosenbalm said. “We do not use taxpayer money.”

The city does have an enterprise fund that BVU has tapped, noted Stacey Arney, vice president of finance and accounting for the utility, but that's different from tax proceeds.

The report asserts Bristol's rates are not sustainable if the operation ever hopes to repay its $8.5 million in bond debt. PFF estimates Bristol is $3.5 million in debt.

“We never planned to make a profit in the first full year of operation,” Rosenbalm said. The fiber-to-the-home build has attracted 4,100 customers — 45% penetration — buying one or more services. Nearly 400 more are waiting for installation.

But the report indicates that some municipal operations, while not directly taking tax funds from the city, could burden citizens in other ways, such as higher electrical rates.

The general manager of Ashland Fiber Utilites in Oregon, another operation cited in the report, lumped the study with other industry-fostered criticism lobbed his way.

“There's so many reports out there, I don't have time to follow it all. I have work to do,” said Dick Wanderscheid.

The report stated Ashland has stopped constructing its fiber ring with coax-to-the-home architecture build, noting that the business plan for the project has been revised at least twice.

Wanderscheid said the build was stopped because it was completed. The remainder of the community houses a few scattered locals that can't be served, he explained. The business plan is being revised, he confirmed, which is not unusual for any business as it reviews actual market conditions.

KUTZTOWN LOOK

The third operation analyzed in the study is Kutztown, Pa., which is building an fiber-to-the-home plant in competition with Service Electric Cable, an operator fully that was upgraded at the time the competitive product was launched. The report estimates Kutztown has a 22% penetration rate among the town's 5,000 utility customers.

Still, the PFF estimated that the town subsidizes the cable build's debt to the tune of $624 per customer, based on the utilities' income statement, according to the report.

The foundation's report concluded that cities would have been better off financially if they had invested the same amount in short-term bonds at market interest rates rather than building operations that will experience annual “cash-flow gaps.”

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