Wadsworth Overbuild Draws MSO Flak

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Two years after going online, Ohio's first municipal cable
overbuild is under fire again from private operators worried that other cities may follow
its lead.

The dispute has reached the Ohio General Assembly, which is
weighing industry-sponsored legislation inspired by an overbuild in Wadsworth -- a
community of 18,500 -- that is whittling away at Time Warner Cable's subscriber numbers.

"Absolutely, they've taken customers," Time
Warner division president Steve Fry said. "But what we want is to shine the light on
what the competition is doing."

To date, just two Ohio cities have launched competing
municipal cable systems. But up to nine others are reportedly eyeing video services as a
way of replacing revenues that may be lost to deregulation of the electrical industry.

In the case of Wadsworth, financial experts contended that
the local network remains afloat through creative booking. By allocating its cable-related
expenses to the city-owned electrical utility, the system's performance is artificially
inflated, they said.

Wadsworth officials, who have grown accustomed to life
under the microscope, insisted that cable's vehement opposition indicates that the city is
on the right track.

"The bottom line that is everybody is
benefiting," Wadsworth director of public service William J. Lyren said.
"Regulation doesn't work -- competition does."

BORN OUT OF POWER-DEREG CONCERNS

The struggle for the hearts of local cable viewers began in
1993, when the city decided that electrical deregulation was just around the corner,
requiring a new suite of services that could be offered to local power customers.

Their answer was a "Supervisory Control and Data
Acquisition" system -- a broadband fiber optic network capable of automated meter
reading, load management and "time-of-day" usage management.

Presumably, the system would also deliver fire- and
burglar-alarm service; security systems for public buildings, parks and schools; direct
access for schools, homes and libraries; and telephone service for municipal facilities.

However, local officials overlooked the fact that Time
Warner, which operates a 4,000-subscriber cable system in Wadsworth, already provided the
city with an institutional network capable of performing those functions, Fry said.

"I was surprised as anybody to see that they were
building this SCDA network," he added.

Fry said that by 1996, the city's real intentions had
become apparent: It launched cable service in competition with Time Warner, but it was
still not offering any of the electrical services the network was originally built to
provide.

"I can see no other reason [for the SCDA
network]," Fry said. "The city said, 'We want to provide remote meter reading,
telephone, a host of services.' But at the end of the day, none of that is being done. So
why was the system built?"

Lyren said electrical services will be offered once the
network is completed, sometime in the next year.

"You have to have the entire network in service,"
he said. "We can't cut meter-reading costs if we don't have the entire system
operating."

As for the city's cable offering, Lyren said, Time Warner
brought an overbuild on itself when it announced in 1994 that its subscribers were being
slapped with a $3.45-per-month charge for new set-top converter boxes, even if they didn't
want the additional services the terminals provided.

"People have long memories that come into play when
they have to make a price decision," he added.

In recent testimony before the Senate Finance Committee,
Lyren said: "Disgruntled cable customers began talking to one another, and it wasn't
long before they were asking why the city couldn't provide cable service over the [SCDA]
broadband network. In all of my years of public service, no issue has brought more public
support than providing a competitive cable system."

INITIAL TARGET: 1,800 SUBS

Wadsworth's cable system went online in January 1997.

According to its own feasibility study, the system would
need 1,800 customers to meet its goals of offering rates 25 percent below Time Warner's;
covering 100 percent of operating costs; paying back headend-capital costs over eight
years; devoting 5 percent of gross revenues to the general fund; and using another 5
percent to support community-access channels.

By this past April, the system had signed up 2,353 local
subscribers, most drawn to a 78-channel offering priced at $24.14 per month. Time Warner
offers identical service for $23.95.

However, the MSO's rates came down from a high of $56.75,
and only after the city agreed to declare effective competition in the market in exchange
for settling a rate-overcharge case that refunded $41 to each customer still on Time
Warner's system, but not to those who had jumped to the municipal network.

"Still, people have seen a tremendous benefit from
competition," Lyren said. "The mere fact that they have lower cable rates
everywhere in the city tells you that. And the fact that Time Warner is offering its Road
Runner Internet service at a $10 discount is another indication of competition at
work."

Meanwhile, with 84 municipal electrical utilities in the
state, the Ohio cable industry has responded to the danger of more municipal overbuilds by
sponsoring the "Fair Competition in Cable Act" -- a bill requiring that
government-owned systems adhere to the same financial and legal requirements as existing
operators.

As written, the bill mandates that local governments obtain
franchises from the Public Utilities Commission of Ohio and pay the same taxes and
franchise fees as private operators.

It also requires cities to incorporate their systems as
either for-profit or nonprofit entities; to conduct feasibility studies, followed by
public hearings, to decide whether to build networks; and to hold hearings when city-owned
networks seek additional funding from local governments.

Ultimately, the intent is to ensure proper cost allocation
of expenses, thereby guaranteeing that consumers won't subsidize risky cable ventures that
could result in high electrical rates.

"Those are important issues for us," Ohio Cable
Telecommunications Association executive director Ed Kozelek said. "Captive
electrical ratepayers shouldn't be subsidizing a speculative, discretionary entertainment
service."

POWER-RATE SHOCKS FEARED

As proof, Kozelek said, a $3.6 million surplus generated by
the Wadsworth electrical utility has disappeared, forcing the city to announce a $4
million increase in rates to cover work on its substations.

He added that municipalities already enjoy an advantage
over private operators: In addition to their tax-exempt status, their start-up costs are
significantly lower due to their existing infrastructure, personnel, equipment and billing
systems.

Nevertheless, unlike states where the industry is trying to
prohibit cities from entering the cable business, Ohio operators simply want a fair shake,
he said.

"We'll compete with them on better technology, better
systems and better customer service," he said. "We'll go door-to-door if
necessary. But they have to play by the same rules that we do."

Stating the industry's case before the Senate Finance
Committee in April was University of Denver professor of finance Ron Rizzuto, whose
economic analysis found that Wadsworth was allocating everything but the cost of its
headend to its municipal electric utility.

The result was an ability to report positive free cash flow
in only its second year -- a rare occurrence for a municipal overbuild -- he said.

"It looks like they're making money, but they're not
even at the breakeven point," he added.

Rizzuto co-authored a study last year that concluded that
without financial support from their electrical utilities, typical municipal cable systems
"could not be sustained over the long run in a competitive marketplace."

In the case of Wadsworth, by attributing its costs to the
local electrical utility, the city has created a "subsidized predatory
situation" that allows it to offer artificially low cable rates, undercutting those
of Time Warner by 26 percent, he said.

"It's a clear case of cross-subsidization,"
Rizzuto said. "They make the investment and allocate it to the power company, then
proclaim they're doing a great job."

Additionally, Fry argued, cities are "wrapping
themselves in the flag" by insisting that Ohio is a "home rule" state,
which allows municipalities to do anything they're not legislatively precluded from.

"So they charge the cost of these networks off to
their power companies in order to maintain artificially low cable rates," he said.
"But I don't have a power network to charge stuff off against in order to give my
customers a break."

CITY BUILDS A TOLL ROAD

Lyren countered by insisting that the city has only
activated two of the 34 fibers that it's installing, with the rest earmarked for other
city utilities that will pay for the right to use them to deliver other municipal
services.

"What we're building is a toll road that everybody
will pay to use," he added.

He labeled the proposed legislation as an
"anti-municipal-cable bill" designed to force regulation on cities at a time
when cable has been deregulated.

"At a time when cable will have no regulation, [the
cities] would be regulated by the PUCO," he said. "This is a cable bill under
the guise of leveling the playing field."

The argument over the Wadsworth system is not lost on city
officials in Lebanon, Ohio -- a community of 14,000 residents that recently became the
state's second municipal overbuilder by launching its own cable service in competition
with Time Warner.

Although only 405 customers were online at the end of
April, deputy director of telecommunications Jim Baldwin predicted that the municipal
network will achieve a 40 percent-penetration rate when it reaches the 2,300 area
residents who are currently on a waiting list.

Most of Lebanon's subscribers, Baldwin said, are former
Time Warner customers who now pay a city rate of $20.98 per month for a 65-channel analog
lineup, compared with $38 for 62 channels offered by the incumbent, not including an extra
$5 for each set-top converter.

"We've only had five customers go back to Time
Warner," Baldwin said, speculating that those subscribers were lured back by
unpublished discounts the MSO has been offering to local residents.

"We had one lady who called to disconnect her Time
Warner service, and by the time she got home, she was getting all of the premium channels
for free," he added.

CITIES DON'T NEED PROFITS

Baldwin said the cable industry's argument against
municipal overbuilds is built on the "fallacy" that cities have to make money,
much in the manner that a private entity must turn a profit in order to satisfy its
shareholders.

"If we can break even at $21 per month, we're doing
fantastic," he said. "We don't want to make a profit. Our dividends are turned
over to the customer in the form of lower rates."

Moreover, Baldwin added, he doesn't see anything wrong with
an electrical utility underwriting a cable utility, as long as the power company utilizes
the telecommunications network.

"You're going to tell me that Time Warner [Inc.]
doesn't take money from the cable division and put it into movies, books and foundering TV
networks?" he asked.

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