Guest Commentary: A Municipal High-Speed Broadband Network Would Be a Huge Financial Risk

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By Dan Carson

This Tuesday, the Broadband Advisory Task Force (BATF) will step forward with its final comments on whether the City of Davis should build and operate a municipal fiber network that could bring higher broadband speeds and new services and technology to our community.

BATF’s community broadband advocates wrapped up three years of hard work as citizen volunteers with a letter endorsing such a venture in concept. The panel did not offer a specific plan to accomplish their dream, calling instead for more financial and technical studies of building such a system. All Davis citizens should read and consider the conclusions of BATF and its response by city staff. I welcome their advice and thank them for their public service.

But don’t just read their latest letter – read all of the information the task force produced. Under the auspices of BATF, the city hired one of the top teams of telecom experts in the country, CCG Consulting and Finley Engineering, to assess the feasibility of a municipal fiber network in Davis and whether local residents would sign up for it. They determined that a municipal broadband project would be costly and risky and that community interest in committing to pay for such a service is weak. Specifically they found that:

— Building such a network in Davis would be costly. The entire system would have to be buried underground. Our high population density means conduit and fiber must be laid down both sides of residential streets, instead of the customary one side. High labor costs would boost construction and operating costs.

— The total cost of construction would exceed $100 million, comparable to the cost of a new water system or sewage treatment plant. Bond issuance fees, working capital, capitalized interest and a debt service reserve would bump up borrowing costs for construction to as much as $140 million.

— Similar ventures have failed in Monticello, MN; Crawfordsville, IN; and Alameda, CA.

Because investors view broadband revenue bonds as pretty risky, the city might have to pursue a general obligation bond (requiring two-thirds voter approval) and make our General Fund a backstop for paying off bonds if the broadband venture failed. That could put pressure on the funding source used to pay for police, fire, parks, and roads.

— Even under fairly optimistic assumptions about the number of customers who would sign up for municipal fiber, the consultants said “the financial projections for building fiber within the city were not as good as the city had hoped for.” Operating losses would occur on day one and range from $34 million to $81 million over 25 years. Competitive pressures mean that the system would be unable to charge higher rates to customers to match Davis’ higher costs.

— Because customer fees would likely fall short of supporting a municipal fiber system, the city would have to seek voter approval for a tax hike to provide between $33 million and $60 million in taxpayer subsidies. A sales tax increase of a half-cent or more is considered most likely. Locking up tax money for a municipal fiber system would require two-thirds voter approval. The consultants said winning over Davis voters, who recently rejected a parcel tax hike for road repairs, “would undoubtedly require a major effort to educate the public and get community buy-in.”

— Comcast, our biggest local broadband provider, has a track record of cutting rates and improving its bundled services to crowd out competitors. A Davis municipal broadband network might need even more public taxpayer dollars to compete.

— Davis has good broadband options today even without the development of a municipal fiber system. Comcast is now advertising 1 Gbps and 2 Gbps internet download speeds in their “Gigabit” and “Gigabit Pro” packages. Only 16 percent of Davis residents are unhappy with their internet services.

— A college town could be tough for Davis broadband, with students likely to be fickle customers. Moreover, large student apartment complexes in Davis have locked in long-term deals with various private providers for internet and cable services, and Comcast and AT&T are moving aggressively to lure more such customers.

— Only 21 percent of Davis residents said they would definitely buy their service from a city system. “This is significantly lower than what we have seen in other markets,” the consultants stated, and “indicates a market that is not massively unhappy with the incumbent providers and not wildly enthusiastic about fiber. It’s a market where a new provider would need to prove themselves and expend significant marketing effort to win over customers.”

Recent developments make a large public investment in broadband seem more risky than ever in a highly competitive, and increasingly disruptive, broadband marketplace.

The FCC last year opened the gates for cellular wireless 5G service by imposing strict time limits for cities to allow the installation of 5G equipment on utility and light poles. Two companies have already filed permits to establish 5G networks in the City of Davis – permits it has no legal choice but to approve. And, the master of all business disrupters, Amazon, has begun launching thousands of low-level satellites into orbit capable of providing broadband worldwide. Competitors like SpaceX are hot on their heels. Broadband technology is morphing rapidly and the market is fragmenting.

Despite the troubling findings in the CCG and Finley Engineering reports, task force members remain steadfast in their support of the concept of a municipal fiber system. They are asking the city to spend more money on studying such ideas as building a municipal fiber network in stages or levying assessments instead of taxes to pay for it.

I look forward to hearing more about these ideas, but worry about a bullet train-style boondoggle in which construction starts only to find out that the rest of the money needed to finish a network isn’t coming. Davis could end up building a “network to nowhere.” Imposing citywide assessments or taxes could force Davis consumers who want to keep their Comcast or AT&T bundles to pay a second time for a municipal broadband system they don’t want. That doesn’t seem fair.

Nobody disputes the benefits of improved high-speed broadband for economic development, education, technological innovation, and addressing the digital divide. The question is, how do we get these benefits without saddling our taxpayers with huge financial risks? We already face an $8 million a year funding gap for basic city services over the next 20 years.

This Tuesday, I would also like to get the community’s feedback on a different approach I call, “If you can’t beat ‘em, join em.” Instead of further studies of municipal broadband, should we explore how we can forge innovative partnerships with the private sector and UC Davis to foster high-speed broadband competition that will improve service and reduce monthly bills for Davis businesses and residents?

Dan Carson is a member of the City Council and liaison to the City of Davis Broadband Task Force. Carson, who graduated with an MBA from UC Davis, retired as deputy analyst after a 17-year career at the California Legislative Analyst’s Office, an independent and nonpartisan fiscal and policy advisor to the Legislature.

Where Can I Read the Task Force Reports?


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Disclaimer: the views expressed by guest writers are strictly those of the author and may not reflect the views of the Vanguard, its editor, or its editorial board.

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8 thoughts on “Guest Commentary: A Municipal High-Speed Broadband Network Would Be a Huge Financial Risk”

  1. Matt Williams

    As the Chair of the Finance and Budget Commission and a member of the BATF, I think Council Member Carson’s concern about the “What will it cost?” question is very important.

    Using the consultant’s construction and operations cost estimate, together with a debt service calculator, and the financing advice a BATF subcommittee got from a professional municipal financing advisor, I calculate the cost per household per month at $20.

    My household’s current bill for Internet is $39.95 per month. That current bill would go away once municipal fiber becomes available, so my personal monthly cost for Internet connectivity would go down by $20 per month.

  2. Matt Williams

    As a member of the BATF I would also like to share with the public the following list of reasons that explain why BATF came to the official conclusion in writing that “the emotion and passion around the concept of a municipal fiber project could not be any more intensified.”

    BATF officially chose not to include the detailed list in the current reccomendation memo because the focus of the memo was limited to the two additional tasks Council gacve the BATF in 2018. These reasons cover what was learned during the whole BATF duration from 2016 to 2019. It is important to note that there are some BATF members who might not personally agree with some of the listed reasons; however ALL of the reasons were actively discussed by the BATF.

    While I am a member of the BATF, and also the Chair of the Finance and Budget Commission, I present these reasons to you as an individual:

    ECONOMIC DEVELOPMENT

    __ 1. There will be significant obstacles to Economic Development if the City does not proceed with Municipal Fiber as discussed by the BATF and “own the last mile” of the local Davis fiber communications network.

    __ 2. … and significant economic development opportunities will become available if the City does “own the last mile” of the local Davis fiber communications network.

    __ 3. Prospect companies thinking about locating in Davis will see a proactive, in-place telecommunications deployment, ready for their immediate use, rather than an ad-hoc, reactive telecommunications deployment that requires expensive and time-consuming case-by-case buildout.

    __ 4. Being able to market “The City of Davis” as a network neutral and fiber-ready city has a very broad appeal to startups and mid-sized companies, especially those in “soft industries” (companies that employ knowledge workers and no heavy manufacturing)

    Fiber to every house/building, and those owned by the City, is essential for the City’s future economic health.

    Telemedicine and medical education enhancements are making fiber essential to the personal health of more and more Davis residents, especially as our community’s cohorts of seniors increases;

    A “21st Century Research University will require remote access to on-campus experiments. Without fiber that will not be achievable.

    Helping UCD build a city-wide virtual campus will be a very positive win-win step forward in building the relationship between UCD and the Davis community

    Fiber supports Smart City/Public Safety initiatives like Police and Fire applications; utility meters, and various other civic applications.

    Fiber is necessary to implement Smart City/Smart Grid requirements to respond to and make meaningful progress on the Climate Emergency Declaration passed by Council.

    Broadband Access for every resident of Davis will define economic and social justice for all based on access. Some examples of such access are:

    __ A. Extension of In-Class/On-Campus grade school and high school assignments and research tools to off-campus venues. The City could establish training program/internship for high school students wanting hands-on experience with the maintenance of the network. This could be a gateway into real-world IT and there is a need for IT professionals.

    __ B. Online education. It will be essential for economic mobility, crucially so for the disadvantaged.

    __ C. Interactive access to City services, which will evolve to require bb service.

    __ D. Employment and career development opportunities

    __ E. Family communication, such as keeping an eye on aging parents

    __ F. Greater choice and level of service and net neutrality for residents and businesses in the community,

    __G. Private service without commercial data mining of every action by Davis residents, and

    __ H. City-owned fiber to every premise is essential for social justice and net neutrality.

  3. Ron Glick

    “Under the auspices of BATF, the city hired one of the top teams of telecom experts in the country, CCG Consulting and Finley Engineering, to assess the feasibility of a municipal fiber network in Davis and whether local residents would sign up for it. They determined that a municipal broadband project would be costly and risky and that community interest in committing to pay for such a service is weak.”

    Reminds me of the consultants the city hired to pitch paid parking who turned out to be shills for the parking industry.  They were the top consultants in that field as well.

    Maybe we should look at how much the city is spending each year on outside consultants and its impact on city finances. Seems to me these consultants are a huge drain on city finances.

  4. Bill Marshall

    levying assessments instead of taxes to pay for it.

    Unless it is only those using the new facilities, both are the same, technically… look at your phone bill… look at what you are “assessed” for, whether you use them or not… it’s a tax… in most cases, fully supportable as to purpose… but still a ‘tax’…

    Other than that, have not yet drilled down into the staff report, but have promised someone I will… but my current view, informed by past experience, is that the City should make no binding decision, at this juncture… “just say no”… you can always say “yes” later… works in many aspects of life, without much in the way of ‘day after regrets’… if the concepts are great, they’ll still be around… but once a conception starts…

  5. Craig Ross

    Some seem to have read Carson’s column as being in opposition to it, I see it as a note of caution.

    Note he writes: “Nobody disputes the benefits of improved high-speed broadband for economic development, education, technological innovation, and addressing the digital divide. The question is, how do we get these benefits without saddling our taxpayers with huge financial risks? We already face an $8 million a year funding gap for basic city services over the next 20 years.”

    Seems like a reasonable concern.

    1. Matt Williams

      Craig,  That comment of Dan’s falls under the category of “damning with faint praise”

      I think his statement, “but worry about a bullet train-style boondoggle in which construction starts only to find out that the rest of the money needed to finish a network isn’t coming.” is a much more accurate assessment of Dan’s opposition.  You are very good at recognizing and calling out Rik Keller’s hyperbole.  I would have thought you would recognize Dan’s hyperbole when you saw it..

      It is a reasonable concern, but in the context of all the social justice and achievement gap and monopoly pricing and digital divide access issues, it is pretty far down on the list of concerns.

      An even bigger economic concern is that using the consultant’s construction and operations cost estimates, together with a debt service calculator, and the financing advice a BATF subcommittee got from a professional municipal financing advisor, I calculate the cost per household per month at $20.

      My household’s current bill for Internet is $39.95 per month. That current bill would go away once municipal fiber becomes available, so my personal monthly cost for Internet connectivity would go down by $20 per month.

      1. Bill Marshall

         I calculate the cost per household per month at $20.

        Is that based on spreading the cost to every household, whether they switch providers or not?  Does it include households that choose not to “do” internet?  Does it cover MF units as a ‘household’, or is that $20 what an entire MF complex would pay?

        Does it include all the costs for the municipal ownership, and concomitant costs of construction operation, maintenance, administration, particularly  additional ‘permanent’ City staff (total comp)?

        Enquiring minds want to know…

        The ‘Municipal’ model is fraught with known and unknown dangers, some of which were presaged with the Davis Community Cable experience in the early 80’s.  Those who do not learn from the mistakes of the past are doomed to repeat them… think that is not a novel concept…

        The big rub is how the costs are apportioned in the ‘municipal’ model… still have unanswered questions as to that, but sure sounds like a “tax” paid by those who may not choose to avail themselves of “the service”… or do not benefit proportionally … guess they should just accept being “serviced” in the animal husbandry sense of the term.

        I say again, the time is not ripe for the City to make ANY decision or commitment on this… the active proposal sure seems “ripe” as to ‘smelly and full of %&@#’.  It should be rejected.

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