Brigham City Develops Alternative Method to Finance Publicly Owned FTTH

The good folks at Broadband Properties Magazine recently ran an article I wrote about Brigham City's use of a new financing model for FTTH networks. You can read it there in the nice layout and formatting, or here:

The UTOPIA project, an ambitious fiber-to-the-home network developed by a consortium of 16 Utah cities, has encountered difficulties that delayed its original buildout schedule. However, it is now building out fiber in Brigham City, one of the original cities in the consortium. Brigham City found a local solution to UTOPIA’s slow deployment schedule and created a model to speed buildout in willing communities.

Brigham City, a city of 18,000 in northern Utah, decided to form a voluntary assessment area – sometimes called a special assessment area – to finance the network buildout that will pass all homes and connect residents looking to subscribe. As with all wired networks, upfront costs are steep and typically require a heavy debt load. Brigham City’s unique approach may catch the interest of deployers unwilling or unable to shoulder that debt.

For several months, a group of canvassers organized by UTOPIA went door to door in Brigham City to talk to residents about UTOPIA and ask if they were interested in subscribing to the network. Supporters organized some 30 block parties and invited UTOPIA to attend with a mobile home to demonstrate the superiority of full fiber optic networks. Residents who wanted service were requested to ask the city to create a voluntary assessment area. Creating this special district would allow participants to finance their connections themselves.

Residents who wanted to subscribe could either pay the connection cost up front or agree to pay up to $25 per month (the exact amount would depend on how many joined the program) over the course of 20 years. This amount does not include the cost of services; rather, it is the cost of connecting to the network and having the option of subscribing to UTOPIA-based services (see sidebar for current services). Those uninterested are not levied.

In other UTOPIA cities, when residents subscribe to services on the UTOPIA network the connection costs are included in the service fees. Those connection costs will be deducted for Brigham City residents who have paid the full cost of their connections, meaning that the assessment cost will be balanced by ongoing savings on services.

Perhaps the biggest long-term benefit of this approach is having a built-in take rate. UTOPIA knows it will have almost 30 percent of the Brigham City community from the day it starts offering services – and that those subscribers are sufficiently interested in the services to place a levy on themselves. Having bought in, they are unlikely to switch away if incumbent providers engage in predatory pricing. Furthermore, if they do decide to switch, UTOPIA has not lost the cost of the connection.

Before UTOPIA began building its fiber network in Brigham City, many residents already had access to last-generation broadband services delivered over copper networks. Both Comcast and Qwest offer some broadband in the city, although not everyone has access. In some neighborhoods, Qwest offers “up to” 7 Mbps and Comcast offers “up to” 20 Mbps. As is common with DSL and cable providers, these connections are asymmetrical, offering slow upstream speeds. UTOPIA, by contrast, offers 100 Mbps symmetrical service.

Qwest sent some of its Salt Lake City lawyers to the city council meeting that created the assessment area. The lawyers complained they did not know enough about what the city was doing and noted that Qwest planned to upgrade its infrastructure in Salt Lake City and might invest in some areas of Brigham City in 2010. Qwest also claimed that, if Brigham City supported the network, it was essentially telling private industry it was creating a public monopoly – a stunning statement, as UTOPIA encourages private-sector companies, including Qwest, to offer services on its network.

Brigham City does have a local, independent provider, Brigham.net, that offers dial-up and DSL services. To provide DSL services, Brigham.net leases and resells Qwest circuits. Incumbent telcos such as Qwest have long fought federal regulations that required them to open their networks to competition, and they have largely won. The number of competitive Internet service providers in the United States has fallen precipitously. Once UTOPIA is operating in Brigham City, Brigham.net will be on the same level ground with other service providers, rather than having to pay Qwest exorbitant prices that leave it unable to compete on pricing. (See city council minutes [pdf])

The City put up $300,000 to connect municipal buildings and facilities – a one-time cost that will result in thousands of dollars in savings in operating costs per month while also generating new operational efficiencies from increased network capacity.

Some 400 households paid $3,000 up front for a connection, while 1,200 other households opted for the 20-year assessment (Brigham City has some 5,600 households in total). Residents opting for 20-year assessments will pay $22.50 per month for 20 years ($5,400 over the full term) for their connections. The city creates a lien on each of their properties as security against a $3.66 million tax-exempt bond at 5.5 percent interest. Monthly payments from the 1,200 households will repay the bond.

Those who choose not to take services from UTOPIA will not be assessed, but will still benefit from the network; they are likely to pay lower rates for their triple-play services due to the competition offered by UTOPIA.

The City Council allocated an additional $371,000 to ensure that the network would be able to accommodate residents and businesses who later choose to join. The city believes that if only 207 subscribers join in the future, it will recover this investment.

UTOPIA has long been dogged by a group called the Utah Taxpayers Association (UTA). UTA, working with Comcast and Qwest, has pushed laws through the state government to hinder UTOPIA and regularly attacks it in the press. Prior to Brigham City’s decision to enact the voluntary assessment area, UTA mailed out postcards to residents criticizing the plan. The city quickly responded to each of the points on the postcard, and those who came to the city council meeting to establish the assessment area (other than the Qwest lawyers) were overwhelmingly in favor of the proposal.

However, the UTA’s opposition reveals dangers for other municipalities contemplating this path. (For more thoughts on this, see FreeUTOPIA blog.) UTA’s postcards threatened that people would lose their homes if they did not pay the assessments they agreed to. Due to these scare tactics and the anxieties of a few people who did not realize they were agreeing to liens on their properties because they did not read the contracts they signed, UTA was able to manufacture a controversy. Groups like UTA can stoke the fears invoked by words such as “assessment” and “lien” despite the fact that unpaid assessments rarely lead to foreclosure – in the case of Brigham City, city officials note they have “never exercised its option to foreclose” under liens for street infrastructure projects.

Though this assessment model solves the financing problem, the costs and difficulty of canvassing neighborhoods are fairly significant. Additionally, the citizens of Brigham City were already committed to UTOPIA, having supported the sales tax pledge, and had waited many years for their connection. Thus, they were likely more receptive to the idea than other communities may be. Still, other communities may find they can finance portions of a fiber-to-the-home network with similar assessments rather than attempting to finance the entire network by borrowing against the liens.

This approach is not for everyone, but it may be appropriate for communities in the right circumstances – other communities in the UTOPIA footprint are already investigating it to finish their build out.