Chelan PUD in Washington Reconsiders Broadband Stimulus Grant

For the last 6 weeks in Chelan, Washington, the Public Utility District has had to make some hard decisions regarding expanding its rural FTTH network using a broadband stimulus award from the federal government. Chelan was an early pioneer of rural FTTH, operating a network that serves over 2/3 of a rugged county that offers great rock climbing and hiking opportunities (I checked it out personally).

As we reported last year, Chelan's citizens had strongly supported accepting the stimulus award and paying for their required match by modestly increasing electrical rates (which are among the least expensive in the nation).

At that time, the PUD believed its network passed over 80% of the county. But after reassessing their coverage and changing the leadership of the group in charge of the fiber-optic aspect of the utility, they found the network passed closer to 70% of the population. They also re-examined assumptions about the cost of expanding the network's reach:

The PUD’s financial review resulted in a series of revised statistics that PUD engineers presented to commissioners Monday.
Of the county’s 43,000 premises — mostly homes and businesses — 30,000 have access to fiber.

Some 6,000 don’t have access because they live in areas where hookups are more costly, despite their often urban settings.

In these areas, the cables that supply electricity are buried directly in the ground. Fiber hookups require costly trenching and installing conduit.

Another 7,000 premises don’t have access because they’re very rural. Fiber access to all but the most rural of these locations will be funded jointly by a $25 million federal stimulus grant and PUD matching funds of about $8 million.

Of the 30,000 with access, some 37% are taking a service (though they have to subscribe through independent service providers that contract with Chelan PUD due to Washington State law denying the opportunity for PUDs to offer retail services on their own network. Nonetheless, they are signing up 100 new customers per month.

The problem is that some of the new connections are in high cost areas (whether due to distance or underground utilities). So the PUD began considering an approach that would cap their cost while giving the potential subscriber different options to connect:

Under conditions of a recommended Line Extension Policy presented Monday, the PUD would continue making connections, at no additional cost to end-users, if they are estimated to cost the PUD less than $1,500. Any connection costing more than that would require the customer to pay the balance under arrangements to be made with a service provider – if the customer wishes. Without cost-sharing, no fiber connection would be made where costs are higher than $1,500.

In presenting the policy to the board for consideration before a vote next Monday, PUD General Manager John Janney said that for every dollar invested in the fiber network by the PUD, it loses 7 cents – something that needs to change. The PUD is evaluating the entire fiber-optic program to develop a new long-term strategy that is expected to be finished before the end of the year. In the meantime, Janney said the Line Extension Policy would allow work to continue on connections and give end-users a way to contribute to paying higher costs if they wish. The policy would protect the PUD in line with its new financial principles and still give end-users a voluntary option for a fiber connection.

The independent ISPs were not thrilled at the prospect of having to play a role in connecting these higher-cost subscribers:

Representatives from service providers LocalTel and Genext said they support the PUD's focus on controlling costs, but they aren't eager to develop procedures and hire staff to oversee and manage line extension requests, according to a press release from the district.

Both LocalTel and Genext said they would prefer that the district budget an amount each year to allow as many connections as possible at an average cost of $1,500 and hold to that spending limit, if necessary. They also said they look forward to seeing clear long-term goals from the district for the fiber program, the release said.

Of course, as the ISPs share none of the risk or costs in expanding the network to higher cost areas, their opinions may not carry much weight in the decision. Unfortunately, it seems the PUD is stuck forcing the ISPs to get involved due to the wording of the state law restricting PUD authority to offer retail services -- as noted in this story about the new policy:

A big difference with the fiber line extension policy is that the arrangements have to be made through a service provider - one of the retail firms that actually provide telephone, Internet or television service to the end-user over the fiber line. The district is only authorized to provide wholesale fiber services.

This line extension policy, which we wrote up here, gives more choices to households in high cost-to-connect areas:

Potential end-users of fiber services can also reduce costs by doing trenching or conduit work themselves, subject to PUD inspection before the final connection gets made. The procedures are now spelled out in the Line Extension Policy, matching options that have long been available for water, sewer and electrical connections. The big difference with the fiber Line Extension Policy is that the arrangements have to be made through a service provider - one of the retail firms that actually provide telephone, Internet or television service to the end-user over the fiber line. The PUD is only authorized to provide wholesale fiber services.

Armed with the new numbers regarding costs to expand the network, a number of officials became concerned about their obligations under the broadband stimulus rules and began considering whether they wanted to back out of the arrangement.

The network has cost $110 million to build, mostly debt financed, and has ongoing operating losses, not a major surprise given its rural territory and inability to offer retail services directly due to the state law. The network will likely never break even on spreadsheets, but residents and local businesses clearly saw it is a wise investment in their continuing support for its expansion. The benefits of robust, locally accountable broadband infrastructure go far beyond what is measured by those focusing intently on simply whether the utility is losing money or making money on the service. Benefits (including lower rates that keep more money in the community from incumbent providers like Charter and Frontier) from opportunities in education, health care and economic development are significant and must be balanced against the strictly financial metric of success.

Examining the situation, the Wenatchee World called for considered reflection in the decision of whether to proceed with the stimulus award:

It is not that the fiber optic network is not good. It is wonderful for those who have access. It is not that extending it to the rest of the county is wrong. If analysis shows the burden is close to tolerable it is the right thing to do. But there must be a lid on how much we can spend to subsidize ourselves. You don’t get $25 million every day, but there are times when you can’t afford all that free money.

A few days ago, the PUD decided to withdraw from the broadband stimulus grant:

Citing revised buildout costs that exceed original estimates by $20 million to $34 million, PUD General Manager John Janney told commissioners Monday that “the only viable option” was to decline the grant and discontinue a 2 percent electric rate increase to help fund the project.
Commissioners, who’d approved accepting the grant in August, were tipped late last week to the revised cost estimates and Janney’s decision. They unanimously agreed.

This seems like a wise decision given their present situation. Trying to make the project work on within the original flawed parameters with the contractual deadline could have ended quite poorly. It is better for the PUD to move forward as it feels comfortable, even if it means having less financial support from the federal government to do so. They are going to continue exploring opportunities to expand the network on their own terms:

Janney said the district hopes to pursue a long term fiber strategy by the end of the year and possible pursue other types of technology to make high speed internet available to more of Chelan County residents.