Transcript: Community Broadband Bits Episode 189

This is Episode 189 of the Community Broadband Bits Podcast. Wes Kelley, the Executive Director of the Columbia Power & Water System, joins the show to discuss his work in several different municipalities. Listen to this episode here.

 

Wes Kelley: You know when the high school kids say that we have the best internet, then we have arrived.

Lisa Gonzalez: Hello and welcome to episode 189 of the Community Broadband Bits Podcast from the Institute For Local Self Reliance, I'm Lisa Gonzalez. Many of our podcasts focus on a particular community, but this week our guest has worked in 3 different communities. We first contacted Wes Kelley, Executive Director of the Columbia Power & Water System, because we knew he had played an integral part in developing the community network in Pulaski, Tennessee. At the time we didn't know it, but he had also worked in Hillsdale, Michigan. In this conversation, Chris and Wes talk about some of the lessons Wes has learned along the way as he's coped with different challenges and victories unique to each community. Wes has some good advice for other towns who may be trying to decide whether or not a municipal network is right for them. Here's Wes Kelley, Executive Director of the Columbia Power & Water System.

Chris Mitchell: Welcome to another edition of the Community Broadband Bits Podcast. I'm Chris Mitchell. Today I'm speaking with Wes Kelley, Executive Director of the Columbia Power & Water Systems in Tennessee. Welcome to the show.

Wes Kelley: Thank you, it's my pleasure to be here.

Chris Mitchell: We're going to get into a number of background issues, talking more generally about this situation with municipal networks. We're also going to talk a little bit about Pulaski in Tennessee; but we're going to start in Columbia, where you are currently, before we go back in time. Tell me a little bit about what's happening in Columbia.

Wes Kelley: Columbia, Tennessee is a nice community, it's just south of Nashville, a little bit north of Pulaski, and it was started a few years before we got started in Pulaski, and it was built as an HFC system; most of your folks know that that means a Hybrid Fiber Coax. In this case, we run fiber to about 70, maybe 80 homes, and then at that point we'll bust it up and put more fiber into the system. Columbia may have the distinction of being the last HFC system built. The system was built in 2003, I guess. I have to think back because I wasn't here at the time.

Chris Mitchell: When you were saying that I was thinking in my head "Do I know one that's more recent?" Because until you said that, the most recent one that I knew of was maybe Spanish Fork in 2001.

Wes Kelley: Yeah, and at the time, fiber to the home was happening. Jackson, Tennessee, not too far from here, had already built fiber to the home; they were the first in Tennessee to get started. Pulaski was gearing up, Chattanooga was gearing up, Morristown was going. There was a lot of fiber to the home discussion, but the leadership here decided "You know what? Let's just stick with HFC." You can't go back and redo those decisions, but I must say that in terms of the customer impact in the services that are provided, for most customers they're not going to see a significant difference if your HFC system is well-maintained and taken care of. That's what we try to do here, is to keep pushing that fiber as deep as we need to to keep the service levels high.

There are some things you can't do with an HFC system. Gigabit ethernet is one of them. You are not going to get gigabit speeds out of your HFC plant. We can get about 100 megs out of this HFC plant, and we have a very, very good plant, so we're offering 300+ channels, we're offering telephone, and we're offering internet speeds. Most of our customers are on a 75 or 50 meg internet package.

Chris Mitchell: When you said about 70 or 80 homes on a loop, it sounded like, which was certainly below the industry average.

Wes Kelley: Oh, it is. It is. Charter is our competitor here in Columbia, and when we look at their infrastructure it's just night and day. Of course, ours is newer. Theirs has been up in the air for decades. We pushed that down, and whenever we start to see any node congestion at all ... A node is where the fiber meets the coax, and there's a device there that manages that; but whenever we start to see any node congestion where that data is getting bottled up, we bust it out, split it, and make sure that the customer bandwidth, that our network is not the bottleneck.

Chris Mitchell: Are you doing fiber to some of the businesses as they need it?

Wes Kelley: We do. We have an extensive fiber network that not only provides our municipal needs that we have, and utility needs that we have, we have an extensive AMI, or smart meter system if you want to use the old term, that means that we've got 26,000 electric meters and over 20,000 water meters that are reporting in to collectors across our network; those collectors are all connected via fiber. We then have fiber that runs to all the city and the county buildings, our hospital. Most of the large businesses in town are on our network, and indeed many of them have data in servers in our data center. Since we have been here for a few years, we've earned the trust of all of the large commercial enterprises in town, and they are almost exclusively using us.

Chris Mitchell: One of the things that we're going to be transitioning to, is a little more background of why communities get into this. I guess I'd be curious, for your time in Columbia, what do you get the sense in terms of the benefits specifically in Columbia have been from the network?

Wes Kelley: Well, certainly competition brings accountability. I think Charter has stayed on its toes. One thing that's interesting is, Charter has actually located their regional headquarters here in Columbia now, so I don't know if we have to be thankful for that or not, but we do seem to be getting a lot of attention. I think the people have enjoyed being able to keep their prices down, although I must say in the cable TV business that the actual video side of the business, the programming costs are just incredible. Absolutely incredible. They're pushing the prices to the retail customers up, no matter what any good, capable provider tries to do, including us; that is just a relentless push on the pocket books.

We've been trying to stall that as much as we can, and keep those rates as low as we can for as long as we can. I certainly think that around internet speeds, we have the fastest internet in town. Nothing makes me happier than when I hear someone says "Oh yeah, my son was saying in high school the other day that y'all have the best internet service." When the high school kids say that we have the best internet, then we have arrived. You might think that you want the people who are paying the bills; no, you want the people who are nagging the people who are paying the bills, to start marketing your product.

Chris Mitchell: Yeah, when it comes to technology, you want that youth enthusiasm, that's always going to help you out.

Wes Kelley: It has helped our community. Our community is starting to see some growth, certainly the 2008 recession impacted many communities. Columbia is close to Nashville, but not exactly within the urban sprawl, but it's getting closer, and we're starting to see quite a bit of economic development from that. Many of these businesses that are coming here are getting hooked into our fiber.

Chris Mitchell: I'm curious if you're seeing any pressure. As Nashville's looking to become a gigabit city, do you have a sense that eventually you'll be going to a fiber to the home type product, or do you think you can just keep thinning the nodes out to keep that performance up?

Wes Kelley: No, I imagine as we start to build new subdivisions we will go with an all-fiber product within the new subdivisions. There's no problem operating both systems and going back into the same head-end with it. We bought a fiber to the home technology that we just haven't deployed yet, that really we didn't intend to use on a fiber to the home system, we wanted to use it on a fiber to the business system and put it in our downtown area. I think we're still going to proceed with that, but it won't surprise you, we have a very historic pre-civil war downtown, and so rewiring the downtown is always a complicated project.

We do intend that as we build out new subdivisions, we'll go fiber.

Chris Mitchell: One of the things that you were telling me is that you have an interesting background in this, starting off with a community in Michigan that decided not to move forward with municipal broadband or a municipal cable type system. Let's get into that and talk about how you started in this business.

Wes Kelley: After I graduated from college I stayed and worked at my college for a few years, and I was a network engineer. I was the IT guy. I ran CAT5 cable and fiber in buildings, and that what I did, and set up servers and whatnot. The community that I was in was Hillsdale, Michigan, which is a small town south of Lansing. In October of '97 the city council in Hillsdale decided they wanted to explore offering ... Well, they didn't call it broadband then because that term hadn't really caught on, but cable TV and internet service. They'd do the studies, and the feasibility plans, and all that that you do. 

They hired me in early 1999. I worked at the college that was located in Hillsdale. I was their network administrator, and I ran into the city manager in line at the local Subway restaurant, and he said "Hey, we're going to need somebody to run this thing." At the time I had a job offer from a large corporate bank that was headquartered in Chicago, and so I really had an interesting choice: Go work at the large corporate skyscraper and do networking for them, or try this crazy municipal broadband thing in a little town in Michigan.

Chris Mitchell: If you've read Flash Boys by Michael ... The guy who wrote Liar's Poker, I can't remember his name now.

Wes Kelley: Liar's Poker book, mm-hmm (affirmative).

Chris Mitchell: It's a fascinating time for banks getting into the IT world, the flash trading, all that sort of stuff. There's a lot of fiber optics going in there, but I think some of these communities are better serviced with your talents working for the community. What happened there?

Wes Kelley: I had the proverbial big fish small pond kind of dilemma, and I decided that I wanted to work somewhere where I could see the fruits of my labor, that it wasn't just getting sucked up into big corporation; that I could actually see the impact, so I decided to stay in Hillsdale, start working for the Hillsdale Board of Public Utilities, which is the public utility that did the electric water and waste water systems. It was through that instrument that the city was going to build its project. They had a vote of the people to ask permission to issue revenue bonds; in the state of Michigan you have to have a vote of the people to issue bonds if the purpose of the bonds was to build a cable TV system. I wonder how that law got passed? But, had the election in 1999, it passed on a 2 to 1 margin to issue 9.5 million in bonds to go build this system. Okay, voters approved it, we were off, we were going to get this thing designed. Problem is, as we were getting it designed ... And by the way, we looked at fiber to the home back in 1999, early 2000, we were talking to a company called Worldwide Packets, now since gone, and Worldwide Packets were saying this was going to be the first fiber to the home system in the US. Well, it didn't quite work out that way. 

We couldn't make the math work out quite right, the price points were still just a little bit higher, and their Worldwide Packet system was not a GPON system which is what everyone is deploying today, it was really an active ethernet system. It was basically taking a local area network and just spreading it across your city. Those costs didn't quite come in for us, so we decided to do a deep fiber HFC system, very similar to what Columbia built, of course this was several years earlier. We got it designed, and then what we found is we couldn't place the bonds. What happened in between when we had the vote and this time, is the dot com bubble had burst, and when that bubble had burst, no-one was interested in revenue bonds where the proceeds of the broadband system were the only revenues pledged to repay the bonds. They weren't tied to the electric system, they weren't tied to the taxpayers. We were getting quoted ridiculous interest rates, and so the only way to solve that is we had to go back to the public to have another vote to get permission to issue general obligation bonds which have the backing of the city's full faith and credit.

When we went back to get that authority, of course the people said "Wait a minute, we voted on this a year and a half, 2 years ago, why are we voting on it again?" It seemed odd, and so that election did not succeed.

Chris Mitchell: Right, I think there's a sense, when you have that delay people sometimes get a sense that "Is this even really going to happen?" And they just start getting very skeptical.

Wes Kelley: Yeah, people get nervous, and understandably so, and especially when you're trying to understand the nuances between a revenue bond and a general obligation bond, and all that. Unfortunately, I sound like a used car salesman, and that's never a good place to be when you're trying to secure an election.

Chris Mitchell: What made you move along from there, then? I know that you didn't spend the rest of your life in Hillsdale.

Wes Kelley: While I was working at the Hillsdale Board of Public Utilities, after the broadband project had sort of been shut down, my boss there said "Hey, stay and I'll teach you the business." And he did. He was a good mentor to me, and so I become the assistant director of the utilities there and learned the power, water and broadband business. Along the way I met a gentleman named Ron [Holkham 00:13:15] who was general manager of a small system in Michigan. Ron moved back to Tennessee and became general manager of Pulaski Electric System. When Ron got down there, and he'd spent a couple years down there, and he was ready to do a reorganization, and he and I ran into each other at a conference, and he said, it's sort of like the light bulb went off in his head and he was like "You need to be in Pulaski. Let's do this thing." Well, again, I'd gone through a lot of emotional issues when we worked on that Hillsdale project for so long and it didn't succeed, so I said "Ron, I'm not going to do it unless I know it's going to happen." I said "When city council votes, and you've got GO bonds, and it is "Go, we're going to build it." Then I'll come." 

That's exactly what happened. All those things transpired. My wife, my very new wife; we'd only been married a few months, we moved to Pulaski and I started working with Ron and a really good team putting together the plan in Pulaski, Tennessee.

Chris Mitchell: Pulaski actually did issue the general obligation bonds, then?

Wes Kelley: They sure did. Pulaski has an interesting history. They were an internet pioneer in their own way. Back in 1993 they were the first community in the state to offer internet service to its residents. If I remember the story correctly, of course long before I was there, but they had gotten a T1 line installed to serve the ... I think it was the local school or workforce development center, something like that, and what they realized is that T1, when they weren't using it for their distance learning application, it just sat there doing nothing. They said "You know what? Let's put a modem bank in." You remember the old 24 and 5600 [inaudible 00:14:58] modems.

Chris Mitchell: I even remember before that, yes.

Wes Kelley: We'll have people dial in and they can use it at night, and then during the day when the classes are on, we won't let people dial in. It was city-owned, it was a city-owned dial-up network, and by 1998 they had about 1500 homes and businesses using that dial-up service. What they ended up doing is they sold it to a private company, or really a private company just took it over and then bought the city out. It rocked on. It still exists in some form or fashion, right now it's a wireless internet business. When Ron was hired to Pulaski, the board made it clear that municipal broadband was something they wanted to spend time talking about. Ron said "Look, I've got some things I've got to do to get the organization where it needs to be to be ready to couple it to a municipal broadband project." But in 2002 they started working on a plan, and then by 2003 they did some customer survey work, which I think is very important to understand what is the market reality.

By the Spring of '05 they finished their business plan. By the Summer of '05 they'd issued bonds. By 2006 we were in construction.

Chris Mitchell: It's interesting that you say that Ron wanted to get the house in order, because that was one of the things I learned about Chattanooga, that it hasn't been commonly repeated, but that they spent a number of years as well making sure that the utility was much more lean and efficient, and that people had a real sense of being in a competitive environment, where as they get into internet service they would be ready to deal with competition as opposed to being in a regulated utility space where they were a monopoly.

Wes Kelley: That is so important, and I know the good folks in Chattanooga, and they did do a lot of good work. It's interesting that they watched us and Pulaski as sort of like a little pilot project for them. As a matter of fact with some equipment vendors, we actually were their test bed, and it worked out for us because the vendors said "If we can test the product on you and it works, then we'll give you Chattanooga's pricing." Well, of course we were very small and Chattanooga was very large, and so that worked out well for us.

Chris Mitchell: Yes, I can imagine.

Wes Kelley: When you have an employee base, and especially a customer service operation which is in the traditional public utility mode, those are very dedicated and focused people, but that focus tends to be on accuracy, and being accurate, and not making mistakes. That's important. You need to shift that focus a little bit to thinking about being proactive and aggressive, and how can we solve problems. Being right is different from solving a problem. You really sort of have to get your brain thinking about "Here's the issue, how can we stretch outside our comfort zone and provide a solution to that problem."

Chris Mitchell: How did Pulaski end up going? How long were you there?

Wes Kelley: I was there until 2012, so I came in 2005, and I was there for 7 years. Now, for 4 of those years I worked under Ron. I started off in customer service and we had a very bright gentleman taking care of the IT side of the fiber business. After about a year or 2, he left, and then I took over the technical side and the customer service side of the fiber system. After another year or so Ron left, and then I became general manager of Pulaski.

Chris Mitchell: How did Pulaski end up doing? What were some of the impacts on the community from the network?

Wes Kelley: I think the people, similar to Columbia, enjoyed having the choice. I think the prices stayed down for a long time. Pulaski got quite a bit of notoriety at the time, being such a small community. A lot of the fiber to the home systems that were in the works at that point were in bigger towns. I think we were just 4500 homes passing, and so that's a small fiber to the home system. That's right on the bubble of "Can you make the fixed costs pay out?"

Chris Mitchell: Especially for that head-end, for cable television.

Wes Kelley: Exactly, and it's a beautiful head-end. The Pulaski data center and NOC that we built, or Network Operation Center, was absolutely first class. They had banks and other folks that stored their data there, because it is such a great facility built in an F5 tornado-proof bunker. We stole a lot of ideas from Jackson, Tennessee who had done similar things. The community did benefit, but it's interesting, you have to remember that while you think you're doing this for altruistic purposes, and to really make the community better; your customers are shoppers first. They look at you with the same level of scrutiny, maybe colored a little bit nicer, but really they're going to put you through the paces just like you were Charter, Comcast, anyone else, and if you don't have a product suite that is attractive to them, and you don't have a price point that's reasonable to them, there are a few that will join you just out of civic pride, but that's not enough to float your business plan.

Chris Mitchell: Tell me about Pulaski's neighbors. Are there people nearby that are unable to get service because of those 4 words in Tennessee law that are being ... I know the FCC struck them down, but it's being appealed. Is this one of those areas that could be benefited if Pulaski could go outside of its borders?

Wes Kelley: Pulaski and Columbia have a situation where our electric systems serve part of other communities. Of course, Pulaski served all of Pulaski, Tennessee, but it also served a portion of Ardmore, Tennessee. Ardmore is an interesting community, it actually bridges a state line between Tennessee and Alabama. It was always a struggle, because Ardmore was a growing little community, and we thought "Well, it'd be nice to provide service there, but we don't want to get in a situation where we can provide service on one side of the street but not the other side of the street. How do you market that without just frustrating people?" Columbia has the same problem now, the community to our north, Spring Hill, we serve electricity to about a third, maybe a quarter, a third of Spring Hill, and Spring Hill's a very, very fast growing community; one of the fastest growing communities in the nation. They've experienced a lot of growth. I would like to participate in that growth, but again, I'm limited in that I can't serve outside my electric footprint, so how could I market to that community?

There's also just some areas that, often municipal electric systems have long drawn-out service territories, because usually they serve the municipality themselves, and then they started going out the high ways 80 years ago as the electric systems were getting built. Well, there are homes and whatnot right off of those boundary lines that could be attractive to be served. It would be nice to be able to do that.

Chris Mitchell: I had one other question that gets back to Pulaski, just because we noted the general obligation debt. That doesn't seem super common in my impression. When I look at most of the fiber networks, particularly those built over the last 10 years by electric utilities, a lot of times it's some form of revenue bond that is ultimately secured by the utility as opposed to the taxpayers. 

Wes Kelley: You get benefits from a GO bond, you also get some increased complications, but I will say this: One of the strengths of a general obligation bond is your city council's going to have to vote for it. What it shows is that the utility is not just going off and doing this itself. The general obligation bond infers the full faith and credit of the community, but really what you're getting is the full faith and credit of your city council. If they understand the significance of what is happening, and they are standing side by side with the utility towards its success.

Chris Mitchell: I think that's a really good point. I'd be curious if you would agree, I think a lot of city councils do take this seriously, but the act of forcing them to put their skin in the game may even amp that up a little bit more.

Wes Kelley: The way these GO bonds work is, they are what's known as tax-backed bonds, which means that the revenues from the system will pay for them; but should those revenues be insufficient, then they can fall back on the full faith and credit of the city. What you get by that is almost no risk to the bond holders, and so you get very low interest rates. That's attractive.

Chris Mitchell: The next step of that actually is that the business plan is more reliable. That's one of the things that can really threaten young networks, if they have a higher interest rate, those early debt payments can be really painful.

Wes Kelley: I'm going all the way back to our discussion of Hillsdale, we were looking at 9% interest, and there's just no way we could make that work. The banks would, at 9, 9 and a half, sure they'd float us the bonds. We couldn't do that. Last time we did a refinance here in Columbia, about 2 years ago, and we were at 1.9% interest.

Chris Mitchell: Yeah, that makes all the difference. As we're winding up, I want to get a sense of any other practical and tactical challenges. I think we've discussed a few. If another community is looking at doing something like this, what sort of advice do you have for them?

Wes Kelley: I think it's important to realize that you may be in a small town, you're really providing a competitive mass market product, so you need to approach it that way. You need to have marketing material and product packaging put together that looks professional, because again, they're comparing you to the biggest titans in the industry. You may say "We're going to sell them on service." And that is a beautiful thing to say, but very few people will give you the benefit of the doubt on that. Your price and your features need to be right; but when I talk about price, don't start a price war. There's no reason to do it, because your competitors can bury you in price, because they can write checks all day long. You need to be lower than the competitors, but don't be crazy low, because you're only going to hurt yourself; because what you're going to do is you're going to set yourself up to where you may have to employ a dramatic rate increase in the future. Anyone who's been in the utility business knows, rate increases are best done when they are small incremental changes over a period of time. Sticker shock will cause you to lose customers.

Chris Mitchell: That's actually something that I wanted to raise earlier as well when you were talking about the pressure that you're in with the television business. We've certainly seen that public and private small-scale providers are being squeezed. I was curious, what have your internet prices done over the years? Have you had to increase them, and how often?

Wes Kelley: 10 years ago this service had I think a 35 meg back-haul. Today we have a 6 gig back-haul. We're paying a little bit more for that for the 6 gigs than we were for the 35 megs. The prices remained very stable, but the amount of bandwidth is just incredible.

Chris Mitchell: What does that mean for the consumers then and their households?

Wes Kelley: It's good things. It's good things for everything, it means that it's good business for us, because internet is the one area out of the triple play bundle where you do have the opportunity to really recover some of your capital investments that you spent building the infrastructure. Cable TV has become a very challenging business, and if anyone is thinking about getting into this now, they need to seriously consider what would be the hit they would take if they didn't launch with video. Before, that would seem crazy, triple play, you had to do it. Now, I think it's sort of on the bubble, you need to weigh out the pros and the cons. Our experience is, you just don't make a lot of money after you pay the programmers. Cable TV programmers, I refer to them as a brood of vipers. Their job is to squeeze as much money possible out of you. We all just watched the Super Bowl and the NCAA championship, and those are fantastic, those are amazing events, tremendous amounts of money are spent; who pays for most of that money? Your cable TV subscribers paid for most of that. 

The financial underpinnings of the professional sports world is based on the revenue coming off of essentially every home in America. They figured out a way to tax every home in America through ESPN and Fox, and those pressures are unrelenting.

Chris Mitchell: One of the things that I hear from those who are still planning on going into the video business is, "Well, we expect to lose $5 per month per video subscriber maybe, just because we can't even offer a lineup that's going to be reasonable at a price that people would take it, but it's worth it to us because we will be gaining more internet subscribers at that point."

Wes Kelley: Yeah, that's very, very true. You have to do the balance. It is somewhat of a loss, there's no doubt about it. Internet provides you an opportunity to recover some of your costs there, because some of the early municipal broadband systems, and this being ones that even happened in the '80s; a lot of people don't realize municipal broadband did get started in the '80s but it was in a non-competitive way, often they were the first and only cable TV provider in their communities until Billy Ray came around in Glasgow and he did a competitive overbuild.

Chris Mitchell: Good old Billy Ray, yes. I just love to hear his voice.

Wes Kelley: Billy's one of my favorite people, he's a good friend of mine, and I respect what he's done and what he is still doing. It's important that some of these early systems, they follow the traditional utility model: You cover your cost and you're done. What they didn't take into account is, those costs were not near as stable as a traditional utility environment, they change dramatically and rapidly. They allowed themselves to get upside down very quickly. If you have a little margin today, enjoy it because it won't always be there. Again, the capital infrastructure of this business is different. When we put pipes in the ground for water, or power-lines in the air for power, they're going to stay there for 20, 30, 40, 50 years; but what we are putting in, the little devices that we are lighting up on our broadband networks are all going to need to be replaced much, much sooner than that.

Chris Mitchell: Is there anything else that you want to share with us before we end the show?

Wes Kelley: Well, if someone is getting into this business and they decide to start off, you can't train your people well enough or test it long enough, there's just going to be some trials that you just have to go through; but keep in mind that a credit to a customer covers a multitude of sins. When you have those first little out of the box problems, throw a couple of credits on the customer, you'll be amazed how forgiving they are.

Chris Mitchell: Terrific. Thank you so much for coming on the show, and it's really great to talk to you.

Wes Kelley: Thank you, it's been my pleasure.

Lisa Gonzalez: That was Chris and Wes Kelley, Executive Director of the Columbia Power & Water System in Columbia, Tennessee. Send us your ideas for the show. Email us at podcast@muninetworks.org. You can follow Chris on Twitter: His handle is @communitynets. You can also follow muninetworks.org's stories on Twitter, where the handle is @muninetworks.org. Thank you to Kathleen Martin for the song 'Player Versus Player', licensed through creative commons. Thank you for listening to episode 189 of the Community Broadband Bits Podcast.

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