The essence of the objection to municipal involved in communications is that public intervention will undermine the private sector due to the cost advantages uniquely available to governmental entities, thus creating a barrier to public entry. As we have shown, however, this objection fails in two ways: First, municipalities tend not to become involved in communications in markets characterized by effective competition; and second, where municipalities do become communications providers, private entry into the market tends to be stimulated rather than suppressed.
Monticello Moves Closer to Settlement with Bondholders
It has been about a year since we checked in on FiberNet Monticello, a city-owned FTTH network about 40 miles northwest of Minneapolis. At that time, the network was generating insufficient revenue to meet debt payments, the private company operating the network (HBC) was stepping down, and Gigabit Squared was kicking the tires.
Since then, Gigabit Squared and Monticello decided against a partnership and the City ceased making payments to bondholders. Previously, the City had covered the difference between revenues and debt payments by borrowing from the City's liquor store fund, a municipal enterprise fund.
Monticello had financed the network with unbacked revenue bonds, meaning investors understood from the start that the full faith and credit of taxpayers would not "make them whole" in the event that the network did not create the revenues necessary to pay back the bond. Because Monticello chose that financing method, it had to pay a higher interest rate - those who buy bonds understand the differences in risk with different types of bonds and rates.
However, the City has been negotiating with bondholders for a settlement to avoid potential lawsuits over the telecom utility and because this is a typically what how these situations are worked out. Bondholders will "take a haircut" in the parlance of finance rather than risk a total loss.
Last week, Monticello City Council approved a $5.75 million proposed settlement in addition to the remaining funds left in the reserve fund, totaling approximately $8 million from an outstanding bond of $26 million. Final resolution may take many more months, but the major arguments seem to be worked out.
This means that Monticello will own and continue to operate FiberNet Monticello. It also means that rather than having a network financed by revenue bonds, the network will have benefited from City funds from the liquor store and will almost certainly be re-financed with other City funds. Monticello could issue a bond for the new $5.75 million but to my knowledge, no one has suggested that.
Thus far, the impact on Monticello's bond rating has been fairly minimal considering the prolonged ambiguity about the bond. Last year, the City had moved from Moody's AA3 to A2, which suggested they are only a slightly higher risk, falling to upper medium grade out of high grade for credit worthiness.
We have seen some criticism of the City for not being more open in how they run the network and engage in negotiations, some of which was noted in the Monticello Times article linked to above. I'm sympathetic to the need for secrecy in discussing matters being litigated but we have also seen secrecy taken to extreme levels in some networks. We encourage Monticello to be as transparent as it can with residents while respecting its need to shield some information from competitors that are far more secretive.
We continue to see FiberNet Monticello as benefiting the community on the whole, as I wrote last year. We draw a number of lessons from this experience, which I will expand on in a future post. As a teaser, they include the impacts of predatory pricing, frivolous lawsuits to delay a project, the challenge of public-private partnerships, and the oddity of being the only city on Earth with two FTTH networks going head-to-head.