We have previously covered the East Central Vermont Fiber Network and their local frustrations at receiving little state or federal support in building a next-generation network. The feds and state government seem too heavily influenced by those with lobbying clout -- leading to subsidies to build lesser networks that local do not want.

They want real Internet, not another wireless promise that fails to deliver. A story from Vermont Public Radio discusses increased tensions as the networks struggle over a few community anchor tenants to help finance the rest of the network. Here, Loredo Sola of EC Fiber explains the problem:

SoverNet will own the infrastructure but is required to provide bandwidth at wholesale cost to providers who extend the service outward.

Loredo Sola is skeptical. He says he's already lost one institutional contract to the SoverNet project. He says that's forced E.C. Fiber to scrap its plans to serve smaller users in the area.

Sovernet is building a middle mile network connection community anchor institutions, but is an example of the exact wrong way to do it. Supposedly, the investment (the vast majority of which is funded by a federal stimulus award) will allow more ISPs to build more last mile networks as they have access to better backhaul.

But lowering the operating cost of a network does very little to make that network affordable to build. The high up front capital costs are what limit broadband in rural (and urban too!) areas. Compounding the problem is what Sola mentions above, Sovernet is taking the key anchor institutions off the board with its project so communities are actually left with a harder business case to connect themselves.

Groups like the Vermont Telecommunications Authority are so proud of having solved a short term problem, they have totally missed the fact that the longer term problem of making sure everyone has fast, affordable, and reliable access to the Internet is now much harder to solve.

When I first read about the WiscNet situation, I was interested to learn that it acted as an ISP but rarely provided the physical connections -- leaving opportunities for communities to build those connections themselves, using themselves as an anchor tenant.

Smarter programs, like the Building Community Capacity through Broadband project, result in the community owning the network. Communities have greater incentive to build out these networks to connect everyone because they understand the value of building infrastructure rather than just trying to maximize a profit from it.

This is the first in a series of posts by Rita Stull -- her bio is available here. The short version is that Rita has a unique perspective shaped by decades of experience in this space. Her first post introduces readers to the often misunderstood concept of the Right-of-way, an asset owned by the citizens and managed mostly by local governments.

In the process of knitting a baby blanket, a whole ball of yarn became tangled into this mess. . . .

. . . reminding me of the time, in the early eighties, when I was the second cable administrator appointed in the U.S., and found myself peering into a hole in the street filled with a similar looking mess—only made of copper wires, instead of yarn.

Why talk about yarn and copper wire in the same breath on a site dedicated to community broadband networks? Because it was the intersection of ‘art and cable’ that got me started in the ‘telecommunications policy’ arena, the same kind of thinking that continues today in our tangled telecom discussions: Is it content or conduit, competitive, entertainment, essential, wireless, landline, gigahertz, gigabits?

I transferred from the Recreation Department to launch the city’s cable office as an experienced government supervisor with a Masters in Theater. My employer and I thought cable TV was the ‘entertainment’ business and I had the requisite mix of experience and skills to manage one of the first franchises awarded in 1981.

Yikes. Imagine my surprise on discovering that cable was a WIRE LINE UTILITY using PUBLIC LAND, which each citizen pays TAXES to buy, upgrade and maintain! And, our three-binders-thick, cable franchise was a ‘legal contract’ containing the payment terms for use of our public rights-of-way, as well as protection of local free speech rights. I was thirty years old, a property owner who had never thought about who owned roads, sidewalks and utility corridors.

Rights-of-way are every street plus about 10 feet of land on each side. That land belongs to everyone in the community. Rights-of-way are a shared public asset—sometimes called part of our common wealth.

The reason we all own rights-of-way, over four million miles of it, is so essential services such as roads, water, gas, electric, and telephone are available, universally—another legal concept—new to me — meaning ‘used by and available to everyone’. We co-own roads and utility corridors to transport ourselves, our goods and services and now our information—essentials required for survival in a developed nation.

Local, state and federal governments manage land assets on our behalf, as follows:

• 75.2%: 3 million miles of rights-of-way are managed by local governments—towns, cities, counties, villages, parishes, townships.
• 20.5%: 820,000 miles of rights-of-way are managed by state governments.
• 4.3%: 172,000 miles of rights-of-way are managed by the federal government.

Important Business Notes Regarding Rights-of-Way

1. To be in business, phone and cable companies must locate their lines in public rights-of-way. Wireless companies must connect towers for ‘signal backhaul’ via landlines. So wireless carriers also use rights-of-way. Customers can’t buy cable, phone, mobile or any Internet services—can’t stream videos—without an Internet Service Provider (ISP) owning or buying ‘landline’ capacity.
2. Telecom is a natural monopoly. The first telecom occupant in the rights-of-way gains tremendous advantage, making it difficult for competitors to finance duplicate infrastructure. In the past, when the threat of competition reared its ugly head, operators used their market dominance, as the incumbent in the rights-of-way, to drastically slash prices, retain customers and force nascent competitors out of business. Once the competitor is eliminated, rates can be doubled or tripled, leaving consumers without the option of changing providers.

Arguably, rights-of-way are the most valuable land asset in the nation. Now that you know you’re the proud owner of four million miles of rights-of-way, what do you think telecom occupants pay to use it?

Do you know that:

• Phone companies generally hold hundred year leases, some in perpetuity, and pay nothing to use rights-of-way. Only the old basic phone rate is regulated. Offered in a duopolist market, most revenues are generated from unregulated phone-line services. Your phone company charges whatever it wants for business and residential service packages, late fees, security deposits, etc., while paying nothing to use your rights-of-way. This reality means that we, as taxpayers, subsidize phone companies by giving them free land.
• Originally, cable operators, because they were offering entertainment services, set the precedent for paying a fair price to occupy rights-of-way. In the late 70’s/early 80’s, as a result of the mostly non-exclusive, franchise competitive-bidding wars, operators agreed to pay the following to use rights-of-way:
  • Up to 5% of gross revenues,
  • Dedicated institutional networks (I-Nets),
  • Public, education and government (PEG) access channels and funding for facilities, equipment, video production training.

From 1980-1985, thousands of local governments monitored the private sector’s deployment of millions of miles of coaxial cable plant in public rights-of-way. In this phenomenal five-year, local, public/private, collaborative undertaking to ‘cable the country for TV’, the U.S. became a ‘wired nation’, as envisioned in Ralph Lee Smith’s seminal book of the same name.

You Did It! … Or did you?

Don’t get all excited about local governments’ successful rights-of-way management – even though it resulted in cable operators wiring the country in five short years. And don’t kid yourself that local governments can effectively leverage their valuable land-use powers in negotiations with telecom incumbents.

Time for a REALITY CHECK:

• Among the wealthiest and most powerful in the country, the telecommunications industry spends tens of millions of dollars, annually, lobbying to retain free use of rights-of-way land.
• Once the country was wired in the early eighties, the cable industry spent the next thirty years lobbying federal and state legislatures to void franchises and eliminate as many payments for using community-owned rights-of-way as possible.

Legal Jargon

Creatively designed telecom regulations confound legislators, confuse consumers, and distort the national discourse. Current regulatory language contorts our understanding of what telecom is and its importance in our lives. Simply stated, telecommunications means the transporting of information on connected networks of boxes (engineering shorthand for computers and switches) and wires, located on poles or under streets.

Today we hear a cacophony of marketers, profiteers, duopolists and plain old crooks – purposely confusing us with: it’s voice - video – data - information – fiber – coaxial cable – wireless - WiFi – broadcast TV – satellite – streaming video - 4G - WiMax - radio – cell phone –- gigahertz – gigabits – megabits – digital - Internet – etc. The list goes on.

As fraught with engineering/marketing jargon as telecom laws are, none address the convergence of digital, Internet and fiber technologies — a convergence that means all information formats—voice, video and data are transported by the same myriad, interconnected wired and wireless networks.

The telecom industry’s lobbying goal is free use of rights-of-way to protect duopolist markets. Twenty states adopted franchising laws depriving local jurisdictions of regulatory authority, thus confiscating communities’ assets and reducing accountability to consumers.

The industry aggressively lobbies for state laws that prohibit or severely constrain jurisdictions use of rights-of-way, specifically to block deployment of next-generation telecom infrastructure: fiber-to-the-premise networks.

Wildly Escalating Telecom Costs for Public Services

When the industry lobbies for state laws that void in-kind services such as I-Nets, the cost can be enormous for the communities they serve. For example: Years ago, a California city, with a population of ninety-thousand, connected thirty municipal facilities, schools, colleges, universities, hospitals and libraries with its institutional network, provided as partial payment for rights-of-way use. When state franchising voided local requirements, the cable operator began billing the city $45,000 a month to use the institutional network. Over the fifteen-year life of the franchise, the operator expects to collect a whopping $8.1 million dollars from the city (thus the taxpayers), instead of paying to use the community’s rights-of-way.

Extorting Future Public Resources

Currently, the industry is lobbying states to PROHIBIT governments from building fiber-to-the-premise (FTTP) networks. Not only do telecom companies refuse to universally upgrade existing wire lines and provide I-Nets, they now want to prevent communities from becoming self-reliant by building their own networks (as in North Carolina and South Carolina, for instance).

Don’t be fooled into thinking that telecom regulations benefit some larger public goal. The U.S. lags behind developed nations in broadband deployment because we are not using rights-of-way to build FTTP infrastructure. We need to ‘catch up’ to competitor nations, where residents, as well as business, buy affordable, bidirectional broadband at gigabit speeds.

We must clean up our tangled regulatory mess, reclaim use of rights-of-way and build the FTTP networks needed to create jobs and compete in a global economy -- starting with JULIET (Joint Underground Location of Infrastructure for Electric and Telecom) [pdf]).

There is so much to say about Burlington Telecom and its struggles that it cannot be covered in a single post. This is one of several posts that will discuss pieces of the situation. One of the questions that has been raised by the Larkin "audit" of BT is whether BT was losing money on the broadband it provided to City Departments.

Though the report prepared by Larkin for the State revealed a number of disturbing practices by Burlington Telecom, a number of them have been strongly disputed. The report clearly has a number of weaknesses, from an apparently lack of expertise on somewhat basic telecom economics to the fact that the "auditors" do not appear to have attempted to talk to anyone who knew anything about how BT operated.

That said, something surely went dramatically wrong with BT and the Larkin report may help shed light on it.

But when one reads articles in the local press about it, it is quickly evident that the writers have practically no understanding of what they write and harbor a strong hostility against Burlington Telecom. Consider this passage from the Burlington Free Press:

Auditors observed as well that the city, a prime user of BT services, was charged “below market rates” and “below BT’s cost of service. The low rates charged by BT ... to the city could be viewed as a form of cross-subsidization,” which, the audit notes, is a violation of a provision of BT’s state license. The building of the system in general, auditors said, was marked by a “lack of timely and accurate accounting information.”

While the quote does come from the Larkin report, it offers no foundation for the claim and later hedges against it (two paragraphs later -- all from page 26):

The fact that BT is providing services to various City departments at below- market rates that may be below BT’s cost of service, which could be viewed as a form of cross-subsidization, is a problem.

After stating without referencing any evidence that BT is providing services to Departments below the cost of provisioning, the conclusion two paragraphs below states BT may be providing services to departments at prices below BT's cost of service ... which could be viewed as a form of cross-subsidization. This is not credible (unless you are a local reporter trying to make the City look bad).

Sorting it out...

BT provides broadband to all the City Departments. BT says that it charges them the full cost of doing so (according to their statements as well as comments to me over the years). This rate is below prices charged by a private sector provider -- no one disputes that.

So we have two potential charges that are lumped together.

1. BT is charging the Departments less than it costs to provide the service. If this was the case, BT would have been losing money on the deal to the great benefit of City Departments.

   The only footnote cited in the area of the charge by Larkin that BT was charging less than the cost of providing the service (which Larkin states once and hedge once) is a reference to where BT explains their formula for recovering the full cost of providing the service.

   This is one instance of several in which Larkin seems to overstep the available evidence and make conjectures unsupported by any facts.

2. BT was charging less than the "market" for broadband services. This charge is more fascinating.
   • It is obvious that BT is charging less than what a private provider would because BT is charging the true cost with no markup. The private sector exists for the markup -- or margin.
   • The "market" for dedicated access consists of probably one or two providers who did not offer 1Gbps services at the time BT started (and may very well still not offer that service yet). There is no "market price" for those services. There are perhaps comparable prices of T.1 and T.3 services that undoubtedly reflect significant monopoly markups.
   • If BT were to charge a higher price closer to those boosted by monopoly power, the very same reporter would undoubtedly argue that the markup amounted to a "subsidy" to BT from the City Departments as the price was above the cost of providing the service. Damned if you do, damned if you don't.

Lesson Learned

So - for our purposes, what is a correct price for a community fiber network to charge City Departments?

This will vary depending on local custom and needs. But it seems foolish to charge only the cost of providing the service. It seems wise to charge some mark-up just as would any other entity - the net income can go toward paying down the debt. If done properly, a new publicly owned network will cut the prices paid by City Departments, increase the capacity of their connections, and have some margin for the provider. Everyone wins.

But if a new community network starts offering a connection at cost, expect a bloody war if the network wants to raise prices. Department heads become quickly accustomed to savings and will not react well to an increase even if they are still getting the best deal in town.

The interesting question is whether Burlington Telecom was subsidizing the City in other ways. This was the question we thought the Larkin report would answer. But it hasn't. Fortunately, City Council members are pushing for a forensic audit to understand exactly where all the money went. We hope they are successful and a proper audit is completed.

Jackson Energy Authority in Tennessee, long the largest community fiber network in the US, is investing in greater smart-grid capabilities. If you aren't already familiar with this network, an article in Electric Light & Power offers some history:

After receiving local government support and revenue bond issue funding, JEA went ahead with the $54 million project. Now its FTTP network boasts 16,500 cable, 10,843 Internet and 7,000 telephone subscribers. JEA is preparing for the next phase of its FTTP deployment with a smart grid initiative expected to begin in 2010.

The article also makes an important point that many find confusing in understanding the economics of these community fiber networks:

In the early years, JEA focused on subscriber growth as its key performance metric, rather than average revenue per user (ARPU). The capital-intensive cost of acquiring and hooking up new customers, however, can create significant cash flow problems for a network operator, especially when growth substantially exceeds the business plan. JEA had to secure more financing to support its incremental growth. The utility also adjusted its business model to focus instead on ARPU and increasing the number of existing subscribers using two or three services. JEA employed special promotions and service packages that took advantage of the huge bandwidth capabilities of its fiber network to build customer loyalty and overcome the customer churn typical of the industry. Today, JEA’s network has passed more than 30,000 homes, more than 16,000 of which are subscribers.

This is a good example of a community encountering a problem and overcoming it. The article also offers other lessons learned along the way. Moving forward, JEA has decided to work with Tantalus to add smart-grid capabilities to the fiber network.