Municipal Networks Take Broadband to the People

www.billingworld.com
June, 2004

Municipal network providers are carving a niche in the telecom market. The obvious target is in rural areas, where a municipality might be the only provider of broadband services such as digital cable or high-speed Internet. But opportunities also exist in several major metropolitan areas where the incumbent local exchange carrier isn't yet willing to upgrade its legacy systems and provide more sophisticated offerings.

"From our perspective, there is a burgeoning awareness and demand for broadband in certain markets," says Terrance McGarty, managing partner of The Merton Group, a financial and operations management company that helps develop enhanced broadband services infrastructures, namely fiber to the home. "Those markets, for a variety of reasons, will never be serviced by the RBOCs," he says. "For the types of towns this makes sense for, the only alternative is some quasi-governmental player."

But the question remains of whether municipalities will limit their responsibility to laying the pipes or if they will also support and maintain the back-office operations of an advanced communications network.

Who They Are

Municipal networks fall into two basic structural categories, according to McGarty. In one structure, the municipal entity owns the network directly through a consortium.

Such is the case with UTOPIA, the Utah Telecommunication Open Infrastructure Agency, a consortium of 18 Utah cities. It created an interlocal entity to design, finance, build, operate and maintain an all-fiber telecom infrastructure. The lead provider of the project is AT&T. Not surprisingly, the project has been surrounded by both hype and setbacks. In April, Salt Lake City decided not to support the project after a lengthy debate over the issue.

The other type of network, in which the municipality adds a communications network to an existing municipal power company, tends to be stronger, McGarty says. This is like the electric company or the water bureau; the municipality owns the pipe and provides service to the end customers.

But Bill St. Arnaud, senior director of network projects for Canada's CANARIE (a not-for-profit organization developing next-generation research networks and services), says that municipalities that choose to offer and maintain communications services will face significant risks and challenges. "It puts the municipalities in direct conflict with private firms," he says. Most service providers claim municipal networks have unfair advantages.

Findings from organizations such as the Progress and Freedom Foundation support the argument against municipal networks. The organization's May 2003 report, "A Survey of Government-Provided Telecommunications: Disturbing Growth Trend Continues Unabated," lists these findings:

• Any public entity that decides to enter the marketplace faces well-known challenges in providing an economic return to their investors—the taxpayers.
• Public entities have unique incentives and abilities to compete unfairly. For example, most cable providers are franchised by municipal governments. The typical process offers opportunities for the municipal authority to impose burdensome service obligations, unrealistic build-out requirements or expensive conditions. The hurdles placed in front of private firms can be quite substantial, for example the denial of certain rights of ways or the imposition of unreasonable non-cost-based fees for rights of way.
• Publicly owned utilities often do not pay taxes.
• When municipal or state governments decide to enter the telecommunications business, their lack of in-house expertise invites and perhaps requires, reliance on a host of outside consultants.

Why They Do It

After years of waiting for broadband services, many municipalities are realizing that their incumbent provider isn't going to offer services in a timely matter.

"Most of the communities experiencing a really high level of frustration with incumbents are usually smaller than 50,000 people and are typically geographically remote or feel geographically remote because the incumbent won't provide services," says Bryan Wassom, senior account director with Alcatel. The municipality then decides it can build and own its own telecom infrastructure, he says, by partnering with telcos or by becoming telecom organizations themselves. "There are now more and more options on how to connect and own the last connection to the town." Right now, he says, most regional Bell operating companies (RBOCs) own the last mile, so that's why they are all-powerful. "They're sort of the troll that dictates the access tolls."

And communities have a completely different approach from that of the incumbent carriers, Wassom added. They are publicly held government bodies that aren't in the business to make money.

The Issues

Obviously, municipalities face several challenges: regulatory issues, scalability challenges, personnel issues, and billing and OSS issues.

In March, the Supreme Court ruled that states can block municipal governments from becoming phone service providers. Missouri was the instigator in this case, but eight other states also prohibit municipalities from getting into the telecommunications business. They are Texas, Minnesota, Nevada, Nebraska, Arkansas, Tennessee, Utah and Florida. Others may follow their lead.

However, some industry players don't see the regulatory issues as a huge obstacle. "The regulatory issues could dampen the market, but the demand is so high that these municipalities are going to move through," says John Gumpel, director of product management for Primal Solutions. Primal currently provides systems for Dalton Utilities in Dalton County, Ga., and for Wyndham, Minn., which is in the final phases of a telecom broadband project.

Gumpel cites the American Public Power Association member survey as proof that the number of municipal networks will continue to rise. The survey revealed that out of 2,000 constituents, 500 municipalities already offer broadband service, and an additional 200 plan to build out network services.

As more municipalities choose to build networks, funding the network and its ongoing maintenance is a challenge. Most of these networks start small and grow quickly, and they are built with today's needs in mind. As new technologies and new services are introduced to the market, how will municipalities keep up with the incumbents? With ongoing capital improvement costs, the municipal network could become a financial drain to the community.

"Private companies have the ability to go to market, show a business case and raise capital for the network upgrades," says St. Arnaud.

Municipalities, on the other hand, may have to depend on bonds. "Several communities are moving the direction of municipally backed bonds guaranteeing revenue from the network," he says. This differs with how an incumbent or even a CLEC would do it. "SBC, for example, would want a return on investment within three years. A community could fund it out for 20 years."

Finding qualified technical personnel is another challenge. "There are not nearly enough people to run a high-tech network [in many small communities]," says McGarty. There is a minimum of 16 people, no matter what for a network operations center, he adds.

"Very rarely will we find large tech departments in house," when dealing with municipalities, says Julie Wingerter, vice president of strategy at NetCracker Technology.

In addition, coming up with a viable model also can prove problematic, especially when dealing with a town committee full of varying opinions.

"All too frequently, you get people who think they know what they're doing and start opining," McGarty says. "These are only part-time people, but they are people of power (within the municipality)," so they are able to generate ineffectual ideas and models.

In addition, these municipalities are a little bit behind in terms of getting the systems in place, says Wingerter. "The network is thrust upon them, and then they get that wakeup call, "Hey, now what?" Moreover, she says, government committees are involved in the project from the actual selection of a system all the way up to the implementation. "So there are all sorts of challenges to actually getting things moving," she says.

Wassom says the community is best served when the municipality collaborates with technical types. "Typically the upfront work will involve an initial committee made up of people who understand a lot about the technology and are paid by the city. When the community pulls in a consultant, it typically will find the funding within the budget. So that's funding upfront."

Another issue is maintaining the back-end systems. "By and large most of these people have significant billing systems in place," says Joseph Van Eaton, an attorney with Miller & Van Eaton, P.L.L.C. "They own water systems; they often own electrical systems. The question is how to package it."

The municipalities often want a system that complements their other BSS/OSS, so they are not facing the common problem of disparate systems.

These municipalities need to be able to work in a number of different configurations, Van Eaton says. "With electric companies, there are not that many models. But I think it's varying from place to place." Then, a municipality might add cable options, which are fairly straightforward, he says. Bigger concerns can arise when a municipality adds Internet or voice into the mix, because of the many options available with such services, he says.

Will They Succeed?

Assuming that not all states will prohibit municipalities from owning communications networks, much opportunity exists for the operators themselves, customers, and of course, vendors and outsourcing providers.

"Should local communities be responsible for providing information roadways just like they provide regular roads?" asks Larry Campbell, president of IPG Telecom in Salt Lake City. "Incumbents would say no, but there is a strong argument that they should provide and maintain these information roadways to provide equal opportunity. All people would be able to use these roadways. So who would be the logical one to provide this type of open network? The community," he says.

McGarty doesn't have a secret formula for how municipal networks can be a success in the communications arena, but he does see it as a growing area. "If enough people show that the formula works, then it can gain traction," he says. "Is there a role for a market maker here? Yeah, there probably is."