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2019-085 Municipal Broadband FollowupDate: April 26, 2019 Report No. 2019-085 INFORMAL STAFF REPORT TO MAYOR AND CITY COUNCIL SUBJECT Provide expanded information on municipal broadband, including potential next steps if given City Council direction. BACKGROUND This is follow up information to Informal Staff Report No. 2019-19 which was included in the February 1, 2019 Friday Report. In that report, staff identified three Texas cities that provide municipal internet in various forms to their citizens: Mont Belvieu, Greenville, and New Braunfels. Each of these cities give examples of providing the service in different forms, and briefly describe the legal process for providing it (if applicable). This report describes the next steps if the City Council desires to proceed with developing a municipal fiber infrastructure. However, in each of the cases in Texas, there were legal considerations. In the case of Greenville Electric, the City retained outside counsel who provided them a legal argument to raise against internet providers wishing to challenge the municipality’s ability to provide this service. In addition, Mont Belvieu received a declaratory ruling from the Chambers County District Court in favor of the City which allowed them to issue public securities to begin installing fiber lines to provide their residents with high-speed internet. Both of those cities are remote population centers and the internet service provider did not wish to challenge because it may have been that there are not enough customers to make it financially feasible to do so. It is important to note that Denton is in a different category because of its size, proximity to the metroplex, and existing fiber infrastructure that has been put in place by current internet providers. So, there could be additional legal and business case challenges presented here that would not be comparable to the other Texas city examples. It is recommended that there be an extensive legal study to be conducted if a consultant is to be engaged for a feasibility study. Nationally, Fort Collins, CO and Chattanooga, TN can serve as examples of the process that a City can go through to install the necessary infrastructure and the offer a full retail internet service. The conditions that these cities faced are similar to Denton’s and the cities responded by entering the competitive market to provide these services. Also included in this report is information about Alameda, California who began offering broadband services to residents in the early 2000’s. The power and telecom utility could not curtail spending in the broadband division and had to continually transfer monies from the electric division to support operations. After over one hundred million dollars in infrastructure costs, the telecom division was eventually sold to Comcast for $15 million. For reference, the City of Denton is nearly 90 sq. miles, and local internet-only provider advertised prices for Denton are listed below. Note that there are taxes and additional fees including installation and wifi routers not included in this base pricing. Date: April 26, 2019 Report No. 2019-085 Frontier Communications Internet Only (for 76208) Speed Price per month Notes 50/50Mbps $29.99 2-year contract 100/100Mbps $39.99 2-year contract 200/200Mbps $39.99 2-year contract 300/300Mbps $99.99 2-year contract Charter Spectrum Communications Internet Only (for 76208) Speed Price per month Notes 200Mbps $44.99 400Mbps $64.99 940Mbps $104.99 Fort Collins, Colorado (Population 165,000, 55.78 sq. miles)1 Fort Collins Connexion is the new community-owned fiber network being constructed in Fort Collins, CO. The city is currently installing fiber in neighborhoods throughout the city, and service is expected to begin between July and December 2019. The city will continue to build out the infrastructure through 2022. Fort Collins started looking into the benefits and needs of a municipal high-speed fiber network in 2010. The initial research was conducted in order for the city to take place in the “Think big with a gig: Our experimental fiber network” competition that was held by Google. After Kansas City prevailed in that competition, Fort Collins and Colorado State University, which is located within the city, partnered to explore the benefits of making the University and city a future-proof “Connected City.” Their research shows that over the next 30 to 50 years fiber is expected to be the required infrastructure. Once the fiber is in place, it is easily adaptable to handle greater speeds in the future as needs continue to evolve. The city then conducted a series of public meetings to gauge community support and simultaneously clear legislative hurdles, including voting to overturn Senate Bill 05-152 which prohibited the city from providing public broadband. In-house staff then created a high-level business plan to give a comprehensive list of data, assumptions, goals, and challenges that they were working from to create a municipal retail fiber- to-the-premise (FTTP) that would provide broadband access to the community. In summary, Fort Collins proposed that it would: 1 The information provided about Fort Collins, CO is a summary of the City of Fort Collins Municipal Retail Fiber-to- the-premise (FTTP) Broadband Business Plan, Version III, August 31, 2017 Date: April 26, 2019 Report No. 2019-085 • Design a fiber grid network to ensure infrastructure is available on a community-wide basis. • Borrow between $130 and $150 million to fund the network construction and systems implementation to all businesses and residences. • Manage construction of the fiber network build. • Design and install fiber drops (connections) to each premise when a customer orders service. • Lease dark fiber as requested by businesses. Dark fiber is unused optical fiber that has been installed. This term usually refers to the potential network capacity. • Develop sales and marketing programs to effectively compete with other local providers. • Develop appropriate customer service and network maintenance staffing models. • Competitive pricing. During this time, Fort Collins held discussions with each of the major incumbents, namely Comcast and Century Link. Each of these companies expressed their strategic commitments and plans to upgrade their systems over time, however they could not offer any specifics or promises. Beginning in 2016, staff conducted extensive community engagement to determine citizen preference among four options: 1. Do nothing – Rely on incumbents to upgrade their systems and provide improved speeds and reliability. 2. 3rd party partnership – Develop a partnership with an existing internet service provider that leverages their expertise and experience combined with the City’s brand and reputation. 3. Wholesale model – The city builds out a fiber network and attracts other service providers to market and operate the system. 4. Retail model – the city enters the business of building out, operating, and providing internet and other services across a city-owned fiber network. The results of face-to-face and online surveys showed that the community was overwhelmingly supportive of the retail model, and so Fort Collins engaged with a consultant to provide a case study analysis of the various business models communities have used.2 In summary, the city felt that “Do nothing” did not meet their strategic goals, and the 3rd party and wholesale model would require the city to make a significant investment in building a network while the success of the investment would be dependent on an external service provider. Another consultant, Uptown Services3, was hired to support a feasibility evaluation of both retail and wholesale models. The consultant conducted market surveys, evaluated and estimated 2 This analysis is provided as Attachment 1 in the Broadband Business Plan. 3 City of Denton staff held a conference call on March 29, 2019 with Uptown Services to discuss municipal broadband models and to gather general information. Date: April 26, 2019 Report No. 2019-085 construction costs, estimated market take rates, and developed a financial model for a full build- out of a fiber network in Fort Collins. Surveys of Fort Collins residents that were conducted by Uptown Services revealed that: • The two incumbents have the vast majority of market share. • Satisfaction for internet service benchmarks was low. • Top residential market needs are: lower prices, increased internet speed, and improved reliability. • Small- to medium-size business market needs are: lower prices and carrier-grade reliability. • Residential market purchase intent is very high. • The project appeal and purchase intent is strongest among younger households. The report assumes that the city builds a fiber network across the entire city limits, operates the network, provides internet and possibly offers other services to subscribers; and takes into account marketing, customer acquisition, repair, maintenance to the network, customer service representatives inside of call centers, and administrative and management oversight functions that will be needed to be created and managed by the City. All of these aspects are needed to provide a successful retail model. The report indicated that in order to achieve all of this, Fort Collins will need to issue bonds in the range of $130 to $150 million to support the construction and infrastructure needed to provide these services. The table below provides a breakdown of these costs: Capital Requirements Amount Network Construction $30M Bond Issuance Fees, Capitalized interest, Financing $13M Contract Installation $7M Facility and Vehicles $6M Fiber Drop, Powering, ONTs $6M Fixed Equipment $5M Engineering, Design, Inspection $4M Engineering, Design, Inspection $4M Back Office Systems and Capital $1M Subtotal $122M Working Capital $10M Contingency $18M Total $150M Date: April 26, 2019 Report No. 2019-085 “Critical success factors within the financial model include: 1) cost of network build, 2) take rate (subscribers) of the services from Fort Collins premises and 3) price for service. Critical operational success factors include: 1) successfully operating within a competitive environment vs. a traditional monopolistic utility environment, 2) gaining expertise and experience within a fast-changing technology business and 3) establishing appropriate governance and oversight structures that allow the broadband business to operate in a competitive market.” The report also estimates staffing needs to provide this retail internet service. In year one, there is an anticipated 10.5 FTE’s with a majority of the residential hookups being performed by contractors, and that number increases to 38 FTE’s in Year 5 when the City picks up the installations and network maintenance. The chart below illustrates the consultants staffing estimates, as provided in the Broadband Business Plan: It is important to note that, like Denton, Fort Collins already had some Customer Service Representatives through their other utilities customer service operations. The totals above are in addition to their current staffing levels. In 2016, Uptown Services originally estimated a 38.8 percent subscriber rate for residential and 45 percent for small business. Since that time, a local private competitor began providing a 1Gbps service, and the City decided to resurvey residents and businesses to get new estimates. Based on the survey responses, Uptown Services estimated the City’s retail model take rate to be 28.2 percent. This estimate is comparable to similar municipal benchmarks at the 5-year milestone. Five Date: April 26, 2019 Report No. 2019-085 years signifies the completion of the construction period. Extensive cost and revenue projections can be found on pages 54-62 of the Broadband Business Plan. Finally, the City of Fort Collins provides a Broadband Timeline that shows important milestones and achievements at a glance. The City expects to complete its buildout in 2022. Fort Collins Connexion Speed Price per month TBD Pricing has not been established Competitor: CenturyLink Price per month 10Mbps $45.00 80Mbps $55.00 100Mbps $65.00 1,000Mbps $85.00 Competitor: xfinity Price per month 60Mbps $29.99 150Mbps $44.99 250Mbps $59.99 400Mbps $74.99 1,000Mbps $89.99 2,000Mbps $299.95 Chattanooga, Tennessee (180,000 population, 144 sq. miles) Another city that may be comparable in size and scope to Denton is Chattanooga, TN, who launched their residential municipal broadband services in 2009. This service is offered through the Chattanooga Electric Power Board (EPB), the region’s municipally-owned electric utility. Groundwork for the broadband service began in the late 1990s when EPB began investing fiber optics. First in April 1996, EPB began using fiber optic cables to construct an “advanced intelligent distribution system” for the electric grid. And in 1999, EPB received approval to enter the telecommunication business. At this time, they began to assemble a staff and technical components to develop a fiber-optics-based network that would provide high-speed data, local business telephone and other telecommunications services. Telecommunications service for local businesses began in 2000. The public approval process was completed in July 2002, allowing EPB to provide internet services, and in 2003 the utility began offering all-fiber high-speed internet service to business customers at speeds up to 300 times faster than other local providers were able to offer at the time. Date: April 26, 2019 Report No. 2019-085 In August 2007, EPB’s Board of Directors announced approval of a Fiber to the Home initiative. This initiative was designed to generate new jobs, improve services to electric customers, and provide high-speed internet service to every customer in its service area. Following this announcement (and one week prior to the vote going to the Chattanooga City Council), the state’s cable industry group, Tennessee Cable Telecommunications Association (TCTA) and Comcast, began filing court claims in an attempt to stop the network construction. Even with these lawsuits, EPB began developing its financing plan for the network, and the Chattanooga City Council unanimously approved this plan the following month. The original financing plans called for two bonds to be issued, and up to another $60 million contribution from EPB’s Electric division to finance the Fiber Optics division startup costs. The table below provides a breakdown of these costs: Capital Requirements Amount Network construction $162M Electrical equipment such as transformers $39M Interest payments (first three years) $26M Financing charges Remainder The bonds were issued in 2008 despite ongoing court cases. By this time, EPB was working toward two goals with the bonds: 1) Build a smart grid for the electric system, and 2) use that robust system offer a residential “triple play” service which would offer voice, TV services, and high- speed internet. At the time that the bonds were issued, EPB planned to move forward with the smart grid regardless of whether EPB began providing triple-play services. In April 2007, the court dismissed the TCTA lawsuit against the municipal utility. This dismissal was followed by another lawsuit filed by Comcast in a different court but using the same basic logic as the TCTA case. This case was thrown out in July 2008. In September 2009, Chattanooga announced that it was officially starting to offer its triple-play services, which would be available to approximately 17,000 households at the launch. In October an additional 10,000 households were able to subscribe. Shortly after, EPB received a $111 million grant from the Department of Energy. This helped the rollout to happen much faster than originally anticipated and the utility completed its scheduled 10-year deployment plan in less than three years. Date: April 26, 2019 Report No. 2019-085 As of October 2018, EPB Fiber Optics exceeded 100,000 residential and business customers across its 9,000-mile fiber optics network. The company claims the following benefits of having a municipally owned and operated fiber optics network and smart grid4: • Power Outage Reduction: The Smart Grid has reduced the incidence and duration of power outages by more than 285 million customer minutes. This is the result of reducing the incidence and duration of power outages by more than 50%. For a market the size of EPB’s service area, this is equivalent to saving customers more than $50 million per year by helping them avoid lost productivity, spoiled food, and other negative impacts. • Keeping electric rates lower: Each year, EPB Fiber Optics pays EPB Electric tens of millions of dollars for the use of the electric system’s fiber optics network and shared costs. These payments keep electric rates significantly lower for every EPB Electric customer whether they subscribe to fiber optics services or not. • Providing Millions of dollars for Local Schools and Local Government Services: EPB is by far the largest contributor to local schools and local government services with annual payments that have more than doubled since deploying the smart grid. EPB’s annual payments to Hamilton County, the City of Chattanooga, and other local governments now total $20.9 million annually. Since deploying the fiber optics network, EPB has paid more than $172 million for local schools and government services. • Serving as a catalyst for Job Creation: Prior to the deployment of Chattanooga’s fiber optics network, the community was not considered a hotspot for start-up activity. Since then, Chattanooga’s Gig Network along with successful efforts to attract investment for start-ups and entrepreneurial support from organizations like The Enterprise Center, Co.Lab, and the Hamilton County Business INCubator have combined to create a blossoming entrepreneurial environment where dozens of new start-ups are rapidly creating new jobs. The company offers a variety of speed and pricing plans to residential customers. In February 2019, EPB upgraded its 100Mbps plan to 300Mbps at no cost to their customer. The table below shows current costs for internet service only. Prices may vary when bundled with either voice or TV service. Chattanooga EPB Speed Price per month 300Mbps $57.99 1,000Mbps $67.99 10,000Mbps $299.00 Competitor: AT&T Fiber Price per month 100Mbps $40.00 300Mbps $60.00 1,000Mbps $80.00 4 EPB Fiber Optics Reaches Milestone of Service 100,000+ Customers. https://epb.com/ Date: April 26, 2019 Report No. 2019-085 Competitor: CenturyLink Price per month 80Mbps $55.00 100Mbps $65.00 1,000Mbps $85.00 Competitor: Spectrum Price per month 100Mbps $44.99 Alameda, CA (Population 79,000, 23.1 sq. miles) An example of the potential risks involved with providing municipal broadband service can be found in Alameda, CA. When the State of California deregulated electricity in the mid-1990’s, Alameda Municipal Power began looking into the telecommunications access in order to diversify their products. The municipal utility proposed expanding into cable and internet access and established its telecommunications division in 1998. The original estimate for construction costs to lay fiber-optic cable and build the system was $25 million, but ended up costing nearly three-times that amount when the construction was completed.5 As construction and operating costs continued to rise beyond the original projects, the Alameda City Council continued to borrow money and refinance existing debt. By December 2003, there was roughly a total of $40 million in bond indebtedness involved with the telecom operation.6 Additionally, the electric division transferred a total of $43 million to support the division. The telecom division was originally anticipated to bring in revenue by 2007, however it was continuing to operate in deficit at that time. The City hired a consultant to evaluate the operation, and it was estimated that it would be an addition seven years before that happened. It was at this time that the system faced increased competition from Comcast, and in June 2008 Alameda Power concluded that there was no alternative to selling the system which Comcast purchased in November 2008 for $15 million.7 At the time of the sale, the telecom service had approximately 15,000 subscribers. Burlington, VT (Population 42,239, 15.48 sq. miles)8 Burlington Telecom (BT) is another tale about the potential pitfalls of a municipality entering the telecom (fiber) industry. Dissatisfied with poor customer relations and products of the private providers in the community, the Burlington Electric Department (a municipally owned company) 5SFGate: Alameda ready to pull out of telecom business (March 2008) https://www.sfgate.com/bayarea/article/Alameda-ready-to-pull-out-of-telecom-business-3290322.php 6 East Bay Express: Alameda’s Utility in a World of Hurt (November 2006) https://www.eastbayexpress.com/oakland/alamedas-utility-in-a-world-of-hurt/Content?oid=1082187 7 Metnews.com: City Held Not Liable to Investors in its Failed Telecom Venture (September 2013) http://www.metnews.com/articles/2013/alameda092013.htm 8 This information is summarized from Learning from Burlington Telecom: Some Lessons for Community Networks. Christopher Mitchell, August 2011. https://muninetworks.org/sites/www.muninetworks.org/files/bt-lessons- learned.pdf Date: April 26, 2019 Report No. 2019-085 entered into a public-private partnership that was ended in 2001 because the private partner did not fulfill their obligations. The City then contracted with a consultant to build BT, and create a city-owned fiber-to-the-home network. By mid-2003, BT had replaced the leased broadband and voice lines for the schools and city departments with city-owned fiber lines in order to decreasethe City’s telecom expenses. This network was financed with a municipal capital lease for $2.6 million. Following that, the City began expanding its network to residents and businesses in 2005 by financing another $20 million to fund the infrastructure. In August of 2007, the City borrowed another $33.5 million to continue expanding the infrastructure and to pay off previous debts. At this time, BT was also looking into expanding regionally beyond City Limits to provide the service. In September, 2007, BT announced that the company was “operationally cash flow positive” meaning that the revenues were more than the operational expenses, however the revenues were still not enough to cover debt service or capital costs. During this period, BT was adding 40 to 50 subscribers per week on average. That subscriber rate declined after the summer 2008. This is when the City investigated financing another round of debt, which would bring the total amount of debt to $45 million, an amount considerably more than what the original estimates were for the network costs. Before a deal on this was finalized, the economy began to have trouble and capital markets froze. BT continued to pay for the expansion using cash on hand which violated terms of the financing and also caused financial problems. In October 2009, BT’s problems became public. In addition to the financed debt, the City had an additional $17 million in debt from the City’s cash pool. The total of these two totaled over $50 million in debt. After other financing schemes failed, BT ceased making payments to the banks in early 2010. When Burlington failed to appropriate funds for the lease in FY 2011, the lease terminated. This was followed by a number of lawsuits from lenders attempting to recover their expenses. A full detailed report of the Burlington Telecom situation can be found here. DISCUSSION The motivations for implementing a municipal fiber or broadband utility vary from city to city, though the following broad goals are most common: 1. Provide services where large service gaps currently exist; 2. Increase responsiveness and reliability in broadband operations; 3. Provide for relatively low and stable monthly rates; and 4. Increase economic development competitiveness. In staff’s research it became clear that most cities take widely divergent paths, based on the unique factors to those municipalities, to implement a municipal broadband utility and achieve their goals. Staff met with Uptown Services, LLC, a telecommunications consultant that assisted the City of Fort Collins, CO with the staging and implementation of its broadband utility, how the process of creating a municipal broadband utility. Date: April 26, 2019 Report No. 2019-085 Prior to moving far forward with the funding and implementation of a utility, most cities performed a feasibility study as a first step in the process. The study will assist the City in understanding the unique factors of the community and determining whether a municipally owned broadband utility is economically feasible. Feasibility Study If direction is given to City of Denton Staff to seriously explore the creation of a broadband utility, staff would likely seek to engage a consultant to assist with an initial feasibility study. The feasibility study would describe and evaluate the logistical and economic viability of the broadband utility by engaging in the following activities: Demand Assessment: Includes economic and market research analysis to determine whether there is sufficient demand and likely customer base for a municipal utility. This is critical in circumstances where the city would not be the sole provider of the service. Legal Considerations The legal landscape relating to the ability of a public entity providing a broadband service is not fully established in the State of Texas and this portion of the study would point to any future legal concerns or points of liability. Capital Cost Assessment The study would provide a preliminary estimate as to the initial capital cost of implementing a broadband utility. Cities with a municipal electric utility may be able to realize efficiencies by using existing electric infrastructure to help convey broadband cables or fiber (unless bond covenants restrict non-electric infrastructure). Design Concept This portion of the study would provide a preliminary system design that would be used as a basis for future financial forecasts and business planning efforts. The feasibility study is designed to answer whether a municipal utility can be successful; both in achieving the goals of the city and as a self-supporting enterprise. The feasibility study process has a duration of approximately four months at a cost of $50,000 to $80,000. Secondary Studies and Subsequent Steps Should direction be given to continue planning, staff would again engage one or more consultants to assist with more detailed planning, including revenue forecasting, a technology strategy, a staffing plan, and a comprehensive business strategy that is designed to provide a pathway to the deployment and operation of the utility. After the conclusion of the detailed planning phase, there should be sufficient information available to seek financing to fund the initial deployment of the capital assets associated with the utility and to fund the initial operations. Since the broadband utility is an enterprise, the city would Date: April 26, 2019 Report No. 2019-085 have the option to issue revenue bonds that are paid with the future earnings of the utility. General obligation bonds are also an option. The financing phase may last from 6 to 12 months. Subsequent phases include the implementation of the utility including constructing the infrastructure components, hiring staff, and laying the groundwork for the day to day operations. The implementation phase would likely last for 18 months once financing is secured. Once the infrastructure and operational components are in place, the utility will begin making connections to private properties and initiate full-fledged operations. The entire process from initial feasibility study to the start of operations has a duration of roughly 2.5 to 3 years. Other Implementation Factors It is important to note that in comparison cities, Universities have played a partnership role in this process, primarily through joint funding. The motivation on the part of universities is to utilize the increased internet speed and capacity that a municipal broadband utility can provide to enhance interest from prospective students, researchers, and sources of grant funding. Additionally, as an electric utility provider, the City of Denton has existing fiber infrastructure that connects various facilities across the city. This fiber could be utilized as the foundation of a broadband network and reduce the amount of new fiber line that must be deployed to connect customers to the system. It should be noted that the technical specifications and capacities of our current fiber lines would need to be evaluated in the feasibility study to determine how these existing lines could be incorporated into a broadband network, if at all. Initial Legal Considerations Under state statute, cities are unable to serve as a “telecommunications service provider”. While Federal Communications Commission (FCC) has modified its definition of a telecommunications service multiple times, it currently does not classify a broadband-only service as a telecommunications service. While creating a municipal broadband utility is legal in Texas, the fact that the FCC has changed the definition for broadband twice within a few years raises concerns about possible additional changes, particularly since the FCC definition of telecommunications will supersede any state or local definition. Additionally, there will continue to exist a possibility that the State of Texas would adopt a statute restricting or eliminating the ability of a home rule municipality, such as Denton, from creating a broadband utility. STAFF CONTACT: Stuart Birdseye Assistant to the City Manager (940) 349-8009 stuart.birdseye@cityofdenton.com Ryan Adams Deputy Director of Public Affairs/PIO (940) 349-8565 Date: April 26, 2019 Report No. 2019-085 ryan.adams@cityofdenton.com