UTOPIA reconnoiters as resistance to local parcel fee halts PPP with Macquarie

Macquarie is probably dead, and that’s probably okay – Free UTOPIA!: While I wasn’t able to attend the latest UTOPIA board meeting (bit of a drive from Cedar City), I did get a summary of what was discussed during that meeting. One of the things that came up was the long-delayed Macquarie deal. For all intents and purposes, it’s most likely not going to happen. There appears to be slow action on a binding public vote and the utility fee was very unpopular (and wasn’t coming down). The board has voted to pay Macquarie what they are due and take those reports as valuable information to plan for the future with no further action.

As this blog reported last March, resistance to a utility parcel fee stalled progress on a public-private partnership between the Utah Telecommunication Open Infrastructure Agency (UTOPIA) and an Australian firm that invests in public infrastructure projects, Macquarie Capital Group. That resistance created a massive stumbling block to the expansion and financial future of the UTOPIA regional fiber to the premise (FTTP) that serves 11 Utah municipalities.

Now nearly a year later as the blog cited above reports, that resistance has proven fatal to the partnership. In order for it to work under the long term financial plan prepared by Macquarie, the parcel fee was a necessary component of the partnership given that a public-private partnership by definition requires the contribution of public financial resources. No public contribution means no partnership, leaving the private partner like a single hand clapping.

This development is yet another example of the lack of adequate funding mechanisms at the state and local government level to ensure the construction of FTTP telecom infrastructure serving all American homes, businesses, and public institutions. The situation calls for an aggressive federal public works program to construct this needed infrastructure for the 21st century as I propose in my recently issued eBook Service Unavailable: America’s Telecommunications Infrastructure Crisis.

Telco CEO offers succinct description of FTTP market failure at network edge

Cincinnati Bell to Slow Fiber Build by 2017 | DSLReports, ISP Information: "Our buildout of fiber is 100 percent success-based and as long as we see the returns that are appropriate we're going to continue to build," Cincinnati Bell CEO Ted Torbeck told attendees of the company's earnings call.

"We anticipate by the end of the year we'll be somewhere over 60 percent and we fully anticipate that we'll be getting close to the upper range where in 2017 our build will decline significantly. The cost of the build is increasing as we expected as we build out and we're getting to the edge of the buildout and it's getting more expensive," the CEO added. "Once we reach the threshold where the margin decreases to the level is acceptable we'll stop the build.

A very succinct description of market failure in the words of a telco CEO that explains why private market forces cannot ensure the ubiquitous fiber to the premise infrastructure needed in the 21st century.

Why the "last mile problem" is a national problem

In the United States, telecommunications infrastructure deficiencies tend to be defined as a local or "last mile" problem. Residents of homes, businesses and government buildings have orders for services refused by providers because no infrastructure exists to deliver them. Or the cost of service is exorbitant, offering very poor value.

Since the problem typically manifests in a specific neighborhood or at a particular address, it's naturally seen as local problem. Particularly when premises just down the road, around the block or elsewhere in the neighborhood are offered service, a broader selection of services or service at considerably higher value.

But while the problem manifests locally, it is not fundamentally a local problem nor is it confined to a single area with a local root cause or causes. It's a microeconomic issue that occurs throughout the nation due to a common cause: market failure on the sell side due to incumbent telephone and cable companies deeming a neighborhood, road, street or even address not sufficiently profitable to serve -- even if consumers request service. It's known as redlining.

Local problems with local causes naturally lend themselves to local solutions. However, telecommunications infrastructure market failure and redlining and price gouging are not local in origin. They are the national business policy of the dominant incumbent providers that while not legal under current U.S. Federal Communications Commission rules, nevertheless are a widespread pattern and practice affecting similarly situated consumers. The resulting market failure is a national problem because telecommunications infrastructure is essentially interstate. National problems require national solutions.

Debate over government role in telecom needs to distinguish between infrastructure and services

Internet access tops Legislature’s list, despite questions of risk - OANow.com: Lee County: Alabama’s Republican legislators are championing a bill that, if passed, would make the state the first in the country to have broadband Internet in all of its public schools. Locally, Sen. Tom Whatley, R-Auburn, sponsored a bill to remove restrictions on the service area of a municipal public provider, like Opelika Power Services.

But David Williams, president of the National Taxpayers Protection Alliance based in Washington, D.C., argued that providing Internet is not the role of government. “I’ve been doing this for 23 years now,” Williams said, adding that he has been looking at municipal broadband projects for the last five years. “Providing broadband and cable TV services isn’t a core function of the government.

Williams' assertion needs to be broken down in order to engender a more informed debate. Let's stipulate he is correct insofar as providing digital media services isn't a core function of government, particularly given the critical role of a free and independent press in a democracy.

However, Williams ignores the fact that the providers of these services generally lack the telecommunications infrastructure in order to make them available to every home, school and business since their business models cannot support the capital investment necessary to build it. The resulting market failure has left some 14.7 million American homes without landline connections needed to deliver high quality data, graphics and video -- not to mention VOIP -- according to this analysis by Doug Dawson of CCG Consulting.

Government has a key role to remedy this market failure in telecom infrastructure by constructing fiber to the premise networks as public works just as they do roads and highways -- while leaving the services delivered over them to private providers.

California telecom infrastructure deficiencies concentrated in metro central, north valley counties

The large bulk of California’s deficient access to landline advanced telecommunications infrastructure manifests in the state’s central and north valley regions, concentrated in counties designated by the U.S. Office of Management and Budget (OMB) as urban metro counties.

Source: U.S. Department of Agriculture Economic Research Service. http://www.ers.usda.gov/datafiles/Rural_Definitions/StateLevel_Maps/CA.pdf

The below state map produced by the Central Coast Broadband Consortium (h/t to Steve Blum of Tellus Venture Associates) shows areas designated by the California Public Utilities Commission as unserved and underserved for landline advanced telecommunications infrastructure are concentrated in and around the Central Valley municipalities of Modesto and Fresno, in the Sierra Nevada foothills east and northeast of the state capital of Sacramento in Placer and El Dorado counties, and up the Interstate 5 corridor in Sutter, Butte and Yuba counties to the Shasta County seat of Redding in far northern part of the state.

These are not sparsely populated areas as shown by the map’s legend, which indicates a large presence of census blocks with populations of 150 to 300 people per square mile (designated as orange) and more than 300 per square mile (designated as red). By definition, a portion of these census block areas is not even considered rural (population density of less than 250 per square mile) by the California Healthcare Workforce Policy Commission relative to the availability of medical services.

Source: Central Coast Broadband Consortium. http://map.centralcoastbroadbandconsortium.org/
Accessed February 14, 2016

 

The takeaway is America’s telecommunications infrastructure deficits and disparate access cannot be necessarily be described as a “rural broadband” issue, particularly when looking at the nation’s most populous state. The operative "R" word here is these areas have been redlined for telecom infrastructure modernization as have similar areas throughout the United States.

5 key indications of America's telecommunications infrastructure crisis

The crisis confronting the United States relative to modernizing its telecommunications infrastructure to support fiber connections for all occupied premises manifests in five key areas:

1. Ongoing access disparities with 34 million Americans unable to obtain telecommunications service capable of delivering high-quality voice, data, graphics and video.
2. Excessive reliance on the constrained, subscription-based business models of legacy incumbent telephone and cable companies to undertake needed infrastructure modernization and expansion.
3. Underfunded state and local government efforts to build and subsidize telecommunications infrastructure modernization projects.
4. Underfunded, restrictive federal government programs to subsidize telecom infrastructure serving rural regions based on obsolete technical standards.
5. Tightly restrained private sector construction of fiber to the premise infrastructure, limited to selected major metropolitan area neighborhoods.

Modernizing telecom infrastructure too big of a job to be left to cities

101 US Cities Have Pledged to Secure High Speed Internet | Motherboard: The US has a big and rather complicated internet speed problem. Its broadband infrastructure is woefully behind in speed and price compared to a broad swath of other countries, and much of this has to do with its tenacious commitment to maintaining the status quo: that is, giving big telecommunications companies a lot of our money without being able to demand a fair amount in return. But here’s a change: 101 cities are have agreed to band together to bring their residents gigabit-speed internet connections, even if they have to build it themselves.

Municipal governments are justifiably concerned that not having modern fiber to the premise telecommunications infrastructure adversely affects their economies, making them less than desirable destinations for residents and businesses considering locating there. The problem is constructing and maintaining it isn't in the budgets of local governments still reeling in the aftermath of the 2008 economic crisis. Other infrastructure such as streets, public buildings and water and sewer systems are at the end of their useful lives, competing for any dollars that could be directed toward building telecommunications infrastructure. Local governments nationwide are also strapped with enormous public pension obligations.

Aside from these financial challenges, legacy incumbent telephone and cable companies regard their service areas as sovereign territories, deploying armies of lawyers and lobbyists to defend them from local governments hoping to build fiber to the premise infrastructure to remedy service deficits and access disparities. Thus far, no munis appear inclined to assert their jurisdictional authority by exercising inverse condemnation powers and/or creating Internet telecommunications franchises. Even if they did, it would likely result in costly litigation that would delay construction for years if not decades at a time when telecom infrastructure modernization is already a generation late.

These circumstances do not bode well for municipal telecom infrastructure efforts. Given the billions needed to upgrade the nation's legacy telecom infrastructure in order to bring fiber connections to every American home, school and business, a national telecommunications infrastructure modernization initiative is clearly needed. Telecom infrastructure doesn't serve only cities. It connects cities to their states, states to other states and the nation to the world. It supports interstate commerce and is fundamentally interstate in nature, not just urban or rural as it is often mischaracterized. Building interstate infrastructure is a national undertaking that can't be left to local governments to accomplish.

Wheeler talking through his hat on "cable competition"

Stop the Cap! FCC Chairman Tells Crowd He's "Not Done Enough" to Bring More Cable Competition: FCC Chairman Thomas Wheeler confessed he “has not done enough” to bring consumers more competition to Comcast, Time Warner Cable, Charter, and other cable operators.

This is complete nonsense from Wheeler. Cable is not a competitive market. It exists in a natural monopoly/duopoly market. The chairman can't make it more competitive any more than he could interstate highways if were were head of the U.S. Department of Transportation.

Wheeler's view of the cable market as a competitive one is also at odds with the FCC's adoption one year ago of its Open Internet rulemaking deeming Internet service provided by cable, telephone and other ISPs a common carrier telecommunications utility under Title II of the Communications Act. That title is predicated on a monopoly -- and not a competitive -- market.

Unpacking incumbent opposition to KentuckyWired

Tom Eblen: Some telecoms, anti-government groups oppose new state broadband network | Lexington Herald-Leader:  The Kentucky Telecom Association, which represents 15 rural Internet providers, thinks KentuckyWired should be reconsidered, claiming it would duplicate existing infrastructure and undermine existing businesses that need their state and school service contracts.

There is likely an element of truth in incumbents' claims that publicly owned middle mile telecom infrastructure would duplicate existing privately-owned infrastructure in some parts of the state. But that doesn't mean it shouldn't be built. However, it should be part of an integrated plan to build a complete network of publicly owned last mile fiber to the premise infrastructure.

KentuckyWired is a partnership between the state and several companies that are building and would operate the 3,200-mile “middle-mile” network linking all 120 counties. From each county, any Internet provider could lease network space, build “last-mile” lines and compete to offer services to homes and businesses.

This is wishful thinking based on a fundamental misapprehension of the market economics of private owned telecom infrastructure. Investor-owned Internet service providers aren't typically going to be interested in connecting to publicly owned middle mile infrastructure to build out fiber to serve all premises. For two main reasons. First and most important, because the ROI on last mile is too far out in the future to make investment worthwhile. Second, because connecting their last mile networks to publicly owned middle mile infrastructure is contrary to the proprietary, closed access architecture of their business models that prefer maintaining control over both the middle and last miles.

There's a third and less likely possibility -- that KentuckyWired will make it easier for local governments to build FTTP infrastructure serving their residents. It's improbable for most except for those with pre-existing municipal utilities due to local governments lacking the financial wherewithal as they struggle to meet existing and future obligations such as employee pensions.

New England state a microcosm of last mile telecom access barriers, disparities

A consultant's report prepared for the State of Connecticut on the state of its telecommunications infrastructure found significant access barriers and disparities. From the summary:

From our urban surveys in Hartford, Connecticut we found evidence of higher-quality fiber and cable broadband services in proximity to the poorly served locations. However, the individuals at those locations reported that service providers decline to connect users to those services, or will do so only at a prohibitively high cost—approximately $10,000 to $30,000 for a short street crossing. Also, services are costly—from $1,000 to $2,000 per month.

We found based on our field survey in rural areas that most areas had copper telephone service, areas in proximity to towns have cable TV, and there is frequently a third fiber telecommunications provider on major routes between towns and in in proximity to State buildings, fire stations, and libraries. However, these services were not readily available to many institutions and businesses—requiring significant effort by the institutions to understand their options and to be connected.

The report also found small business suffer poor telecommunications service. They are unable to obain the level of service they need relative to available services, face long delays in obtaining services, or are unable to obtain service even when infrastructure is relatively nearby.

 The full report issued this week by the state's Office of Consumer Counsel can be accessed here.

Misunderstanding of market economics underlies U.S. telecom infrastructure deficiencies

Fiber-Optic Network Construction Highlights Widespread Lack of Broadband in Salinas Valley, Calif.: Joel Staker of the Central Coast Broadband Consortium estimated the project would cost between $20 million and $30 million, half of which the group was hoping the USDA would be capable of funding.

After quietly listening throughout the entire discussion, Mensah thanked the stakeholders for their time and commitment. She also said that the USDA no longer had grant money available for such projects, but a long-term loan was not out of the question.

“I can see that the scale of need and gaps in service are severe in your region,” Mensah said. “However, I am concerned that if government steps in to accomplish this we would be displacing private industry, which is something we are very careful not to do.”

This story illustrates the circular thinking and poor grasp of market economics impeding the construction of badly needed telecommunications infrastructure in the United States. Areas such as this one near California's Silicon Valley suffer from last mile infrastructure gaps due to a lack of investment by the private sector. Consequently, those adversely affected look to the public sector for help.

Public officials however are reluctant to provide funding, concerned as the USDA official quoted that doing so would deter private sector investment. However, if private sector interest in building last mile infrastructure was there, the "last mile problem" wouldn't exist in the first place and the locals wouldn't be looking to the federal government for assistance.

This story also points up the misguided thinking that once middle mile fiber is in place and anchor institutions such as government offices and schools are connected, the private sector will step in to build fiber to the premise to serve the rest of the community. That typically doesn't happen because the ROI doesn't pencil out quickly enough. That economic reality goes to the heart of the problem. Many people including public officials have difficulty understanding that market failure can and most often does occur for telecommunications infrastructure due to its high costs and lengthy wait for ROI.

FCC declines to forbear universal service requirement; AT&T complains

The FCC’s Half-Shoveled Sidewalk | AT&T Public Policy Blog

This blog post by AT&T notes that it wants the U.S. Federal Communications Commission to relieve it from the obligation to provide landline voice service to all premises in its service territory requesting it, even those in areas not eligible for subsidization through the FCC's universal service subsidy program, the Connect America Fund (CAF). While the subject of the requested relief is voice telephone service, it also extends to Internet service now that the FCC reclassified it as a common carrier telecommunications service subject to the Communication Act's universal service obligations under its 2015 Open Internet Order. 

Although not mentioned in AT&T's blog post, that's the real issue here. AT&T does not want to invest in upgrading and building out its infrastructure to bring landline Internet service to all premises in its service territory -- service that would also be capable of delivering voice service.

Germane to AT&T's complaint are those communities where the cost of deployment is relatively high, but not high enough to justify universal service fund subsidies intended for high cost rural regions. There are a lot of these neighborhoods in its vast service territory because AT&T continues to rely on limited range, obsolete (in its own words) DSL technology to deliver Internet service over aging copper plant that cannot reliably serve premises more than a couple of miles from its central offices or field distribution nodes.

The question going forward is whether the FCC pursuant to its Open Internet order will enforce the universal service obligation on AT&T when a consumer living in one of these unserved areas beyond the range of DSL technology requests Internet service. So far, the FCC has shown no inclination of doing so as AT&T allows its legacy copper plant to rot on the poles. Consumers in these redlined neighborhoods will continue to face the worst of all worlds: no service from their nominal ISP, nor meaningful regulatory action to remedy their plight.

Time to switch to fiscal economic stimulus -- starting with a U.S. telecom infrastructure initiative

If the United States had instituted a fiscal economic stimulus program to build fiber optic telecommunications infrastructure to reach every American home, school and business when the economic downturn began in 2008, it might well have completed the job by now. And for a mere fraction of the $3.5 trillion the U.S. Federal Reserve Bank spent to buy bonds under its quantitative easing program. The program has ended amid indications this monetary stimulus didn't have its intended effect with continued slow economic growth and slack in the labor market.

Now that monetary stimulus has proven less than effective, it's time to take a closer look at fiscal economic stimulus. For starters, a massive federal telecommunications infrastructure initiative to achieve the previously mentioned goal to fiber up the nation. Many of those dollars invested in this critical 21st century infrastructure would return to the federal treasury, thanks to the multiplier effect of creating new businesses and jobs.