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Burlington muni-fiber sticks tax payers with massive debt

By 11 March 2010 6 Comments

The city of Burlington Vermont has just been downgraded from Aa3 “high grade” to A2 by Moody’s Investor Services due to excessive debts, and Burlington’s Municipal Fiber Telecom services seems to be the biggest culprit.  This downgrade will likely mean that the city will have to pay higher interest rates to service Burlington Telecom’s debt.  This was somewhat of a surprise because Burlington Telecom has always been held up as a shining example of how best to run a Municipal Fiber service as a self sustaining enterprise what doesn’t burden tax payers, but it seems that Burlington Telecom isn’t all that different from the other muni-fiber failures.

In a city with approximately 20,000 homes and businesses, 4800 of which are municipal fiber subscribers, Burlington Telecom seems to have racked up a $50,000,000 debt.  That works out to about $10,417 per subscriber which is a huge tax payer subsidy for relatively affluent homes and businesses that can afford the relatively expensive fiber service.  Three out of four Burlington residents don’t subscribe to the municipal fiber service and it is likely that many of them can’t afford the service yet all of them are subsidizing the muni-fiber service with regressive local sales taxes.

Worst still, Burlington Telecom’s deficits and debt are rising which makes the prospect of financial stability more of a dream than reality.  This is likely due to the low 24% adoption rate and a dearth of premium high paying customers which makes it extremely difficult to recover the high costs of building out 100% of the residents and businesses.  There is even a criminal investigation to determine if millions of dollars have been misappropriated and a lawsuit to reclaim $17 million that Burlington Telecom took in 2008 from the treasury without notifying taxpayers.

The experience in Burlington isn’t all that different from “UTOPIA” which is a municipal fiber coalition of eleven counties in Utah.  That fiasco resulted in UTOPIA asking their tax payers for an extension of a $202 million 20-year sales tax subsidy to $504 million over 33 years.  The cause was hardly a surprise because UTOPIA entered the market as a third provider, underestimated their competition, underestimated their own costs, and overestimated their adoption rates.  The nearby city of Provo was similarly disastrous and Provo ended up giving their “iProvo” muni-fiber network to a private operator Broadweave networks with the condition that Broadweave would simply pick up the bond payments.

The problem with all these failed municipal fiber endeavors is that they were all founded on bad assumptions.  They all that tried to enter a saturated telecom/cable market under they assumption that the current providers weren’t serving the market.  The assumed that there would be a market for superfast broadband when there was no such market demand since it is economically infeasible to provide applications that require more than 1 to 3 Mbps.  They assumed that the 1.5 to 50 Mbps hybrid  fiber-copper networks provided by the cable operators and telecoms are insufficient.  The reality is that the national market only demands an average of 4 Mbps and many businesses are happy splitting a 1.554 Mbps T1 line with 50 employees who are supposed to be working rather than surfing YouTube.

By entering a saturated market, municipal fiber operators doomed themselves to failure from the beginning since they now have to share the adoption pie with two other providers.  The typical total adoption rate in the United States is 65% and if that gets split three ways evenly, that’s ~21% adoption rate per provider.  The economics of fiber broadband is extremely unforgiving to low adoption numbers because the operator has to build out nearly 100% of the region to make the service available at a typical cost of $1000 per home passed.  If only 1 in 4 homes adopt the service, the cost per actual subscriber rises to $4000 per home plus the additional $800 it costs to wire up subscribers to the service.

Since Burlington Telecom’s offerings aren’t competitive, it makes it difficult for them to increase their adoption numbers.  Comcast for example offers 15 Mbps down and 3 Mbps up for $43/month which is more attractive to most customers than Burlington’s 5 Mbps symmetric service at $45/month.  The citizens of Burlington essentially paid 50 million dollars in taxes for a redundant network that is slower and more expensive than the commercial offerings that were supposed to be made obsolete by the municipal fiber system.

The lesson in this fiasco is that there is a right way and wrong way to build a successful municipal network and Burlington Telecom is an example of what not to do.  If a community has no high speed Internet services and no commercial operators already providing service or planning to provide service, there is a role for the community and government to step in to fill in the demand.  When that demand is already filled by one or more commercial providers, nothing good can come from using tax payer dollars to destroy the commercial entities.

WCAX has a lot more stories on this.
Burlington Free Press also has this editorial.