i-Yi-Yi-Provo!


Whenever the private arena can provide a service, it is better that public entities try not to compete with them. Provo is finding this out the hard way with its ill-conceived iProvo project. Yet it refuses to give up, only destined to make the problem worse.

It sounded really cool. Most projects usually do sound that way. For their compensation, everyone told Provo that it would be a home run. iProvo would be a slam dunk. A soft ball that they could hit out of the park.

Woops!

About the time I got interested in running for Santaquin City Council several years ago, the extant city council voted to go into the natural gas business, thus directly competing with Questar, who was already a gas provider in town. By the time I got on the City Council, our city manager and our contract engineering firm painted a rosy picture, giving us a break-even point of 110 homes. Every amount of revenue generated by the 111th gas customer and so on was just money in our pockets. When Questar found out that we promised to sell gas to our customers for 10% less than Questar rates, they laughed and asked us to promise them that come heck or high water we would stick to that rate. Heck and high water hit pretty fast. It turns out that the engineers had just assumed that Operation and Maintenance costs could be charged to the water and sewer departments. To make a long story short, a few years later, we sold our operations back to Questar for a substantial loss. We got a new city manager and a new engineer during the process, and they were the ones that pointed out the problems.

Government will invariably waste money when compared with a private entity. Failures are much more likely when the project undergone is large rather than incremental. With failure #1 compounded by failure #2, iProvo is destined for failure.

iProvo has already encumbered about $70 million dollars in the project. Their break even points have changed significantly over several iterations, but the new ones are still presented with as rosy a picture as the first ones were. They are borrowing from enterprise funds like mad, and are not even able to pay some of those debts back. iProvo Manager Kevin Garlick should be fired for essentially lying to the Provo City Council.

Sometimes, it's important to just cut bait. Provo will never break even with its ill-conceived behemoth project. The problems are many in a case like this. First of all, governmental entities cannot declare bankruptcy when their projects fail. So there is the perverse incentive to get a bigger hammer in hopes that the same square peg can be finally pounded into the same round hole. Secondly, the investors didn't get to choose to invest. Every Provo taxpayer will be on the hook for his or her share of the iProvo debacle. This looming specter is a huge disincentive for people (and probably businesses) to move to Provo in the future out of fear that they might instantaneously inherit a higher tax burden to pay for Lewis Billings' and Kevin Garlick's albatross.

Private entities can do for much less what iProvo is trying to provide to Provo residents. Come to think of it, they already are. What was Provo thinking?

Comments

  1. When is a public utility not a public utility? Apparently when it's telecommunications.

    I find it justifiable to take Provo to task for their specific implementation of the project. iProvo over-estimated its success and has been paying for it in a big way. Other projects have learned some lessons about the true take rates and financing needed to pull these projects off. Provo didn't have the benefit of a lot of case studies to draw on, otherwise they would have likely been more aggressive in pursuing additional service providers from the start and courting more business accounts.

    However, using iProvo to condemn municipal wholesale networks is hardly appropriate. I've noticed that every single one of these articles will say "iProvo is a failure, ergo municipal networks are a failure" while pretending that UTOPIA doesn't even exist. The common denominator is a failure of understanding the telecommunications sector and choosing instead to apply overly broad principles and concepts to municipal involvement.

    Our telecommunications system is horribly broken. Telcos promised to deliver 86M lines of fiber optics by 2006 and deliver 45Mbps broadband as part of the 1996 Telecommunications Act. In exchange for these promises, they were given over $200B in increased fees and tax breaks. Today, we have broadband redefined to 200Kbps, under 250K lines of fiber optics and significantly higher prices for phone and television services. (Most studies are showing a greater than 75% increase in rates since 1996.) We pay 10x per megabit what most other industrialized countries do (including Slovenia and Lithuania) and have lower rates of broadband adoption. We also have even fewer choices in the telco sector because telcos reneged on their promises to lease lines at competitive rates, sabotaging competitors at every step.

    The question now is what kind of remedy can be applied. I'm loathe to trust any more promises from an industry that has already taken us for such a large ride without any repercussions. One could argue that new entrants could build their own networks, but that requires the deep pockets and vertical monopolies that got us into the mess in the first place. The only way to truly introduce competition is to divorce retail operations and plant operations.

    The problem with attempting to do this with the existing cable and telco providers is that their networks are not up to the task of next-generation services. AT&T has already demonstrated that using FTTC chokes broadband in the mess of the copper last mile. Cable providers are strained for bandwidth as they compress more and more channels to lower and lower qualities, so don't expect that shiny new DOCSIS 3.0 channel-bonding stuff to see the light of day for years, at a minimum.

    This really does leave us with a brand new fiber optic network as our best solution, the kind of solution the industry already promised and failed to deliver. Fiber currently has a maximum theoretical bandwidth of 14,444Gbps which will increase as Dense Wave-Division Multiplexing (DWDM) gets better. (Consider that VoIP uses a maximum of 512Kbps with all features turned on and an HDTV channel uses 80Mbps.)

    This is at the heart of both iProvo and UTOPIA: the cities asked the dominant providers to make good on their promises and they told the cities to sod off. I don't know about you, but I'd be pretty incensed if I paid for something and didn't get it and was brushed off when I asked for it. This has left cities having to strike it out on their own to get the services required to be internationally competitive.

    Naturally, marrying the construction of a new next-generation network with an open infrastructure that promotes better competition is a slam dunk. As much as the "unfair government competition" platitude gets thrown around, it's hard to see how that is true in light of the broken promises, increased service options (iProvo has 2 competitors and UTOPIA has 5 with more to come) and a standing invitation to both Qwest and Comcast to join the new network.

    When comparing the services, there is no comparison. You can get lower broadband speeds, lower-quality video and mediocre phone service at a higher price or you can double your download speeds, get uncompressed video and have crystal-clear VoIP at a lower price. While iProvo is having trouble paying off the debt (they currently cover all operating costs and about 2/3 of the debt service), that's a problem with the implementation of the financing, not of the concept. (One of my main criticisms of iProvo is that they need to bump up pricing to cover the funding gap instead of chasing after new subscribers that may or may not exist, something that can be done with a $3-5 charge per service.)

    I don't anticipate that I have changed your mind on the issue, but I hope I've given you a lot more to think about. This issue is not as black and white as you make it out to be.

    ReplyDelete
  2. Jesse,

    Thanks for your insightful rebuttal. I need to learn a lot more about the history of UTOPIA. I think you're right that Provo and everyone else could benefit from new networks. I just don't think it's wise for a city to foot the bill and ultimately have to pass on the costs to those who don't even use the service.

    The history of the telcos is interesting as well. There must be something that can legally be done for their failing to fulfill their promises, but I don't know enough about this either.

    ReplyDelete
  3. Frank, I would be very interested to better understand why iProvo isn't doing as well as proponents had expected. I must confess that I am very persuaded by the concept of a community fiber cabling infrastructure.

    I want the cities (or counties or states) to maintain the wiring infrastructure and let others provide the services on that infrastructure. It works for roads. With adaptation, I think it could work for internet, but I hope we'll learn from iProvo's mistakes.

    ReplyDelete
  4. Bradley,

    You and Jesse are probably right in the sense of infrastructure. I am just going based on my previous experience with competing with existing infrastructure--Questar gas in Santaquin. Perhaps iProvo is not an apt comparison in this regard, but I'm glad for the discussion that I've drummed up.

    Thanks for the input!

    ReplyDelete
  5. I think that iProvo's biggest handicap is being one of the first in the market. Municipal wholesale networks are a very new concept and any new concept is bound to hit some stumbling blocks. Provo expected the project to pay for itself almost immediately, an expectation we're starting to realize is not realistic. They were also hampered by the first provider going belly-up early in the project, setting them back at least a year and alienating many potential customers. That wouldn't have been a problem if HomeNet wasn't the sole provider on the network.

    Provo has both learned and taught valuable lessons concerning wholesale networks. First, make sure you set your expectations for subscribers pretty low. Many UTOPIA cities hit the break-even point around a 30% take rate; iProvo is projecting a 50-60% take rate to do the same. Second, have a plethora of providers available. UTOPIA benefits from having big names like AT&T and Xmission in addition to Nuvont/Veracity and MSTAR. Third (and this lesson was learned from other projects), grants are your friend. Some cities have taken advantage of federal grants to build the networks for city usage and then extend them for public use. It's a wiser use of funds.

    UTOPIA has pretty much managed to do a clean sweep on all counts. They have a lower threshold for success that's being met, they have more providers and they took advantage of federal grants for rural broadband to build the networks in Brigham City and Tremonton, lowering the total cost of the project significantly. (They might even be able to use some of the same grants when they eventually build out Cedar City, depending on how "rural" is defined.) UTOPIA members are required to secure sales tax revenue to cover any possible shortfalls on the bond payments and combined with the pooled risk, UTOPIA gets some pretty good bond ratings.

    When we look at the Santaquin example, we see that they pretty much managed to botch up every step of the way. Being a retailer and a wholesaler are very different things, something American Fork couldn't quite grasp either. (This is why they're selling their junk network for a big loss.) It would be tough to turn another utility like gas, electric or water into a public wholesale/private retail model since you're actually moving a more tangible asset rather than providing a service. I don't think the comparison between Santaquin's gas lines and Provo's fiber is entirely inappropriate, but there are some differences between the two worth considering.

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  6. I just came across an interesting article that supports Jesse's point that Provo was sick and tired of waiting.

    Japan has more than 10 times the average download speed (61mbps) than the fastest state in the United States (Rhode Island - 5mbps).

    An interesting paragraph from the article:

    "The United States is the only industrialized nation without a national policy to promote universal, high-speed Internet access," Larry Cohen, president of the [Communications Workers of America] said in a statement.'

    ReplyDelete

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