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Wednesday, May 23, 2007
American Fork Municipal Broadband Update

The earlier engagement to PacketFront broke down; the new suitor is Surpha.

And the New Winner Is . . .

American Fork City issued a request for proposals (RFP) last year, seeking a buyer or buyers for its municipal broadband system (AFCNet) and some or all of its considerable fiber-optic assets. (This old post explains the "fiber-optic assets.") The City accepted a proposal from PacketFront and entered into a 90-day letter of intent. That letter of intent expired some time ago with no contract, and the City reissued the RFP shortly thereafter.

Reportedly, five companies responded with proposals, two for fiber assets and three for the municipal network itself. One of the latter subsequently withdrew. The City and the companies then spent some weeks scrutinizing each other with fine-tooth combs and magnifying glasses. (I believe the technical term is due diligence.)

I did not attend last evening's American Fork City Council meeting, much as I wanted to, but I have the following on good authority.

Last evening, having earlier held a brief executive session to discuss it, the American Fork City Council voted unanimously in its public meeting to accept the offer of an Orem, Utah-based company called Surpha, which wants to buy at least the network. Surpha recently went through an IPO and now is a public company traded on the Frankfurt Stock Exchange.

City officials already were acquainted with Surpha, which submitted an attractive response to the last year's RFP, but did so slightly after the deadline and thus could not have its proposal accepted. (City officials and Surpha representatives still met at least once last summer. I mentioned one such meeting here without naming the company). This time, they delivered their proposal just before the deadline and eventually won the day. The City and Surpha will now enter a 90-day letter of intent. One hopes the matter will fare better this time than last time.

City officials are not yet offering any financial numbers on the record.

Is This the Best We Can Do?

In a word, yes. I'm afraid this is the best we can do in present circumstances.

The economic benefits of publicly owned municipal broadband are substantial and are, I believe, important to American Fork's future economic competitiveness. All else being equal, those benefits justify public ownership of a municipal broadband system. The same conditions which make public ownership desirable also justify an ongoing subsidy. (This is not a point of universal agreement; for example, see this recent post by MFCC, who writes that such ventures should at least break even.)

"All else being equal," I said. All else certainly is not equal in this case. I am forced to concede that the City subsidy currently keeping the broadband system afloat, approximately a million dollars per year, is quite excessive. Add to that the imminent and necessary costs of improving and extending the system -- several million dollars -- and the fact that much of the cable originally installed by AirSwitch/SwitchPoint turns out to have been of low quality and is nearing the end of its useful life. The result is an impossible, unsustainable situation for the City.

Had the City managed the system competently and properly from the date of its purchase until now, I think the picture would be far different now. A subsidy would still be necessary, I expect, but it would be far smaller than it is now. It is far easier to justify $100,000 or $200,000 annually than a million dollars or more.

One wants to say, where there's a will, there's a way. But at this point even those who seem to have the will cannot see the way, at least no way that resembles fiscal sanity. What is done is done, and no one, including myself, has been able to identify a plausible route, under City ownership and management, from where AFCNet is now to where it should have been by now -- extended to businesses citywide, managed and marketed competently, and earning most of its keep. The time and money which might have been spent to that end are gone, and we cannot get them back.

My understanding is that Surpha will maintain and extend the nearly citywide scope of the current system. Surpha certainly is better poised to manage and market the system than the City is. I am guardedly optimistic, both as to the quality of the service and as to the economic benefits to the city (small "c").

As tends to be the case in the broadband world, the private sector, including Surpha, still will probably underserve the community, because much of the benefit of municipal broadband does not return to the provider as profits, but to the community, in terms of economic growth and improved quality of life. (Therefore the provider is undermotivated.) But things will be better with the citywide system under Surpha than without the citywide system altogether.

A Final Note

The first RFP ultimately proved fruitless. It is reasonable to wonder, what if the potential deal with Surpha falls through, too? In replying to another's comment on the MFCC blog post previously cited, MFCC wrote the following. (UTOPIA is a broadband system in which several Utah County cities are involved.)

UTOPIA has in fact received consideration by the City, and is a likely Plan B if Plan A (divestiture) fails.

I'm glad to hear it, inasmuch as I'm disillusioned by the large majority of ComCast representatives who don't know what a static IP address is, when I ask them if I could have one with a ComCast.residential package. (The current answer, when you can get one, is, absolutely not.)

David Rodeback comments (5/24/07):

See Caleb Warnock's detailed article today for, ahem, further details.

"Dave" comments (6/9/07):

There are a couple of oft-quoted but misleading figures associated with the American Fork broadband system. One is that it cost the city $6 million to purchase. This figure is closer to $750,000. The other is that the city loses $1 million per year in maintaining the system. This figure is more of an annualized approximation of what the system has cost the city per year since it was purchased. Essentially, this is how much the original $6 million bond has been drawn down in balance.

The accountants are frankly satisfied with this point of view. If asked what portion of this expense was for capital costs in expanding the network to provide service to more residents, they would not be able to tell you. Even more, they would likely express acute frustration at having been asked for a figure that is not a specific line item on books that are kept following standard government practice.

It should be a matter of public record that operational expenses for the past year were not more than $600,000, and that accounts receivables exceeded $500,000.

So there's lies, damn lies, statistics, and then accountancy a distant fourth. Even though the ultimate decision that has been reached is likely the best one possible, it's unfortunate that the supporting figures have not been portrayed properly. It's as if the city prefers to support the impression that the broadband system is a vast sinkhole, and convince the citizens via exaggerated figures that the choice it's making is obviously the right one.

The reason it's the right decision is not because of the figures. It comes back to the City's attitude during this whole venture. While the citizens voted "yes" to the purchase, the administration has been reluctant to follow through from the beginning. Deap-seated fear encouraged by the City's lawyers has undermined any attempt by staff to run and grow the project as a business and improve the bottom line. So YES! Take the system away from those who do not wish to make use of it, and ensure it gets into the hands of someone who can and will!

The upshot is that the City will be stuck with the bill anyway, without any significant revenue to offset it, as the bond continues to be paid over the next several years. Ah well . . .

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