Government-owned broadband a path to financial ruin

It’s a day of reckoning as sure as a sunrise.  This week, the City of Opelika sold its city-owned broadband system for pennies on the dollar (or, to be fair, nearly a quarter on the dollar).  With $43 million in debt and about $15 million in cumulative losses, the city (or rather its constituents) has poured $58 million into the project.  To fund the losses, the city has raised electric rates by over $5 a customer and forgone millions in services the profits of the city’s electric utility once funded.

If it’s any consolation, Opelika is not the first city to fire sale its broadband systems, and it won’t be the last.  Despite a near 100% failure rate of government-owned broadband systems, city officials across the nation—including nearby Andalusia-Alabama, pointing to the “success” in Opelika—seem committed to the path of financial ruin.  Government at its finest.

With a $14 million sale price (about half the going rate per-subscriber for cable systems), the electric utility is left with $28 million in debt on the books for this network.  The $15 million in cumulative losses are a bygone.  With an annual payment of $1.4 million on that debt, the city’s electric ratepayers are forced to pony up nearly $10 per month per customer to fund it.  For what?  The city officials will tell you its for a “smart grid,” but that’s balderdash.  Chattanooga’s officials said the same to justify hiding the debt on the electric utility, only later to admit the truth.  Smart grid technologies don’t require $28 million in fiber for a city the size of Opelika.  In fact, it is not clear that the city uses much if any of that fiber for smart grid, or that whatever it is used for couldn’t be done using other technologies costing a fraction of that cost.

Only last year the city’s broadband network was described as a “success story.”  Now blame for its failure is being directed at the state for its lack of “help” and at competitors for doing what competitors do—compete.  The thought that extending the network into the county would have saved the network is absurd.  At best, it would have had Opelika’s electric customers subsidizing broadband services outside the city’s limits in areas where the revenue potential is relatively low and the deployment costs relatively high.  Perhaps a good situation for those out in the county, but not Opelika.

Mayor Fuller hopes the fire sale of the network will make the city “shine brighter,” but that seems a pretty low standard in light of the facts.

In an effort at positive spin on this fiasco, city officials point out that the people of Opelika now benefit from “competitive prices.”  Not so.  Companies make money when they sell at “competitive prices.” Competitive prices do not require millions in subsidies from captive electric ratepayers, to the tune of $1,250 in electric rates from the past and $115 per year per customer going forward.  Sadly, the ratepayers are left holding this $28 million bag of debt and there’s likely no way out.

Opelika’s enormous financial loss is, put simply, the result of bad decisions by government.  Bad government, in turn, falls in the lap of the voters.

Dr. George S. Ford is a graduate of Auburn University and the chief economist of the Phoenix Center for Advanced Legal & Economic Public Policy Studies (www.phoenix-center.org).  He is one of the nation’s foremost experts in municipal broadband projects.