MEMO

BACKGROUND

At the request of Councilor Silbiger, staff has researched two public utilities that are offering Broadband services to their customers. We conducted phone interviews with Telecom staff at both Cities and the findings of that research is presented here in this memo.

SPANISH FORK, UTAH

This information was provided by John Bowcut, the manager of their IT Department and Telecom Utility. This is a municipal utility that is located about 60 miles south of Salt Lake City. The Electric Utility serves electricity to 7,076 residential customers and 966 non-residential customers. They began building their Telecom Utility in 1999 and it was constructed for about $7.5 million dollars. The Electric Utility borrowed $10 million dollars to finance the construction of the Broadband Utility and also to construct a new substation. They sold 15-year revenue bonds to raise this money. An additional $1 million was provided by the Electric Utility for operating expenses.

The system is a Hybrid Fiber/Coax system and provides cable TV, cable modem service, and a wireless business service which is being converted to a wired service as fiber is being extended to these businesses. Comcast is the other cable company that services the area. Right now, Spanish Forks Community Network (SFCN) serves about 4,000 CATV customers and they estimate Comcast has between 1,000 and 1,200 customers. SFCN serves about 3,100 cable modem customers and they have no data on the number of cable modem customers that Comcast has. SFCN was able to build their network and offer advanced CATV services and cable modem service before Comcast was able to offer like services.

SFCN debt service is paid to the Electric Utility and their portion of the bond payment is $673,000. Of this, $280,000 or 41.6% is paid by Water, Wastewater & the Irrigation Utilities which utilize the network for services. They chose to do it this way as opposed to actual billing for service like AFN does.

Spanish Fork provides retail Internet services by acting as the ISP for their product. Because they are both the CATV and retail ISP, they are able to bundle these two products together for a price discount.

BRAINTREE, MASSACHUSETTS

This information was provided by JoAnne Stak Bregnard, Marketing Manager and Bill Bottiggi, the Manager of the Light and Telecom Divisions of the City. Braintree is located about 15 miles south of Boston. The Electric Utility serves 12,329 residential and 2,404 non-residential customers. They began construction of their Telecom Utility in 1996 by building a Hybrid Fiber Coaxial network for automated system monitoring and automatic meter reading and billing. The network was completed in 1998 and in January 1999, Braintree Electric Light Division (BELD) launched BELD.net, a full Internet Service Provider offering high speed cable modem service to both residential and business customers. In 1999, BELD held a non-bindery referendum ballot, where 82% of the voters supported adding cable TV service.

Cablevision was the incumbent cable TV provider in 1999, but it has since been bought out by Comcast which competes with BELD. BELD's cable TV service was launched in January 2001. They were able to provide digital cable service before Comcast could rebuild the network and offer like services. Comcast has competed vigorously with BELD and at present each entity has about 5,000 CATV customers for a 50/50 market share split. BELD has about 3,700 cable modem customers and while they don't know the number of cable modems that Comcast serves, they believe the number is far lower than their customer count. Much of Braintree's telecommunication construction was built and funded by the Electric utility prior to the creation of BELD in January, 1999. Cost of the entire infrastructure was about $12-13,000,000. Of this, BELD Broadband sold $5 million in general obligation bonds and received and additional $1 million from the Electric Utility. As such their debt service is $650,000/yr for 10 years. In addition, they pay an additional $120,000 per year as rent to the Electric Utility for rent of the main Telecommunication Infrastructure.

Total revenue for BELD Broadband in 2003 was $4,786,028. Total expenses, including $502,542 in depreciation, were $4,883,475 for a net loss of $97,447. Without the non-cash depreciation expense, the operating income exceeded operating expenses by $405, 095. We have included a table that compares and summarized the Spanish Fork, Braintree and Ashland's situations in a number of areas to help to understand the similarities and differences between the 3 situations.

Spanish Forks

Braintree

Ashland

No. of Electric Customers	Residential	7,076	12,329	9,548
	Non-Residential	958	2,404	1,100
Incumbent CATV		Comcast	Comcast	Charter
CATV Customer	Public System	4,000	5,000	3,200
	Incumbent	1,000-1,200	5,000	3,200
Cable Modem Customer	Public System	3,100	3,700	3,700
	Incumbent	Not Available	Not Available	1,200 (est)
CATV Prices Expanded Basic/Box	Public System	$39.00 (100+Channels)	$47.00 (154 Channels)	$35.00 (123 Channels)
	Incumbent	$42.00	$32.00	$35.00
Cable Modem Prices	Public System	$28.00	$39.00/$29.00 Bundled	$33-$42
	Incumbent	$45.00	$58.00/$43.00 Bundled	$40-$30 Bundled
Bundled CATV, Cable Modem	Public System	Yes	Yes	No
	Incumbent	Yes	Yes	Yes
Public System Total Cost (Capitol)		$7,500,000	$10-11,000,000	$8,900,000

SUMMARY

Braintree and Spanish Forks have approached funding their Telecommunication Utility in different ways than Ashland. In Braintree, the Electric Utility funded the main Infrastructure and BELD Broadband only incurred $6 million in debt to complete the last mile construction. This makes their debt service much lower because their debt is only $6 million. Also, they pay about $120,000/yr to the Electric Utility to rent space on the Electric funded network.

In Spanish Fork, the total debt service payment of $673,000 is offset by $280,000 that is paid by other City departments that utilize the network for services.

In Ashland, virtually the entire cost of building the system and the debt service is carried by AFN. Debt service payments on the refinanced debt begin in July, 2005 and continue for 20 years. AFN charges the departments in the City, fees for use of AFN's facilities. This charge is $3,000 per month or $36,000 per year. Also AFN pays Central Service , Franchise and Pole Attachment fees to the City.

Either of the approaches used by BELD or SFCN provides a subsidy but they devised the approach before building the Network. In AFN's case, we are now trying to determine an appropriate subsidy, 5 years into AFN's operations.

PREDATORY PRICING

Staff has discussed predatory pricing activities of incumbent Cable Companies, with the American Public Power Association (APPA), the Baller/Hearbst Law Group, which represents many municipal utilities and works with APPA and represented Scottsboro Alabama before the FCC, and also officials at Braintree, Massachusetts. We have found that both Charter and Comcast seem to be the most aggressive in competing with Municipal Telecom Utilities for cable TV customers with deep discount pricing. Scottsboro, Alabama in 2002 filed a formal complaint with the FCC asserting anticompetitive practices by Charter Communications and requested prompt and effective agency action to stop Charter from "using its vast revenues from its 6.3 million customers nationwide to subsidize predatory pricing in Scottsboro that are clearly intended to drive Scottsboro Municipal Cable System out of the market." According to Jim Baller, of the Baller/Herbst Law Group which represented Scottsboro, the FCC decided they had no authority to require Charter to stop their activities but at the request of Scottsboro, they included the Scottsboro case in their 8th Annual report. Scottsboro in turn, took this 8th report to the US Department of Justice for action, where it remains today with no action taken from the Department of Justice. Charter has ceased their deep discount pricing in Scottsboro, and the municipal Telecom Utility now owns 76% of the CATV market.

The City of Braintree's Telecom Utility BELD Broadband also tried legally to stop Comcast from anticompetitive behavior in Braintree. According to JoAnn Stak Bregnard, BELD Broadband took their case to the State of Massachusetts Attorney General and the State Office of Telecommunication & Energy Regulation (DTE). They received a good response from the DTE Commissioners and head of Cable Regulation, but were informed that it was outside their area of responsibility. The Attorney General whose main focus is to protect the customer, said that customers were benefiting from the competitive pricing and without BELD Broadband demonstrating that Comcast had embarked on a pattern of behavior and specific plan of pricing designed to cause BELD Broadband to fail, they wouldn't take any action against Comcast. Neither governmental entity pursued the action but Comcast ceased their deep discount pricing because of the publicity generated by BELD Broadband and media attention related to the complaints.

In checking with both Jim Baller, and APPA staff, no one is aware of a successful legal action that caused a governmental regulator to step in and intervene with an incumbent cable TV company and require them to cease their actions. However, the negative publicity and media attention that accompanies a request for regulatory action, in some cases, causes the incumbent to cease their deep discount pricing in localities where municipal over-builders are competing with incumbents.

Staff will continue to research this area of concern and will return to the Council with a course of action designed to seek relief from these action if it appears there is a reasonable chance to get regulatory relief in this matter.

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