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Quest for 'Utopia' hits a roadblock

Armed with a recent Supreme Court decision, major telecommunications companies are successfully thwarting plans by municipalities to build advanced networks.

Attempts by municipalities across the country to build advanced telecommunications networks, including the high-profile "Utopia" project in Utah, are being stymied by a Supreme Court decision and opposition from major telecommunications companies.

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What's new:
Attempts by municipalities across the country to build advanced telecommunications networks, including the high-profile "Utopia" project in Utah, are being stymied by a Supreme Court decision and opposition from major telecommunications companies.

Bottom line:
With most state laws clearly on the side of the incumbent providers, the Baby Bells and the cable companies are racking up wins. As a result, supporters of municipal networks will have to fight harder to convince communities to take a risk on building a fiber network themselves.

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Inspired by the model of municipally owned power and cable systems, many local governments in recent years have floated plans to build high-speed networks that their residents could use to tap the Internet, make voice calls and watch movies. But those efforts were dealt a serious blow when the nation's highest court significantly raised the bar for such plans.

Last month, that states have the right to pass laws restricting or prohibiting municipalities from building telecommunications networks that would compete with private telecommunications firms.

And last week, the Baby Bells racked up two more victories. First, Salt Lake City, the largest city involved in the controversial --or Utopia--fiber project, said it would not financially back the project with taxpayer dollars. Also on Friday, the governor of Wisconsin signed a law that would impose strict rules for building telecommunications networks and selling services from those networks.

The Supreme Court's ruling helps protect local phone companies and cable operators from more competition in many local markets. Municipally owned networks have been growing in popularity, particularly in rural regions, where incumbent service providers are less likely to introduce cutting-edge services.

Nine states, including Wisconsin, already have laws limiting municipally owned networks. Now the Supreme Court's decision is paving the way for the Baby Bells and regional cable providers to increase their efforts to include even more states on this roster.

As a result, residents of rural communities may have longer to wait to receive advanced telecommunications services, while city and suburban residents will have one fewer choice of providers of a service that is becoming as essential as the telephone or the power grid. While broadband usage has grown steadily in recent years, it is typically provided by either the local phone or cable company at prices ranging from $40 to $80. Fiber-optic networks have yet to roll out in any meaningful way.

Although officials in Wisconsin said the court's decision did not influence Governor Jim Doyle, it certainly makes fighting challenges to the law much easier.

"The Supreme Court has spoken," said Dan Ebert, an executive assistant for the Public Service Commission in Wisconsin. "There could be challenges to the new (Wisconsin) law in the future, but the court has made a pretty strong statement."

Similar to a law in Utah, the new statute in Wisconsin requires municipalities planning to offer telecommunications, cable or Internet access service to conduct a feasibility study, including a cost-benefit analysis. They must also hold public hearings on the proposals. The bill prohibits a municipality from requiring taxpayers to pay any cost of the system, except for debt service and public, educational and governmental access channels. An exception is allowed if a majority of voters in a municipality vote in favor of the proposed service.

In areas where there is already sufficient competition, the law limits the types of services that can be offered. For example, a municipality might not be able to offer services directly to consumers but would be able to provide wholesale services to other carriers. An exemption to provide consumer-based services is made if no company is providing that service in the municipality and no company plans to during the next nine months.

Trouble in Utopia
Laws limiting municipal networks have already started to take their toll on some projects. For example, organizers of Utah's Utopia project were forced to get approval from all 18 cities to use taxpayer money to back the bonds needed to fund the project before April 15. The deadline was imposed by legislation in Utah, Senate Bill 66, which requires cities investing in cable, Internet or telephone services after April 15 to get any bonding approved by a general vote.

Eleven of the original 18 cities approved the funding. But the biggest blow came from Salt Lake City, the largest of the cities involved in the project, which voted against backing the bonds.

"I just don't see the social good in using taxpayer money to fund a network that provides more television and bandwidth for illegally downloading files."
-- Rocky Anderson, mayor
Salt Lake City
"It's irresponsible to place bets on a project that puts taxpayer money at risk," said Rocky Anderson, mayor of Salt Lake City. "With our budget challenges right now, I would be very upset if a previous mayor obligated the city to this kind of debt if things don't work out."

Utopia organizers said the project will continue as scheduled. Construction is expected to begin this summer, once the financing has been arranged, said Roger Black, chief operating officer of Utopia. But now that Salt Lake City is on the sidelines, some wonder if the project can survive.

AT&T, which will operate the network once it's completed, has said it needs an addressable market of at least 120,000 homes and businesses. Black said that the 11 cities alone provide 140,000 addresses for homes and businesses.

But just having an addressable market available is not the end of the debate. Utopia organizers have based their financial assumptions on aggressive adoption rates. In order for the project to break even, providers using the Utopia network must penetrate at least 30 percent of the addressable market in the first seven years of operation, according to Black. Utopia's business plan calls for 55 percent customer penetration by the 10th year of the project.

Critics are skeptical that Utopia can achieve even its minimum goal, since the average market penetration for broadband is around 15 percent.

"If demand for this kind of network existed, the private sector would build it," Anderson said.

If Utopia doesn't achieve the subscription rate it expects, money set aside by each of these cities will be used to help pay down the debt.

For Anderson, the risk is too great.

"I just don't see the social good in using taxpayer money to fund a network that provides more television and bandwidth for illegally downloading files," he said. "We should spend money on getting people fit, rather than deteriorating their quality of life with higher bandwidth to surf the Net."

The threat of these projects has spurred at least some incumbent providers to step up their plans to offer service. Before last week's vote in Salt Lake City, Qwest Communications, the local phone company in the region, pledged that if the council voted against Utopia, it would accelerate its plans for deploying DSL (digital subscriber line) service to 90 percent of residents in Salt Lake City by the end of 2004. Currently, Qwest DSL is available to 60 percent of the population.

Even with their plans to increase rollouts of DSL, supporters of the municipal network movement say the services offered by the Bells and the cable companies will still be too expensive and too slow.

Utopia would offer Internet access that is at least 35 times faster than the copper-based DSL service offered by Qwest, Black said. Even though a price list hasn't been published for the expected services, Utopia organizers have promised residents their network will provide higher-speed services at prices comparable to Qwest's DSL offering, which sells for about $40 a month.

But the incumbents argue that municipalities have no business building or running telecommunications networks. They say it puts established local service providers at an unfair disadvantage--because local governments are not pressured to turn a profit, they can sell services much cheaper than the incumbents can.

Supporters of municipally owned networks say that is exactly why these networks should be built.

"The public sector has always been involved in building major infrastructure," said Black. "Look at airports, railroads and highways--these were all built with public money. The fiber we are putting in the ground is the electronic equivalent of a transportation infrastructure."

With most state laws clearly on the side of the incumbent providers, the Baby Bells and the cable companies are racking up wins. As a result, supporters of municipal networks will have to fight harder to persuade communities to take a risk on building a fiber network themselves.