Mannkind Perspectives: Utopia Fiber and Highland

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On February 4th, 2020 Roger Timmerman, executive director of Utopia Fiber, reviewed with the city council Utopia Fiber’s program for installing and running “Municipal Open Access” fiber in Highland (video, copy of slides). The short version of their proposal is:

Utopia would install fiber connections to all residences in Highland with speed of 250 Mbps to 10 Gbps within two years. These are dedicated connections whereas cable internet is shared and slows down when during busy time periods.
Residents who elect to activate the connection would be billed ~$66 per month for residential internet service. $30 per month from Utopia and $33 to $37 per month by the Internet service provider they select (Internet and email). There are currently 11 service providers available on Utopia.
To fund the build out Utopia will take out a 27 year bond that includes two years capitalized interest (i.e. no payments for the first two years).
If after two years ~40% of Highland residents (based on the number of existing residencies) sign up for the service then the city will not incur any expenses.
If we do not reach the target subscription rate then the city will need to fund any shortfall. These funds would be treated as a loan to Utopia.
Mitigating policies which can reduce our target or otherwise benefit the city include: factors are: (1) All revenues collected during the first 2 years can be used to cover shortfalls, (2) The city would get credit for 50% of all non-residential revenue (businesses, schools, and churches), and (3) the city would pay a wholesale rate for connections it uses directly (city offices, connections used for smart irrigation controllers, etc).

Utopia put a survey together for the city to assess the interest of residents in this project. If you haven’t taken it please click here regardless of your view of the project.

I put together an estimate as to what the required “take rate” translates to in terms of a liability to the city and how much we could expect the mitigating policies to reduce that liability. The spreadsheet provides that information. I used conservative figures when calculating the value of the cost mitigating features of the proposal.

Below is a comparative list of pricing for the 11 internet service providers available on Utopia as well as Century Link, Rise Broadband, and Xfinity. As mentioned Utopia Fiber provides a dedicated connection to each home whereas the other providers have shared connections. In a shared connection internet performance is impacted by other users in the neighborhood. With the other providers upload speeds are significantly lower than download.

For me there are several key questions regarding this project:

What financial risk is the city taking on?
That is a good question. In this case the city is taking on the liability of making the bond payments if the project doesn’t generate enough funds to cover the cost. As outlined above the city would guarantee ~$16.5M in payments over a 25 year period. The table below lists the cities currently using Utopia and the subscription or “take” rates within them:
With the estimated take rates the project would create enough revenue to allow for 22 months to reach the target subscription rates after the debt obligation starts. The average take rate of completed cities is higher than our required take rate. There however are risk elements to the project. If there were an economic downturn would subscription rates drop below the target threshold? Could a less expensive technology become available that would reduce subscription rates? At the end of the day regardless of future events the city and therefore all residents have a long term obligation.
Is the fiber scalable/will demand outstrip capacity in a few years?
Currently fiber is used to provide 100+ Gbps connections and will be able to support significantly higher speed connections in the future. The only changes that will be needed are upgrades to endpoint equipment.
Is 5G a threat?
5G is coming and should be able to offer speeds up to 300 Mbps but is it a shared resource and performance will be affected by increased usage. While the initial infrastructure cost of 5G is lower than fiber the maintenance/operating costs are higher. Most projections indicate that 5G and fiber will coexist. Will 5G provide adequate connection speed for some users at lower cost than fiber? Would that affect subscription rates to the point the city would need to cover some of the monthly costs? It is an unknown at the moment.
Is providing fiber infrastructure something that cities should be involved with? Is it the equivalent to roads, sewer, and water?
There are opposing points of view. We are being asked to take some risk out of the equation for Utopia, by backstopping the bond. Our participation helps Utopia get a lower interest from lenders. Utopia not a private company is an an interlocal agency. In addition to building out a fiber infrastructure using bond money, Utopia covers the cost of operating the network and connecting new homes that are built after an agreement is signed.
Here are a few additional questions. Does having fiber service make Highland a more desirable community? Does that affect our property values? Does having fiber spur economic development?

Below are selected slides from the Utopia presentation to Highland on Feb 4th. Click here to view the entire presentation (84 slides).

Note, because Utopia is an interlocal entity (its board is composed of representative from member cities but it has no power to impose taxes) you can look at its board agendas on the Utah Public Meeting Notice website – select “Interlocal”, “UTOPIA”, and “UTOPIA Board”.

Click here for updated survey results as of February 19th.

The following is the content from an email sent by Utopia to city council members after the Feb 4th meeting.

Highland City Council and Mayor,

Thank you for your time last night. I hope it was informative and helpful as you consider opportunities to improve the broadband options in your city.

A lot of good questions came up and I feel that we barely had time to scratch the surface of the content of our proposal (link below for full presentation). If possible, I would like to come to a follow-up work session to continue to present additional options and details that we did not get to.

I did have a few specific follow-up items from last night that I wanted to provide:

Concerns about the pledge/risk to the city – This is really just a mechanism to achieve better financing terms and for purposes of fair partnership (each city having a partial commitment to the project in their own city). Various protections are put in place to ensure that this doesn’t actually cost the city anything, unlike the pre-2009 projects you may have heard of. Those protections include the following:

Any additional homes and businesses built in the city do not increase the city’s obligation, but subscriber revenues from new development do count toward the revenue requirement of the agreement lowering the effective take-rate requirement and risk to the city over time.
The financing includes 2 years capitalized interest. This gives 2 years to build out and achieve the needed take-rates before the obligation begins. Any revenues accumulated before the first financing payment act as a buffer.
If there was for some reason a shortfall, it is paid as a loan and UIA repays it to the city when take-rates and revenues do exceed the needed amount.
We are growing very rapidly in other comparable cities, and our sign-up rates give us a very high-level of confidence that we will be able to achieve the needed take-rates in Highland to be fully subscriber funded with no cost to the city.
100% of revenues from city services and smart city applications off-set the obligation, resulting in a lower take-rate requirement.
50% of revenues from businesses, schools, churches, other non-residential off-set the obligation, resulting in a lower take-rate requirement.
All UIA projects (over $170M in projects) have exceeded their revenues targets for covering all of their debt service obligations.
Highland is comparable to cities with especially high demand for UTOPIA Fiber price points and service offerings.
With eighteen years of UTOPIA Fiber projects across 14 cities, they have all increased in take-rate over time. If there were a shortfall, it would only be temporary until the take-rate exceeded the amount needed.
All industry and technology trends favor increased demand and revenues for fiber deployments for 20+ years.
Some areas in Highland have only wireless options. We easily expect 80%+ take-rate in these areas which helps the city-wide take-rate requirement.

If UTOPIA Fiber is so confident the project will be successful, why does it need the backstop agreement?

Keep in mind that we are not a business. We are a group of cities doing these projects via the interlocal entities of UTOPIA and UIA. To do a project without participation from the city would essentially be asking other cities to do the project in your city. The agreement is required in fairness to other cities as well as a test of support among your elected officials. The UIA board will not counter-approve a project unless it is clear that the city is supportive and willing to take on at least a portion of the risk of their project. Things are going very well at UTOPIA/UIA and we do not need a Highland project. However, we do have resources available to do additional city projects and are willing to them as long as the city is supportive and partners with us in one of the ways that has been approved by the other cities.

Take-rates in other cities

Completed cities marked in blue, cities with significant new areas recently released in yellow. These recently completed areas cause an artificially low take-rate because they have not yet had 2 years of sales and marketing efforts time. Lindon, Centerville, and Layton are considered our most comparable cities to Highland and are exceeding 40% take-rate. Layton is reported lower because of new areas, but areas in Layton over 2 years completed are over 40%. …. see table from Item #1 at the top of the post.

Survey

The survey results were extremely positive. However, the sample base was still relatively small, but still statistically relevant. We have left the survey open so that additional responses can be received. We would encourage the city to advertise this survey (https://www.surveymonkey.com/r/highlandcitybroadband). We would be happy to work with you on ways to advertise this to get more responses.

Smart City Applications

There is more detail in the presentation (link below) about these that we skipped over last night. For some smart-city applications UTOPIA Fiber can act as a full integrator for the city. For others we simply provide the connectivity needed to support the application. We would be happy to discuss these smart-city applications in more detail with the city.

Enormous Benefit to Community - No other city project can so dramatically benefit a community as a municipal fiber network. The impacts include the following:

It is expected that residents will pay on average $27/mo less for broadband as a result of this project (including non-subscribers). This results in a cash savings of $324 annually per household or $1.8M annually for the entire city (~5500 households). (See link in presentation for study that shows this impact, slide 58.) This results in enormous immediate and long-term economic benefit to the residents and businesses of the city. This benefit alone makes the project worthwhile even if the city backstop was impacted, even though it is not expected to.
Better city services - ability to implement various smart city applications that are dependent on connectivity
Better quality of life - Broadband has become a critical service for education, business, entertainment. Having an ultra-fast broadband connection significant enhances all of these uses.
Transportation, tele-health, telecommuting, and air quality – Decreases need for transportation if you can do more from home, as well as reducing transportation related air pollution, and enabling remote dr. visits and other tele-healthcare.

Please let take the survey and then feel free to let the council know your views on this potential project. You can send an email to the mayor and council using the email address council@highlandcity.org. Contact info for individual council members can be found on the Highland City website.

Mannkind Perspectives

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Wednesday, February 12, 2020

Utopia Fiber and Highland

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