A few years ago the city of Burlington, VT decided to build its own fiber optic network. The tale of that adventure is worth retelling and bringing it up to date. In a sense I had tried to parallel this effort but fortunately I saw the problems before they became problems. We had first started with a similar municipal approach, namely having the cities and towns use borrowing power to finance their own broadband. That soon became clear to me that it was a horrible idea after I had initially supported it. The cities and towns are just not business people.
They cannot make decisions. Consensus management just does not work. Second, even if one wanted to finance this separately one still needed a franchise. That was the final death knell. For example in Hanover, NH, they demanded that we build twice the distance of Comcast and that we provide Universal Service, namely free service to poor people. I agreed to personally pay for any poor person found residing in Hanover if they could introduce that person to me. They could not find one, but that discussion took a great deal of time and money. Municipalities are at best competent road cleaners. Now to the tale of Burlington Telecom and the City of Burlington.
One must understand Burlington, VT. It is as close to the socialist capital of the US as you can get, no holds barred, it is even more so than anything in California. It was the home of Bernie Sanders who was mayor, Bernie was from New York City originally, but settled in his now home in Burlington and now in Washington. It truly is a thrown back to the late 60s, a veritable time warp.
The City decided by some complex route that it wanted broadband and that the best way to do this was to do it themselves. Thus more than a decade ago the process began. The Burlington Free Press gives a wonderful chronology. They begin:
"March 1996: Burlington voters approve Burlington Electric Department’s exploration of cable television, fiber optic cable, Internet and other telecommunications services."
They continue:
"March 2000: Burlington voters pass two measures to allow for telecommunication network creation: a charter change so the city may go into business with Kansas-based Aptus Networks, and a $6.1 million
April 2000: Vermont House of Representatives votes 68-53 to reinsert a telecommunications measure into a charter change for Burlington, going against the advice of the Local Government Committee."
We discussed this back in 2002 and 2003 in a White Paper on Municipal Broadband. At that time we saw broadband as essential and viable and we saw that municipalities could build their own via bond offerings. However we also saw the potential pitfalls because the towns needed a strong partnership with an experienced team. After two years of analyzing this we changed our minds because it was clear that no municipality was capable of thinking like a business. They were just too political and had little business acumen if any. After two more years we abandoned the effort totally due to the franchise issue because the towns could not even issue a pari passu franchise. Bottom line, towns have trouble cleaning streets!
The news paper chronology continues:
"January 2006: BT begins to offer Internet, phone and TV service.
October 2007: Burlington Telecom General Manager Tim Nulty resigns amid differences with the Kiss administration about Nulty’s desire to expand to neighboring towns. City Chief Administrative Officer Jonathan Leopold becomes more involved in Burlington Telecom finances. BT has 2,250 customers."
It is important to note that in October 2007 the BT network has 2500 subs. It then continues:
"May 18, 2009: Leopold informs City Council that Burlington Telecom is in debt to city, but some councilors say they were not made aware that was in violation of Condition 60.
September 2009: Burlington Telecom notifies Public Service Board it is in violation of Condition 60 and asks for relief from that and Condition 17.
Oct. 5, 2009: City Council votes 13-1 to back BT’s effort to restructure its debt and expand beyond city lines. Leopold tells council that on June 30, BT’s debt to city was $17 million, in violation of Condition 60. BT has 4,600 customers."
It is key to observe two facts. First in two years they went from 2500 subs to 4600, or 2100 in two years, hardly a satisfying number. Second it appears as if all of this was hidden from the City council! It is akin to not telling your Board. Had anyone ever heard of Enron! In a local community site they state:
They cannot make decisions. Consensus management just does not work. Second, even if one wanted to finance this separately one still needed a franchise. That was the final death knell. For example in Hanover, NH, they demanded that we build twice the distance of Comcast and that we provide Universal Service, namely free service to poor people. I agreed to personally pay for any poor person found residing in Hanover if they could introduce that person to me. They could not find one, but that discussion took a great deal of time and money. Municipalities are at best competent road cleaners. Now to the tale of Burlington Telecom and the City of Burlington.
One must understand Burlington, VT. It is as close to the socialist capital of the US as you can get, no holds barred, it is even more so than anything in California. It was the home of Bernie Sanders who was mayor, Bernie was from New York City originally, but settled in his now home in Burlington and now in Washington. It truly is a thrown back to the late 60s, a veritable time warp.
The City decided by some complex route that it wanted broadband and that the best way to do this was to do it themselves. Thus more than a decade ago the process began. The Burlington Free Press gives a wonderful chronology. They begin:
"March 1996: Burlington voters approve Burlington Electric Department’s exploration of cable television, fiber optic cable, Internet and other telecommunications services."
They continue:
"March 2000: Burlington voters pass two measures to allow for telecommunication network creation: a charter change so the city may go into business with Kansas-based Aptus Networks, and a $6.1 million
April 2000: Vermont House of Representatives votes 68-53 to reinsert a telecommunications measure into a charter change for Burlington, going against the advice of the Local Government Committee."
We discussed this back in 2002 and 2003 in a White Paper on Municipal Broadband. At that time we saw broadband as essential and viable and we saw that municipalities could build their own via bond offerings. However we also saw the potential pitfalls because the towns needed a strong partnership with an experienced team. After two years of analyzing this we changed our minds because it was clear that no municipality was capable of thinking like a business. They were just too political and had little business acumen if any. After two more years we abandoned the effort totally due to the franchise issue because the towns could not even issue a pari passu franchise. Bottom line, towns have trouble cleaning streets!
The news paper chronology continues:
"January 2006: BT begins to offer Internet, phone and TV service.
October 2007: Burlington Telecom General Manager Tim Nulty resigns amid differences with the Kiss administration about Nulty’s desire to expand to neighboring towns. City Chief Administrative Officer Jonathan Leopold becomes more involved in Burlington Telecom finances. BT has 2,250 customers."
It is important to note that in October 2007 the BT network has 2500 subs. It then continues:
"May 18, 2009: Leopold informs City Council that Burlington Telecom is in debt to city, but some councilors say they were not made aware that was in violation of Condition 60.
September 2009: Burlington Telecom notifies Public Service Board it is in violation of Condition 60 and asks for relief from that and Condition 17.
Oct. 5, 2009: City Council votes 13-1 to back BT’s effort to restructure its debt and expand beyond city lines. Leopold tells council that on June 30, BT’s debt to city was $17 million, in violation of Condition 60. BT has 4,600 customers."
It is key to observe two facts. First in two years they went from 2500 subs to 4600, or 2100 in two years, hardly a satisfying number. Second it appears as if all of this was hidden from the City council! It is akin to not telling your Board. Had anyone ever heard of Enron! In a local community site they state:
"Burlington city officials are mired in controversy over the legality of a recently revealed $17 million dollar unpaid loan given to Burlington Telecom, an apparent violation of the terms of its license issued by the Vermont Public Service board. While the municipally-owned fiber optic network is permitted to borrow money from the city, it must be repaid within 60 days, because the city charter insists that Burlington Telecom be an independently financed venture that does not become a taxpayer liability.
Dubbed by some as TelecomGate, it has become a major media story in Vermont’s largest city. Some taxpayers are upset by the perceived “bailout” of Burlington Telecom after the company exhausted its commercial loans of almost $34 million dollars to construct a fiber network serving homes and businesses. The Burlington Free Press has reported the city began quietly funding Burlington Telecom as early as late 2007, for both capital expenditures and some operating costs. As of today, Burlington Telecom has an accumulated debt of $50 million dollars, $17 million of which is owed to the city."
They then continue:
"Caught in the middle is Burlington Telecom and its 4,600 subscribers. The provider is in apparent violation of its license for its loan arrangements, needs additional money to complete its buildout, and will likely also be cited for not completing that buildout on the schedule it committed to as part of its license to operate."
Let us perform a simple calculation. To date BT has spent $34 million of initial debt plus $17 million of City loan, a total of $51 million for 4600 subscribers. That is over $11,000 per subscriber. There is no way you can have a business with those numbers! Ever. We have shown over and over again that at best $3500 is the maximum for a per sub investment. I remember being asked to meet with the group evaluating the BT build out for the City in the summer of 2004 if I recall and they wanted advisers to help them analyze the deal. The selected some consultant who had no operational experience. That is par for the course.
Now what apparently happened is that the loan from the city was less than correctly done, at least so thinks the Council. In a recent article in the Times Argus they state:
"The Burlington City Council is planning for an independent audit of the city-owned cable company, Burlington Telecom. Monday the city council voted to make public internal communications about a $17 million loan of taxpayer funds to the utility. Some say Mayor Bob Kiss and treasurer Jonathan Leopold didn't tell them about the loan. WCAX-television says that at the council's Wednesday meeting, members approved getting an independent audit of Burlington Telecom. Councilor Karen Paul says officials need to know if Burlington Telecom is viable. The council hopes the audit can be finished by early next year."
This has now reached the point of asking if the funds were properly and legally taken from the taxpayers and given to BT. Or is BT now owned by the "people' as a de facto result.
The most recent step is that it appears as if BT has obtained added financing. It has been reported by WCAX that:
Let us perform a simple calculation. To date BT has spent $34 million of initial debt plus $17 million of City loan, a total of $51 million for 4600 subscribers. That is over $11,000 per subscriber. There is no way you can have a business with those numbers! Ever. We have shown over and over again that at best $3500 is the maximum for a per sub investment. I remember being asked to meet with the group evaluating the BT build out for the City in the summer of 2004 if I recall and they wanted advisers to help them analyze the deal. The selected some consultant who had no operational experience. That is par for the course.
Now what apparently happened is that the loan from the city was less than correctly done, at least so thinks the Council. In a recent article in the Times Argus they state:
"The Burlington City Council is planning for an independent audit of the city-owned cable company, Burlington Telecom. Monday the city council voted to make public internal communications about a $17 million loan of taxpayer funds to the utility. Some say Mayor Bob Kiss and treasurer Jonathan Leopold didn't tell them about the loan. WCAX-television says that at the council's Wednesday meeting, members approved getting an independent audit of Burlington Telecom. Councilor Karen Paul says officials need to know if Burlington Telecom is viable. The council hopes the audit can be finished by early next year."
This has now reached the point of asking if the funds were properly and legally taken from the taxpayers and given to BT. Or is BT now owned by the "people' as a de facto result.
The most recent step is that it appears as if BT has obtained added financing. It has been reported by WCAX that:
"Mayor Bob Kiss, P-Burlington, and the City's Chief Administrator Jonathan Leopold called in the press to announce that the city-owned cable company-- Burlington Telecom-- has secured a $55 million finance restructuring agreement with a Midwestern company.
"Which will enable BT to meet its current financing obligation to the CitiCapital as well as its obligation to the city's pooled cash account," Kiss said. "In addition BT has done an analysis of cash flow projections and can expect to repay any future debits from the pooled cash account with 60 days."
The announcement was made with many of the city councilors in the room who claimed the mayor and the city's chief financial officer kept them in the dark about a $17 million loan from the city's cash pool and failure to repay it within 60 days as required by law."
There still are many questions to be answered. First, who in their right mind would loan $55 million to a technically defunct entity and why. The second is why was the city allowed to "loan" $17 million of taxpayers money behind what appears to be closed doors, and third, given what has occurred to date, why would anyone believe that things will improve?
One may ask how did things get this messed up. One answer is the City and it management. Another is the management of BT. For example the alleged background of the initial CEO, Nulty, is as stated by VermontBiz as follows:
"Nulty, a 63-year-old Jericho resident, has considerable experience in the telecom field. As chief economist for the US Senate Commerce Committee in the late 1970s, he worked on legislation that set some basic rules for the industry that are still in effect. Nulty then oversaw a number of the World Bank’s biggest telecom-related investments in eastern Europe. He also ran a venture capital firm in Hungary and served as a senior advisor to the US Department of Energy"
Thus it appears that he has no real experience running a company. First as an economist, well we all know economists cannot do anything, you would rather have an accountant. Running a VC firm is NOT running a company. Watching someone do something is not doing something. Thus the fatal flaw was sown from the outset; municipal oversight combined with apparently less than highly experienced management led to what may still be a disaster.
Yet how would this apply to the Stimulus. Simply, this system actually was constructed and actually served a population, albeit a small one. Imagine this being multiplied several thousand fold, and with a much less experienced team in an even more complex environment. Then you envision the Stimulus Broadband program.
To see where that program is going, the Broadband Stimulus Program one need just look at the current Federal Register. The statement says:
"RUS and NTIA announce the release of a joint Request for Information (RFI) seeking public comment on certain issues relating to the implementation of the Broadband Initiatives Program (BIP) and the Broadband Technology Opportunities Program (BTOP). This is the second joint RFI that the agencies have issued since the enactment of the American Recovery and Reinvestment Act of 2009 (Recovery Act), which established these broadband initiatives."
Since the initial applicants were even less prepared than Burlington the applications seem tohave been deficient. The Announcement states:
" For the first round of funding, applicants were required to complete a broadband infrastructure application, public computer center application, or sustainable broadband adoption application, depending on the type of project being proposed. For each application, the NOFA requiredapplicants to respond to a number of questions and submit certain data. Those applicants considered highly qualified after completion of step one of the review process were required tosubmit additional information during a step two ‘‘due diligence’’ phase to substantiate the representations provided in the application.3 Some stakeholders, especially applicants completing the broadband infrastructure application, stated during the first round application process that completing the initial application was overly burdensome based on the questions asked and the number of attachments required. RUS and NTIA tentatively conclude that the application process should be streamlined. In what ways should RUS and NTIA streamline the applications to reduce the burden on applicants, while still obtaining the requisite information to fulfill the statutory requirements set forth in the Recovery Act? Should the agencies modify the two-step review process, and if so, how? Should certain attachments be eliminated, and if so, which ones? Should the agencies re-examine the use of a single application for applicantsapplying to both BIP and BTOP to fund infrastructure projects? How should NTIA link broadband infrastructure?"
Frankly there is a simple answer to this. Do what RUS had done with others in the past. The risk here is that RUS, which has an unblemished record, will be forced to make loans in a manner and fashion which just increases default risks almost to 100%. That is just a wast of taxpayer money, fails to create value, and distorts the whole intent. Burlington is an example of how things can go wrong given the best of intentions. Consider what would happen if the money is placed in the hands of those less well intentioned.
Posts
