Tuesday, November 09, 2004

Blogging the Council's Public Hearing on Fiber to the Premises

For the next couple of hours or so, I'll be blogging the Lafayette Consolidated Government Council meeting on the proposed Lafayette Utility Systems' Fiber to the Premises project. I'm at home and watching this via Acadiana Open Channel — yes, Cox is letting it run!

Joey Durel made an opening remark about this project putting Lafayette on the map in terms of being a forward looking, technologically savvy community.

Terry Huval is up, recognizing members of his team before getting into the formal presentation. Jim Baller in the house!

Huval says "we've done due diligence." Says the project will be beneficial to the city, the parish and possibly the region and state.

Doug Dawson of CCG will lead the presentation. CCG founded in 1997, after passage of the Telecommunications Act of 1996 became law. They've got 350 clients that cover the gamut of telecom providers — cities, private sector telecom companies, cable companies, universities, etc.

"We're doers and implementers, not just consultants," Dawson said.

Dawson cites Act 736, the state law that resulted from the attempt by BellSouth and others to kill the project before it got started. Says the presentation will relate to the requirements of that act.

First bullets:

— The concept is to build a state of the art broadband network to using fiber technology to every home and business in the city.

•— Initially, the major product offering will be the triple play — voice, broadband and video.

•— Fiber is the ultimate technology and can be continually upgraded overtime to deliver more bandwidth than any other technology around.

•— Will continue LUS wholesale services.

•— Future-proof network through constant innovation in the technology. This is a 50 year network.

•— FCC says competition drives price decreases, service improvements in every place where it occurs.

•— Targets 50 percent market penetration. Gets there incrementally. Based on market survey in the spring, think that is realistic over time. This is what they're pitching to the bond market.

•— 20 percent lower than other providers. That's the goal. Because of that, support $85 per month triple play package. 70 channels of cable included, significant bandwidth, plus telephony.

•— LUS will sell just retail to home and small retail.

•— 50 percent is the target. 30 percent market still results in bond payoff within 19 years.

•— Positive margin — revenues greater than expenses — in 2007. First customer in June 2006. Whole operation will be cash positive by 2010 — 100 percent self-supporting.

•— 56 percent operating margin when the system matures.

•— Over the 25 year life of the bonds, the project has a 14-18 percent interest return year to year.

•— Assumes competition will respond. Will drive even more savings to consumers.

•— LUS will pay $100 million in new revenue in lieu of taxes. Cash bonus of $213 million over life of the bonds which can be put back into this system, to other aspects of LUS operations.

•— Subsidy issues: Law requires that this division not be subsidized by other divisions of LUS. Because of this is develop a cost allocation manual to insure that none of these subsidies exist. Support will come in the form of a loan. Does not think loan will be necessary; bond will be sufficient. Communication will buy $6 million in existing fiber from the Electric Division.

— Imputation Rule requires that pricing reflect the projecting that LUS would have to pay federal and state taxes which private sector providers must pay. In Lieu of Taxes can be counted against that amount. So, In Lieu of Taxes will always offset imputed taxes.

— Key points: Don't jump to 50 percent penetration. Think it will take four years to get to everyone who will want the service. Will lose money in early years. Will be covered by bond issue. After that we should be making money.

— In Lieu of Taxes is "$0" for a while. That starts in 2010. Does not start until covering all its expenses, including debt service. Ultimately will be about $6 million per year.

— Current bond structure will show no debt payments for first three years. May extend to four years. Debt payments will run $14 million per year. Might be lower. By 25th year, payments in lieu of taxes $7 million per year, and clearing $20 million per year.

KEY ASSUMPTIONS
— Deployed by phases, but exact path not determined.

— Rates will be 20 percent below rates of competitors.

•— 49 new employees.

•— 25 year Bond Issue.

— Pay in Lieu of Taxes in 2010.

— Business Customers. 2,000 large businesses will be targeted by wholesalers currently using LUS system. Retail customers, there are 5,000 other business customers in town which will be targeted by LUS.

— Revenue assumptions: Voice over Internet Protocol (VoIP) supported from day 1. High speed Internet. Cable also available. Sell more bandwidth at lower prices, that's LUS's commitment.

— Residential: 47,000 households in Lafayette. Everyone will have fiber down the street. Triple play package will be offered, but can buy pieces individually. Tiered Internet packages. Will exceed all locally available packages for less money. Marketing will be conducted through various means.

— LUS will distinguish itself by offering more for less in cable, telephony and Internet services.

— Wholesale assumptions: fiber will be running past every business. Will improve their ability to recruit and win customers to the network. Expect 30 percent growth in customer base for wholesalers.

— Penetration assumptions: 50 percent of 47,000 households. Start slow and build.

— Conservative on Internet penetration. Project 38 percent, but expect much higher penetration due to attractiveness of the offerings.

— Business penetration: will go slower than residential base. Will reach 50 percent, but maybe faster than projected.

— Asset intensive business. 2009 is anticipated end of initial build out. $117 million. $46 million for fiber. $20 million for fiber drops into buildings. Fiber to the home electronics (part of it at LUS and the other part of it on the side of the building). Cable TV head-end. Settop boxes. Switch. Building to erect to serve as network operations center.

— Financing assumptions: 25 year revenue bond, $110.5 million. Secured by overall LUS revenues. Will cover full cost of constructing fiber system. Will be inter-utility loan to buy existing fiber, but no cash changes hand. Long-term interest rates will not be moving much soon. Projections based on 5.5% interest rates, which is a full percent higher than current rates.

NEXT STEPS
— Need council approval of feasibility study.

— Start process of bonding.

— Once get approval can do detailed engineering.

— Meet legal and regulatory requirements. For instance, need cable TV franchise agreement from council.

— Address delay tactics. These happen everywhere, expect them here. Foresee 18 months before first customer on line, June 2006.

Terry Huval
Since we've started this project, we've been getting a lot of questions. Here are some of those and our responses.

Does the cost allocation and affiliate transaction rules in Act 736 affect time line?
No. These rules are not new, they are new to us. Taken directly from National Regulatory Commission models. LPSC rules will only require minor modifications of those rules, but don't expect that to be time consuming. These cost allocation principles are long established within LUS, where there is no cross subsidization taking place. Not a new thing for us.

BellSouth requested FCC relieve them of these types of cost allocation issues.

Doesn't Lafayette already have fiber?
No Lafayette homes have fiber run directly to them. No plans in place by incumbents to do so within the foreseeable future. Incumbents are underestimating bandwidth demands here and this will have impact on community and economic development here.

US trails rest of the world in broadband access. This will set Lafayette apart. We want to be part of America that forges ahead.

Priorities, why not drainage and roads?
This project will generate new revenues. Can only borrow money if you have a revenue producing entity. This project will produce revenue. Also, will save consumers millions of dollars in reduced rates, even if they stay with competitors. This project will be smaller than any generation project that LUS has engaged in over the past 25 years.

High potential for failure?
More than 70 percent of homes and businesses have expressed an interest in these services. The potential for great things to happen here will be higher as a result of this project.

Is this putting LUS at unreasonable risk with this project?
No, this project has a very high probability of success. The size of the project is not a threat as it will be phased in. $40 million is far less risky than the other projects in which LUS has invested in over the past decades. Debt will be less than 1.5% of entire revenue portfolio. The rest of the money will be spent only when customers come on line. So, $40 million is at risk.

Will LUS bills increase because of this project?
No. Telecommunications system will pay for itself and will lower bills for all customers. Will produce lower cable, telephone and Internet bills here. Might actually lower utility rates.

Will taxes be raised to pay for this project?
No. Project provides a source to keep need for new taxes low.

Will there be an install fee to connect?
No. No connection fee if you already have telephone or cable services.

Do you have to buy all three services?
No. Buy separately.

Better technology?
Fiber is the ultimate infrastructure. Even wireless requires fiber to move data. This would be a compliment to wireless systems. Within five years, Jupiter research predicts average home will need 72 megabits of home bandwidth, possibly 100 megabits. This is 20 times currently available.

More than we need?
That's what they said about the Interstate highway system fifty years ago. More bandwidth will become a necessity. By building fiber to the home, all bottlenecks are removed from the infrastructure. Forward thinkers think fiber to the home is the infrastructure of the future. Quotes former VP of BellSouth saying the same thing.

Verizon is doing this in Keller, Texas. Why not Lafayette?

Municipal failures?
There have been no municipal failures when the municipality has been the direct seller without a middleman. Lafayette citizens are already benefiting from the discussion of this project. They say that the new products are not related to the LUS plan. You be the judge.

Fiber as an infrastructure.
The incumbents have been whispering that fiber is sensitive and expensive to work with. This is the same infrastructure upon which they are betting their future.

Fiber to the Curb
This is an improvement over current incumbent systems, but it is ultimately a half-step to the future. Take the full step now, Lafayette will join a small, but growing circle of advanced communities worldwide.

— All Lafayette businesses and consumers will get better rates as a result. Tens of millions will be saved annually and will stay in circulation within our community.

— Positive impact on the General Fund to support other projects without having to increase taxes.

— Contractors will get work on the buildout.

•— Positive impact on education.

• — Close the digital divide. Want to find more opportunities to close that divide.

• — Lafayette job market will see 49 new technology jobs. Expected economic development impact will draw new companies and jobs to Lafayette. We will be the only city that can provide this bandwidth and these capabilities to prospective companies. Cedar Falls, Iowa, has outgrown neighboring Waterloo, Iowa, since deploying fiber there. Will also help keep companies and jobs here.

— Will grow opportunity here instead of having to go elsewhere to find it.

End of LUS presentation.

1 comment:

Anonymous said...

Who is that clown Neal Brakefield?