Friday, June 29, 2007

The Money's in the Bank

The sale of LUS fiber to the home bonds officially "closed" Thursday both the Advocate and the Advertiser report. LUS sold $110.4 million in revenue bonds to support the construction and intial costs of the network. As in "closing" on your home or car loan what this really means is that the money is in the bank and you can take possession of what you've been sold. In this case LUS (and the rest of us) is "buying" the use of the money. Now they can begin spending money.

Expect the pace of things to pick up.

The papers report that spending will begin on planning and on the early construction of items like the warehouse necessary to store construction equipment and the head-end building that will be the electronic heart of the new system.

Attentive readers may wonder what happened to the $125 million that the voters approved two years ago. Why only $110.4 million? The easy answer is that new cost projections are lower as a consequence of the delay are less so they are borrowing less. But while that is central there is a bit more to consider as the following from the Advocate indicates:

The $110.4 million in bonds are based on projections of what it would take to build a system if half the market signed up for LUS service.

The savings in technology and interest cost mean that should LUS exceed that 50 percent share of the market, it could make it easier to pay for further expansion with cash instead of another bond issue, Huval said.

The hope of LUS has always been to make LUS Fiber a utility, that is for LUS Fiber to be a ubiquitously available service run in the public interest. It is part of the history and community orientation of LUS to hope and believe that it will be the dominant provider of telecom services in Lafayette. While that level of subscription is not essential to the network's success as a business (that figure is in the lower 20% range) a subscription figure above 50% is clearly what LUS desires. Based on subscription rates to other locally-owned, advanced telecom systems that hope is not particularly grandiose. Bristol, Va.'s system has recently had to retool its network at a real additional cost to accommodate higher that expected "take rates." Consequently LUS has always taken seriously the potential for rapid subscriber growth—especially after having been endorsed by 68% of the voters. Heavy, early, buy-in from the community means a much higher initial cost to be paid for from the bonded money at a time before income really starts to roll in. The cost to run fiber from the street to the wall of your house, install the electronics box there, and connect up your home is a large, fixed cost that the business intends to pay off over time. (Huval estimated that cost at $6-700 recently.)

So part of what it means to ask for less money from bond market than you were authorized to take by the voters is that you believe that you can keep up with the hoped-for take rates at more cheaply as a consequence of lower interest rates and lower equipment and installation costs than you originally thought. This is good news.

The most dangerous moment for LUS might well be the moment of its biggest success. If LUS gets a huge initial subscription bulge that prevents it from showing a quick profit (as it pays off all those expensive but income-producing $6-700 dollar investments in new customers) AT&T, Cox and its agents are no doubt waiting to make use of the incumbent-written "Local Government (un)Fair Competition Act" to try and "prove" that LUS not making a profit (precisely because it is dominating the market) and use clauses in their their law ostensibly inserted to "protect the citizens" to shut down their local competition. LUS has apparently decided that this is not worth worrying about at the 125 million dollar level--only the 110.4 million dollar level. Having to worry about such nonsense at all adds cost to the build and is yet another reason why this special interest law should be repealed.


Oh, by the way...am I the only one to notice that LUS had the authority to take home $125 million dollars—authority directly from the people—but chose to only use $110 million of that authority? That its "excuse" was the best of all fiscally responsible reasons: that it wasn't going to cost that much so they didn't want to burden the people with the expense of what would amount to a safety cushion? Where are all the nutcase jobs who were sure that the project was going to be incompetently and corruptly handled? Are any of them rethinking or moderating their stand based on the evidence? (Thanks, I needed to get that off my chest.)

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