MUNICIPAL BROADBAND Case Study: Municipal Fiber In Chattanooga, Tennessee Chattanooga’s public power utility is rolling out fiber to 160,000 homes and businesses. Energy savings, new jobs and local video content are among the benefits.

By Christopher Mitchell ■ Institute for Local Self-Reliance

n September 2009, EPB, the public power utility serving Chattanooga Chattanooga’s fiber-to-the-home project, one of Iand nearby communities in Tennes- see, rolled out fully fiber-powered triple- the most ambitious in the U.S., will enable smart- play services to 17,000 households. Its grid applications as well as the triple play. goal was to pass 100,000 premises by July 2010; with more than 95,000 passes in mid-May, EPB will hit the 100,000 mark more than one month early. EPB has long offered some telecom try, making Chattanooga the envy of It may take three years before all services. Starting nearly 10 years ago, larger cities. 160,000 premises are passed. In the the power utility stepped up to ensure According to a recent article in Busi- meantime, those who can sign up are that businesses had access to the tele- ness TN, Josiah Roe of Medium, a Web doing so at an average rate of 78 per day. phone and broadband networks they graphic design company, cited the ability Adding so many subscribers rapidly is needed. Those services clearly scratched to upload and transfer large files with the difficult, but EPB is actually connecting an itch, as EPB had more than 2,300 “comprehensibly better product” as an up to 100 per day. customers before beginning to expand advantage for his company. “When I go the network to everyone. One of EPB’s to Chicago or larger cities and they hear avoiding cross-subsidies early subscribers was a radiology clinic we have [FTTH], they’re just amazed Chattanooga’s quest faced numerous where 10 radiologists help rural hospi- to see a city of our size doing something lawsuits. The Tennessee Cable and Tele- tals, which may lack such specialists, to like that,” Roe says. He adds that “Chat- communications Association sued in diagnose problems. The burgeoning area tanooga is very progressive and forward- 2007 and Comcast chimed in a year thinking” in its fiber initiative. of telemedicine requires next-generation later. As private companies have done in other communities, they alleged that networks to transmit very large data files Fiber and the Smart Grid the power utility was cross-subsidizing quickly. One reason publicly owned fiber net- its triple-play telecom offering with rev- EPB’s footprint includes more than works are commonly built by public enues from the electric side. 168,000 electrical customers scattered power companies is that the power com- The private companies say such over a 600-square-mile area that reaches panies need fiber to reliably transmit cross-subsidization would be unfair to into northern Georgia. As the fiber net- data in real time to monitor the grid. them, even though cable and telephone work expands to cover the full territory, EPB’s fiber network will be used exten- companies routinely cross-subsidize it will quickly become the largest pub- sively for electrical purposes, which is from community to community – over- licly owned fiber network in the coun- why the electricity side of EPB is pay- charging in noncompetitive markets to compensate for lower prices in competi- tive markets. Nonetheless, public power About the Author companies and other public agencies Christopher Mitchell, researcher for the Institute for Local Self-Reliance, writes regu- have learned to keep meticulous books larly at www.muninetworks.org and can be reached at [email protected]. to show they are not cross-subsidizing, “Breaking the Broadband Monopoly,” the report from which this article is excerpted, and courts have upheld their financial is available at www.muninetworks.org/reports/breaking-broadband-monopoly. arrangements.

40 | BROADBAND PROPERTIES | www.broadbandproperties.com | May/June 2010 MUNICIPAL BROADBAND Chattanooga EPBFi Prices EPB hopes to recoup its investment primarily from automating the reading Network speed Price of its 160,000 meters, reducing theft 15 Mbps $57.99 of power and generating revenues from video and telecommunications services 20 Mbps $69.99 that are made possible by the fiber optic 50 Mbps $174.99 network. 100 Mbps $349.99 Triple-Play Competition All network speeds are symmetrical and consistent. Several tiers of phone and Over the next three years, EPB expects to video service are also available, and discounts are applied for bundles. sign up at least 35 percent of the house- holds in its footprint for its telephone, ing $160 million of the network’s $220 only to those residents who are taking Internet or television services. Comcast million expected cost. EPB received a telecommunications services. Those who has now made Chattanooga a priority $111 million stimulus grant from the do not subscribe to fiber-based telecom for investment, offering its “up to” 50 U.S. Department of Energy, allowing it services will be given electric meters that Mbps down/5 Mbps up cable Internet to cut the project’s expected completion connect wirelessly to a mesh network service. Although Comcast often ad- time down to three years from 10. and send usage data to an access point at vertises introductory rates that increase Though many utilities are turning a nearby fiber-connected home. dramatically after the introductory pe- to wireless networks for smart-grid data Some critics have claimed the electri- riod is over, publicly owned networks transmittal, EPB fears the terrain in its cal side of EPB should pay less for the typically resist using such gimmicks. service area is not suitable for long-range fiber network, but the Electric Power In an interview with the Chatta- wireless solutions. Fiber is considerably Research Institute, a trusted source in nooga Times Free Press, Katie Espeseth, more reliable than wireless networks, these matters, has validated the EPB vice president of EPB Fiber Optics, ex- but the upfront costs are indeed higher. numbers. Additionally, the smart-grid plained that EPB would market its ser- To reduce costs, EPB is running fiber pilot project is already showing benefits. vices based on long-term quality rather

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Packages and Pricing: Advice for Municipal Providers

For a municipal provider, responding to a price war is Take advantage of the advanced fiber network. Many difficult. Incumbents, because of their scale, have ad- early muni FTTH networks offered the same slow speeds vantages in obtaining television content, and they can as DSL or cable competitors, but this approach does not cross-subsidize from noncompetitive service areas. In differentiate the public network. FTTH networks should addition, they have already amortized their networks. offer fast speeds to attract subscribers – a lesson many However, a municipal network, by emphasizing its lo- recently built networks have taken seriously. cal nature and better quality (higher broadband speeds, faster response to technical problems), can be poised Avoid Low ARPU to compete even if its short-term price is slightly higher Because connecting a customer to a fiber network can than the incumbent’s. cost between $750 and $1,000, a subscription to a low- If incumbents lower their rates, the community priced triple-play tier can take more than five years to should receive credit for those savings. Keep a record repay the up-front costs. A customer who takes only of price changes over time, preferably by collecting bills phone service will be a fiscal drain on the network for from the incumbents. Some incumbents offer special many years. deals only on the phone; advertised rates may not re- The fact that average revenue per user (ARPU) is a key flect subscribers’ actual costs. metric for a network’s financial success creates a tension between the goals of financial success and lower costs for Network Speed/Price the community. Communities have dealt with this pricing Comparisons paradox in various ways. Some offer discounts to senior citizens and those living below the poverty line. Others Network Mbps Monthly Cost keep prices low but require minimum monthly contracts. In Lafayette, the lowest-cost Internet service is a speedy Lafayette, La. 10 $28.95 10 Mbps symmetrical at $28.95, as long as the subscriber 50 $57.95 also takes telephone or television, increasing the monthly Loma Linda, Calif. 5 $29.95 bill to at least $44. This ensures that the utility generates Monticello, Minn. 20 $34.95 enough revenue to make debt payments and continue connecting new customers. 50 $95.35 Burlington Telecom found itself a victim of its own Reedsburg, Wis. 10 $49.95 success when some residents switched their home UTOPIA, Utah 15 $39.95 phones to the new network without taking other ser- vices. Their subscriptions hurt the network financially 50 $59.95 because their low monthly bills did not recoup the high 100 $147.00 connection costs. Educating the community about the Wilson, N.C. 10 $34.95 economics of a community network may help residents 20 $54.95 understand why these networks take so many years to pay off – especially if they offer extremely low prices. Comcast* up to 15/3 $42.95 New revenues can help offset connection costs. Con- up to 50/10 $99.95 sider new services such as home security, health care Verizon 15/5 $54.99 visits and work-at-home options. Each new service has value either to the customer or the service provider. 50/20 $144.99 How much might a customer value the ability to Free (France)** 100 $33.00 check in on her home through a video and security con- Japan*** 100 $44.00 –$48.00 nection while on vacation or business travel? What is the Table reflects regular rates absent discounts for pro­mo­tion value to rural health care providers of checking in with or bundling. All speeds are symmetrical unless otherwise patients via high-definition video rather than dispatch- noted. ing a nurse? Community-owned fiber networks will pro- vide services not thought of today – but some new ser- * Because of cable architecture and Comcast’s vices are known and can be included in revenue plans. PowerBoost technology, subscribers are less likely to achieve these speeds consistently. Chargebacks to City Government ** Includes telephone and video services. How much should a network charge city departments, *** Price depends on provider. agencies and schools for broadband? In Provo, the city

42 | BROADBAND PROPERTIES | www.broadbandproperties.com | May/June 2010 MUNICIPAL BROADBAND

bragged that iProvo created tremendous savings be- partment would cut its costs in half and the network cause city departments had faster connections at no would generate a margin, better enabling it to make charge. However, critics focused solely on the financial debt payments – important goals in the early years of performance of the network, which was not generating any network. Prices in telecom are typically set based sufficient revenues to pay operating costs and debt. on market conditions (often monopoly power) and bear Even when a city owns the network, it should charge little relationship to the cost of provisioning services. If itself for connections. The question is how much city the network were to be sold, departments would have agencies should pay. Consider a 100 Mbps connection to go back to leasing lines, so these costs should be con- that replaces several leased T1 lines costing $3,000 per sidered when deciding on pricing. If the network is independent of city government, month. If the network’s cost of provisioning the 100 the city may have to issue an RFP for its connectivity, de- Mbps circuit is $1,000 per month, how much should the pending on local and state laws. This changes the pricing city department pay for it? dynamic because incumbents may engage in predatory In Burlington, city departments pay the cost of the practices just to prevent the new network from grow- connection and no more, creating significant direct sav- ing. In Ashland, Ore., and Kutztown, Pa., publicly owned ings for city budgets while greatly increasing bandwidth. networks lost bids to private incumbents that bid well In the hypothetical example, this department would save below the cost of providing services. Some companies $2,000 per month while greatly increasing its broadband would rather lose money than allow the public competi- capacity. The network would just break even. tor to gain a new customer. There is little to be done in Another option is to charge more than the cost of this situation other than document and note the com- providing the service – say $1,500 per month. The de- munity savings that arise from competition. than on short-term price promotions: $850 million in value from both com- including things like jobs and energy “We’re entering the market munications and smart-grid services, savings.” BBP with a consistent and clear price – it is not a temporary, promotional price. ... Because of our fiber optic April 26 – 28, 2011 infrastructure, our picture quality InterContinental Hotel – Dallas is clearer and more consistent and our ‘Fi-speed’ Internet service is Addison, Texas consistent and more reliable.” The Leading Conference on EPB promotes local content and Broadband Technologies and Services faster services rather than engaging in a price war. It is actively looking for local Broadband video content, including youth sports Properties that it will make available on VoD. EPB’s slowest broadband connection Magazine is 15 Mbps symmetrical – faster than the speeds available in most communi- the newest sponsorsCongratulates and exhibitors joining the ties around the country. EPB designed its services to ensure that any subscriber 2011 Broadband Properties Summit. can use multiple modern applications 3M simultaneously – an increasingly com- mon need as households continue buy- Advanced Media Technologies ing bandwidth-hungry devices. Blonder Tongue Laboratories Espeseth has estimated that 2,600 new jobs will be created in the greater Quanta Services Chattanooga area from the fiber net- work and resulting economic develop- TAKE ACTION ment. EPB has hired 70 full-time in- today and secure your participation! stallers and more temporary workers in To Exhibit or Sponsor, contact: Irene Prescott at order to add 100 subscribers a day to [email protected], or call 505-867-2668. the network. According to an article in For other inquiries, call 877-588-1649, or visit www.bbpmag.com. earth2tech.com, EPB expects “almost

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