City of Madison Fiber-to-the-Premises Feasibility Analysis

Prepared for City of Madison August 2016

CTC Report | City of Madison FTTP Feasibility Study | August 2016

Contents 1 Executive Summary ...... 1 1.1 Project Background ...... 1 1.2 Methodology ...... 1 1.3 Residential Market Research Identified Unmet Demand ...... 2 1.4 The City’s Core Objectives Are Equity, Ubiquity, Competition, Consumer Choice, and Control ...... 3 1.4.1 Ubiquitous FTTP Deployment Will Create Consumer Choice and Competition ...... 4 1.4.2 New Broadband Competition Will Create Benefits for Equity ...... 5 1.4.3 Meeting the Need for Broadband Services to Small and Medium Businesses in Madison Will Promote Economic Vitality and Innovation ...... 6 1.5 Building Ubiquitous FTTP in Madison Would Cost at Least $143.5 Million ...... 8 1.5.1 Dark FTTP Cost Estimate – No Network Electronics, Service Drops, or CPEs ...... 8 1.5.2 FTTP Cost Estimate for Fiber, Network Electronics, Service Drops, and CPEs ...... 10 1.5.3 MUFN Decreases FTTP Construction Costs ...... 13 1.6 Madison Would Require Lease Payments of at Least $15 per Passing per Month to Cover Its Costs ...... 13 1.7 Recommendations ...... 14 1.7.1 Consider Adopting a Partnership Model in Which the City Owns the Dark Fiber Network ...... 14 1.7.2 At the Appropriate Time, Publish a Dark Fiber Rate Card to Promote Fiber Leasing 15 1.7.3 Target a 1 Gigabit Per Second (Gbps) Service Offering to Meet the Emerging Broadband Benchmark ...... 16 1.7.4 Continue to Coordinate and Collaborate with Madison Gas and Electric ...... 18 1.7.5 Consider Exploring a Procurement Process to Further Evaluate Partnership Opportunities ...... 18 1.7.6 Prioritize the Continuation of Service to Customers in Pilot Service Areas if Feasible 19 2 The City’s Goals and Priorities ...... 20 2.1 The City’s Core Objectives ...... 20

CTC Report | City of Madison FTTP Feasibility Study | August 2016

2.2 Promoting Equity ...... 21 2.2.1 Addressing Areas of Need ...... 21 2.2.2 Bridging the Digital Divide with Pilot Fiber Project ...... 22 2.3 Understanding Competition and Open Access ...... 23 2.3.1 Facilities-Based Competition ...... 24 2.3.2 Competition at the Dark Fiber Level ...... 25 2.3.3 Competition at the “Lit” Services Level ...... 26 2.3.4 Over-the-Top Content Offers Service-Level Competition and a Variation on Open Access 27 2.3.5 Evolving Over-the-Top Providers ...... 29 3 Market Analysis: Assessment of the Local Broadband Marketplace ...... 32 3.1 Enterprise Market ...... 32 3.1.1 Dark Fiber Services ...... 32 3.1.2 Lit Services ...... 34 3.2 Residential and Small Business Services ...... 38 3.2.1 Cable ...... 39 3.2.2 Digital Subscriber Line (DSL) ...... 39 3.2.3 Satellite ...... 40 3.2.4 Wireless ...... 41 4 Residential Market Research ...... 44 4.1 Survey Process ...... 45 4.1.1 Overview ...... 45 4.1.2 Coordination and Responsibilities ...... 45 4.1.3 Survey Mailing and Response ...... 46 4.1.4 Data Analysis ...... 46 4.2 Survey Results ...... 47 4.2.1 Home Internet Connection and Use ...... 48 4.2.2 Television and Telephone Service ...... 70 4.2.3 Telework and Home Businesses ...... 76 4.2.4 Respondent Opinions ...... 80

ii

CTC Report | City of Madison FTTP Feasibility Study | August 2016

4.2.5 Respondent Information ...... 85 5 Framework for Options to Meet City’s Goals: Public–Private Partnership Models ...... 90 5.1 Overview of Partnership Frameworks ...... 90 5.1.1 Risk ...... 90 5.1.2 Benefit ...... 91 5.1.3 Control ...... 91 5.2 Public–Private Partnership Models ...... 92 5.2.1 Model 1: Private Investment, Public Facilitation ...... 92 5.2.2 Model 2: Private Execution, Public Funding ...... 95 5.2.3 Model 3: Shared Investment and Risk (Dark FTTP Partnership)...... 98 5.3 Additional Strategic Considerations for Public–Private Partnerships ...... 103 6 Engineering Analysis: FTTP Network Requirements and Design ...... 105 6.1 Field Survey Methodology for Network Design and Cost Estimate ...... 105 6.2 FTTP Network Requirements ...... 107 6.2.1 User Applications and Services ...... 107 6.2.2 Network Design Considerations ...... 112 6.2.3 Target User Groups ...... 122 6.3 FTTP Network Design ...... 125 6.3.1 Network Architecture ...... 125 6.3.2 The Role of the Metropolitan Unified Fiber Network (MUFN) ...... 129 6.3.3 Network Design Assumptions ...... 131 6.3.4 Network Core and Hub Sites ...... 133 6.3.5 Distribution and Access Network Design ...... 134 7 FTTP Cost Estimates ...... 138 7.1 OSP Cost Estimation Methodology ...... 138 7.2 FTTP Cost Estimate Components ...... 139 7.3 Cost Estimate for Fiber, Network Electronics, Service Drops, and CPEs ...... 140 7.3.1 OSP ...... 141 7.3.2 Central Network Electronics Costs ...... 143

iii

CTC Report | City of Madison FTTP Feasibility Study | August 2016

7.3.3 Customer Premises Equipment and Service Drop Installation (Per Subscriber Costs) 145 7.3.4 Operating Cost Considerations ...... 145 7.4 Cost Estimate for Dark FTTP ...... 149 7.4.1 Cost Implications of Dark FTTP Partnership ...... 150 7.4.2 Dark FTTP Cost Estimate – No Network Electronics, Service Drops, or CPEs ...... 151 8 Financial Analysis of Dark FTTP Network ...... 154 8.1 FTTP Financing Options ...... 155 8.1.1 General Obligation Bonds ...... 156 8.1.2 Revenue Bonds ...... 157 8.2 Cost Implications of FTTP Technical Model ...... 157 8.3 Financing Costs and Operating Expenses ...... 159 8.4 Operating and Maintenance Expenses ...... 162 8.5 Revenue ...... 164 8.6 Sensitivity Scenarios ...... 164 8.6.1 Adding a One-Time, $10 Million Payment from the City’s Partner ...... 165 8.6.2 Increasing the City’s Interest Rate ...... 165 8.6.3 Increasing the City’s Bond Term to 30 Years ...... 166 8.6.4 Reducing Operating Expenses by 25 Percent ...... 167 8.6.5 Construct Network with a Mix of Aerial and Underground Construction ...... 167 Appendix A – Common Community Objectives ...... 169 Appendix B – Best Practices for FTTP Deployment in Underserved Areas...... 170 Appendix C – Residential Market Research Instrument ...... 171 Appendix D – Glossary of Terms ...... 172

Figures Figure 1: Demarcation Between City and Partner Network Elements ...... 9 Figure 2: Total Estimated Cost versus Take Rate ...... 12 Figure 3: Equity Informs Ubiquity, Which Aligns with Choice, Competition, and Control ...... 20 Figure 4: Facilities-based Infrastructure Competition ...... 24 Figure 5: Competition Over a Dark Fiber Network ...... 25 iv

CTC Report | City of Madison FTTP Feasibility Study | August 2016

Figure 6: Competition Over a Lit Network ...... 27 Figure 7: Over-the-top Competition ...... 28 Figure 8: Level 3 Dark Fiber Routes ...... 33 Figure 9: Zayo Fiber Map ...... 34 Figure 10: CenturyLink Network Map ...... 36 Figure 11: Charter Network ...... 37 Figure 12: Netwurx Wireless Coverage Map ...... 42 Figure 13: Age of Respondents and Madison Adult Population ...... 47 Figure 14: Communications Services Purchased ...... 48 Figure 15: Services Purchased by Age of Respondent ...... 49 Figure 16: Services Purchased by Presence of Children in Household ...... 50 Figure 17: Services Purchased by Household Income ...... 50 Figure 18: Importance of Communications Service Aspects ...... 53 Figure 19: Importance of Communications Services by Home Internet Service ...... 54 Figure 20: Importance of Communications Services by Age of Respondent ...... 55 Figure 21: Number of Personal Computing Devices ...... 55 Figure 22: Number of Personal Computing Devices in Home by Household Size ...... 56 Figure 23: Have Computing Device(s) and Internet in Home by Age of Respondent ...... 56 Figure 24: Have Computing Device(s) and Internet in Home by Level of Education ...... 57 Figure 25: Have Computing Device(s) and Internet in Home by Household Income ...... 57 Figure 26: Primary Home Internet Service ...... 58 Figure 27: Primary Home Internet Service by Age of Respondent ...... 59 Figure 28: Estimated Average Monthly Price for Internet Service ...... 59 Figure 29: Internet Speed (Respondent Opinion) ...... 60 Figure 30: Internet Service Aspect “Quadrant” Analysis ...... 61 Figure 31: Mean Willingness to Switch to 1 Gbps Internet at Price Levels ...... 62 Figure 32: Willingness to Switch to 1 Gbps Internet at Various Price Levels ...... 63 Figure 33: Willingness to Switch to 1 Gbps Internet by Age of Respondent ...... 63 Figure 34: Willingness to Switch to 1 Gbps Internet by Price and Household Income ...... 64 Figure 35: Home Internet Activities ...... 65 Figure 36: Home Internet Activity by Age of Respondent (Percent Ever Using) ...... 65 Figure 37: Importance of Aspects When Selecting a Home Internet Provider ...... 66 Figure 38: Importance of Home Internet Service to Telework by Demographics ...... 67 Figure 39: Average Willingness to Pay Upfront Hook-Up Fee for Fiber Optic Network ...... 68 Figure 40: Willingness to Pay Upfront Hook-Up Fee for Fiber Optic Network ...... 69 Figure 41: Willingness to Pay Upfront Hook-Up Fee by Household Income ...... 69 Figure 42: Willingness to Pay Upfront Hook-Up Fee for $20/Month Savings by Income ...... 70 Figure 43: Importance of Television Programming Features ...... 70

v

CTC Report | City of Madison FTTP Feasibility Study | August 2016

Figure 44: Importance of Television Programming Aspects by Children in Household ...... 71 Figure 45: Importance of Television Programming Aspects by Age of Respondent ...... 71 Figure 46: Types of Television Service in Home ...... 72 Figure 47: Importance of Television Programming Features by Types of Television Service ...... 72 Figure 48: Types of Television Service in Home by Age of Respondent ...... 73 Figure 49: Types of Television Service in Home by Home Ownership ...... 73 Figure 50: Types of Television Service in Home by Household Income ...... 74 Figure 51: Monthly Price of Cable or Satellite TV Service ...... 74 Figure 52: Monthly Price of TV Service by Service Type ...... 75 Figure 53: Home Telephone Service(s) ...... 75 Figure 54: Home Telephone Service(s) by Age of Respondent ...... 76 Figure 55: Employer Allows Telework ...... 76 Figure 56: Household Member Teleworks ...... 77 Figure 57: Current Teleworking and Interest by Age of Respondent ...... 78 Figure 58: Current Teleworking and Interest by Level of Education ...... 78 Figure 59: Current Teleworking and Interest by Household Income ...... 79 Figure 60: Own or Plan to Start a Home-Based Business ...... 79 Figure 61: Importance of High-Speed Internet to Home Business ...... 80 Figure 62: Opinions About the City’s Role(s) (Mean Ratings) ...... 81 Figure 63: Opinions About the City’s Role(s) ...... 81 Figure 64: Opinions About Broadband Internet ...... 82 Figure 65: Opinions About Broadband Internet by Age of Respondent...... 83 Figure 66: Main Role of the City with Respect to Broadband Access...... 84 Figure 67: Main Role of the City with Respect to Broadband Access by Age of Respondent ...... 85 Figure 68: Education of Respondent...... 87 Figure 69: 2015 Household Income ...... 87 Figure 70: Number of Children in the Household ...... 88 Figure 71: Total Household Size ...... 88 Figure 72: Race/Ethnicity of Respondent ...... 89 Figure 73: Length of Residence at Current Address ...... 89 Figure 74: Map of Field Survey Areas ...... 106 Figure 75: Unicast IP Network Carries Multiple Copies of Single Video Channel ...... 121 Figure 76: Multicast IP Network Carries Single Copy of Single Video Channel ...... 122 Figure 77: High-Level FTTP Architecture ...... 128 Figure 78: Map of MUFN Showing Its Suitability as an FTTP Backbone Network ...... 130 Figure 79: FTTP Service Areas ...... 132 Figure 80: Sample FTTP Access Layer Design ...... 133 Figure 81: Demarcation Between City and Partner Network Elements ...... 151

vi

CTC Report | City of Madison FTTP Feasibility Study | August 2016

Tables Table 1: Projected Cost Estimates Summary ...... 8 Table 2: Breakdown of Estimated Dark FTTP Cost – Combination of Aerial and Underground Construction ...... 10 Table 3: Breakdown of Estimated Dark FTTP Cost – All Underground Construction ...... 10 Table 4: Breakdown of Estimated Total Cost ...... 11 Table 5: Breakdown of Estimated Total Cost with Electronics for an All Underground Network 12 Table 6: Base Case Financial Analysis ...... 14 Table 7: Current MUFN Dark Fiber Lease Fees ...... 16 Table 8: Overview of Residential and Small Business Data Services in Madison ...... 39 Table 9: AT&T Residential Internet—Internet Only...... 40 Table 10: Netwurx Internet Services ...... 42 Table 11: Age Weighting ...... 47 Table 12: Internet Access by Key Demographics ...... 52 Table 13: Importance of Internet Service Aspects ...... 60 Table 14: Satisfaction with Service Aspects ...... 61 Table 15: Internet Service Aspect “Gap” Analysis ...... 62 Table 16: Demographic Profile by Age of Respondent ...... 86 Table 17: Field Survey Findings ...... 106 Table 18: PON Standards ...... 116 Table 19: Total Potential Residential Customers Passed ...... 123 Table 20: Total Residential Passings ...... 123 Table 21: Total Potential Business Customers Passed ...... 124 Table 22: Total Business Passings ...... 124 Table 23: Total Residential and Business Passings ...... 125 Table 24: Breakdown of Estimated Total Cost with Electronics (combination aerial and underground construction) ...... 140 Table 25: Estimated OSP Costs for FTTP ...... 141 Table 26: Breakdown of Estimated Total Cost with Electronics for an All Underground Network ...... 143 Table 27: Estimated Central Network Electronics Costs...... 143 Table 28: Per Subscriber Cost Estimates...... 145 Table 29: Breakdown of Estimated Dark FTTP Cost – Combination of Aerial and Underground Construction ...... 152 Table 30: OSP Cost Estimate Summary (Underground Construction) ...... 153 Table 31: Base Case Financial Analysis ...... 154 Table 32: Breakdown of Estimated Dark FTTP Cost – Combination of Aerial and Underground Construction ...... 158

vii

CTC Report | City of Madison FTTP Feasibility Study | August 2016

Table 33: Breakdown of Estimated Dark FTTP Cost – All Underground Construction ...... 159 Table 34: Income Statement ...... 161 Table 35: Cash Flow Statement ...... 162 Table 36: Operating Expenses ...... 164 Table 37: Base Case Financial Analysis ...... 165 Table 38: A $10 Million Upfront Payment Reduces the City’s Borrowing by $12.5 Million ...... 165 Table 39: Increasing the City’s Interest Rate by 2 Percentage Points Increases Required Borrowing by $7.5 Million...... 166 Table 40: Reducing the City’s Interest Rate by 2 Percentage Points Reduces Required Borrowing ...... 166 Table 41: Increasing the City’s Bond Term to 30 Years Decreases the Per-Passing Fee ...... 167 Table 42: Decreasing the City’s Operating Expenses by 25 Percent Only Slightly Reduces the Per Passing Fee ...... 167 Table 43: Mix of Aerial and Underground Construction Slightly Decreases Per-Passing Fee .... 168

viii

CTC Report | City of Madison FTTP Feasibility Study | August 2016

1 Executive Summary

1.1 Project Background The City of Madison is among the localities that seek to bring ultra-high-speed broadband connectivity to their communities. The City recognizes fiber-based connectivity—particularly fiber-to-the-premises (FTTP) deployment designed to serve every business and resident in the community—as an important foundation for taking full advantage of the power of broadband. A ubiquitous FTTP buildout ensures that, no matter who the retail service provider is, every resident and business has the opportunity to access the power of a fiber-based network infrastructure. This is especially true if the City prioritizes some form of open access, which is a common goal for many localities.

There are several possible approaches to deploying broadband in a community; the City aims to determine which of these options—if any—makes sense for Madison’s residents and businesses. Accordingly, the City engaged CTC Technology & Energy (CTC) to explore whether the City can feasibly1 pursue deployment of a citywide ultra-high-speed fiber-based broadband network, either directly or through a public–private partnership. This report also aims to assist the City in distilling its goals and focusing on realistic solutions to meet the community’s connectivity needs.2

This report and the supplemental market research described in Section 1.2 represent the City’s compliance with Wisconsin state law, which requires any municipality that seeks to offer broadband services to conduct a cost-benefit analysis.3

1.2 Methodology This report was researched and prepared in early 2016 by CTC, with ongoing input from City staff. In addition to drawing on our extensive industry experience, our analysis is guided by our conversations and interviews with a range of City staff and stakeholders about the City’s objectives and desired outcomes.

Over the course of the engagement, CTC performed the following general tasks:

1. Reviewed and inventoried the City’s key physical infrastructure, including the Metropolitan Unified Fiber Network (MUFN);

1 While CTC cannot provide legal counsel and this report does not contain legal guidance, the City has engaged legal counsel to expand on CTC’s findings from a legal standpoint. 2 Appendix A outlines common community goals and objectives to help guide the City’s decision-making. 3 David L. Lovell, “Statutory Limitation on Municipal Offering of Broadband Service,” Wisconsin Legislative Council, last modified October 3, 2014, https://c.ymcdn.com/sites/www.weda.org/resource/resmgr/Fall_PP/Lovell_Outline_10-3.pdf. 1

CTC Report | City of Madison FTTP Feasibility Study | August 2016

2. Conducted interviews with representatives of City departments, stakeholders, and utility owners;

3. Researched the region’s available broadband services and costs (see Section 3);

4. Conducted onsite and desk surveys of City infrastructure;

5. Evaluated potential public–private partnership business models based on current developments in the broadband industry; and

6. Developed pro forma financial statements for the City based on a dark fiber lease model, where the City would own and operate a fiber network, and grant access to it through dark fiber leasing.

In addition to those tasks, at the City’s request, CTC prepared a high-level network design and cost estimate for deploying a gigabit FTTP network. The cost estimate (Section 7) provides data relevant to assessing the financial viability of network deployment, and offers guidance in developing business models for a potential City construction effort (including the full range of models for public–private partnerships). This estimate also provides key inputs to financial modeling to determine the approximate revenue levels necessary for the City to service any debt incurred in building the network.

1.3 Residential Market Research Identified Unmet Demand The City also commissioned CTC to carry out residential market research to supplement the findings of this report, and to help gauge the community’s interest in broadband. The City was prudent to reach out directly to the community in order to cast the widest net possible in understanding citizens’ needs and desires, and to give residents a voice.

To develop a set of questions tailored for Madison residents, CTC sought feedback from City staff and stakeholders on the survey questionnaire. We adjusted question language and placement consistent with City recommendations, while being mindful of best practices for conducting market research. The resulting questionnaire is attached to this report as Appendix C.

The survey, which was mailed to approximately 3,700 randomly selected Madison residents in early May 2016, was designed to identify issues related to residential demand, and to identify differences among users based on income level, education level, and other differentiating factors.4

4 Individual information about respondents is not reported separately; rather, it helps ensure that the responses are a representative sample of the citizens of the City of Madison. 2

CTC Report |