Tuesday, June 10, 2014

The Gift That Keeps on Taking: Municipal Broadband System in Lafayette, LA Showing Weakness

Last month, city auditors issued yet another warning to the municipal broadband system in Lafayette Louisiana, LUS Fiber. Rstreet.com reported the details of the recent advisory, published an in-depth case study on the Lafayette system, and noted that Lafayette auditors have voiced concerns about the network in each of their reports over the past two years. LUS Fiber is the just the next in a long line of government-owned broadband networks that have fallen far short of expectations.
According to the city’s financial reports, LUS Fiber reported $23 million in operating revenues, compared to $36.7 million that was forecast in its feasibility study for the fiscal year ended October 31, 2013. According to LUS Fiber’s original plan, the operation was projected to produce a profit of $902,000, but instead the system incurred a $2.5 million operating loss for the year. But the most telling number is LUS Fiber’s deficit of $47 million at the end of FY 2013, up from $37.1 million the year before.
LUS Fiber has tried to downplay these results by publicizing that the network is “cash-flow positive.” But that just means that LUS Fiber is taking in more than it’s spending on a day-to-day basis, but it does not properly acknowledge the network’s substantial long-term debt liability. The failure to produce promised-profitability puts taxpayers on the hook for LUS Fiber’s debt, which increased a staggering 27 percent from 2012 to 2013 according to Coalition for the New Economy.
And unfortunately for local taxpayers, data shows that municipal broadband systems like LUS Fiber are unlikely to find relief for their ever-increasing debt. LUS Fiber and other municipal broadband networks that offer landline broadband services and rely on the triple-play package – phone, cable, and Internet - to produce revenue are betting on a dying model. Based on a report from ISI Group, an equity research firm, BusinessInsider.com reported that nearly 5 million cable TV subscribers cut the cord in the last five years. The number of cable TV-only subscribers remaining could fall below 40 million next year, as the graph from ISI Group shows.

The weaknesses of LUS Fiber are regrettably common among municipal broadband networks. Free State Foundation scholars have tracked the failure of many government-owned networks, including Burlington Telecom’s February $10 million settlement with Citibank over loans to its ailing system. Other examples of municipal “broadband busts” include Mooresville and Davidson, North Carolina, Utah’s UTOPIA network, Chattanooga, Tennessee’s Electric Power Board (EPB) network Provo, Utah, Lafayette, Louisiana, and the N.C. Eastern Municipal Power Agency
Municipalities should view the consistent failure of government-owned networks as confirmation that the private sector is best suited to develop and manage broadband networks. Absent compelling evidence that private sector broadband providers will not make adequate service available in the locality, local governments should refrain from building out their own networks in order to protect their taxpayers from the high costs and high risks of broadband network deployment.
If local governments want to increase competition in their broadband markets, the best way to do so is to remove existing, costly, unnecessary regulations. This will incentivize private investment, remove barriers to broadband deployment, and promote the continued growth of today’s competitive communications environment.