Should Your town Become a Telecom Business Partner?

A number of cities and municipalities are using their public utilities infrastructure to build telecommunications networks rather than contract for services from established providers. The option makes a lot of sense as it gives local governments a chance to manage their own telecommunications assets more closely, not to mention generating revenues for city coffers.

In Glasgow, Ky., for example, the city's municipal electric utility is now directly offering telecom services to the city government and its residents [civic.com, November/December 1996]. And in a variation on that theme, the city of Anaheim, Calif., is taking an approach that gives the city many of the same benefits that Glasgow receives, but without some of the headaches.

With a population of nearly 300,000 in Southern California's Orange County, Anaheim's largest employers include Disneyland, American Drug Stores and Rockwell International Corp. Like Glasgow, Anaheim built its own telecommunications network to support utility operations. But unlike Glasgow, Anaheim's Public Utility District did not choose to offer services directly to the public. Instead, it entered into partnership with a private firm, which will offer telecommunications services using fiber-optic cable leased from the city.

Anaheim's electricity and water are provided by the municipally owned Anaheim Public Utility District. Starting about two years ago, the Public Utility District began designing a fiber-optic network to replace an aging copper-based network that links equipment at nine power substations. Anticipating future needs, the network was designed with a significant amount of excess capacity. The fiber network is undergoing testing and is expected to become operational this summer, at which time the copper network will be retired.

Using Excess Capacity

As the network was being constructed, the city began thinking about how to make use of the excess capacity. After the city council established a set of six "guiding principles" (see sidebar), the Public Utility District issued a request for proposals seeking a public/private partnership to expand the network and use it to provide telecommunications services to businesses, residents and government. Anaheim received 18 proposals, and after a one-year selection process it narrowed the field to two vendors. After discussions with the two finalists, Anaheim decided to negotiate a contract with SpectraNet International Inc. of San Diego. The city and SpectraNet concluded an agreement in February of this year.

Under its agreement with SpectraNet, the Public Utility District is providing 60 of its 96 fibers to SpectraNet under a 30-year lease, and the city is retaining 36 fibers to support electric department and public safety applications. SpectraNet is constructing local-loop distribution facilities that extend the backbone network to Anaheim's commercial districts, and it is installing a telephone central office switch. SpectraNet expects to begin delivering telephone service to business customers this July. Following a rollout to commercial districts, the company plans to expand service to the rest of the city.

Open Net Design

The network is being built as an open network. Other telecommunications carriers will be able to buy capacity from SpectraNet and use that capacity to provide services; for example, a cable company could lease capacity and use it to deliver video programming. The city and SpectraNet expect the network to be sufficiently attractive so that carriers will elect to lease capacity rather than dig up Anaheim's streets to install their own fiber.

SpectraNet was initially created to respond to Anaheim's interest in establishing a public/private partnership, and Anaheim is the firm's first project. The company sees its business as "designing, constructing and operating broadband fiber-optic networks in partnership with cities," with an emphasis on "sharing resources," according to Jim Kramer, SpectraNet's vice president of sales and customer service. The company claims to be in discussions with two or three dozen cities, but Anaheim is currently its only customer with a network under development. SpectraNet is also providing network design services to Lakeland, Fla., but the company does not have an ownership interest in that city's network.

SpectraNet's deal with the city appears to be a favorable one. SpectraNet will pay $6 million to lease the city's fiber-paid with interest over the 30-year lease period. Anaheim will also receive 5 percent of SpectraNet's gross revenue, with a minimum of $1 million per year guaranteed starting in 1999; in addition, the city will receive 35 percent of net revenue.

SpectraNet will invest about $75 million to finance central office facilities and initial deployment of the network to the city's commercial districts, and it is likely to invest additional capital as the network is expanded to the rest of the city. The company is subject to penalties if it does not complete the first phase of the network's rollout.

However, SpectraNet's obligation for subsequent network expansion is limited to preparing a feasibility study regarding residential rollout. If SpectraNet elects not to proceed with network expansion, the city retains the option to contract with other companies or to expand the network itself.

A notable aspect of the arrangement is that SpectraNet will become the city government's telecommunication provider-with comprehensive services at preferential prices. Until the network reaches all city facilities, SpectraNet will serve outlying facilities by reselling services from other carriers. The company also will get a leg up over other competitors because there is no excess capacity in the city's fiber backbone. Under the Telecommunications Act of 1996, it is likely that the city would have to lease fiber to other carriers-if there were additional fiber to lease.

But more importantly for local governments, SpectraNet reduces the city's risk significantly by financing and owning the network. And in the quid pro quo of the partnership, the city reduces SpectraNet's risk by becoming its first and largest customer.

Miles Fidelman is president of the Center for Civic Networking, which helps local governments develop and apply local information infrastructure. Readers are encouraged to submit topics or questions to mfidelman@civic.net or to (617) 241-9205. The Center maintains a Web site focusing on municipal telecommunications and civic networking at www.civic.net/telecom/.

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