Finances and Cherry-Picking: A Response for Rep. Steve Urquhart

Before I left town for a jaunt to DC, Venice and Florence, I had a few questions posed to me by Rep. Steve Urquhart of St. George on my summary of the November 7 subcommittee hearing. It seems he has some concerns over the financial viability of the project and some perceived cherry-picking activities in private subdivisions and non-pledging cities. Simply trying to fully respond in the comments would not fully answer the questions posed and I think it's important that both get the time and attention they deserve. Here are the questions he posed:

(1) Can UTOPIA make it financially or will taxpayer money be used to bail it out? (Its best-possible cost/subscriber rate is north of $5,000. Companies don’t live to tell what happens in that territory; bankruptcy courts tell the story for them).

(2) Has UTOPIA departed from its very reason for being — ubiquitous service? (Yes. It originally declared that it existed to serve areas that cherry pickers wouldn’t. Now, though — as you note — it is doing the exact same thing as Qwest (cherry picking)).

For starters, I really appreciate that Rep. Urquhart participates so readily in open discussions. It helps move the political process forward and puts a human face on legislators who are often reduced to a handful of quotes in the major papers. Without that, we sometimes have a tendency to read too far between the lines and create caricatures of the people we should be working with instead of against.

Regarding the financials, he is correct that a company would not be able to survive for very long if it had installation costs of $5,000 per household for a $110/month service. This, however, does not consider what costs to date have been incurred. Phase I construction comprises two main parts: construction of the main backbone to connect all cities and construction in the Phase I cities. The backbone construction is obviously a very high cost since it needs to be able to reliably support all Phase I and Phase II cities.

Given its purpose, it seems unfair to consider the costs of the backbone in total when calculating the actual cost of installation in each household. This is like using total construction costs to determine per-unit expenditures in a half-built and half-occupied apartment complex; the unfinished buildings have no real relevance in determining how much was spent on occupied units, especially when construction is on-going.

Part of the problem here is that UTOPIA doesn't do a really good job at updating its website with current information. I understand that some of their reservations in this realm have been because Qwest and Comcast have purposefully taken and misrepresented the data for their own aims. (This says nothing of hacks like Steven Titch of The Heartland Institute.) The flip side, however, is that those of us willing to actually sit down and analyze the data can't defend UTOPIA appropriately either. Transparency always works out for the best, even with some short-term damage from the incumbents and their "think" tank hired guns. If you ask UTOPIA for data, they'll probably be willing to provide it to you. It certainly can't hurt to ask.

A large reason why UTOPIA has been so late in meeting its goals has to do with the incumbents themselves. Qwest successfully put construction on hold for several years thanks to a lawsuit and UTOPIA has repeatedly been denied access to telephone poles in violation of legal requirements. These are things that can't be predicted and were carefully calculated moves to try and sabotage the project, just like the restrictions on new membership in SB66 and the proposed new onerous amendments to the Municipal Cable Television and Public Telecommunications Services Act. These kinds of underhanded maneuvers are not something that can be planned for.

On to the second question, does UTOPIA cherry-pick? Let's take a look at some of the specific examples Rep. Urquhart has brought up.

When it comes to subdivisions, UTOPIA can only build there if construction poses no risk to pledging cities. This means that the developer must pick up the cost of deployment and that the minimum costs of operation be covered by subscriber revenues, HOA fees or a combination of the two. Without such safeguards for pledging cities, developers would have to be told to take a hike. How these costs are passed onto the homeowner is not part of UTOPIA's concern nor should it be. Their primary concern is financial viability. If a developer decides to build in the costs of construction and maintenance, that's between them and the buyer. If a prospective buyer doesn't like the deal, they can buy a house elsewhere. It seems the real villains to be targeted here are developers and the HOAs they create, not UTOPIA.

In terms of non-pledging cities, it is important to consider how construction would proceed in these cities with universal built-out requirements. With the current laws regarding universal service, UTOPIA would have to save up all of the money required to do a build-out in that town before they start construction. If they did not, they could risk running afoul of the build-out requirements if there isn't enough revenue to complete construction by the specified deadlines. What makes the most sense for them is to do incremental building as funds become available. Since this situation has not yet arisen, it's a matter of speculation as to how the build plan would proceed. It could be that they start with areas closest to the backbone. Maybe they'll start in areas with lower construction costs like new developments or neighborhoods with lots of aerial runs. We won't know until we get there.

Given the valid explanations for both situations, it seems that UTOPIA isn't looking to cherry-pick in the manner that Qwest has been. Rather, it's looking out for the financial interests of the project and finding a reasonable way to deliver services to non-pledging cities once the time comes. I'd have a hard time believing that intentional malice was at play.

Here's something else to consider on top of these two responses: why we need UTOPIA. We can look at things like how far behind we are internationally in Internet speeds and pricing, the lack of true telecommunications competition or how high-speed systems will aid in transportation and eduction policy. I think we need to look at the broken promises of the Telecommunications Act of 1996 whose provisions were supposed to be administered by the states.

Under The Act, we were supposed to see the aging copper infrastructure replaced by fiber optics to every serviceable address. This new infrastructure was supposed to be made available to competitors and be capable of at least 45Mbps. In exchange for these promises, telecommunications providers were given around $200B in increased service fees and tax breaks to make it happen. Instead, they plowed the money into long distance and cellular operations, redefined broadband to a paltry 200Kbps and raised telecommunications costs over 50% in the following decade. In Utah, the scam amounts to $1.4B in extra profits for delivering on none of the promises.

We're only got a few options to remedy this. One is to require all incumbent telecommunications providers to build the network they initially promised us with a firm "do or die" deadline. Another is to take the incumbents to court to get the money back with interest and penalties for abusing the public trust. Neither of these is palatable; they would spell certain bankruptcy for those companies and involve years or costly litigation without the assurance of the required remedy.

is a best compromise to achieve the aims of The Act without causing an economic meltdown. Qwest and Comcast are allowed to continue doing whatever it is they're doing and we get the infrastructure we were supposed to have had completed by last year. By creating an independent wholesale network with the capacity and capability to provide a 21st-century platform, it lowers telecommunications costs, increases competition and spurs additional economic activity. Qwest and Comcast don't want this; they're perfectly happy with their giant cross-subsidized vertical monopolies. To paraphrase Qwest CEO Jerry Fenn, why build a Cadillac if you can get the same price to sell a Chevy?

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5 Responses to Finances and Cherry-Picking: A Response for Rep. Steve Urquhart

  1. Ah, a breath of fresh air! Welcome back, and thank you for your (as usual) thoughtful post.

    Thank you for the explanation on the backbone funding. That is extremely helpful. Accounting issues can be tedious, but it really is something that legislators can and do deal with — if people give us the chance. I would love to see the data and the cost allocations (e.g., what are costs/potential subscriber for the areas now being built). Any idea where I can get it?

    The discussion on cherry picking at least gives us a substantive way to disagree. Policy can advance, when we focus the areas of agreement and disagreement (when we’re not arguing passed each other and, figuratively, squeezing a toothpaste tube).

    I am a fan of build-out requirements. As I’ve explained elsewhere (here and at, I think that putting telecom costs into HOA fees greatly thwarts competition in those subdivisions. (No one will pay twice). It is a way for developers to produce residual income — community and public policy be damned. Rereading your comments, it seems you and I agree on that. My consternation, then, is that UTOPIA (purportedly devoted to ubiquitous service) is using its taxpayer-backed employees and corporate resources (which they are — unless there is some strict accounting discipline going on) to promote those bad activities.

    It seems very hypocritical (and credibility undermining) to profess a profound need for ubiquitous service on the one hand, but, on the other hand, to be battling alongside all the other cherry pickers to grab easy profits. In non-pledging cities, there is no difference between UTOPIA, Qwest, and other cherry-pickers regarding deployment. All are working to change build-out ordinances to cherry-picking ordinances, so that they can commit to specific developments — and, after that, get to the rest of the town if and when they can.

    I see how UTOPIA can meet some unmet needs and can be a valued player in the arena. To make sure there is substance, I need to be convinced that its finances are solid. Thanks for helping with that. I need more information. And I need a better understanding of its activities in pledging/non-pledging cities. Inconsistency often is a hurdle in the policy arena. Hence, the public’s interest in flop-flops. I don’t understand how UTOPIA can simultaneously be in favor of ubiquitous service and cherry picking. It doesn’t make sense.

  2. rmwarnick says:

    I really appreciate Jesse’s information, as he says the UTOPIA website is lacking. I didn’t know that Qwest had succeeded in stopping construction for several years. The $110/month figure is something I hadn’t seen, either (maybe that came out at the hearing).

  3. Jesse says:

    Most of the financial data is stuff I’ve managed to piece together from dozens of various sources: news articles, white papers and committee hearings. I’m pretty good at retaining facts, but not so good at remembering where I retained them from. If you asked David Shaw at UTOPIA for some better data, he’ll probably be happy to provide it. I’ve found him to be very forthcoming.

    I like build-out requirements as well. What we should be trying to find is a way to relax the timetables for build-out for new providers without sacrificing full coverage for a city. Perhaps there could be some kind of formula to ensure a mix of various income levels within the initial footprint and subsequent expansions? I’m open to suggestions. We can’t have providers go only to rich neighborhoods, but we also can’t expect them to have tens or hundreds of millions lined up to build a new network. There has to be a happy medium somewhere.

    In order to determine if UTOPIA is complicit in the higher fees for homeowners via an HOA, we have to know what level of involvement they have with that process. As a network provider (and not a service provider), they can only exercise so much control over the process. Without specifics on how any of these HOA deals are operating, it’s hard to say if they only collect fees to make up the difference when there’s a lack of subscribers or if it is truly being treated as a revenue stream. (As an aside, I think HOAs are Really Evil(TM) and wouldn’t live in a subdivision with one.)

    On the flip side… HOAs can be a way for residents outside of a non-pledging (or even non-member) city to get UTOPIA service without having to bug their city council endlessly. If there were one in White City, you can bet I’d be bugging them at least weekly. At least when it’s a group of private citizens signing the contract, taxes aren’t on the line.

    I think the perceived inconsistencies are well-explained by their desire to offer service as quickly as possible to non-pledging cities while facing the uncertainty of cash flows. Maybe they have a really good year and can build half of the city, then the next year isn’t so good and they only get another tenth. The danger here is that they could end up running afoul of the existing ordinances though they don’t mean to. I think they’re trying to make sure they can build in spurts as money becomes available rather than play a game of “pick and choose” with their footprint. I imagine that talking to David Shaw or maybe Roger Tew would help clear some of that up.

    rmwarnick: The $110/month figure for triple-play services comes direct from MSTAR’s website. They’re currently the only provider doing triple-play (Nuvont/Veracity does Dish outside of iProvo for some strange reason and XMission doesn’t seem to want in on the TV or VoIP businesses).

  4. You raise the $64 question — what should “build out” mean? It likely depends on the unique situation of each city (another reason not to have a statewide franchise — which, by the way, is simply an attempt to allow nothing but cherry picking). I would think a timetable would be appropriate (3 to 5 years) and some mix of greenfield/brownfield, rich/poor. Serious consequences would have to be imposed, such as complete franchise revocation. Otherwise, franchisees will stop when the cost to build exceeds the amount of fines/damages.

    Has White City tried to get UTOPIA?

    In Phoenix, Qwest didn’t live up to a build-out requirement, and it was hit with $2 million in liquidated damages. That sounds like a big deal, until one realizes that Qwest already built where it wanted to be and that it would have incurred costs many times more than the $2 million to build where it didn’t want to be. Thus, I bet it laughed all the way to the bank after getting slapped on the wrist.

  5. Jesse says:

    That’s a proposal I could get behind, especially if incumbents are held to that same build-out standard. I’m sure the residents of Woods Cross (many of whom can’t get any form of high-speed Internet) would be clamoring for it.

    I spent quite a bit of time getting the White City Community Council interested, but it ultimately came down to two options: get state law changed so that unincorporated areas can participate in UTOPIA directly or attempt to create a private cooperative to bring the service to White City. The former option isn’t likely to happen given the prevailing attitude that UTOPIA needs to be reigned in rather than expanded. The latter option goes beyond my capabilities as a professional computer nerd with a day job. Unincorporated areas are out in the cold on this one. This is among the reasons why I’m seriously considering a move to Murray if/when we decide to move to another house.

    I’m sure Qwest was delighted to price that $2M in as a “cost of doing business”. They probably would have been a bit more eager to get moving had the city made it into a daily penalty.

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