Clarifying UTOPIA's Financing Models

While I was on KVNU’s For the People tonight,  a caller expressed concerns about how UTOPIA is financed. It became clear to me that this caller had confused the various funding models and bonds UTOPIA has been and is currently using. I thought I should clarify how exactly UTOPIA got its money and who is on the hook for what. There’s a lot of confusion about how UTOPIA is backed and financed and this is because there have been two rounds of bonding under one financial model and new potential rounds of bonds under a new financial model.

The original model called for a portion of construction to be backed with sales tax pledges from the various pledging member cities and the remainder to be paid for with loans backed by system revenues. That second tranche of funding came in the form of loans from the USDA’s Rural Utilities Service (RUS). They would approve a phase of construction and then repay UTOPIA once construction had finished. Almost immediately, RUS become uncommunicative with UTOPIA and would reimburse them for approved construction costs weeks or months late. Finally, RUS declined to reimburse them for almost $11M of approved construction expenses and notified UTOPIA that it would not approve any further construction.

Obviously, UTOPIA had been left in the lurch as they now had bills with no money to pay them and had been shorted million in additional expected funding. This is where the second bond came in. UTOPIA, not having finished the construction they had expected and being months behind schedule, had to ask the cities to create a new bond. The new bond covered the original bond, the loans from RUS, outstanding construction bills from RUS’ lack of promised reimbursement, capitalized interest payments for two years, and about $11M to cover operating expenses and complete some partially-finished sections of the network. They did not pull out more money because they did not want to overextend the cities.

Both of these fall under what I call the “Free Lunch” Model. The legislature restricted any municipal telecommunications effort from being able to bond for more than 50% of the total construction costs. Under such a financial model, the plan is to build quickly with the money that can be obtained and use system revenues to continue expansion. It was certainly very ambitious and, in hindsight, fraught with pitfalls. The biggest problem is that the common infrastructure such as the NOC and fiber backbones consumed a disproportionate share of the available funds, thus little was left to actually get out to customers. The build “plan” (if it can even be called that) also had little rhyme or reason and was not matched to areas with higher demand. This also left pockets of service throughout cities instead of a contiguous footprint. To call it a bucket of fail would be charitable.

There’s also the problem that the collective project carried collective risk. If it didn’t succeed as a whole, all cities had to pay into the pot. This is part of what caused problems with the build plan. UTOPIA wanted to try and make sure that every city got at least some service, something that might not have necessarily matched demand. Voters are always a bit touchy when they feel that their tax dollars are going to someone else.

With the implosion of the “Free Lunch” Model, UTOPIA has started trying out the Special Assessment Area. The SAA comes in two flavors: voluntary and involuntary. As the names imply, one of them requires everyone in the area, participating or not, to pay up. The other, however, divides the costs between all participants and assesses no costs to the non-participants. UTOPIA is using the voluntary SAA. Only those who want service will be expected to pay for it and the cost assessed per participant decreases as more people join. This type requires a minimum percentage of homes and businesses to commit to service before it can be executed to prevent the per-address cost from being prohibitively high.

This new model has several distinct advantages. UTOPIA is no longer required to secure financing for construction as participants will pay it directly. Additionally, only those who want the service will be paying for it, relieving critics and naysayers of the potential tax burden. It also allows those who want service to get it much quicker than if they waited for UTOPIA to go revenue-positive. Each SAA will also be required to be revenue-neutral in order to be executed, so no additional burden is created on the network. The SAA isn’t currently in use, but it is being worked on in Brigham City. So far, it appears to be well-received.

Hopefully this helps dispel any of the confusion and rumors concerning where the money is coming from.

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11 Responses to Clarifying UTOPIA's Financing Models

  1. It Worked says:

    Brigham City Council passed the resolution! I will get my internet!

  2. Capt. Video says:

    What does that mean?

    What passed? (I don’t see anything on the Brigham City web site related to UTOPIA?)

    Has a Special Assessment District (Area) been created? How large is it? (How many homes?)
    How much is the Assessment? (What is the “deal”?)

  3. Jesse says:

    Apparently the voluntary SAA was approved by the city council last night. I’m still trying to get some more details before I do a write-up.

  4. luminous says:

    I can’t wait to see more information, will be interesting to see what the success level of this thing is.

  5. Mark says:

    See The last answer says that the whole city will be built out after the November 5 city council meeting. Some of Capt Video’s questions are answered in other answers at the same location.

  6. Capt. Video says:

    I don’t read it that way.

    I read it to suggest that any neighborhood in the city that gets sufficient sign-ups will get the service?

    Interesting the way they answer the “What if I move?” question. Saying the title company may elect to pay off the debt….don’t they really mean the title company may ask YOU to pay off the remaining debt? I’m sure the title company will not pay your debt, except with your money from the home sale? Or you may get less for your home if you sell it with the debt attached?

    The really important question we are all dying to see is just how successful UTOPIA has been at getting people to bite on this offer. Sounds like it’s still open until Nov. 20th??

    With construction to begin again around Thanksgiving and to be finished by about year end. The we will see if this plan has worked.

    I believe it will NOT work. Perhaps getting some subscribers in locations with limited other options (if cable internet or only slow DSL is available (parts of Brigham city??)).

    I just cannot see this being something that will be big enough to move UTOPIA forward. I still believe either they get Obama Money or they are dead in the water again.

    Connecting a few hundred…or even a few thousand homes will NOT change things for UTOPIA. They need tens of thousands of new homes connecting and I see no way that will happen with the SAA model.

    But of course, I could be wrong!

  7. Dean says:

    Capt. Video you obviously do not know much about Brigham city the the majority of town has mediocre at best DSL and cable, while parts of town the only way that they can connect using a broadband connection is to go though a company called Digis that uses satellite to provide there connection. The case is the same in to the majority of the cities that are taking part of UTOPIA. the extension on the deadline till the 20th is to ensure that the whole city gets built out (approximately 1700 homes + numerous businesses) adding to the over ten thousand current customers on the UTOPIA network.

  8. Anon says:

    A point of correction… Digis uses WiFi, not satellite. I was a customer of a small network that was later purchased by Digis. I can’t speak to the reliability or performance of Digis, but my pre-Digis service was pretty lousy, and I was extremely happy when Comcast finally added service in my neighborhood so that I could ditch WiFi-based “broadband”.

  9. Jesse says:

    My brother-in-law was with Digis and wasn’t very happy with it. It had quite a bit of downtime and Vonage didn’t play nice with the higher latency. He too switched to Comcast.

  10. luminous says:

    anon, To backup your comments on how bad Digis is.

    WIFI “broadband” sits on the same radio channels as baby monitors, microwaves, cordless phones, bluetooth, and all kinds of other things.

    Its the only broadband delivery method that can be knocked out the microwavable burrito you are having for breakfast.

    Many(all) of these WIFI ISP’s transmit at illegal power levels and/or illegal antenna configurations to get over interference, HAM radio operators, each other, etc.

    Its only a solution if your only other option is dialup. and even then you will need that dialup service as a backup.

  11. Capt. Video says:

    I know nothing about Broadband in Brigham City.

    I don’t believe anyone with availability of normal (good) DSL and Cable broadband would agree to pay $3,000 to have UTOPIA installed. (Well, almost no-one? Would YOU?)

    UTOPIA (and iProvo) were having a tough time getting people to sign up with a FREE install in most areas, so I can’t see people paying $3,000….IF they have normal cable broadband and DSL available.

    IF Brigham City is unusual in that it does NOT have good cable or DSL, then I can see some interest in UTOPIA.

    Think of the tens of thousands of people that currently have UTOPIA or iProvo passing their home and have not been convinced to sign up without having to pay $3,000 for an install.

    …and yes, UTOPIA has about 12,000? customers…but I believe they need about 40,000 – 50,000 to reach break-even. A very significant shortage with no solution in sight?

    At the end of the month UTOPIA will provide their annual report to the State that will show us all how they are doing (were doing at the end of June). Showing their revenue per subscriber, etc.

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