In yesterday’s meeting of the Political Subdivisions Interim Committee (listen here), legislators sought to get a deeper understanding of what the Macquarie deal is and how it works. Unfortunately, most of the meeting consisted of the Utah Taxpayers Association spewing out fear, uncertainty, and doubt while the Utah League of Cities and Towns corrected the many, many mistakes they made. West Valley City Mayor Ron Bigelow also spoke and did a great job of detailing how cities are putting an extraordinary amount of effort to solve this problem on their own without state assistance.
Worth noting is that the UTA made many very thinly veiled threats to sue to stop the Macquarie deal. It felt like they were using that potential legal morass as a justification for seeking more legal restrictions. HB60 proponent Rep Curt Webb (who co-chairs the committee) also spoke against UTOPIA and seemed to have learned nothing from the massive amount of national negative press he garnered for his efforts earlier this year. Fortunately, the committee shut down an attempt to work on a bill to hamstring the Macquarie deal. They were directed to speak directly to Macquarie to get answers to some of their questions.
Overall, it seems like the committee is content to watch things play out for now and is truly interested in learning the details of the deal. Since I’m sure they’re already getting plenty of misinformation from the CenturyLink-funded Utah Taxpayers Association, it’s probably time for you as citizens to email them and let them know that you’d prefer they take the hands off approach as well. Click here to email all of the members of the committee at once and let them know how you feel.
In a move surprising precisely nobody, Payson’s city council voted 4-1 to pass on Macquarie’s proposal to UTOPIA. You may recall that this is the same city that passed on rebonding in 2008, didn’t join the UIA in 2011, and didn’t bother to show up to board meetings with any consistency since 2009.
From a fiscal perspective, it’s easy to see why they made the decision. Since joining the network, the population has grown by several thousand, so there are a lot more homes to cover. At this point, there’s less than a decade of the original bond payments left for them to make. I’m sure they’re figuring that the cost to pay off the bond and walk away from their share of the network is less than taking the deal. Unfortunately, it also means that the city probably has little chance of seeing an open-access fiber network. Anyone who’s using the network in Payson is probably also looking at going dark Real Soon Now(TM).
I honestly did not expect this. Despite being one of the few cities with a near-complete network, Tremonton voted 5-0 last night to move forward with Milestone Two. This makes the tally so far four in favor (including Midvale, West Valley City, and Layton) and one against (Lindon). Votes are still scheduled in Orem, Centerville, and Murray. Payson and Brigham City have both been discussing it, but Perry has been pretty quiet.
If you live in a city that hasn’t voted, there’s still time to talk to them and urge them to move forward with Milestone Two. Check the list of events to get an idea of the when and where of what I know or contact your city directly.
UPDATE: Payson votes tonight at 6PM.
In what is not a terribly surprising move, Lindon has decided not to move forward with Milestone Two from Macquarie by a unanimous vote. This makes them the first (and so far only) city to not move forward on the proposed deal to complete the network. While Lindon could reconsider sometime in the next nine days, it seems very unlikely.
Sources tell me that the council listened very closely to intense efforts by Councilmember Caroyln Lundberg to put the deal on ice. It just so happens that her husband, Dean Lundberg, is Vice President of Operations at Vivint Wireless. You may recall that Vivint is working on doing a pilot program of wireless mesh home Internet access here in Utah, so it appears that they, in a very CenturyLink-like move, have used inside connections on a city council to derail potential competition that would ruin a multi-million dollar investment.
Of course, Lindon is going to be in for a very rude awakening in the coming months. They will still be on the hook for the bond, and they will have to cough up their share of the operational shortfall to keep the network running or face the very real possibility of turning off Internet access to 45% of their residents. Though 70% of Lindon residents residents are reportedly not fans of the utility fee, I’d bet a similar percentage doesn’t want to face the ugly fiscal realities of the other options left on the table.
Surprising precisely nobody, it appears that CenturyLink VP and long-time UTOPIA opponent Eric Isom is a member of the Utah Taxpayers Association’s Executive Committee. Per their June 2014 newsletter, he’s currently serving as the Secretary. You may recall he also was roaming the halls during meetings on HB60. If it isn’t crystal clear now why the Utah Taxpayers Association is astroturfing for CenturyLink, I don’t know what it’s going to take.
Of course, CenturyLink has a lot to lose. With the announcement in West Valley City that Ooma will be giving away the hardware for free landline service, they could shed as many as 40,000 access lines and several thousand vanilla DSL customers who opt for the basic 3Mbps service. While that fits their moves to abandon residential wireline service entirely, it also cuts into the highly profitable business products they’ve been focused on for the last few years. CenturyLink could lose tens of millions of dollars per year if Macquarie completes the buildout of the network.
So what can you do to help?
I don’t think most people realize just how deeply CenturyLink is embedded in the Utah Taxpayers Association. Bring it up at every public meeting. Share this post on every piece of social media you can and do so often. Once more people realize the uNOpia effort is just CenturyLink protecting its turf, the tide will change.
A pretty common accusation I’ve seen lately is that Macquarie is looking to lock up UTOPIA cities in a contract to make a guaranteed buck. After seeing fly-by-night operators like Broadweave and the almost comically underqualified attempts by FirstDigital (let’s not even get into HomeNet), I can’t blame someone for being just a bit cynical. Once you understand what they’re after, it makes it clear why they need the cities to win for them to win.
Based on the amount Macquarie will collect under the utility fee, the rate of return is somewhere between 3.7% and 4.7% less expenses for operating and maintaining the network. This barely keeps up with inflation, so a lot of the profit depends on getting a healthy take rate for the network. They actually have a strong financial incentive to make sure the network succeeds or they may barely break even.
They are also a VERY large company with over $140B in assets. They’re used to doing multi-billion dollar projects like toll roads, airports, and other infrastructure projects. This investment of $300-400M is relatively small. For an entry into telecommunications networks to work for them, they need to scale up. This means getting other cities on board. The only way that can happen is if the projects have a high likelihood of breaking even or better. UTOPIA cities are stuck with their existing bonds, but the deal is to generate enough revenue to cover Macquarie’s utility fee and have money to reduce the amount charged to residents for bond service. Cities without existing bonds will want to end up padding city coffers to take the deal.
There’s also a much longer term opportunity here for Macquarie. If they do a good job at operating and maintaining the network, they may be asked to continue doing so at the end of the 30 year deal. It could also open up opportunities for them to take a similar role as a network management company for other networks across the country. For a company that’s focused on stable long-term returns for investors, not the quick buck, this is a dream position to be in.
If you haven’t figured it out yet, this is a small bet that Macquarie wants to use to sell this plan to other cities. If they don’t do a good job and make it no or low cost to new cities, that won’t happen. It could also result in reputation loss in their other market segments, something a highly conservative investment bank wouldn’t want to be caught up in. So will Macquarie act in the best interests of the cities? Yes. Because they have to.
In a live news conference this morning, City Manager Wayne Pyle announced that the city is working on a partnership with Ooma to provide free phone service to every resident of West Valley City. Residents would be responsible for taxes and fees and there is also a charge to port an existing number. The city projects that the partnership would save residents around $20M per year in telecommunications costs. This service will ride on top of the completed UTOPIA network assuming that the city council accepts Macquarie’s offer when the Milestone Two report is complete. While this deal seems to apply only to West Valley City, it will be interesting to see if other UTOPIA cities try to get in on that action.
This only highlights the immense brand power of a ubiquitous fiber network in a city. It also gives Google Fiber a bit of a black eye since they have no phone product at all.
UPDATE: Here’s the press release.
As if the hyperbolic uNOpia site wasn’t light enough on facts, the Utah Taxpayers Association also commissioned a report that repeats many of the same mistakes. Apparently the hope is that by repeating the same lie over and over, it’ll end up being true. In this case, it appears that Doug MacDonald, who prepared the report, chose to merely parrot what his client asked him to. Let’s go through section-by-section and find the glaring errors and omissions, shall we?
Number 1 (pg 2)
- Doug is making the same error of insisting on using inflation figures rather than constant dollars. This is misleading and no reasonable economist would dare do this. Constant dollars are the bread-and-butter of all economic analysis. Someone with his experience should know better.
- The report shows 149K households, but Macquarie’s Milestone One report makes it clear that they intend to build out 163K households.
- Macquarie will be contractually obligated to build, operate, and maintain the network for 30 years, but the report raises the impossibility of them abrogating the contract and still collecting the utility fee. He also hints that a future city council could attempt to break the contract, yet that would open the city up to massive liability. Apparently contract law is not a strong suit.
Number 2 (pg 3)
- Doug claims that cities have considered not making existing bond debt payments, but there is zero evidence of this. No city in their right mind would default on any bond obligation.
- Macquarie is assessing the utility fee to the cities who are free to figure out the most equitable way to collect it. The report, however, claims that the fee is mandatory for every resident. This makes no mention of Provo’s utility fee which is scaled so that businesses pay more and residents pay less or the planned waivers for indigent households.
- The report makes the absurd statement that anyone who doesn’t have UTOPIA either loves their existing service or doesn’t want any kind of telecommunications service. This is despite the readily available evidence that consumers absolutely hate incumbent providers. There was apparently no effort made to do any kind of survey, scientific or otherwise, to back this claim.
- The waiver for the indigent has been falsely characterized as a general opt-out provision. That is completely false.
Number 3 (pg 4)
- Macquarie has committed to investing around $300M in building out UTOPIA, yet the report hand-wrings that it will be very difficult, if not impossible, to find the money. Macquarie is an investment bank with $140B in assets, so I’m pretty sure they’ve got the money around there somewhere.
- The take rate figures provided in the report are completely inaccurate and measure the entire city as opposed to areas actually passed with fiber and able to be hooked up. There’s also no comparison to iProvo which achieved a 35% take rate with no install fee, a ubiquitous build, and terrible service providers.
- The “break even” mentioned in the report is way off. A wash on the Macquarie deal is around 35%. Covering all of the existing bond service as well is in the 55% range.
Number 4 (pg 5)
- Every ISP has committed to participate in the included basic tier of service, yet the report spreads more fear, uncertainty, and doubt about their participation. It’s obvious that Doug didn’t talk to a single one of them about this. I know for a fact that XMission, SumoFiber, Veracity, and WebWave are on the record with being strongly in support.
- Of the ISPs on UTOPIA, most of them do not provide services over other methods of transport. Those that do are often looking to get away from doing so. XMission converts DSL customers to UTOPIA. Veracity has gone so far as to build their own fiber to CenturyLink cabinets to get off of their transport. The idea that they will sell their service over competing infrastructure is not based in reality.
- The utility fee covers connecting the network to each address. The $50 reimbursement to ISPs is to cover any installation costs beyond that. ISPs do not have to front any money to hook up basic service customers.
- Doug again asserts that cities may choose to default on their existing debt obligations, a scenario that no city in their right mind would ever attempt.
- Macquarie has experience with telecommunications systems in Asia and is partnering with some of the biggest names in fiber optics such as Alcatel Lucent and Fujitsu. This is not going to be a project run by rank amateurs.
- The report cites a failed toll road project in San Diego to try spreading fear that Macquarie would walk away from a project, but the details, as usual, are much more complex. The project went through a Chapter 11 filing in which Macquarie had to write off their interest in the road, yet the road continued to operate.
Number 5 (pg 7)
- Macquarie has never stated that people will not need premium services. Even if lines will not be fully utilized, there is a huge demand for service provider alternatives just to get away from the terrible service provided by incumbent operators.
- Again, the utility fees are assessed by Macquarie to the cities and it is up to the cities to determine who pays what. Provo has already implemented a model where businesses pay a lot more than residents. Concern trolling to scare residents isn’t serious research at all.
Number 6 (pg 8)
- Evaluating the cost to sell or shut down the network is a farce. In either event, the bond reportedly becomes callable meaning that the entire amount is due immediately. Treating that as a realistic option doesn’t even make any sense.
- No evaluation of the probable value of the network was done. Instead, Doug pulled two numbers out of a hat: the $1 “sale” price of iProvo and the $86M in assets reported by UTOPIA.
- The “sunk cost” argument depends heavily on the fabricated “needed investment” and fallacious take rate estimates from number 3. As such, it can’t be considered a serious argument at all since the underlying assumptions are bad.
Number 7 (pg 9)
- The debt amounts cited in the Econowest report do not appear anywhere in the Milestone One report, yet it claims that they do. In fact, the Milestone One report makes it very clear that the principal and interest currently totals around $500M. This amount is in line with $185M of bonds over 30 years at a nominal interest rate. How that gets inflated to $335M is beyond me.
- Doug again screws up by claiming that UTOPIA debt is 69% of the level of state debt, yet the state debt of $35.7B works out to almost ten times the amount he claims. This is something easily discoverable with Google in about 30 seconds.
Number 8 (pg 10)
- Just like the auditor’s report it cites, this one fails to draw any distinctions between current and former management.
- Doug completely fails to consider any argument on the economics of utilities and trots out a “private sector” argument with no supporting evidence. I’ll just leave this piece on why he’s wrong right here.
This report is sloppy and unprofessional, something that should be embarrassing for someone of Mr. MacDonald’s experience. There’s ample concern trolling and FUD on points that have been settled. Basic figures are completely incorrect and unsourced. Absolutely no effort was put into doing research to back up the conclusions. This amateurish work doesn’t read at all like it was completed by a professional.
If this is really the best that the UTA can come up with, I’m going to have a hard time believing that opponents of the deal are going to make much headway.
Wondering how the uNOpia site sprung up so quickly and with so much funding? Wonder no more. I have inside information that the payments for the entire operation come directly from CenturyLink itself. This isn’t too surprising since they rarely directly involve themselves in politics anymore, preferring to launder the money through hatchetmen like the Utah Taxpayers Association (who, of course, is heavily promoting the uNOpia site). Given how much CenturyLink stands to lose in the residential and commercial wireline market should this succeed, it’s no wonder they’re willing to spend thousands of dollars to try and upend it.
This isn’t anything too surprising after the confirmed involvement of the Utah Taxpayers Association in HB60 and the suspected involvement in SB190 earlier this year. Incumbents will stoop to any low in order to protect their turf and keep prices artificially high.
Layton joins Midvale and West Valley City in voting yes to move forward with getting final details of Macquarie’s proposal under Milestone Two, the third city in a row to do so. For those keeping score, this means that all of the cities who have voted on the proposal have chosen to get more details. Given that there’s
no little commitment to do so, it’s a wonder any city isn’t interested in say “yes, please, give us the finalized details”.
The next scheduled votes won’t be until the final week to respond, so it’ll be really quiet. In the meantime, there’s a lot of public meetings you can drop in on to show your support. Also make sure that your city councils are hearing from you that they should move forward with Milestone Two.