Publication Date: Wednesday, February 11, 2004
Hot wired
Hot wired
(February 11, 2004) Fiber-to-the-Home may throw Palo Alto into the telecommunications business
by Bill D'Agostino
Palo Alto faces a big decision, the center of which is no wider than a strand of hair.
It's called fiber optics -- light signals delivered by glass filaments that could one day deliver blazingly fast and reliable Internet access, plus cable television and possibly telephone service, to all Palo Alto residents and small businesses.
Proponents are organizing for what they consider a major battle in a multi-year struggle to bring the technology to every Palo Altan, via the local government's utility service.
But city officials, conscious of the $35 million-plus price tag, are taking a long, hard look at the potential benefits and risks that stand between today's technology and tomorrow's promises.
"We're breaking new ground, and you have to be cautious when you do that because you can make very expensive mistakes," Assistant City Manager Emily Harrison said.
Although the city's consultant, Uptown Services, believes the initial investment will be repaid in approximately 15 years, but whether that primarily happens depends primarily upon whether enough Palo Alto residents decide to sign up.
The city is expected to release its own analysis of Uptown Services' plan in the coming few weeks, a study conducted after some staff members and advisors stated the consultant's report was more cheerleading than hard-nosed scrutiny.
If the City Council ultimately moves ahead on the project, observers expect a November election -- though not technically required -- would be held so residents could weigh in on the topic.
Advocates -- including many who are part of a 70-household, 2-year-old trial in the Community Center neighborhood -- paint a rosy picture of the fiber technology powering Palo Alto's future.
Prices for cable TV, Internet and telephone services will be noticeably lower than in neighboring cities, they predict. The competition will force current providers to lower prices and improve their own services. And there will finally be a reasonably priced option for a rip-roaringly fast Internet connection, which is especially important for those who work from home and need to send large files over the Internet.
"It would put us on the forefront of telecommunications," said Bob Harrington, a financial consultant whose home is equipped with a fiber-optic system, thanks to the city's trial. "To be anyplace else is just not smart."
Other cities throughout the country have seen such predictions come true as their local governments entered the business of providing Internet and cable television.
Residents in Tacoma, Wash. pay lower prices thanks to the local government's "Click! Network," a combination of fiber and more traditional coaxial cable. The private communications firms, some of which held monopolies over their services, have improved noticeably and even lowered prices.
Plus, the new locally-owned technology has been a boon to the area's economy. The Chamber of Commerce told the city that 100 businesses reported that technology was one reason they came to Tacoma, which has marketed itself as "America's #1 Wired City."
"A lot has changed since Click! came to be," said Click! spokesperson Diane Lachel, who added that Tacoma made a $90 million investment in the technology in 1997 -- the same time Palo Alto first discussed the issue.
So far, 32 percent of households have signed on to Click!, even though the city had only projected 25 percent. "We're feeling really good about that," Lachel said.
Another benefit touted by promoters in Palo Alto is that residents could have a say -- through a local board -- about what channels would be offered through the cable television service, potentially providing more choices.
Plus, all the money residents spend on Internet and television would be kept locally, they say.
While that money would initially repay the startup investment, those revenues could ultimately go straight into the city's coffers, paying for the police, library and other services the local government already provides.
Palo Alto's City Hall could also use the technology to increase its own efficiency by reading power meters remotely and institute a near-instant warning system for such possible emergencies as floods or earthquakes.
But the risks are large, especially when at least $35 million is on the table.
An early plan saw the majority of the investment coming from revenue bonds, repaid by funds from the city's electricity utility. That means if the consultant's projections fell short, electricity rates would have to rise to make up the difference.
Other funding sources are also being examined in the city's latest study, including using some of Palo Alto Utilities' $165 million reserves.
Since most Palo Alto residents already subscribe to Internet and cable TV services, the utility would have to attract customers from current providers. Critics point out that competition is something the city's utility service-- which runs Palo Alto's electricity, water, gas and waste -- has never dealt with.
Existing companies aren't likely to take the new competition lying down. Both SBC and Comcast already appear to be taking steps to dissuade the city from entering their markets.
Comcast announced last week it was doubling the rate of the upstream (see glossary for terms) high-speed Internet connection for some customers, at no additional charge.
SBC representatives have regularly attended city meetings for years -- and held their own private meetings with a few council members. They say the city's estimates are way off.
"Just reading the penetration rates that they are proposing, there's no way," said Stacey Wagner, external affairs director for SBC. "Maybe 10 years down the road. Maybe.
"Just because you build it, doesn't mean they come," she said.
Wagner also contends it's not fair for Palo Alto to enter an industry it helps regulate. "That's a concern," she said. "That's a huge concern."
Skeptics also contend that few people need an Internet connection at such a high speed. There's also a worry that another technology could supplant fiber, making the city's investment obsolete before the 15-year payoff (see sidebar).
On a more practical note, city officials note the manpower necessary to launch the technology into every home would take employees away from other much-desired projects, such as improvements to the city's storm drains or police headquarters.
Even proponents are nervous about the impact of Palo Alto's well-known penchant for taking a long time to make decisions.
So far, thee length of Palo Alto's consideration has actually driven the building price down. Since the economic recovery has been a "jobless," the projected price has dropped due to falling manufacturing costs. But if the decisions keeps getting delayed, those prices could rise again.
The long-anticipated city analysis will also highlight the complex legal regulations the city would find itself in if officials choose to enter the personal telecommunications business.
For such reasons, the likelihood that telephone services could be offered has diminished.
"Telephone is one that is really a regulatory landmine," said Dexter Dawes, a member of the city's Utility Advisory Commission, which will scrutinize the final report before passing it along to the City Council.
"I'm not sure that Palo Alto has the guts to be a pioneer," Dawes added. "It can be very expensive to be a pioneer. You pay all the legal costs and the spears end up in your back."
The upcoming report will also challenge the economic assumptions made in the consultant's initial study to ensure the city "fully understands and accurately assesses the pros and cons," said Karl Van Orsdol, the city's risk manager.
There are a number of factors in the city's favor, should it decide to take the leap. Number-one on is the shining reputation of the city's utility department.
"We think people are very favorably disposed to choose City of Palo Alto Utilities as a trusted brand," said Rick Ferguson, an attorney and former Utility Advisory Commissioner who favors a fiber service.
The numbers back up his claim. A survey conducted by the city's consultant found that 90 percent of respondents believe the utility provides its services well.
The city would also be counting on widespread dissatisfaction with competing Internet and cable providers.
The results of the survey -- included in last year's draft of the city's business plan -- demonstrated that residents felt frustrated with the telecom giants, especially Comcast.
But that survey was taken many months ago, and from what Utility Advisory Commissioner Dick Rosenbaum hears and sees lately, "the incumbent providers are doing a better job than they were doing a couple years ago."
One supporter of fiber even pointed out that while he once typically waited over an hour on the telephone for a Comcast customer service representative, he now waits around 15 minutes.
The city also has a number of economic benefits over existing providers, Dawes pointed out.
Among them is it doesn't need to make money right away. While private companies have to consistently return profits to please investors, the city can wait to make its revenues in the later years after existing companies stopped aggressively fighting the city.
Before the city decides to jump into a risky new venture, there is also a basic, philosophical question to be asked: Should the local government provide services the private sector already provides?
For some, the answer is an easy "no."
"It's inappropriate for government to be competing with existing private industries just because certain individuals don't want to pay the going prices for services," said frequent city critic Wayne Martin, who is likely to lead the citizen side of any opposition should the measure get on the November ballot.
At the same time, a better-funded challenge is likely come from SBC and Comcast.
Last April, those companies successfully defeated three Illinois cities that placed a similar measure on their ballots, according to Ron Lunt, the director for Broadband Services for the American Public Power Association, which advocates on behalf of local municipal power companies.
"Palo Alto will be challenged in getting the truth out, and not the rhetoric," Lunt said.
Bill D'Agostino can be e-mailed at bdagostino@paweekly.com
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