Guest Opinion: Some pros and cons of a city-owned 'fiber-to-the-home' system Guest Opinion: Some pros and cons of a city-owned 'fiber-to-the-home' system (February 18, 2004)

by Dexter Dawes

It seems to me that during the six years I have served on the Utilities Advisory Commission, the discussion about a city-owned fiber-optic system of some type has taken more time than any other subject.

But now, at last, we are approaching a decision point.

To clarify things in my own mind, I began comparing some pros and cons. While I tend to lean toward the benefits side, I, like many others, am cautious and a bit skeptical -- the estimated installation cost of $35 million is a big investment. However, it is important to realize the investment will be paid back by the revenues the system generates -- not by taxpayers directly.

So here are my thoughts:

The proposed fiber project will increase the appeal of Palo Alto as a place to live, will augment our school system's well-deserved reputation and will tend to increase or maintain property values. The underlying assumption is that increased capability and capacity of two-way communications will enrich our lives.

Both businesses and employees will benefit as the system expands potential for telecommuting, thereby reducing traffic congestion, pollution, energy use and commuting time.

Small businesses can benefit from a high-capacity system without the expense of T1 lines or their equivalent from the telephone company. High upstream speeds and bandwidth are particularly important to these customers.

Small businesses will settle in Palo Alto, drawn by the capacity and capability of the system.

The basic technology (glass fiber) is the best available cost/capacity trade-off and will continue to be, with upgrades to expand and improve service. The basic fiber plant is incredibly robust with very low rates of outage and it is not susceptible to obsolescence.

WiFi and higher-speed wireless derivatives are important technologies but do not have the inherent performance or dependability to be an acceptable substitute for the foreseeable future. However, they are ideal for many specific applications.

The fiber cable plant is inherently simpler, more dependable and requires less maintenance than competing systems, such as wireless and hybrid.

Internet-protocol (IP) telephony and TV will become the accepted method of delivery and the proposed fiber system will enable these at low cost. High-definition TV will become much more popular in the near future. The system is able to deliver more significant amounts of HiDef than is possible with existing competing commercial providers (except satellite).

The low cost of capital enjoyed by the Palo Alto Utilities Department (tax exempt bonds and no taxes to pay -- either property or income) and the willingness to accept a longer payback period than commercial providers gives a large competitive advantage to the Palo Alto system. It will however, pay dividends to the city after it has repaid its investment.

The inexperience of Palo Alto Utilities in providing the service will create inefficiencies and mistakes, but these can be accommodated without disaster due to the cost structure above.

The Utilities Department already has a staff that deals with customer service and maintenance of its electrical plant, key success factors.

The capacity of the system will permit uses not yet imagined, many of which might improve the quality of life in Palo Alto -- such as broadcasting school functions and art events.

If left to commercial competitors, a system like FTTH could take decades to come to Palo Alto, particularly since the local cable company has just completed an upgrade to its hybrid system and thus is unlikely to invest in full fiber in the near future.

Over time, the system will pay for itself and yield returns to the city to help other programs.

But there are some serious downside risks. Competitors have already invested in systems and will be able to cut prices to a point that makes the new city system unattractive, notwithstanding the long payout and low cost of capital. As pointed out in the staff report, competition in price and capability is potentially a great public benefit to the citizens of Palo Alto, who benefit even if the system struggles financially.

The capacity promotes pooling of signals in neighborhoods through WiFi connections, thereby reducing penetration rates -- fewer paying customers increase the financial risk to the city.

The television side of the business is key to the success of the system financially. Palo Alto Utilities has no track record of picking a winning combination of channel offerings, pricing and tiering (packaging groups of channels by price) to make this part of the system a success.

The TV business is changing rapidly with "costs of carry" (the amount content providers, such as ESPN, charge for programs) increasing and the balance of power shifting to the content providers. Can Palo Alto Utilities compete successfully with the extremely large distributors such as the local incumbent provider, ComCast?

Governance could be structured improperly. If you box with the big guys, you better be fast on your feet in the ring. Even if the city can learn fast footwork, can it legally maintain strategic confidentiality necessary if you don't want to telegraph your punches? A strong board able to make decisions rapidly within broad council-approved guidelines is imperative.

There's a risk of competing technologies. WiFi technology is going broadband, with higher speeds and more bandwidth than heretofore imagined. Intel has announced a chip that will enable a 30-mile radius of broadband wireless service that can serve many subscribers, perhaps into the thousands, with little or no degradation of performance and as much capacity as most of us need.

Finally, the major question is, "Who picks up the tab if the system does not perform to plan?" Assuming the system is built with proceeds from a bond sale by the electric utility (by no means certain), the electric ratepayers would pay more if the system's cash flow failed to meet expenses plus paying off the bonds.

Becausebusinesses pay more than 70 percent of the electric bills, the system must be attractive to them as well. If it's funded by a bond issue, the City Council will decide if the matter should be placed before the voters. Strictly speaking, as a utility investment, that is not required.

When the legal issues and the final staff evaluation are at last placed on the table, the UAC will debate the entire package. It's recommendation will proceed to the council for a final decision.

Dexter Dawes is a retired venture investor and a member of the Palo Alto Utilities Advisory Commission. He also is a member of the board of the Weekly's parent firm, Embarcadero Publishing Co. He can be e-mailed at dexter@dawes.org.

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