March 05, 2004

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Palo Alto Online

The price of fiber

by Bill D'Agostino

Just how important is the city's proposed telecommunication business, compared to other city projects?

If the city is serious about entering the fiber-optic business in an effort to offer cheaper cable television and faster Internet connections for its residents, then other long-desired public improvements -- such as expanding libraries and repairing storm drains -- could suffer.

The proposed fiber-optic venture will require so much time and energy from officials and residents in coming years, it would need to become one of the city's "Top 5" priorities, administrators said this week, yet another sign of the magnitude of the ultimate decision. The council's current "Top 5" priorities -- used to focus city efforts on the most essential issues -- are city finances, infrastructure, affordable housing, land use planning, and alternative transportation/traffic calming.

Various other projects would not compete for dollars with the telecommunications proposal, but would instead vie for attention, Utility Director John Ulrich said.

The city's Utility Advisory Commission will review a report based on the proposal during a March 17 and 18 public hearings. Based on the commission's recommendations, the council could examine the issue as early as April.

How fast to go, and which risks need further investigations, will be among the questions next before the commission and the council.

The much-anticipated and long-delayed report, released this week, outlines many of the risks inherent in the fiber-optics business.

The start-up cost of the fiber-optic system is estimated to be $40 million, although Ulrich believes that figure would ultimately be smaller, due to shrinking construction costs.

Despite more than $1 million already spent to study and test the technology, including a trial in which 70 homes were wired with the technology, city administrators said they need more money to conduct an in-depth risk analysis. An engineering study would cost an estimated $200,000, while a legal study would cost around $70,000.

In the worst-case scenario, as stated in the report, the business completely flops and its assets are sold. Residents would then have to pay approximately 70 cents more a month in electricity rates, for 15 years, to repay the remainder of the investment. Businesses would likely have to pay even more.

The best case scenario, often hyped by supporters, would be the city's residents and businesses would pay lower rates for cable and Internet access, and the venture would be profitable, subsidizing other city projects and services.

The city's consultant, Uptown Services, believes the investment would be paid off in 11 years. The return on the city's investment depends entirely upon how many residents and businesses choose to get their cable television and Internet services from the city, according to Uptown. In fact, the city would get $11 million less in revenues if only 26 percent of potential customers choose to get cable from the city, instead of the anticipated 31 percent, according to the analysis.

Even in the best case, "Palo Alto will have to tolerate short-term deficit to enjoy the long-term benefits from this project," according to the city's report.

The newly released report, which includes an updated 95-page business plan from Uptown, states that prices offered by the city for cable television would attempt to be 10 percent lower than currently offered by existing businesses. The consultant warns that existing companies could engage in a price war to drive Palo Alto out of business.

If the project goes forward, approval of the new business will almost certainly be put before voters.

One question before voters could ask for the residents' to allow the city to sell bonds to pay for the business' operating costs. Another question could be required to amend the City Charter to allow for the creation of a governing body to run the cable business.

Other companies, like Comcast and SBC, are expected to fight hard to keep Palo Alto from becoming their competition, as they have in other cities. The city's latest analysis of the fiber-optics project can be found at www.city.palo-alto.ca.us/cityagenda/publish/uac-meetings/uac-meetings.html.

Bill D'Agostino can be e-mailed at bdagostino@paweekly.com

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