Tennessee town’s broadband plan may face difficult hurdles

By Johnny Campis / Watchdog.org

If Newport, Tennessee, moves forward with its plan to build a broadband network while also upgrading its electrical grid, the project will cost nearly $7,000 per potential customer.

Newport Utilities recently announced a contract with nearby Morristown Utilities that would involve running fiber between the two towns, with a goal of signing up customers starting in January 2018. Speeds would range from 100 megabits per second 1 gigabit per second.

The project is expected to cost $24.7 million. And, as Sharon Kyser, spokeswoman for Newport Utilities, recently told local news outlet Citizen Tribune, the potential customer base would generate the loan payments back.

Critics aren’t so sure.

Newport Utilities anticipates capturing 45 percent (or 3,600) of the potential customer base of 8,000 residences and businesses by 2021. That’s a projected cost of $6,861 per expected customer.

But that 45 percent goal may be unreasonable, say state auditors. Sandra Thompson, director of the Office of State and Local Finance, sent a letter to Newport officials on May 17 saying the broadband plan didn’t provide adequate assumptions, or methodology, to support the 45 percent customer-capture rate given the number of existing providers in the area.

The existing wired providers in Newport includes AT&T, Charter, Comcast and Windstream and fixed wireless providers Planet Connect and Ultranet. This competition will surely affect the ability to sign up those 3,600 households and businesses.

Thompson wrote that Newport’s plan didn’t take into account the effect of increased competition on pricing.

“Because the Plan did not consider the impact of market competition to the population of customers that currently have service, we could not conclude the reasonableness of the uptake rate and therefore could not determine if the Plan is feasible,” she wrote.

Newport Utilities’ pricing plan currently calls for rates of $39 per month for symmetrical internet speeds of 50 megabits per second, up to $149 per month for symmetrical speeds of 500 mbps. A “triple play” package with 50 mbps internet, basic cable and phone service would cost $120 per month.

Kyser told the Taxpayers Protection Alliance Foundation (TPAF) that plans call for the project to be completed in multiple phases to reduce financial risk.

“We’re trying to be aggressive yet fiscally responsible with our phased approach so we don’t put ratepayers at risk,” she said.

Kyser noted that the Tennessee Valley Authority (TVA), a regional power supplier, has given its blessing for the project. Earlier this year, the TVA announced its own regional $300 million initiative[DW1] to upgrade its broadband capacity with 3,500 miles of upgraded fiber to be installed over the next decade in Alabama and Tennessee.

John Dunn, spokesman for the Office of State and Local Finance, told TPAF that comptrollers officially take a neutral stance on Newport’s broadband expansion.

“We just couldn’t come to the same conclusions they did,” he said of Newport officials.

“There were calls from Newport folks trying to get us to change our mind, but that’s still our position and it hasn’t changed from that,” Dunn added.

Will Rinehart, director of technology and innovation policy at the American Action Forum, said Newport “will face steep competition” given the number of market competitors.

“I know it’s pretty common to get about a third of all customers in a region,” he said of similar projects. “The comptrollers are likely right given they have more information on the region.”

Rinehart said Newport’s expected cost per premise passed with fiber – about $3,600 – is a little higher, but not unreasonably higher, than the average of about $3,000. But the payback on even the normal range can be difficult.

He noted that Newport’s plan calls for the broadband to be cash-flow positive quickly.

“Even private providers struggle to recover these costs, so I don’t see how a government provider could do any better,” Rinehart said.

In a letter to customers posted online on May 4, Newport Utilities General Manager Glenn Ray claimed that “no taxpayer money is needed or required for our plan’s success.”

However, the majority of the project will be paid for by a 35-year, $21.3 million loan from the taxpayer-funded U.S. Department of Agriculture. Newport Utilities’ electric division will loan the remainder of $3.4 million to the broadband division, which will be paid back over seven years.

In his letter, Ray also wrote that “the Plan is currently being reviewed by both the Tennessee State Comptroller and TVA. If either of these organizations were not assured the success of our plan we would not be proceeding towards the next steps to obtain funding, start final designs and begin installations.”

Yet despite the concerns raised by the comptrollers, the project marches on.

 

 

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