July 15, 2014
Today the Coalition for the New Economy continues its look at the recent study of government-owned broadband networks (GONs) from New York Law School by examining the report’s case study on Cedar Falls, Iowa.
According to authors Charles Davidson and Michael Santorelli, the city’s GON was established in the mid-1990s and is one of the oldest in the country. (The network began offering broadband service in 1997.) The reports says, like the networks in Bristol, Va. and Chattanooga, Tenn., Cedar Falls’ GON has survived because of several unique circumstances (like federal taxpayer help), but its finances are worsening now that the city has tried to add gigabit service. Specifically, the report says, “Over the last decade … The system rarely generated revenues to cover its total costs,” but now that the system has added gigabit service, its operating expenses are growing significantly while revenues have not kept pace.
The expansion also resulted in a downgrade to the city’s credit rating. Davidson and Santorelli report Moody’s cut the city’s bond rating from A1 to A3 because the utility system’s “debt is becoming increasingly illiquid, the network is highly leveraged (due mostly to its fiber expansion), and the network lost several major customers to competitors in recent years.”
Voters initially approved $3 million for the cable and broadband service offerings in the 1990s, but the expansion to gigabit service is expected to cost an additional $17 million. Cedar Falls used loans from its traditional utility system and grants from the federal government to finance its project.
Meanwhile, the city recently approved property tax increase to fund improvements to its roads, a fact that highlighte the very significant opportunity costs of running a GON, Davidson and Santorelli argue.
Households pay $265 a month for the gigabit service (slightly more if they are in the rural areas outside the city) while businesses pay $950 a month ($990 in rural areas). The city’s basic service, which offers speeds of just 2 mbps, costs consumers $30 a month.
The system has about 11,600 subscribers, less than one-third of the city’s population.
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