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Government-Owned Broadband Review of the Week: Chattanooga’s EPB Network

June 27, 2014

mom and girlEarlier this week, the Coalition for the New Economy gave readers its topline review of the Advanced Communications Law and Policy Institute’s (ACLPI) new study on government owned broadband networks (GONs).

The report is full of general information about these networks and also includes detailed reviews of 10 of them. We’ll look at each of these case studies over the coming weeks and begin today with Chattanooga’s network – the GON that has probably received the most national media attention.

While questioning the economic impact the system has had on the city, the study’s authors, Michael Santorelli and Charles Davidson, do note Chattanooga’s GON (run by the city’s utility system, the Electric Power Board) is profitable.

However the two argue “a number of aspects” render the system “unique” and “make it difficult for other municipalities to replicate.”

For example, a significant portion of this money – $111 million – came from the 2009 federal stimulus. Additionally, a web of “intra-utility loans, one-off federal grants, and significant debt” was used to provide additional financing for the $390 million system. Santorelli and Davidson explain the Electric Power Board used revenues from its traditional utility to finance its GON and the GON was able to get favorable financing because of its ties to the more general utility system. As the report explains, “Many of these actions were enabled by the network’s close relationship with the larger EPB utility and the city of Chattanooga (and, by extension, its residents), all of whom serve as financial backstops for the system.”

While this web “allows the [Electric Power Board] to take on liabilities without directly exposing the city government or taxpayers to these risk” it will harm local taxpayers in the end, Santorelli and Davidson seem to believe. That’s because the “cross funding scheme” that provided a substantial amount of capital for the network led to downgrade of the city’s overall bond rating. According to ACLPI, “The downgrade was due to an ‘increase in leverage to fund capex in the electric system’s smart grid.’” Eventually, the ACLPI report says, EPB “might be forced to raise the rates of its 174,318 electrical customers” to finance its GON.

Of course, a lower bond rating also means higher borrowing costs for other capital spending projects, including for schools and highways.