August 14, 2014
Today the Coalition for the New Economy (CNE) continues its look at a recent study of government-owned broadband networks (GONs) from New York Law School by examining the report’s case study on Groton, Conn. As a reminder, CNE has written about this network, which was sold by the city for a nearly $30 million loss, many times before.
The study’s authors, Charles Davidson and Michael Santorelli, do no sugarcoat the Groton experience. They say, “[A]midst much acclaim and anticipation in the mid-2000s, the network quickly collapsed under the weight of soaring debt …”
Davidson and Santorelli explain the city utility system came up with the idea for a broadband network in the late 1990s when it was looking to make some cash to make up for declining revenues from electricity customers. Groton estimated the network would cost $25 million to $30 million. Voters approved the idea and by “the early 2000s [the city] began to develop plans for deploying a hybrid fiber/cable network that would extend cable service to residents and thus compete directly in the market for broadband and television.” The city council approved this plan in 2003 and the network came online in 2004. (Construction was not yet finished, however.)
The total construction cost of the network surged to more than $50 million, about twice what was initially anticipated and it hemorrhaged money from the beginning, losing an average $2 million a year. (Davidson and Santorelli say consumer demand was “tepid” so the network couldn’t cover costs with revenues.)
In 2012, the city decided to sell the network and successfully completed the $550,000 sale the next year.
Even after getting rid of the albatross, Davidson and Santorelli report the city and its residents are still on the hook for $27.5 million in loans, which will take 14 years to pay off. The debt has, and will continue to have, a significant impact on residents. Davidson and Santorelli conclude, “Due to the city’s use of general obligation bonds, this onus falls directly on residents, either via increased taxes, fewer municipal services, or higher electricity rates” to pay off debt. Additionally the two authors report, “Groton’s credit rating has been negatively impacted by the failed network.” Indeed, “Moody’s downgraded Groton’s credit rating as a result of the failing municipal network, and only after selling the GON to CTP was the city’s credit outlook upgraded from ‘negative’ to ‘stable.’” A lower credit rating will make it more costly for the city to borrow for other initiatives.
To read more about Davidson and Santorelli’s study, see our previous posts on their top 10 arguments against government-owned broadband networks, Chattanooga, Tenn., Bristol, Va., Cedar Falls, Iowa. and Danville, Va.
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