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Utopia Questions and Answers
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Q. I have heard that in 19 days I will have to start paying $20 for the UTOPIA service. How can they do this?
Layton City has no plans to charge residents a $20 utility fee in 19 days, nor do any of the other UTOPIA Cities.
Layton City is currently reviewing the Macquarie proposal. Under the proposal, residents would not be paying that $18-20 utility fee until their entire neighborhood, including their home, is connected to the fiber network. Approval of the plan is still months away, and there will be opportunity for public input. Once approved, it could be as many as two years before they would have to pay that utility fee. When the neighborhood is connected to the UTOPIA network and has internet service, the utility fee would be charged to each residence; the fee includes internet service at no extra cost.
Q. What's this we hear about a private partner for UTOPIA?
A private company, Macquarie Capital (together with its affiliates, “Macquarie”), are interested in forming a Public-Private Partnership (“PPP”) with the eleven pledging Cities that make up the UTOPIA network. Just recently Macquarie presented to the Cities a “Milestone 1 Report,” or initial feasibility study. There are four “Milestones” to be completed before any final deal. Under the proposal, Macquarie would assemble the capital needed to complete construction of the fiber network. It would then form a company to manage and maintain the network under the oversight of the 11 Cities.
Key Point: The Cities would incur no additional bond debt for the build out and Macquarie and its investors would collect payment over 30 years. Furthermore, this model shifts all further capital risk away from the Cities and taxpayers and over to a private consortium. This would end the cycle of increasing public debt that UTOPIA has suffered from to this point.
Q. Is this a done deal?
No, it is not. Macquarie and the UTOPIA Cities are engaged in a “Pre-development Agreement,” an intensive investigative and research process by which both sides can see if a deal can and should be made. The Milestone 1 (of four) report was completed on April 29th. Milestone 1 was unanimously approved by the Layton City Council June 5th, 2014.
Q. What does this mean to my city and me?
The Macquarie proposal will resolve a number of challenges for the UTOPIA network.
- Every home, apartment and business in the 11 member Cities will be connected to the network, in other words this will be a ubiquitous (fully built seemingly everywhere) network, which will attract new service providers and content opportunities.
- A connection to the network will be installed at each residence within 30 months.
- A utility fee will be charged by the Cities, in exchange, a basic level of service provided.
- Fixed cost for construction and operations.
- Operating deficits will be eliminated.
- The network remains open access (meaning any ISP, Phone or TV provider can use it), fostering competition and enhanced services.
- Upon hand back of the network after 30 years, the Cities will have an asset that is expected to produce approximately $100 million of cash flow per year. This represents a tremendously valuable resource for future generations.
Q. How much is the utility fee?
The Milestone 1 report estimates a fee between $18 and $20 per single family residence, per month. Residents in apartment buildings and other multi-dwelling units will receive a reduced rate, reflecting the potential to share the gigabit connection among those occupying that building, while the business fee will provide a basic level of service that is competitive with basic DSL for both speed and price. The utility fee is calculated to cover the costs of network construction, operations, maintenance and a periodic refresh of the network’s technology.
Q. I have never heard of Macquarie. Do they have the resources to follow through?
Macquarie Capital is the financial advisory business of Macquarie Group. Macquarie Group, based in Sydney, is one of Australia’s premier financial institutions, with a market capitalization of over $16 billion, balance sheet assets of over $40 billion and more than $360 billion of funds under management. Macquarie is a global leader in infrastructure investment which, directly and through its more than 100 portfolio companies worldwide, employs more than 85,000 people and services the infrastructure needs of roughly 100 million people daily. Macquarie is considered a ‘trusted partner’ of governments around the world with several large infrastructure projects here in the U.S.
Macquarie has also been a leader in developing the Public-Private Partnership (PPP) model. Globally, Macquarie manages assets including $100 billion of infrastructure projects in the United States, diversified across ports, telecoms infrastructure, bridges, tunnels, roads and airports. Approximately $25 billion of these assets have been developed under the PPP model, and Macquarie believes that municipal fiber assets such as the UTOPIA network are well suited to this same model.
Q. Why are governments using public-private partnerships?
- State and local governments face mounting infrastructure needs.
- Resources not keeping pace – debt levels getting too high.
- Advantages of a Public-Private Partnership (PPP)
- A PPP leverages government resources without capital market expense and more debt.
- A PPP ensure ‘asset performance’ — payments to a private entity based on performance.
- A PPP assumes burdens: on-time, on-budget, managing performance and costs.
- Cost reductions of 20-30% compared to similar, government run projects.
Q. Is it like Google Fiber in Provo and maybe Salt Lake?
Yes and no. Google has begun working on one model. Macquarie’s model is quite different. For one thing, the UTOPIA network will remain an open access network (open to any ISP, Phone or TV provider) on which any number of service providers could ‘ride’. Therefore, customers will have a broad choice of providers for home telecom services – voice, data and video. The sponsoring government entities also retain ownership and ultimate control of the network, unlike under the Google model. Also, under the Macquarie model, all addresses in the Cities will receive access to a gigabit connection.
Q. Will my city still carry debt from UTOPIA?
Yes. The good news is that the Milestone 1 report indicates that the new network operation will likely be able to help repay that existing debt over time. A fully built network will create a large increase in the number of users able to access the network, and as more users join the network and receive additional enhanced services from providers, there will be a greater amount of revenue available to the Cities to help pay their existing debt obligations. Preliminary numbers from CTC a premier technology consultant suggests the enhanced services market is between 30 and 50%. Even at 30% this will produce revenue roughly equivalent to two times the Cities’ debt service over the 30 years.
Q. How large an investment are we talking?
The current estimate is about $300 million to complete the build out and an initial technology refresh. No matter what, Macquarie’s investment and the Cities’ obligation will be clearly specified and binding at the outset of any agreement.
Q. How do we know that Macquarie can provide such a large capital investment?
Macquarie is the world’s leading infrastructure investor, and over the past five years, raised over $23 billion of equity for infrastructure investment, a sum more than $5 billion greater than its closest competitor. In the U.S. alone, Macquarie has either invested directly or arranged financing for PPP projects worth over $12 billion, including the $1.6 billion Denver Eagle FasTracks PPP, the first mass transit rail PPP in the U.S., in 2010. Macquarie also has a history of investing in fiber assets, including an $860 million trunk line development that connected three major capital cities in Australia.
Q. Some people say UTOPIA has a history of cost overruns and unfulfilled promises. Why is Macquarie different?
Again, a key benefit of a PPP is that almost all future risk is transferred away from the Cities and UTOPIA to the private sector partner. Macquarie will guarantee the cost and completion date for build out, and will be immediately required to pay penalties if either of these guarantees is not fulfilled.
The Cities will not have to make any payments to Macquarie until a customer is connected to the network, or 6 months after the network is built to the customer’s address, whichever comes first.
Q. Why not just let Google do it?
The news about Google Fiber potentially coming to Salt Lake City is exciting. But it does not extend to the 11 Cities of UTOPIA. It does demonstrate two important things about this type of undertaking. The first is that fiber is critical infrastructure for thriving cities, and others recognize it. The second is that the incumbent providers (existing companies with older networks) are simply not meeting the needs of today’s communities. Google knows there is a critical need to be met, and so does Macquarie. Furthermore, Macquarie’s ubiquitous build and proposed open access model allows all users to have greater choice and competition than Google’s proprietary (closed to outside Phone, ISP’s and TV providers) network.
But please note that a deal with Google, were it available, will provide no opportunity to assist the 11 partner Cities with existing debt. Provo sold its fiber network assets for $1, kept all its debt, and was left with no revenue stream to help pay it down.
Q. UTOPIA has faced management problems in the past. Why should we believe things will change?
Macquarie has a long track record of success in setting up and running PPP projects. The network will be managed and operated to private sector standards with a service level agreement (SLA). Even more important, Macquarie will have to meet certain performance and service standards.
Q. How do we know Macquarie won't come back for more money?
As on most of its projects, Macquarie will be putting its own capital at risk. It is up to them to properly calculate the costs. There is no provision for increasing the amount later through a contractual arrangement. Macquarie will not only factor in the costs of construction, but also the cost of refreshing the network over 30 years. In fact, 20% to 30% of the total estimated cost is for keeping the network up to date. If Macquarie fails to properly calculate costs, its own capital is at risk.
Q. Why is the city even in this business? This seems like a job for the private sector.
High speed broadband is increasingly being viewed as the “fourth utility”, as essential as electricity and water. A recent survey of the UTOPIA Cities shows that 55% of residents believe that “high speed internet is a basic need” for modern communities. Research has shown that access to high speed internet contributes to a community’s economic development (through new opportunities and increased productivity), increased employment (through new and retained jobs), and an increase in the breadth and quality of municipal services.
A key objective of the partnership between the Cities, UTOPIA and Macquarie is to maximize benefits for the communities. Keeping the infrastructure in the control of the cities ensures all residents, regardless of income, are provided a basic level of connectivity at a competitive price.
Q. But will government be competing with the private sector?
The government will not compete with a Comcast, for example, nor will the PPP. When governments build highways it doesn’t mean they are competing with General Motors, they are building infrastructure that allows competition between car and truck makers to flourish. The proposed PPP in this case is similar. The PPP will build an information super highway allowing all providers of Phone, TV and Internet access to take advantage of fiber optic speeds. Cities will retain ownership of the network assets, and the private partner will take operational responsibility for the network over a 30-year period, effectively leasing the network from the Cities.
The PPP will not compete with private providers for residential or business customers. The network will be providing a “fiber super highway” that any provider can use to deliver data, voice, video and other services to customers. This highway is open to any provider that wishes to use it, including Comcast.
Q. Why am I paying taxes or fees for a system I never plan to use?
Macquarie and its partners hope you will change your mind, and will work hard to earn your trust and your business. But even if they never do, all citizens will benefit from this partnership.
First, simply completing construction of the UTOPIA network will increase the alternatives available to all residents. Providing communities greater choice of providers generally reduces prices for telecom services, even from current providers. Macquarie understands that Google’s entry into the Provo, Kansas City and Austin markets has resulted in price reductions and speed increases from incumbent providers.
Second, the PPP will help your city save money in a number of ways in delivering services and information to residents. Third, network Cities may offer free services such as public ‘hot spots’ throughout the community. In short, the benefits will not begin or end at your front door.
Q. What about my very senior neighbors who can't afford or won't use the service?
Chances are good that they are now purchasing or need to purchase some minimal level of service. The plan is to provide a basic level of service for the minimum charge. It may very well be less than they are paying now but will certainly be competitive. Even so, many Cities are discussing ‘circuit breaker’ mechanisms that will provide relief from the fee for lower income residents in certain situations.
Even if certain residents don’t use the internet, there is a very good chance they do have a phone service. For very little additional cost (likely less than $8 per month), residents could add a phone service to the basic internet service.This will likely result in basic internet and phone service at a price lower than their existing phone-only service.
Q. What happens if technology changes? Are we going to be left behind?
Technology demands have changed, and many American states and cities are being left behind. That is why fiber infrastructure has become so critical. Fiber optic cables transport signals at the speed of light, and fiber is increasingly accepted as the next generation delivery technology for data, voice and video applications. Macquarie, UTOPIA and the Cities are confident that the core fiber infrastructure will continue to be competitive technology over the long term. A more relevant consideration is the electronic equipment used to transmit and receive those signals. Macquarie will be required to ensure that all users have reliable access to connection speeds up to 1Gbps, and it will be at Macquarie’s cost to ensure that those speeds are maintained for the 30 year term. Macquarie and the Cities will continually look to deploy faster network equipment to keep up with user demand. It will be in all network stakeholders’ interest to ensure the network keeps up with future technology and is able to compete in the marketplace. With average US broadband speeds of only ~7Mbps we believe the initial network technology will have sufficient capacity to ensure that users stay at the forefront of national broadband access.
Q. Some say UTOPIA has service issues. How do we know that will change?
Macquarie does not face the same capital constraints as UTOPIA or the Cities and is undertaking a rigorous feasibility analysis to ensure that the network is designed in such a way that the bandwidth available to providers and, in turn, consumers, is capable of meeting the Cities’ desired performance standards.
The service level agreement standards will be set to ensure users have a reliable network on which they can utilize the full capacity of connection speeds up to 1Gbps. Macquarie must meet these standards, both in network design, construction and operations, to receive any payment from the Cities. Macquarie’s ultimate success hinges on superior network capability, a robust product offering and high customer satisfaction.
Q. What about people who paid fees for installation, placing liens on their homes?
Macquarie’s preliminary assumption is that some users have either paid or are paying connection fees. These users will continue to pay these charges in place of the utility fee. Macquarie and UTOPIA are working through structuring considerations to incorporate these users into the utility fee model and will ensure that they are treated equitably relative to those individuals that did not pay the connection fee. If these users can be incorporated, there will be a compensation mechanism to reflect the installation fees already paid, and we will look to discuss the mechanism in more detail with key stakeholders once it has been further developed.
Q. What about Wi-Fi?
Wi-Fi is a great tool and important to any community. But Wi-Fi can only exist with a robust facilities base to support it with backhaul and other functions; it can never be a stand-alone solution. The network will allow enhanced Wi-Fi accessibility in homes and in public spaces throughout the city.
Q. Why don't we just mothball the system and get out of the business?
You could, but your city will still carry the obligation for debt service and will still be required to pay per the terms of the original agreement. Based on the Cities current repayment profile, UTOPIA’s annual obligations are expected to increase 25% by 2025. Mothballing the asset will not only keep the full burden of the existing debt with the Cities, but also devalue an extremely valuable asset and shut off any revenue. Fiber networks are increasingly being viewed as highly preferable to cable, evidenced by the 1,100 applications that Google Fiber received prior to its initial rollout in Kansas City. Existing users will also be stranded without service.
Q. What if I'm satisfied with my current provider and don't want to change it?
You are free to make that choice. If you are purchasing a home telecom package now, it is likely that you will save a significant amount each month by subscribing to the network. You may still save even if you don’t join the network as competition brings better service and lower prices in every market we know. The evidence is clear – when additional providers enter a market, speed increases and prices decrease. Three good examples are Kansas City, Austin and Provo, where non-Google customers have received enhanced service along with price reductions. We expect that same effect. Your household will also benefit from free services provided in your community and from better and lower cost delivery of some municipal services.
Q. Will the utility fee increase over the thirty years of the agreement?
Macquarie and the Cities are still determining the methodology of calculating the utility fee. While it is likely that this fee will increase over the term of the agreement, annual increases will be capped and will most likely linked to a public index, such as the CPI. However, no adjustment will be made to cover any unexpected or unforeseen increases in costs that could have been mitigated by Macquarie. For example, even if the cost of the build out exceeds the price guaranteed to the Cities, or costs to operate the network are materially higher than calculated by Macquarie, the utility fee cannot be adjusted without written consent from the Cities.
Q. UTOPIA has made promises before, but has a spotty track record of delivery.
Following the PPP, the UTOPIA network will be a world away from its historical performance. The PPP model is a performance-based model, which requires Macquarie to achieve the requirements outlined in the concession agreement in order to earn a return. Under this model, the Cities no longer bear the costs if the network does not deliver its required objectives.
Q. Isn't part of the problem that UTOPIA was run by politicians?
Again, in the future, the network will be run by private sector personnel and management. The eleven Cities will still maintain oversight, but the construction, operation and maintenance will be performed by a private company.
Q. What is a concession agreement?
A concession agreement means a private entity takes over management and operation of a public asset. An example might be the café at a public golf course. The concessionaire operates and maintains the location, but the city retains ownership. Macquarie will take overall management and operation functions and will be paid by the Cities for the 30 years of the agreement, but the Cities retain ownership.
Q. What does ubiquitous mean?
Ubiquitous means “seemingly everywhere” in this context. It means the intent is to provide a fiber connection to every home and business in the 11 member Cities.
Q. What if I don't need that much speed and don't want to pay the cost?
The new network entity will provide services at many different price points. You will not have to subscribe to a “superfast” connection if you don’t want to. We believe there will be a level of service appropriate for almost every consumer, at extremely competitive pricing. But even if you stay with your current carrier, you will still benefit from competitive pricing, enhanced city services, increased economic development and a host of other positives.
Q. I like bundled services - will the new network offer that sort of thing?
The network itself will be a wholesaler and won’t offer services directly to end users. Bundled double and triple play services are already offered on the network. We expect even more bundled services will be available when the network is completed and there is enough reach to attract national service providers.
Q. What is the bottom line? Why should we buy this deal?
Everyone understands the eleven UTOPIA Cities are in a tough position. The original financing, planning, construction and operation of UTOPIA fell short. As a result, UTOPIA has become a “stranded asset,” loaded with debt and unable to break into the black or achieve “launch velocity” for success. Inadequate revenue means insufficient “take rates,” which results in reduced revenues. A PPP with Macquarie provides a way forward. Macquarie’s injection of private capital, experience and know-how will break the cycle of underperformance.
Fiber networks and the superfast connectivity they provide are the future in medicine, education, public safety, business and economic development – almost every aspect of our lives. Who could have imagined fifty years ago where we find ourselves today in terms of telecommunications and information technology? Connectivity affects everyday living in ways our grandparents could never have imagined. A successful, prosperous future will require continued vision, innovation and investment.