Wilson risks taxpayers’ money on city-owned fiber-optic system

January 5, 2009

RALEIGH — Wilson’s $28 million Greenlight fiber-optic cable system could be obsolete before it’s complete, sticking taxpayers and electric utility customers with the bill for the city’s investment. That’s the conclusion of a new John Locke Foundation Regional Brief.

Click here to view and here to listen to Michael Sanera discussing this Regional Brief.

“By investing millions of dollars in this telecommunications project, Wilson city officials are irresponsibly risking taxpayer money,” said report co-author Dr. Michael Sanera, JLF Research Director and Local Government Analyst. “The city should have stuck to managing its essential services, but since it is fully invested, all Wilson residents can do now is hope Greenlight can avoid the pitfalls of other city-owned fiber-optic systems across the country.”

Greenlight offers Internet, phone, and television service. Taxpayers and electric customers bear the ultimate responsibility for Greenlight’s costs, even though they would be least likely to benefit from the service, Sanera said. “City officials admitted from the start that the fiber-optic cable system was tied to the buzz words ‘economic development,'” he said. “In other words, the city is treating Greenlight as another form of corporate welfare to attract new business.”

Greenlight’s price structure makes that corporate welfare focus clear, Sanera said. “Greenlight’s fastest Internet service costs $300 a month,” he said. “That’s cost-prohibitive for the average homeowner, but it’s significantly lower than the rate large business users pay Greenlight’s competitors for similar service. It has been clear from the start that the city’s promotional appeals directed to homeowners are a cover for another city corporate welfare plan.”

Wilson talked about starting its own cable television service 20 years ago, Sanera said. In 2006, the city council unanimously approved using bond funding to build a fiber-optic network for internal government use. Plans at that time called for expanding the network for citywide service. Sanera and JLF Research Intern Katie Bethune document in their report Greenlight’s history and the challenges the city faces.

Wilson started selling services from its Greenlight network this summer. “By 2010, Wilson expects citywide coverage, and the initial $28 million investment will be followed by expected operation and maintenance costs of $5.6 million for the first year,” Sanera said.

City officials “constantly claim” that Greenlight’s subscribers will pay all costs, Sanera said. “That’s the city’s intent, but it is unlikely to work out that way,” he said. “As the Wilson Daily Times reported, the city could expect annual revenues of $6 million for Greenlight, only if 30 percent of the city’s households sign up for a $90 per month package of basic TV, Internet, and phone service. That’s a generous estimate, given Census data that suggest as many as half of Wilson’s households have no computer service.”

The numbers don’t add up, even if Greenlight hits that $6 million target, Sanera said. “With first-year operating costs pegged at $5.6 million and an annual debt repayment of $1.8 million, Greenlight would face an annual loss of $1.4 million.”

Wilson already has signaled who would end up paying the bill, Sanera said. “In an application with the State Treasurer’s office for approval of the bonds, the city said it could repay the debt on 25-year bonds with an electric rate increase of up to 1.4 percent or a property tax rate increase of up to 5.6 cents,” he said. “The application says, ‘These rate increases are not considered by the city to be unreasonable if they become necessary.'”

Sanera and Bethune describe a service called WiMax wireless Internet technology that is “rapidly leapfrogging fiber-optic cable technology, making it obsolete.” “It’s only a matter of time before Wilson residents have access to this advanced wireless technology,” Sanera said. “WiMax availability will make it even harder for Wilson to secure customers for Greenlight.”

City-operated fiber-optic cable systems don’t have a great track record, Sanera said. “Lebanon, Ohio; Provo, Utah; and Ashland, Ore., all installed fiber-optic cable systems intending for subscribers to pay for the costs,” he said. “Each of these cities had a median household income higher than Wilson’s, but each had problems using subscriber revenue to pay for its system. Each covered deficits by turning to property taxpayers or city electric service customers. Unable to stem those deficits, the cities all eventually sold their systems.”

Wilson could have learned a lesson from those examples, Sanera said. “Rather than falling for rosy reports from consultants, guesses about consumer behavior, and overestimations of the city’s ability to deliver a new technology in a highly competitive market, city leaders should have considered the failure of fiber-optic cable systems in other cities as better indicators of how a fiber-optic cable network would fare in Wilson.”

Michael Sanera and Katie Bethune’s Regional Brief, “Wilson’s Fiber-Optic Cable Boondoggle: City Invests $28 Million in a Technology That Could Be Obsolete Before It’s Paid For,” is available at the JLF Web site. For more information, please contact Sanera at (919) 828-3876 or [email protected]. To arrange an interview, contact Mitch Kokai at (919) 306-8736 or [email protected].