Minutes of the Centerville City Council work session held Thursday, March 27, 2008 at 8:00 p.m. in the Centerville City Court Room, 250 North Main, Centerville, Utah.
MEMBERS PRESENT
Mayor: Ronald G. Russell
Council Members: Justin Y. Allen
Ken Averett
Paul A. Cutler
Sherry Lyn Lindstrom
Lawrence Wright
STAFF PRESENT Steve Thacker, City Manager
Blaine Lutz, Finance Director/Assistant City Manager
Randy Randall, Public Works Director
Lisa Romney, City Attorney
Ted Skeen, Inspector of UTOPIA Construction in Centerville
Kathy Streadbeck, Recording Secretary
VISITORS
Jack Dellastatious
David Gill
Chris Hogan, PacketFront (UTOPIA partner)
Kurt Sudweeks, UTOPIA Chief Financial Officer
DISCUSSION - UTOPIA Business Model and Refinancing Plan pertaining to the Construction of a Fiber-Optic Telecommunications Network in Centerville
Councilman Cutler said the purpose of tonight’s meeting is to provide details regarding UTOPIA’s new business model and refinance plan and to allow for questions prior to the public hearing scheduled for next week. He reviewed UTOPIA’s current status, their successes, and their challenges. He also reviewed and discussed the financial difficulties and delays that UTOPIA has encountered. He said that UTOPIA’s operations are not generating enough cash to pay for their construction debts. He explained that the refinance package should mitigate the need for the City’s sales tax pledge. He said UTOPIA can continue with the current finance package but taxpayer funds will have to be used. He said UTOPIA is hopeful the financial issues will be resolved.
Councilman Cutler said UTOPIA’s original business model relied on the service providers to market the network. He explained the service providers focused on themselves and did not market the UTOPIA network. They also launched services before they were ready, which resulted in poor customer satisfaction. He said the original plan was for AT&T to be the anchor provider on the network. AT&T was bought out and the new owner opted out of the UTOPIA partnership.
Chris Hogan explained the new business model will promote the value of the network, introducing people to a revolutionary product that is greater than cable technology. UTOPIA will actively recruit subscribers and then allow them to pick their services and their service providers. This should take the focus off price, which is currently part of the problem.
Chris Hogan said UTOPIA plans to monitor the service providers closely and bring only good quality service providers to the network. UTOPIA plans to take on the labor and cost of the acquisition of customers. This should lower service providers’ costs and allow them an opportunity to offer better packages for the customer. The new business models should significantly lower the churn rate (customer turn-over). Once a customer has committed to the network (pays the connection fee) they will be less likely to leave the network for simple offers from an outside service provider, especially when they have several good service providers to choose from that are already on the network. The more service providers there are on the network the more attractive it will be. UTOPIA will also promote the ability for additional services (other than the typical TV, phone, and internet that may be offered on the network).
Councilman Wright said he is concerned with the significant connection fee. He believes the fee will lower the churn rate, but will also limit the number of people that will sign up. Councilman Cutler said the only other option to the connection fee is to use the taxpayer subsidy. UTOPIA is suggesting each customer bear the cost of their own connection, then taxpayer money may not have to be used. Only those willing to bear that cost will have access to the network.
Mayor Russell said a connection fee or impact fee is generally associated with any utility service. He said his biggest concern is with the market variable. He said it will be very hard to convince customers to pay a connection fee when there are only a few service providers on the network.
Chris Hogan said the new business model should allow service providers to lower their rates significantly (20-30%). He said a fiber-optic connection to a home increases the value of that home by several thousand dollars ($4,000-$7,000). He also said that a fiber-optic connection will provide capabilities that coaxial and DSL connections cannot. These are all selling points that customers will value. He said most services already charge a monthly fee and when you leave that service there is no return on your investment. This is not true with fiber-optics.
Councilman Cutler reviewed UTOPIA’s key objectives with the new business model. The new business model will preserve UTOPIA‘s core principles, accelerate growth of the network, and reduce financial risk to the member cities.
Mayor Russell said one of the core principles is to serve the entire community. He said UTOPIA plans to become widely available, but now they are planning on charging individual connection fees. Those communities that got on board with UTOPIA first, were not required to pay a connection fee. It seems the connection fee is being required in order to subsidize the connections that have already been made in earlier communities. This hardly seems like a fair service.
Councilman Cutler said this is a problem that has been raised by several city managers. He asked if it was more important to be financially stable or to be perfectly fair. Chris Hogan agreed this is not a level playing field, but said that new customers (who pay the connection fee) will be offered lower monthly prices than those that are already on the network. He said older customers will also be allowed the lower monthly prices if they too will pay the connection fee. He said service providers will also be offered incentives for bringing customers to the network. This should offset service providers marketing costs as well as encourage them to keep prices low.
Jack Dellastatious asked why UTOPIA does not become the service provider themselves, eliminating many of these problems? Councilman Cutler said UTOPIA could become the service provider, but currently it is against the law.
Steve Thacker, City Manager, said Centerville originally got involved with UTOPIA because fiber-optic seems to be the telecommunication system that people will want for the future. If the municipality doesn’t take the initiative to get the system built, then a private company will so it some day, but will also control the services and prices. He said Centerville is already at risk under the current business model and Centerville’s portion of the network will not be constructed without the proposed refinancing. He asked what will happen if all the participating cities do not agree to accept the new business model?
Councilman Cutler said fiber-optic is the wave of the future. It is already being installed with new developments. He said Verizon has already gone to fiber-optic and is being hailed as the leading company. Chris Hogan said the internet is going to run into some major traffic problems; it will begin to slow, and fiber-optic is the solution.
Councilman Cutler explained that under the current business model, if participating cities do not approve the refinance, taxpayer money would be used to pay existing debt. UTOPIA is unable to secure the financing necessary to complete construction under the current business model. It would take about ten million dollars to completely build out Centerville and hook up residents from this point. He said if a small city chooses not to accept the new business model, it wouldn’t be a significant problem, but if a large city chooses not to accept the new plan, it could potentially cause difficulties. However, each participating city has already pledged funds and those funds would continue to be paid until another solution is found, if they opt out.
Councilman Wright asked if the 10 million dollars was paid, could the entire community be built out and the connection fee eliminated? Councilman Cutler verified this to be true. He explained that all participating cities are sharing the current debt and the new business model should exonerate the current debt as well as continue to build UTOPIA. Councilman Cutler reviewed and explained the refinancing proposal. Under the new business model, UTOPIA will replace current bonds, pay off debts and balances, and extend and increase City pledges.
Councilman Allen said it seems that too much money is being spent on management. He suggested management be streamlined in order to cut some of these exorbitant costs. He said he would like to see more details on how UTOPIA plans to curtail spending excesses. He also asked if it will be guaranteed that Centerville will be built out under the new business model.
Councilman Cutler said some management cuts did take place when the Board became more actively involved. He also said there is no guarantee that Centerville will be built out (service to every residence) under this new model. The money being pledged goes into a larger pot, servicing all the communities involved.
Blaine Lutz, Finance Director, said it is not likely that Centerville can find 10 million dollars to ensure the system is built out. He said the City is already at risk with UTOPIA and any additional funds will be difficult to find. However, there may be some options with the use of Redevelopment Agency funds. This is something that could be researched further.
Councilwoman Lindstrom said she has some concerns with the new model, but she is also not surprised with the problems that have been encountered. She said the City knew this was risky and that there would be a significant learning curve. She said although details still need some work, the new plan will allow for a step back to re-group. Chris Hogan said weaknesses have been found and now UTOPIA can build from those weaknesses and turn them into opportunities.
Steve Thacker questioned how a city can get built out (service to every residence). Chris Hogan said the network will be made available to everyone. Once 40% of a neighborhood is interested in connecting to the network, the logistics of expanding into that neighborhood will be considered. Distribution rings will be placed throughout the city, close to neighborhoods, and each neighborhood will have an opportunity to connect from one of these rings. Community participation will be key to expansion. There will be incentives for early sign-ups.
Mayor Russell said, as a consumer, subscribing to the network would be dependant on the service providers. He said he is skeptical moving forward with pledging additional funds until there is some assurance that the service providers will be adequate. He asked if there are any tentative commitments from service providers at this point or are there certain conditions that can be offered that would interest service providers into signing up on this network?
Chris Hogan said they are currently working with several promising service providers, but there have not been any commitments as of yet.
Councilman Wright said the marketing plan does not show an aggressive approach to secure service providers. He said he is concerned that UTOPIA will not be able to implement this program and have enough subscribers to break even. He said UTOPIA must have added utility in order to attract customers. Service providers alone cannot do it. He suggested UTOPIA identify the added utility and then provide ways for service providers to implement advantages. He feels that taxpayer funds will have to be used regardless of the business model, unless customers have enough reason to subscribe.
Councilman Cutler agreed that the number of service providers on the network is crucial to its success. Kurt Sudweeks said, under the new business plan, UTOPIA will break even when there are approximately 30,000 subscribers within five (5) years across the eleven (11) participating cities. Chris Hogan said tapping into the value and the benefit of the network is critical. He said they hope the network will inspire innovators to produce that added utility or value. Eventually those added applications will become a reality because the fiber-optic connections are already there.
Councilman Allen said he has already resigned himself to the fact that taxpayer funds will eventually be used. He said at this point the City might as well do what is necessary to build this system out and not waste the money that has already been spent. Steve Thacker said if the construction is completed, at least the city will have the infrastructure, and at worst case scenario, can sell that infrastructure to recover some of the costs.
Councilman Cutler said he would not support the refinance plan unless UTOPIA commits in writing that Centerville will get service. He said the refinance plan should complete Centerville’s construction (i.e., the hubs and distribution rings).
Kurt Sudweeks said it is likely that Centerville will be one of the first cities to be completed following the acceptance of the refinance plan. Construction has already begun in Centerville, engineering has been done, contracts have started, and the materials have already been purchased.
Chris Hogan said Tremonton will be finished first (conduit is already run), then Brigham City, Perry, and Centerville. Once Tremonton is completed, UTOPIA can test the model, identify problems and correct those problems before moving onto other cities.
Councilman Cutler said public hearings throughout the participating cities (regarding the new business model) are set to begin April 1, 2008 and conclude by April 15, 2008. He said it is his belief that at least ten of the eleven cities will approve the new plan, but these cities will not all have a unanimous vote.
Steve Thacker reminded everyone that Centerville City’s public hearing is scheduled for Tuesday, April 1, 2008 at 8:00 p.m. (Note: Later changed to April 22, 2008 because of incomplete information in the public hearing notice for April 1, 2008.)
At 10:17 p.m. the meeting was adjourned.
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Marilyn Holje, City Recorder Date Approved
Kathleen Streadbeck, Recording Secretary
