Government Internet Coming to Traverse City
Taxpayers on the hook for risky broadband plan
Traverse City may become the second city in Michigan to own a municipal fiber optic network that sells internet service to residents. The proposed plan would run fiber optic cables to every home and business in the city, competing with internet providers already in the area. The city is preparing to take the plunge despite most municipal broadband projects losing big money for taxpayers.
Executives at the city-owned power utility, a group of tech enthusiasts and the Traverse City Area Chamber of Commerce claim that current internet offerings are insufficient. They say that rates are too high for businesses and upload speeds are insufficient for those who want to work from home. Currently, it costs a business over $2,000 per month for a 1-gigabit, or 1,000 megabits per second, fiber internet connection.
Traverse City Light & Power does have a small network already, but it only connects government buildings and substations. It doesn’t have any residential or business customers.
Attracting new technology businesses is not always as easy as building a fiber network. Nor is the payoff certain; a study from the Mercatus Center in Virginia indicates the economic benefits of building a municipal fiber network are often a wash, with only a slight increase in the number of governmental employees. And a recent University of Pennsylvania study showed that of the 20 municipal broadband projects that make their financial information available, only two are expected to recover their project costs within 40 years. (That does not include the many projects that cities sold off after failing to generate income.)
According to Tim Arends, the executive director of TCL&P, the utility began to seriously consider operating a fiber network in early 2016. The power company has run a fiber network between its power substations, public schools and government buildings for about 10 years. Similar projects are also being discussed by municipal governments in Holland, Marshall and Wyandotte.
“There is a time when the government can and should provide the service when the private service isn’t stepping in,” Arends said. “Charter, our biggest cable company here, has no intentions of providing fiber to every home ... so we’re offering something that is not being provided by the private sector.”
A report commissioned by TCL&P estimates that the project would cost $16.2 million if the utility acts as the internet service provider, with costs being recouped in 11 years. Another option, which the utility prefers, would have it rent out its fiber network to a private company. That option is estimated to cost $10.1 million, with costs being recouped in 2 years.
Brent Skorup, a research fellow in the Technology Policy Program at the Mercatus Center, a Virginia-based research organization, believes the report doesn’t detail enough of the risks present in a municipal fiber project.
“Optimism is fine but the study is flawed in that it doesn’t give outside parties’ probabilities of success,” Skorup said. “The fact is: These are risky projects for taxpayers.”
While the exact financial details of the project are still unknown, Arends said it would be financed by either a revenue or general obligation bond.
TCL&P has $19.4 million in cash, cash equivalents, and investments, but it also has more than $14 million in net pension liabilities according to its most recent financial report. According to Arends, the project won’t be subsidized by the utility’s fund balance.
William Morand, the regional spokesman for Charter Communications, called the proposal “a solution in search of a problem.” Proponents like Kent Wood, the director of government relations for the chamber of commerce, believe that the fiber network could spur economic growth.
“We are a desirable place to live,” Wood said. “What we’ve seen from the [TCL&P] meetings is there’s already a lot of interest [in the fiber network].”
The company LightSpeed was in talks with TCL&P to build a 1-gigabit fiber network in Traverse City. But it ultimately decided not to enter the market because of disagreements with the city-owned utility over access to conduits, pole attachments and whether it would be allowed to expand to all homes in the city. In Lansing, LightSpeed customers are eligible for 1-gigabit service for $49 per month.
Skorup said while there are a few examples of municipal fiber networks being modestly successful, there are many more examples where the fiber networks fail, never recovering the costs it took to build them.
“When you look at the large-scale data of dozens of cities, the results are more modest,” Skorup said. “These projects can be successful for some cities, but they distract from other [responsibilities of local government] like schools and roads.”
Michael LaFaive, a fiscal policy analyst with the Mackinac Center for Public Policy who lives in Traverse City, believes the project is misguided. He said in an email:
“The politicians and central planners who promote these schemes rarely consider their impact on future decisions made by potential private investors. Technology shifts so rapidly that what appears optimal today – like a government-owned internet service provider – may be made entirely obsolete in five years by some new advance.”
Melanie McCoy, superintendent of Sebewaing Light and Water, believes her utility’s partnership with internet service provider Air Advantage has been very successful. Sebewaing is currently the only municipality in Michigan to own a fiber network that provides service to residents. The build-out costs of the fiber network there were covered by utility funds, but the network only covers about 900 of the village’s 1,702 citizens.
Sebewaing offers speeds of between 30 megabits per second for $35 and 1 gigabit per second for $160. Only 4 percent of the utility’s internet customers pay for internet faster than 30 Mbps. Like Traverse City, Sebewaing had private internet service providers in the village, but residents were dissatisfied with their service.
Looking at Sebewaing’s fiber network, Skorup said that in similar situations, a municipal fiber network may be economically feasible, but he argued that there are better alternatives.
“I think a better way of doing it is building utility poles in rural areas and giving private providers low-cost poles and conduit,” he said.
Evan Carter can be reached at firstname.lastname@example.org.
Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.