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UTOPIA (Utah) would fail, says analyst

June 10, 2004View for printing

Depending on who does the analysis, the UTOPIA fiber-optic network will be a big success and bring a new telecommunications age to 11 participating Utah cities or a huge boondoggle that will leave more than 100,000 families with burdensome debt payments for 20 years.

By Steven Oberbeck The Salt Lake Tribune

http://www.sltrib.com/2004/Jun/06102 ... usiness.asp

For William Fitzsimmons, an economist with nearly two decades of experience analyzing the telecommunications industry, the latter is the case. He believes UTOPIA is a poorly conceived, high-risk investment that has at best a small chance of success.

"It is fascinating, though, watching UTOPIA [move forward]. It is like watching a high stakes game of three-card monte," Fitzsimmons said, referring to a risky gambling game.

Two years ago, 18 Utah cities organized UTOPIA, short for the Utah Telecommunications Open Infrastructure Agency, to explore construction of a large-scale wholesale network that would offer a fiber-optic link to every home within their boundaries. Eventually, 11 cities bought into UTOPIA's promise and pledged financial support.

Fitzsimmons analyzed UTOPIA's feasibility study at the request of Qwest Communications, an avowed critic and potential competitor of the network. He presented his findings at a news conference Wednesday organized by the Utah Taxpayers Association, which also is critical of UTOPIA's plan to use tax revenue from the participating cities to guarantee payment on the $340 million in bonds the network will need to issue for construction financing.

UTOPIA needs taxpayer backing for its bonds to ensure it receives a low-enough interest rate on the bonds -- 6 percent -- to make its proposed fiber-optic-to-the-home network financially feasible. Without taxpayer payment guarantees, UTOPIA faced an interest rate on its bonds of 12 percent or more.

In his study, Fitzsimmons pointed out the risk associated with UTOPIA is not any less because taxpayers are backing the funding.

"A cost of capital of 6 percent greatly understates the inherent risks of the investment by effectively ignoring the substantial risks that are shouldered by taxpayers," the report said. "Ignoring these risks, however, does not make them go away."

Ray Gifford, president of the Progress and Freedom Foundation, a Washington-based think tank that studies the telecommunications industry with the financial backing of companies such as Microsoft, Qwest, Comcast, Sun Microsystems and Cisco Systems, said that when state and local governments enter the telecommunications marketplace they typically fail despite the benefits of below-cost financing, lower tax payments and free access to city rights of way.

"The studies that have been done show that those ventures have difficulty covering costs and achieving payback of their investments," Gifford said.

He added that municipally owned systems typically fail to meet their projected revenue and take rates, or the number of subscribers who sign up for the services, and emerge as an indefinite drain on city taxpayers.

Yet Jeff Fishburn, chief technology officer and vice president of engineering at the Lindon-based Dynamic City, which will provide the construction oversight and operate the UTOPIA network once it is built, disagreed with that assessment. "I personally was involved with a fiber-optic network that exceeded its take-rate projections," he said.

Dynamic City's position is that a number of municipally owned telecommunications systems are successful.

Rather than exposing taxpayers to an ultra-risky gamble like UTOPIA, Utah should offer tax incentives to private-sector telecommunications companies and others to expand existing infrastructure, said Mike Jerman, vice president of the Utah Taxpayers Association.

steve@sltrib.com

© Copyright 2004, The Salt Lake Tribune.

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