Steven Oberbeck
May 8, 2010
The Utopia fiber-optic system once again will ask the leaders of its 11-member cities to commit millions more to bolster the nearly bankrupt network.
Two years after its last period of financial turmoil — one that saw member cities rescue the network by increasing their financial commitment to the system by several hundred million dollars — Utopia plans to go back before those same city councils to request another $60 million.
As before, Utopia will be promising that money is all it needs to become profitable.
“There is light at the end of the Utopia tunnel,” said Mike Winder, the newly elected mayor of West Valley City, the largest Utah community participating in the network. “We’ve seen two solid years of growth, but it needs a larger (subscriber) base to break even.”
Utopia has added 3,500 subscribers over the past two years, bringing the number of Utahns receiving service over the fiber-optic network to 10,000. During that time the network also has increased the number of companies that offer services over the network from three to 12, he said.
Short for the Utah Telecommunication Open Infrastructure Agency, Utopia was born in 2002 amid a sense of frustration by community leaders who believed the largest private telecommunications providers were unwilling to bring high-speed Internet and other services to their cities.
Of the original 18 municipalities that joined under the Utopia banner, 11 eventually pledged $202 million in tax money over 20 years to partially back Utopia’s bonds so it could get a more reasonable interest rate on a project Wall Street viewed as junk bond risky.
What followed was years of failed projections and unkept promises, even as its fiber-optic technology attracted a strong following of technologically savvy users.
“I’d hate to think what would happen if we no longer had the Utopia network,” said Evon Waters, director of information technology at Ensign Engineering, a survey and structural engineering firm in Midvale. “Before we signed on for service over their network, we had a hard time getting all the work done each day.”
Waters lives in Layton and receives Comcast service at his home. “If Utopia were available in my neighborhood, I’d sign up in a minute.”
Although Waters said he has only scant information about Utopia’s financial trials, he hopes the network’s managers will be able to figure out something. “It seems that every business that starts out runs into some kind of challenge, and if they can just get over that initial hump they are OK. I hope that is the case with Utopia.”
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Money woes » Despite similar customer endorsements of the technology, by mid-2008 Utopia was insolvent. New management was brought in, and it convinced 10 of the 11 member cities to approve a major refinancing that increased their pledges to more than $500 million over 32 years. Only Payson balked.
The new financing was designed to give Utopia two additional years of working capital, with the network operators insisting that any additional money would come from signing up new customers.
But Utopia lost $51 million for its fiscal year ended June 30, 2009, and it is projecting that this fiscal year it will lose another $25 million. The network could be completely out of operating cash later this spring and is calling upon its member cities to begin covering the network’s bond payments, something the original Utopia promoters contended would never happen.
West Valley City Mayor Winder, who voted against the 2008 refinancing as a member of the City Council, today argues that the only way out of the financial dilemma is for cities to pledge more for the network on the hope that it can grow out of its problems.
“What should cities do? Should we borrow more money or throw our hands in the air and walk away? Well, I (West Valley City) have a $147 million (Utopia) mortgage payable over 30 years,” he said last week, indicating he is willing to see the city up its commitment if the additional funding can protect its investment.
And he contends Utopia will be able to pay all of its operating expenses if the number of Utahns receiving services over the network can be increased from 10,000 to 15,000.
With 25,000 subscribers, Winder said, Utopia no longer would have to call upon its member cities to pay its bond debt. “A plan to grow to 25,000 subscribers has been designed but it needs to be funded.”
Utopia’s strategy centers around convincing the residents of its member cities to agree to participate in “special assessment areas,” similar to the one set up late last year in Brigham City.
In that instance, the city issued a $3.7 million bond, with the proceeds going to Utopia so it could cover the cost of running its fiber-optic lines down residential streets and into homes. The revenue to pay the bonds will be generated by the 1,600 or so city residents who agreed to pay $6,000 each over the next 20 years, or about $25 a month, to hook up their homes so they could have access to the network.
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Boondoggle -label » For long-time critics Howard Stephenson and Royce Van Tassell of the Utah Taxpayers Association, who have argued from the beginning that Utopia was a boondoggle waiting to happen, the notion that Utopia can cover all of its costs with 25,000 subscribers is nonsense.
Even if Utopia signed up 50,000 subscribers and received from them the same $417 annually that it receives from current customers, it would be taking in only $21 million a year, Stephenson said. “That is hardly the $54.6 million it needs for its operating, principal and interests costs.”
Stephenson said the cities involved in the Utopia network — Brigham City, Centerville, Layton, Lindon, Midvale, Murray, Orem, Payson, Perry, Tremonton and West Valley — need to acknowledge it is a failure.
“Utopia needs the additional money just keep its lights on,” Stephenson said. “What is happening is a lot like a family that is overextended on its credit cards. They are maxed out and are hoping to roll over their debt to another charge card so they can keep going a little longer.”
He contends the millions Utopia cities have invested is gone.
Utopia’s financial statements for its 2009 fiscal year seem to bear that out. It has a negative net worth of $126 million, which means that if Utopia’s cities sold off all of the network’s assets they still would owe another $126 million.
Utopia struggles, though, didn’t prevent it from receiving a prestigious award several weeks ago from Broadband Properties Magazine , which bestowed its “2010 Cornerstone Award.”
“This award means a great deal, because since its inception, Utopia has had an iconic status for those who believe in Fiber-to-the-Premises,” Scott DeGarmano, president of Broadband Properties said in announcing the award. “More than any other project here or abroad, it represents the aspirations of numerous individuals and organizations.”
The network is available for use by any broadband company that wants to serve customers in member cities.
Winder points to the award as evidence Utopia is on the right track. He deems Utopia’s troubled past as “irrelevant” because he now believes there is tremendous opportunity for West Valley City and the other communities involved in the network.
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Support in Midvale -» Midvale Mayor JoAnn Seghini expressed much the same sentiment, calling Utopia “much-needed infrastructure” that offers her city tremendous economic development opportunities.
“We recently had FLSmidth commit to consolidating their Utah operations in Midvale, and the Utopia network was one of the key factors in their decision,” Seghini said, adding the company that provides equipment to the minerals and cement industries required access to a fiber-optic network.
Winder said Utopia will begin approaching the various city councils within the next month to six weeks requesting additional bonding. “What I don’t want is to wake up 10 years from now and only have two competitors (Qwest and Comcast) offering broadband services.”
But Qwest and Comcast, the two companies that Utopia’s founders believed would never offer high-speed broadband services, today are the major providers along the Wasatch Front, while Utopia is a distant third.
Although Utopia’s supporters discount Qwest’s and Comcast’s networks as inferior to its all-fiber system, both of the competitors have introduced technologies that offer broadband speeds considered unobtainable from their systems only a few years ago.
In parts of its service area, Qwest can deliver download speeds up to 40 Mbps (million bits of data per second) over its fiber-to-the-neighborhood, copper-to-the-home network. Comcast offers up to 50 Mbps using its new cable modem technology, similar to what many Utopia service providers offer.
“Private enterprise has a remarkable ability to provide people with the services they want when they want it,” Van Tassell said.
What Utopia member cities would have to pay each year.
Despite promises by its early promoters that it would never go this route, the Utopia fiber-optic network will be asking its 11 member cities for millions in taxpayer funds to help pay off the system’s bonds.
Brigham City — $397,290
Centerville $395,126
Layton — $1,983,125
Lindon — $365,036
Midvale — $719,398
Murray — $1,460,515
Payson — $259,920*
Tremonton — $299,750
West Valley City — $3,319,461
*Payson is required to pay only the amount it pledged in 2004, having opted out of a 2008 refinancing pledge
What Utopia member cities would have to pay each year
Despite promises by its early promoters that it would never go this route, the Utopia fiber-optic network will be asking its 11 member cities for millions in taxpayer funds to help pay off the system’s bonds.
Brigham City $397,290
Centerville $395,126
Layton$1,983,125
Lindon $365,036
Midvale $719,398
Murray $1,460,515
Payson $259,920*
Tremonton $299,750
West Valley City $3,319,461
*Payson is required to pay only the amount it pledged in 2004, having opted out of a 2008 refinancing pledge