Sunday, August 14, 2005

My Reasons

Reasons I oppose LUS Fiber to the Home

As I’ve had several letters published regarding LUS Fiber to the Home (FTTH), I’d like readers to know that I have no relationship with BellSouth or Cox. I’m not even a customer. I was raised in Lafayette and I am a minority partner in a family business located in Lafayette; however I represent no one but myself.

As this would significantly enlarge LUS and Lafayette Consolidated Government and put LUS customers and LCG taxpayers at risk, I believe that the burden is on LCG to show why voters should vote in favor of the LUS bonds. I will try to show that they have fallen short. I will try to show why voters should vote against the LUS bonds. I will try to show that LUS should not expand its involvement in the telecommunications business. The circumstances that might justify anything like this are few and far between.

If my position was based on who I know and what I think of them I’d be all for this. Ironically, the only people I know on either side of this debate are LUS director Terry Huval and FTTH proponent Kal Saloom. I’ve known both of them for most of my life. I’ve been friends with Kal since grade school. I have no doubts regarding their character, their motives, or their sincerity, but this is not how I decide such things. If you think you feel the same way I challenge you to this test; would your position on this be the same if Walter Comeaux was still mayor? Kenny Bowen?

One reason given in favor of LUS FTTH is the benefits of optic fiber. I do not dispute this; however, this is insufficient justification for such a significant government expansion. Optic fiber is just not that critical or imperative. It will not bring any new services that are not currently available from existing providers. There are already thousands of miles of optic fiber in Lafayette and much of its capacity remains unused because copper is able to meet most of the current demand.

Another reason given is that many want FTTH, and the existing telecommunications providers are unwilling to provide it. This is still insufficient justification. No business can prosper by making a premature investment in permanent infrastructure for which there is insufficient demand. If there is insufficient demand for BellSouth and Cox to install FTTH, there is insufficient demand for LUS FTTH. As demand warrants, BellSouth has been installing fiber in Lafayette Parish. BellSouth alone has thousands of miles of fiber in Lafayette Parish.

Another reason given is the lack of choice in providers. Not only is this an insufficient reason, it’s not entirely true. I know people who have dropped their BellSouth landed phone service in favor of cell phone service and there are a multitude of cell phone providers. There are also two direct dish TV services and one of them now offers local network channels. For broadband many have a choice between BellSouth and Cox. For those who don’t yet have access to or need for broadband, there are a multitude of dial-up internet service providers. Finally, BellSouth wants to get into the TV business and Cox wants to get into the phone business. The most likely effect of LUS’ entry into this market would be to discourage such future competition and expansion and instead possibly encourage existing providers to abandon this market. It’s possible that the mere prospect of LUS FTTH is already having this effect. This is because, though it may be acceptable for local government to encourage competition, it’s not a proper role for local government to be that competition.

Another reason given in support of LUS FTTH is the price competition it would bring. LUS claims that prices will be 20% lower than the competition. How low will LUS go if a price war ensues? I believe they are (or will be) constrained by law from pricing below an established threshold. Even if LUS were to succeed in bringing price competition, it’s not a proper role for local government to be that competition. In addition, any savings on LUS telecom (should they actually materialize) are likely to disappear in order to pay for the resulting increases in LUS electric and water rates or LCG taxes.

Another reason given is the jobs it might bring. It’s highly debatable as to whether or not LUS FTTH would bring sufficient number or quality of jobs to justify this expense. We can be pretty certain that, should LUS FTTH gain sufficient market share, it will cost some jobs at BellSouth and Cox. Even if we knew for certain that it would bring more jobs than it would cost, that alone is not sufficient justification. Lafayette voters knew that video poker would preserve jobs at Evangeline Downs, yet Lafayette voters defeated video poker. About surplus jobs simply due to LUS FTTH, we cannot know. We do know that it hasn’t happened for most other municipal broadband utilities. If it had I’m sure we'd hear it being shouted from rooftops.

Another reason given is a good chance of financial success. The history of other municipal broadband efforts suggests otherwise. Measured against the goals they have set for themselves, very few (if any) municipal broadband utilities have succeeded. Measured by revenue against expenses, some appear successful, but only if you discount repayment of debt on the original capital expenditure. In addition, municipal broadband expenses can be, and in many cases are, absorbed by, and concealed within other municipal departments. Virtually all municipal broadband utilities are being subsidized in some fashion. It's difficult for proponents to dispute this because very few municipal broadband utilities have made any contrary information available. They simply dispute without giving evidence. Even if LUS could succeed where so many others are failing, this alone is not sufficient justification to support this, though the prospect of likely failure is certainly sufficient justification to oppose it.

Another reason given is that so many civic organizations have endorsed LUS FTTH. I suspect that the proponents knew that they would be unable to persuade voters based on the merits of the plan and therefore solicited this boatload of endorsements. Some of the earlier endorsements, the ones in which some of the endorsers actually read the plan, contained caveats; they endorsed a fiber infrastructure and they endorsed the bonds but they failed to endorse the plan for LUS to become a telecom retailer. I suspect that many of the later endorsements were primarily based on the earlier endorsements. It started as a utopian dream and later it simply became fashionable to endorse LUS FTTH. A well-founded respect for Terry Huval and LUS may also explain a lot of it. In addition there’s a contagious enthusiasm for what is perceived to be best for Lafayette. This is a good thing when the perception matches with reality. However, in this case the cheerleaders have worked the fans into a frenzy without telling them that it’s a full-contact non-stop intrasquad game. Both sides continually sustain injuries but nobody ever wins. The proponents have done an effective sales job but haven’t shown the customer any other choices. Nor have many studied the fine print. It should be made clear that many of these endorsements were voted on not by the members of the endorsing bodies, but by a handful of board members. Regardless, these endorsements alone are not sufficient. The voters can think for themselves. There are very good reasons why more than 99% of municipalities are not trying this.

The only LUS FTTH justification that really makes any sense is the LCG revenue that could be generated by the in lieu tax. The in lieu tax is equivalent to a sales tax. It’s a cash cow for LCG. For those who think that it’s a good thing for local government to compete with existing business this makes perfect sense. Even if the telecom utility loses money, LCG can still collect up to 12% on gross revenues of LUS telecom. Furthermore, if LUS has to increase electric rates to compensate for telecom losses, LCG collects additional ILT on that increase, in effect double-dipping on LUS telecom losses. LCG could collect ILT twice on the same dollar, once when it’s a telecom loss and once again when it’s electrical earnings. LCG could theoretically collect 24 cents for every dollar LUS telecom loses. If you think local government is not big enough and should be bigger, here’s your justification.

None of the reasons given, alone or combined, justifies LUS competing against existing business, unless you accept, a priori, that this is an acceptable practice, in which case you need no other reason.

Regarding the bond election, it should be made clear that the obligation placed upon the people of Lafayette includes not just the sale price of the bonds, but also compounded interest. It would be more accurate and honest to call this a $200 million bond election.

I suggest local business owners do the math to see what kind of revenue and time frame it would take for your business to repay such a debt. Now imagine you're starting a new business from scratch in a highly competitive and rapidly changing market in which you have little or no previous experience. Remember also that your market is geographically limited to the city limits of Lafayette and it is already highly saturated and you have promised 20% savings to all customers. What combination of market penetration and price and profit margin and debt service would it take? I asked just such a question of businessman and fiber proponent Bill Fenstermaker and he was unable or unwilling to give me a direct answer. I don't think anyone can come up with a realistically achievable answer without including some kind of tax-funded subsidy.

It should also be made clear that LUS is not bound to use the bond money for FTTH. LUS can use the bond money any way it sees fit. Furthermore, defeating the bonds will not necessarily defeat LUS FTTH. Should this bond vote fail, LCG could decide to fund the FTTH construction using LUS revenues. In a very real sense this bond election and LUS FTTH are separate issues.

Finally, should this bond obligation have an adverse effect on utility rates and taxes, it will impact most those least able to afford it. It could also impact many who are not able to vote on it, including people not yet old enough to vote. Our children and grandchildren will be left with this obligation.

For those who remain undecided or unconvinced, I offer the following reasons to oppose LUS FTTH and to vote against the LUS bonds.

I oppose LUS FTTH because it’s an example of central planning: government experts deciding what the market demands. History has shown that central planning is inferior to the free market. Central planning causes market distortions leading to the misallocation of scarce resources. Resources are wasted on surplus goods causing shortages of other goods.

I oppose LUS FTTH because the business plan is based on achieving unreasonably optimistic penetrations in internet, TV, and telephone service. We are at the beginning of a trend of trading landed phone and TV service for wireless. These are shrinking markets. In addition, despite the advantages of optic fiber, many will prefer, and even pay a premium for the convenience of wireless broadband service. Finally, BellSouth and Cox are not likely to give up many existing customers without a fight, and they have deep pockets.

I oppose LUS FTTH because it presumes that copper and wireless and yet to be developed transmission technologies will remain static for as long as it takes to repay the bonds.

I oppose LUS FTTH because LUS is neglecting its core mission. LUS electric rates are among the highest in the state and LUS is often unable to meet the demand for water. In addition, many have become dissatisfied with LUS for drinking water and are willing to pay a significant premium for bottled water. You’d think with a monopoly water utility LUS would be able to keep bottled water from becoming such a big business locally, however, a government monopoly typically doesn’t have the political will to raise prices sufficiently to cover the costs of meeting demand, hence, water shortages and a big market for higher priced bottled water, furnished by the free market, which is willing to furnish the goods to those who are willing to pay the price. Furthermore, as far as I can tell the existing LUS fiber ring is not paying off. The demand just isn’t there. These are predictable consequences of mission creep. The money that LUS has already spent on fiber might’ve been better spent on water infrastructure and lower electric rates.

I oppose LUS FTTH because municipal broadband is failing elsewhere, even though it’s being disguised as success.

I oppose LUS FTTH because, to date, it’s by far one of the most expensive municipal broadband ventures in US history. It may actually be the single most expensive. I don’t know of any other municipal broadband venture that even comes close.

I oppose LUS FTTH because LUS is not really a business. When a business fails, it sells out or ceases operations, with owners and voluntary investors absorbing any losses. If a government utility fails, it most likely gets tax-funded subsidies, though it could possibly be sold at a loss. Either way the taxpayers unwillingly absorb the losses.

I oppose LUS FTTH because, as de-facto guarantors of all government liabilities, taxpayers are the only parties really exposed to this risk while LUS gets risk free entry into a new business.

I oppose LUS FTTH because it violates the distinction between government and the free market. Historically the primary legitimate purpose of civil government has been to enforce justice. LUS FTTH would not only supersede justice, it would invert justice. BellSouth and Cox pay federal, state and local taxes and fees, some to LUS and LCG, to all of which LUS is exempt. LUS FTTH would put BellSouth and Cox in the position of unwillingly subsidizing theirmunicipal competition. In addition, along with other LUS customers and LCG taxpayers, BellSouth and Cox would also be unwillingly assuming a portion of the LUS FTTH risk while LUS assumes none. This is clearly unjust. In the words of Lord Acton, “The will of the people cannot make just that which is unjust.”

I oppose LUS FTTH because I oppose anyone using government power for the benefit of anyone's pet project, which is essentially what this is.

I oppose LUS FTTH because it will increase the payroll of local government. The more people employed by LUS and LCG, the more votes they have in their pocket to support their next pet project.

I oppose LUS FTTH because LCG has yet to deliver on promises of efficiencies and cost savings of consolidated government. Why should I believe these new promises? It seems the more we give them in the way of tax and utility revenues and government power, the more they want.

I oppose LUS FTTH because I don’t want a government owned utility to be in a position of determining what I can or can’t watch. LUS will have to choose between offering or censoring potentially offensive programming.

I oppose LUS FTTH because, for the most part, the proponents have avoided addressing objections and have instead personally attacked many of those making objections. They speak as if there is absolutely not a single valid objection.

I oppose LUS FTTH because it is very likely to cause other unintended and unforeseen negative consequences.

I oppose LUS FTTH because the Lafayette economy (as opposed to the Lafayette government) is prospering quite well without it; so well that the Lafayette government has trouble keeping up.

Finally, I oppose LUS FTTH because, as I think I have shown, no matter how desirable the end, it just doesn’t justify the means.

David Hays

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