Tennessee’s cable providers blast KUB’s municipal broadband initiative, while TVA and the state Comptroller have given the project the green light.
The state’s private-sector broadband providers have responded to the Knoxville Utilities Board’s plans to enter the market with a third-party analysis they say exposes flaws in the utility’s business model.
The Tennessee Comptroller's Office determined that KUB's broadband plan is financially feasible.
KUB released its business plan to provide municipal broadband service to its electricity customers in March, laying out a roughly $500 million investment over the next decade.
KUB's plan is to build out its electricity system’s fiber network, expanding the number of customers who could have access to the broadband service gradually over that time period.
The Tennessee Cable & Broadband Association hired economist Joseph Gillan of Merritt Island, Fla.-based Gillan Associates, a telecommunications industry consultant, to review and report on KUB’s plan.
“KUB’s business plan demonstrates their electric ratepayers are bearing the significant risk and expense to offer broadband services in an area where 98 percent of homes have multiple choices of broadband providers,” the association said in a statement provided by president Amy G. Martin.
“As shown by an independent analysis, without subsidy from its electric operations, KUB’s fiber division would incur cumulative losses of $123 million in the first 10 years,” she continued. “Ultimately, this plan will allow KUB to overbuild current providers in a highly competitive market, with their electric customers, including the elderly and lower-income communities, incurring the burden of its cost.”
KUB disputed the findings, primarily Gillan’s assertion that KUB’s electricity customers would underwrite its broadband effort.
“This is not true,” KUB President and CEO Gabriel Bolas said. “The fiber network will be an integral part of KUB’s electrical distribution system, yielding benefits in improved reliability, energy efficiency and connectivity, providing a pathway for future technologies to meet the needs of KUB’s electric system customers. The fiber network will also enable KUB to offer broadband services throughout its electric system territory.”
By law, utilities must keep their services financially and operationally separate — electric bills only go toward the electric system, wastewater charges go toward the sewer system and so forth. Funds can’t be commingled, and each division must be self-sufficient.
Bolas said a newly created Fiber Division, using revenues from broadband customers, will compensate the Electric Division for its use of the fiber network system through annual access fees estimated to reach $29 million by the time the system is fully built out.
KUB pointed to a finding by the Tennessee Comptroller’s Office that the plan is feasible and the Tennessee Valley Authority’s determination that the broadband initiative posed little risk to KUB ratepayers.
“Based on the information in the Plan, revenues during the 10-year pro forma period appear sufficient to cover all operating expenses and pay debt service; therefore, we have determined that the proposed Plan appears feasible,” Betsy Knotts, director of the Division of Local Government Finance, wrote in a letter to KUB.
“TVA found that no cross-subsidization exists between KUB’s Electric Division and the Fiber Division and that KUB’s business plan is low-risk for KUB’s electric ratepayers,” Bolas said.
Gillan also asserted that KUB isn’t equipped to compete with private-sector companies for broadband customers.
“The Knoxville Utility Board proposal to enter a highly competitive and complex broadband/video and telecommunications industry — an industry and market structure in which it has no experience — is likely to yield lower than anticipated sales volumes, lower prices and higher than predicted costs,” Gillan wrote.
He said KUB’s experience is limited to providing utility services as a monopoly, not competing in a complex market against large, established competitors, and doesn’t account for responses from competitors such as discounted promotions and other efforts to attract and retain customers.
Bolas countered that KUB acknowledges the competitive landscape and only projects a 35 percent “take rate” — market share, essentially. Chattanooga’s Electric Power Board, which has offered municipal broadband for longer than a decade, has a take rate of roughly 70 percent.’
Bolas noted that 74 percent of KUB customers who responded to a survey said they were somewhat or very interested in switching their TV and internet to KUB at comparable prices to their current providers.
Gillan, on the other hand, said that only 11 percent of Comcast subscribers and 8 percent of AT&T subscribers rated their service as a four or less on a 10-point scale, undermining KUB’s claims of widespread dissatisfaction with private-sector providers.
As part of the approval process, KUB will hold a public forum at 6 p.m. Wednesday, May 26, at the Grande Event Center on Clinton Highway. Anyone interested in attending can register at www.kub.org/broadband.