March 1, 2004 4:00 AM PST
A network of one's own
More and more government agencies are saving money by sidestepping the Baby Bells and building their own data networks. Some are even selling excess capacity.
Money saved--and/or earned--can be channeled into public services, such as schools. But the private sector is pushing back, arguing that since many of these agencies are involved in regulating the industry, and since taxpayer "subsidies" may come into play, they shouldn't be allowed to enter the market.
Getting local provider BellSouth to upgrade the old network would have cost millions of dollars. What's more, the school system would still have had to pay recurring charges for services related to the network. The administrators decided that by owning the equipment and taking a do-it-yourself approach, the school system could dramatically boost performance and also save money for the county's 30 Atlanta-area schools.
So far, their math appears to be working out. For a total cost of $2.2 million and a year's worth of work, Douglas County traded its old 1.5 megabit per second leased system for a brand-new 10 gigabit per second network--enough capacity to consider selling the excess for a profit. The new network, which is capable of carrying everything from voice to video to data, has also eliminated roughly $320,000 per year in recurring data communication charges, according to administrators.
"We can't lose on what we've done," said Lee Christianson, senior project manager for the school system's technology team. "The network will pay for itself in just a few years, and we haven't experienced any downtime at any of the schools that we've switched over to the fiber network."
The Douglas County School System is one of a growing number of municipalities, state and county agencies, and local governments that are building their own networks. Most of the network activity to date has been by local utilities, like electric and water companies, building their own networks in rural areas where it has been too expensive for incumbent telephone companies or cable companies to upgrade networks or install fiber.
"We can't lose on what we've done. The network will pay for itself in just a few years."
Senior project manager
Douglas County School System
Now the "do-it-yourself" model has begun to move into more densely populated areas, like Douglas County, where telecommunications providers and cable operators are already offering services. These municipalities want to control their own networks, and they want to be able to offer services to their government agencies or constituencies that the local incumbent provider is not offering, such as fiber to the home (FTTH).
That's struck a nerve among incumbent carriers, like the regional Bell operators, that are serving these areas. Not only do these carriers lose customers when people decide to build networks themselves, but many local governments, municipalities and educational institutions that build networks for their own use wind up selling services as well, thus becoming competitors to the regional operators.
"Many of these communities start out building the network to serve their own needs," said Derek Johnson, a spokesman for The Fiber-to-the-Home Council, an industry marketing group. "But they quickly learn that they can offer services using the excess capacity."Incumbents fire back
The Bells and other critics counter that publicly-owned fiber networks stand on shaky legal and economic grounds.
Running a telecommunications network is not a sure thing, as many private competitive providers have already discovered. Fiber investment risks were highlighted recently in a study by Washington, D.C.-based conservative think tank The Progress & Freedom Foundation. The group examined several publicly run telecommunications networks and suggested that municipalities getting into the telecommunications game are exposing their tax- and ratepayers to significant losses.
"The municipal governments that are using their taxpayers' money to enter the telecom business are not investing that money wisely," said Thomas Lenard, senior fellow and vice president of research for the foundation. "Many of them are violating the basic principle that government should avoid entering markets where there are already private firms actively competing."
The local incumbent providers are not taking the new challenge lying down. Though they haven't launched any direct legal assaults as of yet, many have been lobbying state governments and local regulatory bodies to limit the scope of the networks.
"BellSouth hasn't taken any legal action against these municipalities," said Joe Chandler, a spokesman for the company. "We've just been sharing our views and information with local regulatory commissions to educate them on the issues."
In 2002, when a group of Missouri cities proposed building their own networks, the local incumbent, SBC Communications, and other telecommunications companies and associations lobbied the Missouri Legislature to pass a law banning cities from building networks other than for city business, 911 emergency services and education. The measure was signed into law and is now being challenged before the U.S. Supreme Court.
In Nixon v. Missouri Municipal League, Missouri State Attorney General Jay Nixon has argued that the Telecommunications Act of 1996 doesn't permit municipal telecommunications services, while the Missouri Municipal League has said it doesn't prohibit them, either.
A similar scenario is playing out in Utah, where Qwest Communications International has joined forces with the Utah Taxpayers Association to promote State Senate Bill 66, which seeks to limit the way cities spend tax dollars on building telecommunications networks.
Senate Bill 66 has already passed the Utah State Senate and will soon be debated on the State House floor. If passed, the new law would require cities to get voter approval before they pledge sales tax revenue in support of a $470 million fiber-to-the-premises network called Utopia (Utah Telecommunications Open Infrastructure Agency).
Local incumbent carriers, such as BellSouth, said all they really want is a level playing field. They argue that the cards are stacked against them since municipalities control the local regulatory environment and the rights-of-way for laying new fiber. They can also build new networks using taxpayer money or use excess cash from utility operations. These subsidies could allow these competitors to offer services more cheaply than a Baby Bell or a cable operator competing in the same region.
"We aren't afraid of competition; we compete everyday," said BellSouth's Chandler. "As long as they are competing on the same basis as we are and their telecom operations are self-sufficient, then we don't have a problem with them. But if they can offer cheaper services because they are being subsidized in some way, then that's not fair competition."Fiber or bust
The criticism comes as fiber investments by cities and public agencies are on the rise, with the number of local governments offering telecommunications services increasing by 50 percent in the past two years, according to The Progress & Freedom Foundation.
"The government should not get into the telecom business. They shouldn't be providing services in an industry that they have a hand in regulating."
In just one example, the city of Washington, D.C., last month publicly discussed its plans for building its own network and said it will have the project completed by the end of the year. The DC-Net will eventually link more than 300 sites throughout Washington, D.C., allowing the city to consolidate data and voice communications traffic from all of the city's agencies. The city expects to be able to provide real-time interactive video for public schools as well as an updated emergency communications system for the police and fire departments. The city will spend about $93 million to build the network, but it anticipates savings of at least $10 million per year in communications costs. DC-Net has contracted with MCI to run and manage the network.
"Our local phone company will definitely lose business as a result of this," said Peter Roy, deputy chief technology officer for the project. "I'm sure Verizon is not happy with our decision to build it on our own, but they can recompete for the contract to manage the network later. But unlike before, it will be our network, and we will have complete visibility into it when something goes wrong."
Verizon Communications declined to comment regarding the DC-Net network build.
Roy said Washington, D.C., has no plans to offer services over its network, but it hasn't ruled out the possibility in the future.
Other municipalities are building their own networks with the explicit intention of competing with local providers. They argue that the incumbent phone and cable companies are moving too slowly to deploy services, such as high-speed broadband and fiber.
One of the most controversial networks being built is the Utopia network in Utah, where 18 municipalities across the state have joined forces to construct the system. The Utah plan calls for Utopia to serve nearly 250,000 households and 34,500 businesses with access speeds of 100 megabits per second, at a monthly cost of $28 per subscriber.
Because Utopia has the potential of indirectly competing with the local Baby Bell and other broadband providers, it's not surprising that these operators--namely Qwest and Comcast--are opposed to the project. They are mounting stiff resistance to Utopia as well as to other similar community broadband and cable initiatives around the country.
"We strongly oppose the Utopia initiative," said Vince Hancock, a spokesman for Qwest. "Our position is that the government should not get into the telecom business. They shouldn't be providing services in an industry that they have a hand in regulating."
The Utopia network will eventually be funded by revenue it gets from leasing capacity to private service providers. But the initial cost of the network is being financed through bonds, which have been secured with taxpayer money. The idea is that as new service providers come onto the network, the access fees will be used to pay the normal operating expenses of running the network and to pay off the bonds.Teachers splice fiber
Municipalities that build their own networks can save a significant amount of money over the long term by doing it themselves. But exactly how much they save is in proportion to how much of the work they can do themselves.
"Schools aren't used to making money, so it's a different thought process for them. We are trying to let them know that the network could not only help them save money, but also help them make money."
The Douglas County School System spent as little as it did on building its fiber network--which included all the networking equipment, labor costs, fiber splicing equipment, and two new trucks used in the deployment and maintenance of the network-- because it only outsourced a small portion of the project. Christianson said that hiring contractors to do the work would have more than doubled the cost of the project.
As a result, Christianson designed and configured the switching and routing gear himself. The school system even bought equipment to do its own fiber splicing and taught two teachers how to actually splice the fiber, which entails joining together two or more conductors on a cable. The only part of the project that was outsourced was the fiber installation, which required climbing to the top of utility poles and stringing fiber from pole to pole.
"Our teachers and technical staff really took pride in the work that they did," said Christianson. "And we saved a lot of money."
The Douglas County School System hasn't officially started selling excess capacity, but it is looking into barter contracts with Internet service providers and leasing agreements with the local fire department and the county sheriff's office, said Christianson, who is now running the network along with one other staff member.
"I designed this network for our schools," Christianson said. "But I made sure there was extra capacity. Schools aren't used to making money, so it's a different thought process for them. We are trying to let them know that the network could not only help them save money, but also help them make money."