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TelecomGate: City Up In Arms Over Loan Controversy With Municipally Owned Burlington Telecom

Burlington city officials are mired in controversy over the legality of a recently revealed $17 million dollar unpaid loan given to Burlington Telecom, an apparent violation of the terms of its license issued by the Vermont Public Service board.  While the municipally-owned fiber optic network is permitted to borrow money from the city, it must be repaid within 60 days, because the city charter insists that Burlington Telecom be an independently financed venture that does not become a taxpayer liability.

Dubbed by some as TelecomGate, it has become a major media story in Vermont’s largest city.  Some taxpayers are upset by the perceived “bailout” of Burlington Telecom after the company exhausted its commercial loans of almost $34 million dollars to construct a fiber network serving homes and businesses.  The Burlington Free Press has reported the city began quietly funding Burlington Telecom as early as late 2007, for both capital expenditures and some operating costs.  As of today, Burlington Telecom has an accumulated debt of $50 million dollars, $17 million of which is owed to the city.

WCAX-TV in Burlington breaks the story about the funding controversy on October 16th. (3 minutes)

Burlington officials admit they underestimated construction costs, in part because they failed to complete a comprehensive engineering study prior to construction.  Installing underground fiber cabling has literally hit a rock ledge, part of the geological character of underground Burlington, that will require an additional $10 million to cope with.

The fact the public is just finding out about it now is a major reason for the controversy.  Jonathan Leopold, the city’s chief administrative officer, said he learned that the financing violated the company’s license terms last November.  The Free Press reports he only informed the city council responsible for overseeing the operation in May of this year, six months later.  The city council itself waited four months until late September before it notified Vermont state officials about the apparent violation, which led to the matter finally going public.

State officials publicly criticized the Burlington city government for the apparent transgression and for what some have called a cover-up, and State Auditor Thomas Salmon called on Burlington Telecom to have greater openness and transparency.  State Public Service Commissioner David O’Brien called the funding irregularity a potential violation of law and that Burlington Telecom was “in debt beyond their ability to recover,” a charge which brought a hot response from Burlington mayor Bob Kiss:

“Commissioner O’Brien’s statements as quoted in today’s Burlington Free Press are inaccurate, inflammatory and totally inappropriate given there is a present proceeding before the Vermont Public Service Board in which his Department is supposed to be representing the public interest. Commissioner O’Brien knew or should have known of the City’s use of pooled cash to fund BT’s capital expenses and start up costs for almost a year. His comments only serve to undermine the confidence of BT’s customers, the interests of whom his Department is charged by statute to protect.”

O’Brien responded that Kiss was “shooting the messenger.”

WCAX-TV reports Burlington city council members had tough words for Jonathan Leopold at a meeting on October 20th, but Burlington mayor Bob Kiss is standing by Leopold. (3 minutes)

City council members have scurried for cover after the local press revealed they approved Burlington Telecom’s funding 13-1 at a city council meeting held October 5th.  That may serve to back up Leopold’s position that he never hid any details about the loan arrangements — city officials and lawyers were well aware of these transactions, he says.  Several public venting sessions were rapidly scheduled to allow constituents to express their concerns.

The Burlington Free-Press editorialized that the city can no longer keep information about city-owned Burlington Telecom’s problems and violations from residents by saying the secrets are necessary for business reasons and is calling for an independent investigation and audit.

State and local politics have also become deeply ingrained into the debate, with accusations flying between political parties that the flap has now become more about undermining the current administration than ferreting out and resolving issues with Burlington Telecom.

WPTZ-TV in Plattsburgh covered the public venting session on October 22 set up by the city council to allow residents to speak their minds.  (2 minutes)

Leopold, whose administration duties involve Burlington Telecom, and who has been the most visible figure in the middle of the dispute, called attacks on him by some local politicians part of a scapegoating witch hunt.

City council voted 8-6 at 1:30am this morning approving a resolution to ask for the suspension of Jonathan Leopold anyway.  So far Mayor Kiss won’t hear of it.  At a press conference he reiterated his full support for Leopold, saying his suspension is “not warranted by the facts and is not in the best interests of the city. As mayor, I will not suspend the CAO from his service to the city.”

Caught in the middle is Burlington Telecom and its 4,600 subscribers.  The provider is in apparent violation of its license for its loan arrangements, needs additional money to complete its buildout, and will likely also be cited for not completing that buildout on the schedule it committed to as part of its license to operate.

Commentary: Our Take

Too often municipal broadband projects end up as political footballs kicked all over town, especially when controversy erupts.

WPTZ-TV covers the political repercussions and damage control operations in full force after news of the controversy erupted. (10/20/2009 – 2 minutes)

Burlington Telecom made a crucial mistake when it failed to undertake a detailed engineering study to determine the true costs of wiring Burlington with fiber optics, something incumbents Comcast and FairPoint have not been willing to undertake.  A true picture of the start-up costs would have resulted in a better understanding of initial construction costs and the financing required to pay for it.

City officials also erred in how they began funding some of the costs to administer the system after initial financing ran out.  Good intentions or not, the fact there is a perceived cover-up makes things much more attractive to a media that often ignores or buries telecommunications stories on the business pages.

A frank and open discussion explaining the challenges and resolutions to them might have brought about temporary city loans with the consent of the community, without melodramatic political theater.  Residents have a unique buy-in with Burlington Telecom because it’s municipally-owned.  Many would be more than willing to see that and some additional investments pay off instead of collapsing with a complete shutdown.

WCAX-TV covers Burlington mayor Bob Kiss who held a press conference yesterday to defend his administration’s role in Burlington Telecom (3 minutes)

When the story broke, the usual and very predictable campaign of finger-pointing, ducking for cover, and scapegoating began.  This time-honored political damage control method is voter approved, if you stick your finger to the wind and see where voter sentiment seems to be blowing.  That’s precisely what state Commissioner O’Brien did, only he overplayed his populist hand.  This is, after all, the same commissioner who initially made excuses on behalf of FairPoint and seemed all too willing to give that company the benefit of the doubt, right up until it became politically untenable.  You cannot be a credible torch-bearer in a populist mob if you helped build the castle you now seek to burn to the ground.

Mayor Kiss was correct in calling O’Brien out, not just for his convenient criticism, but for trying to win the Self-fulfilling Prophecy Award by predicting Burlington Telecom’s demise.  Vermont residents should ask him where his clairvoyance was when he was publicly stating FairPoint was doing “pretty well” a year ago.  O’Brien needs to be part of the solution for a change, not part of the problem.

Leopold appears to be a classic scapegoat.  As he struggled to keep Burlington Telecom afloat, it is inconceivable he was cutting loan deals without the knowledge and consent of others in the city administration.  The same city council now demanding his suspension seemed all too willing to go along just a few weeks ago when it voted almost unanimously with going forward.  That speaks volumes.  But when the media lights fire up, and angry residents start writing and calling, the complete turnaround is a site to behold.  A series of self-serving, concern trolling speeches followed, along with complaints they were never given enough information or were confused by what they heard.  If that is the kind of leadership Burlington has, perhaps residents need to consider making some changes.

Late last night, WCAX reported city council was still undecided about what to do about the Burlington Telecom controversy.  (3 minutes)

The public has a right to be upset, but are all too often satisfied with the political theater designed to quickly “resolve” the problem by expelling the designated scapegoat from their midst.  Mayor Kiss has remarkably withstood the usual pattern very well thus far.

While the politicians play “not my fault,” Burlington Telecom customers need answers to know if their provider is endangered.  An independent audit and review, free of political know-nothings would be a start.  How about bringing in those with actual expertise in deploying municipal networks.  How about excluding involved, self-interest-protecting elected officials, especially those who had any hand in the FairPoint debacle.

It’s also time to fund that engineering study for the unwired portions of Burlington to get a true cost analysis.  A review as to why Burlington Telecom is not attracting a larger segment of the market is also needed.

In broadband, at least, that’s a no-brainer.  Burlington Telecom’s speeds on the download side are too slow and too expensive.  Comcast offers faster downstream service at lower prices, so why would anyone want to switch?  Burlington Telecom is trying to market their synchronous speed network (your downstream speed and upstream speed is the same), which would normally be appealing to a segment of Internet customers frustrated with cable and DSL shortchanging them on upload speeds.  But the customers who understand and appreciate the difference will not accept a broadband service that tops out at 8Mbps for an enormous $71.80 a month.  That’s far too slow and too expensive when Comcast is offering 12Mbps/2Mbps (upload speed with PowerBoost) for $42.95 per month.  Service for 16Mbps/2Mbps is $10 more, still twenty dollars less than Burlington Telecom is charging for half the speed.  Burlington Telecom can attract a larger base of broadband customers by accelerating speeds on their network beyond what Comcast provides.

Municipal broadband projects can be successful, but should be based on a true and honest appraisal of the costs, a complete understanding of the competitive landscape, a flexibility to respond to changing markets, and a good reason why they should exist in the first place.  Fulfilling the needs residents want, but incumbent providers will not provide is always the best answer.  Customers don’t want anemic broadband at high prices.  Provide that and a municipal broadband project will fail, even without political grandstanding and finger-pointing.

This morning Burlington residents learned Burlington mayor Bob Kiss was still standing behind Jonathan Leopold, despite their calls for Leopold to be suspended. (WPTZ) (2 minutes)

Below the jump, find a one hour video interview between The Burlington Free Press and city officials on the Burlington Telecom matter.

Currently there are 7 comments on this Article:

  1. Ian L says:

    Is Comcast online with DOCSIS 3 in Burlington, VT? If not, you’re comparing apples to oranges. Comcats non-TV internet rates (which are a valid comparison vs. BT’s fiber rates) are $55 for 6/1 or $65 for 8/2. Plus $3-$5+ tax for modem rental. PowerBoost doesn’t count.

    Also, while I’m in the minority, I’d take an 8 Mbps symmetric connection any day over my 22/5 asymmetric one at the same price…upload speeds matter to me.

    That said, in both cases Comcast’s marketing machine has you convinced that they have BT beat out of the gate. Which is incorrect.

  2. Nice writeup. I’ve been following Burlington very closely since writing the original case study on it in 2007. I think the crap about not doing the full-on cost assessment is false and an attempt at shifting blame to the founder who left in 2007. Figuring out financing needs is tricky as it depends not just on the final costs, but expected take rate and ave revenue per user – projected years in advance. Having the numbers off isn’t much of a surprise.

    That said, communities must do the best they can to understand the costs when they go in, and when those costs change, they have to be open and transparent about it even though it gives strategic info to competitors.

    I’m working on a longer report about how this occurred and what lessons muni networks can take.

    I take issue with your characterization of suggesting the Comcast speeds (DOCSIS 1 or 2, I believe) are better than the BT speeds. BT actually provides what they advertise whereas Comcast gives an empty “up to” promise. In this market, my impression is that Comcast is more congested than in most.

    Finally, the matter of getting the final cost estimates misses the real difficulty – how soon they have to finishing building to the 7.5% of town that is on the granite ledge. This is in negotiation at the Public Service Board. Until they have the date, they cannot know how much to refinance because the closer the date, the more they need to borrow (a date further away allows them to pay cash from incoming revenues on more of the build). Another 7.5% is a pain because Comcast claims they have exclusive on the MDUs and condos are another problematic area where they must negotiate with the landowners.

    None of this is easy, but when you watch people testifying on it, BT has enormous public support – it the Mayor that is unpopular.

    • I have a hard time finding out what the *real* speeds are (are the ones advertised on Comcast post-PowerBoost gimmick or pre, for example). DOCSIS 3 is coming to Burlington like most other Comcast cities, which will change the dynamics as well.

      I would think the engineering study issue could be reviewed as part of an overall independent review of the system. I think municipalities need to better organize to listen and understand the challenges they are going to face, particularly from incumbent providers, and be ready and prepared to counter the propaganda.

      Right now, it’s every person for themselves on the city council, and it’s shameful to watch.

      It’s my feeling that if you give the opinion leaders in broadband what they want, which is usually fast, reliable, and affordable speed, they will be your biggest evangelists, and will counter the “muni broadband is socialism” crowd quite effectively.

      In some interviews I’ve given, I’ve also clued in the media to be on the lookout when using astroturfers for soundbites. A lot of media people don’t understand the issue of fake consumer groups.

      In the end, I think Burlington Telecom is on the right track, but it needs to revise its marketing, and even if Comcast is overselling, BT should be able to ramp up speeds (see Lafayette, Louisiana for an example of a success story.)

      They need to capture a bigger percentage of the market to counter the inevitable talking point that you will hear soon enough from BT opponents and political opponents of the city administration that the whole thing is a boondoggle with too few customers, at which point Comcast will offer to cut a check to buy it and get rid of it.

      • I am in almost total agreement with you – especially the need for communities to be ready for the inevitable and predictable attacks. That said, different markets have different economics for the backhaul and I don’t know that every community can offer the low low prices for fast fast connections that Lafayette can. But I do think BT has to really amp up its marketing – especially noting that they are serving an important niche for small businesses.

        I would also note that while 8M Symmetric is the fastest advertised rate, faster speeds are available for those who need them. But yeah, pricier than you might find in Lafayette.

  3. Morgan M says:

    The technical merits of BT vs. Comcast get hashed about online, but in general those BT subscribers I know are happy with their service, just like most Comcast users I speak with. In those areas served by both, most residents have made their choice by now.

    BT made an early presumption that in a liberal college town a publicly owned network would have lots of intrinsic appeal. For many, it does . . . but these folks, the ones Christopher Mitchell hears, were hooked up awhile ago, and in numbers that fell well short of BT’s original hopes. Support for BT drops off steeply outside of the “true believer” camp, and the mood among those not connected to BT–digitally or literally, is seething. Remember that more than $10,000 has been expended to connect each BT subscriber, and $3500 of that has come–legitimately or not–from lots of Comcast subscribers and those who don’t want, or cannot afford, to connect. The mantra-response of the mayor– that Burlington Telecom is a “gem”– is technically correct, but betrays an unbelievable political disconnect from the mood among most taxpayers.

    • Morgan, I think you are right in that Comcast is not so horribly bad that more than 20% of the citizens will go running to BT for that reason. However, I don’t think BT was so naive as you suggest – especially as city leaders had been working on a cable/broadband system for a longtime before BT began. And I haven’t only received information from people who love BT – I’m fortunate to have some contacts among those who care little about who provides their telecom.

      I think you have to be careful about claiming $10K cost per subscriber – taking the raw money spent and dividing it up among the users ignores many network realities. The cost of the head end and such should not be included in that per user cost. Nor should the more expensive connections for institutions and businesses that are taking much higher-cost services than residential users.

      As for your $3500, I assume that is using the money lent from the City pool. This is not an accurate way of accounting – the city is earning interest on the money it loaned to BT, which means that unless the city were to just walk away from the network (and extremely unlikely prospect), the taxpayers will be getting a return on that money in the pool greater than if it were just sitting unused in the pool. So the idea that this money has come from the taxpayers is somewhat off – especially as this pool sees net income from Burlington electric and presumably other city-run enterprises.

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