It has been about a year since we checked in on FiberNet Monticello, a city-owned FTTH network about 40 miles northwest of Minneapolis. At that time, the network was generating insufficient revenue to meet debt payments, the private company operating the network (HBC) was stepping down, and Gigabit Squared was kicking the tires. Since then, Gigabit Squared and Monticello decided against a partnership and the City ceased making payments to bondholders. Previously, the City had covered the difference between revenues and debt payments by borrowing from the City's liquor store fund, a municipal enterprise fund. Monticello had financed the network with unbacked revenue bonds, meaning investors understood from the start that the full faith and credit of taxpayers would not "make them whole" in the event that the network did not create the revenues necessary to pay back the bond. Because Monticello chose that financing method, it had to pay a higher interest rate - those who buy bonds understand the differences in risk with different types of bonds and rates. However, the City has been negotiating with bondholders for a settlement to avoid potential lawsuits over the telecom utility and because this is a typically what how these situations are worked out. Bondholders will "take a haircut" in the parlance of finance rather than risk a total loss. Last week, Monticello City Council approved a $5.75 million proposed settlement in addition to the remaining funds left in the reserve fund, totaling approximately $8 million from an outstanding bond of $26 million. Final resolution may take many more months, but the major arguments seem to be worked out. This means that Monticello will own and continue to operate FiberNet Monticello. It also means that rather than having a network financed by revenue bonds, the network will have benefited from City funds from the liquor store and will almost certainly be re-financed with other City funds.

Monticello faced a number of key decision moments throughout the history of its FiberNet. Given the recent changes in management and decision not to make up the different between debt service and revenues, some may be wondering if proceeding with FiberNet was the smart decision. It was 2008 and the economy hadn't entered its death spiral. Monticello had overwhelmingly voted by a 3:1 margin for the local government to bond for and build the network. When Monticello was beginning to sell its bonds, the incumbent telephone company (TDS) filed a lawsuit against the City, with the extremely dubious claim that Monticello did not have the authority to do what other cities in Minnesota had done. Courts later tossed it, finding that the TDS suit had no merit and making TDS reimburse Monticello for some of its costs due to the frivolous suit. But the goal was never to win the lawsuit, it was to delay and harass. Monticello had to wait a year to begin building its network. Though TDS had previously maintained that its DSL was just fine for the needs of residents and busineses, it began pulling permits to significantly upgrade its DSL to a FTTH product. (TDS has steadfastly maintained, while investing more in Monticello than any other Minnesota community, that community networks result in less investment from incumbents.) At any rate, Monticello had a decision. It faced an expensive court case and the City's action was apparently driving TDS to improve its poor network. Monticello could have backed down in the face of TDS' bullying. And if it had? From what we have seen elsewhere, this is our best guess: TDS could have delayed its upgrades or changed its mind entirely when the economy tanked. If it continued with upgrades, it would likely have made some token investments but not lowered its prices because the threat of actual competition was removed.

Monticello has been all over the muni broadband news lately, in the wake of a letter it sent to bondholders [pdf] alerting them that the City would no longer make up the difference between the revenues produced by the system and the debt payments. This came shortly after the company managing the network decided to step down. Over the next year, the reserve fund will make up the difference while the City and bondholders come to some sort of an agreement. The Star Tribune today published a good synopsis of the situation:

City administrator Jeff O'Neill said that the city has no intention of abandoning FiberNet's 1,700 customers, including about 130 businesses. "This system isn't going anywhere," he said. "We're not going out of business." Despite the problems, he said the city has one of the fastest Internet systems in the country that has driven down prices and improved services by providing competition.

The article also notes that prior to the City-owned network, the telephone company (TDS) provided very poor DSL service that was harming area businesses with slow and very unreliabile phone and broadband services. Without FiberNet Monticello, we don't know how many businesses would have been forced to relocate to be competitive in the digital economy. We decided to dig a little deeper to get a sense of what Monticello has received for its investment and difficulty. We previously examined the prices charged by Charter cable in town and found that households taking that deal were saving $1000/year. We also noted that Charter was almost certainly engaging in predatory pricing. After talking with other networks, we would guess that Charter is losing between $30 and $50 (conservatively) per subscriber per month.

In a surprise move, HBC has announced it will end management of FiberNet Monticello, though the actual time frame has not been announced. FiberNet Monticello is a FTTH network approximately 45 miles northwest of Minneapolis. HBC has been operating the publicly owned network, offering triple play services, since inception. FiberNet Monticello has had a particularly rough road since citizens overwhelmingly voted to build it to create a locally owned alternative to cableco Charter and incumbent telco TDS. TDS landed the first blow against the network with a frivolous lawsuit. Though the courts tossed it out, the proceedings took a year and slightly added to the interest rate Monticello had to pay on its debt. Since then, TDS invested in its own FTTH connections and Charter engaged in a vicious bout of predatory pricing in their attempt to drive competition out of Monticello. Throughout it all, the City and HBC worked together to deliver the best broadband and customer service in the area. However, the network has not met its revenue targets (largely due to time lost from the lawsuit) and that has led to discussions about how to ensure the network would become financially self-sufficient as rapidly as possible. HBC's performance in Monticello has actually been impressive given the anti-competitive tactics of Charter and TDS. If you want to know why we have no cable or broadband competition in America, look no further than the refusal of state and federal agencies to investigate predatory pricing tactics used to deny subscribers to FiberNet Monticello. Regardless, elected officials in Monticello were not happy with the status quo (covering FiberNet shortfalls from the liquor store fund) and new management will offer an opportunity to chart a new course. Though HBC has decided to withdraw, FiberNet Monticello retains most of its staff and may even be better motivated to meet this challenge. From the City's press release (also below in full): The City of Monticello would like to express appreciation to HBC for the key role they played in successfully developing and delivering high quality and reliable video, voice and internet service to the community.

When Monticello, Minnesota, decided to build its community fiber network -- Fibernet Monticello -- it expected the incumbents to lower their prices and fight to keep subscribers. But Monticello had no idea the lengths to which they would go. The telephone incumbent, TDS, delayed the project for a year with a frivolous lawsuit and then built its own fiber-optic network while dramatically lowering its prices. We have yet to find another community in North America with two citywide FTTH networks going head to head. Because of the city's network, Monticello's residents and businesses have access to better connections than the biggest cities in Minnesota can get. Now, Charter has weighed in by cutting its rates to what must be below cost to gain subscribers. It reminded us of a shoot-out, so we created this infographic to explore what is at stake. Download a higher resolution PDF here. Charter has taken a package for which it charges $145/month in Rochester, Duluth, Lakeville, and nearby Buffalo (MN) and is offering it for $60/month - price guaranteed for 2 years. A Monticello resident supplied us with this flyer, which this person had received multiple times at their home over the course of a month. (See below for the full flyer). This is either predatory pricing or the cable industry is out of control with its rate increases. If that package costs Charter more than $60/month to supply, then it is engaging in predatory pricing to drive competitors out of the market. Consider that Charter may be taking a loss of $20/month ($240/year) from each household that takes this offer.

Monticello, a small community of 13,000 about 40 miles northwest of Minneapolis, built one of the most advanced broadband networks in the midwest and delivers some of the fastest connections available in the state at incredibly competitive rates. The Twin Cities metro area, stuck mostly with Comcast and Qwest, cannot compare in capacity or value. Monticello is fairly rare in the publicly owned FTTH region because it does not have a public power utility and services on the network are provided by a third party, Hiawatha Broadband Communications -- a Minnesota company with an excellent reputation and track record. Unfortunately, Monticello's network suffered costly delays due to a frivolous lawsuit filed by the incumbent phone company in a bid to bleed the publicly owned network while it suddenly invested in its own second generation network (that it previously maintained was totally unnecessary for a small town like Monticello). Monticello lost a full year on the project, which has hurt its finances significantly. More unexpectedly, it has become the only community in North America where all residents have a choice between FTTH networks. They also have Charter in the mix. Add to this the economic downturn that hit just after they financed the network in 2007 -- the population growth has been much lower than forecast. The predictable result? Much lower prices, lots of community savings, and a publicly owned network that is behind its projections. The local paper recently ran a story about the project, "FiberNet struggles in a sea of red. Should you read the full piece, please be aware that the inaptly named "Freedom Foundation" has no credibility, existing solely to defend massive corporations like cable and telephone companies. For those who wonder why incumbents filed absurd lawsuits that have a vanishingly small chance of winning, note this discussion from the story:

“It stopped us from really building the system by about a year,” said Finance Director Tom Kelly, “which put our revenue collections about a year behind.

Minnesota Public Radio, as part of its Ground Level Broadband Coverage has profiled WindomNet with a piece called "Who should build the next generation of high-speed networks?"

Dan Olsen, who runs the municipal broadband service in Windom, was just about to leave work for the night when he got a call. The muckety-mucks at Fortune Transportation, a trucking company on the outskirts of town, were considering shuttering their office and leaving the area. "They said, Dan, you need to get your butt out here now," Olsen recalls. "I got there and they said, 'You need to build fiber out here. What would it take for you to do it?'" Fortune, which employs 47 people in the town of 4,600, two and a half hours southwest of the Twin Cities, relies on plenty of high-tech gadgetry. Broadband Internet access figures into how the company bids for jobs, communicates with road-bound truckers, controls the temperatures in its refrigerated trucks and remotely views its office in Roswell, New Mexico. Fortune even uses the Internet to monitor where and to what extent drivers fill their gas tanks in order to save money. Yet, when it was time to upgrade company systems three years ago, Fortune's private provider couldn't offer sufficient speeds. That's where Windomnet came in. Though Fortune was a mile outside the municipal provider's service area, "We jumped through the hoops and made it happen," recalls Olsen. "The council said, "Do it and we'll figure out how to pay for it.' We got a plow and a local crew. We had it built in 30 days."

I have thought about this story frequently when I hear claims that publicly owned networks are failures.

The private sector is not going to expand broadband to everyone. Some places simply do not offer enough promise of profit. This story out of Wisconsin, "Residents Beg for Broadband" not only reinforces this truth, it looks at what happens when people depend on the private sector to control essential infrastructure.

Some Berry residents may have to move if they can't get high-speed Internet access, according to town officials, because their employers require them to have the service for working from home. "Parents have told us their children are at a disadvantage by not having high-speed connections," Town Chairman Anthony Varda wrote in a recent letter to TDS Telecommunications, the town's Madison-based telephone provider. "It is critical to the success of rural students, people working from home, and residents serving on nonprofit boards, committees and local government," wrote Varda, an attorney with DeWitt, Ross & Stevens.

Their property values are going down because few people want to live someplace without fast and reliable access to the Internet. To cap it off, Wisconsin is one of 18 states with laws to discourage communities from building their own networks. TDS puts on an act about how difficult it is to tell these people that they aren't getting broadband ... but if they were to build it themselves, I wonder if TDS would sue them like it did Monticello. In asking the state PUC to require TDS to expand, the residents are taking a unique approach. I can't really see it working under the modern rules. It long past time we realize the limits of the private sector: The private sector is simply not suited to solve all problems. Matters of infrastructure are best served by entities that put community needs before profits. (Image: Liberty rotunda mosaic at Wisconsin State Capitol, Madison, Wisconsin, a Creative Commons Attribution Non-Commercial No-Derivative-Works (2.0) image from photophiend's photostream)

Monticello Minnesota, the small community located 40 miles northwest of the Twin Cities, recently returned to the news when its telephone incumbent, TDS, began offering a fast 50/20 Mbps residential broadband connection for $50/month. Nate Anderson, of Ars Technica, covered both the story and backstory (something he has extensively reported).

But the entire congratulatory press release glosses over a key fact: the reason that Monticello received a fiber network was the town's decision to install a municipal-owned fiber network to every home in town… spawning a set of TDS lawsuits that went all the way to the Minnesota Supreme Court, which ruled in favor of the town.

I might also note that the press release and much of the coverage also glosses over a one-year contract and early termination fee (though it isn't clear if this is applied in all circumstances). However, Nate nails the story by framing it with the title "Want 50Mbps Internet in your town? Threaten to roll out your own."

We spoke to TDS about the situation last year, and its director of legislative and public relations told us that TDS didn't act earlier because it didn't actually know that people really, really wanted fiber; once the referendum was a success, the company moved quickly to give people what it now knew they wanted.

Of course, TDS did not start rolling fiber after the referendum. They waited. It was only after the City successfully bonded for the project that TDS acted (first by filing a lawsuit to block competition and second by investing in their network to be competitive when the doomed lawsuit would inevitably be dismissed). TDS did not change course because they suddenly realized that people wanted better broadband, they did it because they knew that they would have to invest or perish when confronted with actual competition. Nate's article looks at other communities that have followed a similar trajectory.

Our focus on the broadband stimulus is almost entirely on last-mile infrastructure because it is the most challenging and expensive problem to solve before all Americans will have affordable access to the broadband networks they need in the modern era. As we are most familiar with Minnesota, we decided to take an in-depth look on who is proposing what projects in our state. Total Infrastructure Grants Requested for Last Mile solely in MN: at least $240 million Total Infrastructure Loans Requested for Last Mile solely in MN: at least $85 million Groups seeking stimulus funds to deliver last-mile broadband access in Minnesota have asked for hundreds of millions of dollars. By my tally, some 17 applicants are seeking to serve Minnesota with last-mile access (I threw out applications pertaining to middle mile infrastructure, digital divide, and those last-mile projects that combine Wisconsin and North Dakota areas) have requested some $240 million in grants and $85 million in loans. If one assumes that the total amount of money is divided evenly among the states, this is somewhere around 3x as much stimulus money that will be awarded to Minnesota applicants over the course of the multiple rounds of funding. At some point, this list will have to be winnowed and prioritized, so let's delve into it. All applications still must survive the peer review process (ensuring they met NTIA/RUS requirements), the incumbent challenges (incumbents can veto applications by showing that targeted areas already have broadband advertised to them), and the prioritization of surviving projects by each state (no one seems sure of how this will happen in Minnesota, our Governor is too busy not running for President in 2012). There are two applications that should be jettisoned immediately, Arvig Telephone Company and Mid-State Telephone Company, both of which are owned by TDS Telecom.