Penn Study Stirs Debate on How to Measure Muni Broadband Success

Those who want a “definitive report” about the financial status of networks “don’t understand how difficult that is,” said Chris Mitchell, Institute for Local Self-Reliance director-community broadband networks: It’s tough to “evaluate complex investments that have multiple uses.” A comprehensive evaluation should consider user satisfaction, public benefits and cost savings, said Mitchell, a muni broadband supporter.

Writing such an empirical report is “labor intensive,” said Yoo, a Penn law professor who directs the university’s Center for Technology, Innovation and Competition. “You have to collect financial statements from a large number of sources.” Yoo said he had a single student working two years, assisted occasionally by library staff. Another challenge is determining the right method, he said.

It may be impossible to fully capture muni networks’ worth or demand for them, said industry analyst and muni broadband supporter Craig Settles. Metrics can’t quantify the level of excitement for broadband or the harm of not having good broadband, he said. “I can’t show -- in terms that wonks understand -- where the value is.”

The study employs “one methodology and one set of data,” and circumstances can change, but it and other empirical reports using historical data remain valuable, Yoo said. Case studies and anecdotes have complementary value, giving context for numbers, the Penn professor said.

Responses

Some muni networks failed and local officials should consider financial performance, but the Penn report paints an overly “negative picture” of municipal networks, Mitchell said. Settles said the study doesn’t adequately show community benefits and perpetuates a myth that such networks never work.

The report is too critical of networks, including those in Wilson, North Carolina; Chattanooga, Tennessee; and Lafayette, Louisiana, said Mitchell: “Incredible successes.” Lafayette may not be able to quickly pay off debt, but the network has attracted many high-tech jobs, he said.

The report appears to use sound methodology and is “an important contribution,” especially for cities receiving pressure from muni broadband advocates and constituents, said Doug Brake, telecom policy senior analyst at the Information Technology and Innovation Foundation. It makes sense that some muni broadband projects would be in “dire straits,” said Brake. Where there’s no economic case for a private provider, there’s usually no economic case for anyone, he said.

Mitchell said the report beats some other anti-muni papers because it at least sets up a “legitimate debate.” He said he contacted Yoo and hopes to have a lengthier conversation. Brake agreed it’s better to have numbers to argue about than continue with “ideological shadowboxing.”

Yoo welcomed debate, saying he’s “very interested in improving the report.” Yoo made corrections in response to early criticisms and plans additions later this week, he said. Yoo expected edits, which he said don’t change the report’s basic analysis. Later, Yoo wants to expand the study -- which used data from 2010 to 2014 -- to include data from 2015, 2016 and previous years, he said.

Yoo rejected “ad hominem” attacks about objectivity of the report, which received no direct funding, he said. Donations to the university are critical to funding research and they come from “a wide variety of sources,” including some who agree and others who disagree with the report’s findings, Yoo said.

Measurements

The report inappropriately applies Wall Street financial standards, Settles said. “The private sector wants to have payback in three or four years, whereas a city has maybe 20 or 30 years for getting a payback for an infrastructure buildout.”

Measuring net present value over a few years tells nothing about the wisdom of building a municipal network, said Mitchell: “There are communities in the United States where they would say, ‘Look, even if this network will not fully pay for itself, it is worth us doing.’” One reason net present value is a bad measure is that it dings municipal networks for not depreciating the full cost of the network, Mitchell said.

“All data has limitations,” and while the financial accounting data used has weaknesses, it’s “the highest quality data” available publicly and is relied upon by financial markets and state governments, Yoo said. He disagreed the report unfairly evaluates government projects using standards for companies. “The question we asked is, ‘Will this project perform as advertised to the voters?’” The authors tested whether revenue would cover construction and operating costs, he said. “The level of return we’re holding them to is break-even.” Yoo disagreed with the criticism about depreciation, a factor he said the study didn’t hold against the networks.

Whether debt can be repaid is a narrow but important question that applies to cities and companies, said Brake. The ITIF official agreed some projects may be more financially viable for a local government, which must recoup costs but isn’t looking to make a profit.

State Bans

The Penn report fails to consider how state restrictions make muni networks struggle, said Settles. Several muni networks in the report are operating in states with restrictive laws, he said. Don't blame muni broadband failures on state limits, replied Yoo. Wilson and Chattanooga never predicated their networks’ success on being allowed to expand into neighboring areas, which is banned by a state law upheld in court, he said.

State legislatures have legitimate interest in ensuring localities carefully consider their actions but should be careful about how they craft limits, said Brake. Flat bans can be overbroad, sweeping in public-private partnerships that may be effective, he said.

Consequences of muni broadband failures are often overblown, Mitchell said. Failures have “resulted in slightly higher taxes,” but project costs tend not to “threaten the solvency of a city,” he said. Chattanooga officials said if they lit on fire all the money they had for the network, the impact to ratepayers would only be $2 per month per electric bill, Mitchell said.

Some cities have paid high prices for failed projects, the professor said. Dunnellon, Florida, financed one broadband build for $7 million, but after three years of heavy losses sold it for $1 million. The municipality had to absorb $6 million, more than twice the annual budget, he said. “Some cities can take the loss. Some cities can’t.”