Memo

To: Date: Re: Mayor and City Council 3/5/12 RS Fiber Workshop From: Matt Jaunich, City Administrator This is just a quick reminder that we have a workshop scheduled for Tuesday, March 6th at 5:30 p.m. in the Council Chambers to discuss the RS Fiber to the Home Project. With the Joint Powers Board requesting the second half payment commitment of $10,710 to the RS Fiber Project, I thought now would be a good time to have a significant discussion on our participation in this project. There has been some concern expressed on this project and I think its safe to say that our continued participation is up for debate. My thought and that of others is that if we dont want to proceed with this project, we might as well get out now and save ourselves the $10,710. But before we make that decision to stay in or get out, I would like for us to have a discussion on the project and hopefully provide a forum so you can get answers to your questions so you can make a well-educated decision. Shannon Sweeney will be present at the meeting to answer any questions you may have on the project, and Councilman Reetz will be present to give you feedback on what discussions have taken place at the Fiber Board Meetings. I think the question on whether or not we can do this project has been answered. However, Im not sure if the question on whether or not we should be doing this project has. In the meantime, on the following pages I have put together some information to hopefully assist you in your discussion. In this memo, Ive attempted to highlight for you a list of benefits of the project, and a list of risks associated with the project as I see it. Thanks,

Matt

Benefits of the RS Fiber Project (Broadband) to the City of Arlington

While I realize that the benefits of a project are subject to each individuals belief or interpretation of benefits, Ive done my best to highlight the potential benefits of this project. EDA Director Cynthia Smith-Strack assisted me in highlighting the potential benefits of the RS Fiber project. Broadband can provide access to a wide range of resources, services, and products that can enhance quality of life in a variety of ways. The information on benefits of broadband access included below is sourced from various public and non-profit entities that are active in a pursuit to bring broadband access to every person in America. Benefit #1 Benefits Related to Education, Quality of Life, and Entertainment Broadband can overcome geographical and financial barriers to provide access to a wide range of educational, cultural, and recreational opportunities and resources, especially in rural settings. Broadband allows innovations in education like (a) supporting leading educational opportunities presented by technology and (b) by supporting teaching and learning both in and outside the classroom. Broadband provides access to telecommunications technologies and improvements such as Voice Over Internet Protocol (VoIP) allowing voice communication using the Internet. Broadband provides ability to stream audio and video content (live and recorded) from radio stations, television stations/shows, and the latest movie releases without needing cable television service. Broadband permits users of Telecommunications Relay Services (telephone service that allows persons with hearing or speech disabilities to place and receive telephone calls) to use Video Relay Service (a form of Telecommunications Relay Service that enables persons with hearing disabilities who use American Sign Language to communicate with voice telephone users through video equipment, rather than through typed text).

Benefit #2 Benefits Related to Health Care and Medicine Broadband can provide medical care to unserved and underserved people/areas through remote diagnosis, treatment, monitoring, and consultations with specialists. Broadband and digital medical records can lower healthcare costs and create better outcomes. Broadband can accommodate mobile health services (scanning, testing, screenings, etc.) a viable alternative in rural areas. 2

Broadband can accommodate in home, day to day monitoring of individuals providing a means to aging in place.

Benefit #3 Benefits Related to Economic Development Broadband can promote economic development and revitalization through electronic commerce (e-commerce). Broadband opens up regional, national and worldwide markets to local businesses, workers, and rural areas. Broadband access can be a consideration when expanding existing businesses and recruiting new industries. Next-generation energy solutions require broadband as a means of modernizing the electric power grid.

Benefit #4 Benefits Related to Government Broadband can allow individuals to access e-government services and provide information about government policies, procedures, benefits, and programs. Broadband can increase public access to government information and provide new ways for citizens to participate in their democracy and community.

Benefit #5 Broadband Benefits Related to Public Safety A nationwide public safety broadband wireless network will allow first responders to send and receive video and data improving service, improving their ability to communicate with each other, and their ability to keep the public informed. Broadband can help protect the public by facilitating and promoting public safety information and procedures, including, but not limited to: Early warning/public alert systems and disaster preparation programs. Remote security monitoring and real time security background checks. Backup systems for public safety communications networks.

The RS Fiber Website Lists the following benefits: General Benefits Prices will be lower than the prices people are paying today. Everyone who lives in the project area and connects to the fiber network will be put on an equal or greater technology footing with anyone living anywhere in the world. Internet speeds will be tremendously faster than what is available today.

Cable service will provide crystal clear pictures and include local programming like high school sports and government meetings. Programs wont fade or get lost because of the weather. Faster Internet will make it easier for some people to work from home. The network will be owned by the people who support it. The model is nearly identical to a cooperative. This project represents an once-in-a-lifetime opportunity to make a permanent, lasting and positive investment in our childrens future. Because of the large amount of bandwidth associated with a fiber network, high definition video links are possible between two or more people or locations. The network will spur economic development in Renville and Sibley Counties

Benefits on Education Rural students in the GFW and Sibley East school districts will be put on equal technology footing with students who live in town and currently have better access to the Internet. Increase in bandwidth for students at home, whether they live in town or on the farm. The Intranet that connects you with everyone else on the RS Fiber network will have nearly unlimited bandwidth for sharing resources. If you home school, attend a charter school or a parochial school you will not only have tremendous bandwidth where you learn, you will also have the ability to attend classes at using the local Intranet that will connect your location to the high school. If you are an adult and are taking classes online you will have enough bandwidth for any class you want to take or any video or presentation you need to see. You will also have tremendous upload capacity at your disposal and will be able to send large files (pictures, PowerPoints, videos etc.) from your home. Benefits on Health Care The fiber network will offer new telemedicine opportunities that will improve the delivery of health care to everyone in the area. Telemedicine is the delivery of health care services over distances, more often than not via the Internet or a local area network (RS Fiber network). The RS Fiber network is perfect for delivering health care services. The bandwidth available on a fiber network makes it possible to have high definition video conferences, or e-visits, with doctors and nurses. The amount of bandwidth provided by the network means the video link will be crystal clear, even making it possible for psychologists and psychiatrists to have remote sessions with patients in rural areas. Other services that can be delivered digitally include medicine reminders, patient scheduling, medical records and test results. Telemedicine is an area that will see great development of applications and services that can be delivered over networks that provide very large amounts of bandwidth to the home or business. With a fiber network its possible for your home to be a doctors room that the doctor visits remotely.

Risks/Concerns of the RS Fiber Project to the City of Arlington

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Risks, just like the benefits, are subject to each individuals belief or perception of risk. The amount of risk to one person may not be the same amount of risk to another. The RS Fiber Group has done an excellent job highlighting the benefits of this project. I have some reservations on the lack of risk or at least perceived risk, especially from a taxpayers standpoint, that has been discussed. To hopefully address that, Ive done my best to highlight the potential risks to this project as I see it. Its up to each elected official to determine the level or risk to the City and/or how it will impact your decision on this project. I have not identified every risk (or benefit for that matter). There are some risks that are unavoidable. The risk of litigation is obviously there, but the City risks litigation in almost everything we do. Risk/Concern #1 Financial Risk to the Taxpayer if Project Fails Government owned fiber projects can and do fail, just like they can and will succeed. When they fail, the financial responsibility usually falls on the taxpayer. A 2004 report by the Heartland Institute stated that very few cities attempt to build and own their own broadband telecommunications network because the cost and financial risks are too great. The current financial risk of the RS Fiber Project is the $4.5 million debt service fund. While it has been noted that there would be no additional risk to the $4.5 million if the City chooses (failed system would go back to the bond holders), research shows that municipalities would rather not see a failed system and continue to support the system, generally with taxpayer dollars. Some examples of failed systems are included in the handout The Hidden Problems with Government-Owned Networks by Joseph Fuhr. One of interest to us is the Monticello project which has had to borrow money from its liquor reserve fund to cover a shortfall of more than $1 million, and it was recently reported that they lost $2.6 million in 2011 despite receiving a one-time $1.5 million legal settlement (article attached). If the project was to fail and we let it go back to the bold holders, it would likely negatively affect our taxpayers by resulting in increased borrowing costs (interest rates) for future bonding projects. Risk /Concern #2 Lack of Cost and Customer Control over other Providers The RS Fiber project would technically be considered a utility operation by the City if the project would proceed. When analyzing our utilities, telecommunications would be the only utility we would not have a monopoly on. It would be the only municipally owned utility that would compete against the private industry for customers. Unlike the water, sewer, and electric department, we will be competing against private companies for customers and our service rates would be in direct competition with those companies. We run the risk of pricing wars of which we are unfamiliar with. In a January 26th interview in the Monticello Times, Monticello Mayor Clint Herbst states that the Monticello Fiber Project has run into predatory pricing from their competition, and a February 26th article in the Monticello Times states that the Monticello FiberNet lost customers in the last half of 2011 in the highly competitive cable TV category and also lost internet service customers in the fourth quarter. Most municipally built fiber projects receive a competitive response from the private section upon building a system. What that response will be here in Arlington and how that will affect us is unknown and is a potential risk. Risk/Concern #3 Lack of Knowledge on Owning a Telecommunications Business While the inclusion of Hiawatha Broadband (HBC) to this project will bring some much needed telecommunications knowledge to the business, those in charge of the direction of the business, elected/appointed officials to the Joint Powers Board, do not have the knowledge in the field of 5

telecommunications that may be needed to deal with an industry that has ever changing technology. Research by Joseph Fuhr, Professor of Economics at Widener University, noted that there are substantial risks involved when a government entity enters the broadband industry, where technology changes rapidly and constant reinvestment is required. Thus, municipalities should proceed with caution when advocating government owned networks because such government ventures shift the risk from voluntary investors to involuntary investors (taxpayers). Unlike a private industry, RS Fiber could run into issues in dealing with rapid changing market conditions due to bureaucratic operating constraints or changing state and federal regulations, posing an additional risk to this project. Risk/Concern #4 Project Plans will be a Design Build instead of Engineered In an early February meeting I had with Mark Erickson, Mark indicated that the project would be a design build project instead of a fully engineered project to save on time and money. I believe this type of design is a risk to the City. Many communities that experience financial losses from their municipal broadband system did so because construction costs were higher than original estimates. I believe a fully engineered project will help alleviate some of this risk. Risk/Concern #5 Political Risk on Who Will Receive Service First It has been noted that the nearly $70 million bond issue will cover build out of the project to 70% of the total system. However, 100% of the defined area (Parts of Renville and all of Sibley County, and the 12 communities) will be involved with the project. Who decides on who gets service and who doesnt? What if a particular area of the project wants service but it is cost prohibited to service that area with the initial $70 million. How much will it cost to build out the remaining 30%? A 2011 report by the State of Minnesota shows that 39% of rural households, when offered broadband, still do not subscribe to it. How will that affect the build out? If tax dollars are put into the project, there is the possibility that property owners who do not have access must still pay for the system in the form of higher taxes. Risk/Concern #6 Similar Municipal Projects have not been identified

Identifying similar projects allow for an evaluation of what went right and what went wrong within a particular project. For one reason or the other, most cities dont get involved in the Telecommunications business. Mark Erickson noted that there are approximately 75 municipally based fiber projects, and a March 2011 report from Nate Anderson of Arstechnica.com shows that only 133 US Cities have their own broadband network. 54 are city-wide fiber projects and 79 are city-wide cable networks. Doug Dawson noted that this was the First Fiber to the Home AND Farm Network he has worked on. He did state similar projects where constructed in North Dakota, but those projects were privately owned. The Lac Qui Parle County project has been identified, but that project is a joint venue between a public (Lac Qui Parle County EDA) and a private (Farmers Mutual Telephone) company. RS Fiber is strictly a public project.

Risk/Concern #7 State/Federal Incentives to Private Industries to Expand Broadband In 2010, the Minnesota Legislature adopted Minnesota Statue 237.012 which contained broadband goals for the State of Minnesota. Included in those goals was the ability to obtain universal access 6

and high speed as soon as possible, but no later than 2015 to all state residents and businesses. The legislature also identified the goal of being within the top five states of the United States for broadband speed universally accessible to residents and businesses, and the top 15 when compared to countries globally for broadband penetration. Also, in his 2011 State of the Union Address, President Obama set a public policy goal aimed at providing broadband to 98% of Americans within five years, and to provide significant funds to build out broadband to more American Communities. While the goals seem lofty, talk of incentivizing this build out is already taking place. Here is some of what is currently taking place:

While State incentives have been lacking, a task force has been established to assist in meeting State goals. In 2011, the FCC began the long-debated reform of the federal Universal Service Fund (USF) away from ensuring voice telephone service in the US and towards ensuring ubiquitous broadband availability. In 2010, telecommunication carriers in Minnesota received over $137 million from this fund for services provided in Minnesota. The vast majority of that amount was provided to support the provision of voice service in rural areas of the State, where costs of building and operating networks are more expensive than urban areas. In late October of 2011, the FCC adopted an order that transitions the rural, high-cost program to directly subsidize broadband deployment in unserved areas across the country. As early as this year, the FCC may take steps that will provide opportunities for eligible telecommunications carriers to receive immediate funds to deploy broadband to Minnesotas unserved areas. In particular, the FCC will make available nationally $300 million in additional incremental funding for larger providers like Frontier to build out fixed networks to a standard of 4 Mbps down/1 Mbps up. In addition, in 2012, the FCC will have an auction of an additional $300 million that will support the deployment of mobile broadband in areas across the country that do not have access to that service today. The National Telecommunications and Information Administration (NTIA), the Rural Utilities Service (RUS); and other federal agencies are also looking at ways to assist in the expansion of broadband.

If some of these programs result in private carriers in Arlington expanding their broadband capabilities, what will that mean for our municipally owned broadband network? What will happen if the private competitors come to the playing field and invest in broadband locally? Will we be able to compete with the larger, private companies if they enter the market, most likely driving down rates to levels that may threaten our ability to pay off bonds? Are we ahead of game when it comes to financing this project? Will there be federal/state assistance that could help drive down project costs? Expressed Concerns from the Arlington EDA: The EDA discussed the RS Fiber project at their February 27, 2012 meeting. Although the EDA didnt offer any specific recommendations to the City Council, those present, at the recommendation of Council Member Pichelmann, suggested a recap of concerns be included any

City Council packet memo. In a nutshell the EDA is supportive of access to high speed internet but has concerns about the pending project. Concerns addressed at the EDA meeting included:

Insolvency of the utility if the ups and downs of business cycle are too great or construction costs are higher than expected. The lack of an upfront equity requirement (down payment), borrowing to fund initial few years of debt payments, and borrowing for working capital. These items would disqualify local business owners seeking a revolving loan from EDA. Budget allocations will expect to cover any or all shortfalls from the utility regardless of how large. Borrowing to cover 70% of the project costs. A second issue would be needed to fund the entire project. Engineering as the project goes versus up front design and then build is risky. Political issues such as: who gets service first, who gets service when not initial funding is not enough to serve everyone, who decides who can get service and who cant, who will pay for the additional expenses associated with building out to all, rate structure. Government should not compete with private industry. There are four providers already in Arlington. Originally public was told RS Fiber would be equal to or less than current provider prices, pledge card response based on that assumption. HBC says they will be the high cost provider as they are in every other city. What will not get done if this project does?

Questions that are still in Need of Being Answered

The biggest question we have yet to have answered deals with our concern on the disproportionate financial risk between City and County residents. It is our belief that the risk to city residents is twice that of non-city/township residents. We have also yet to receive what the Citys proportion of the $4.5 million debt service fund will be. Additional Resources See attached report by CCG titled Sibley County and Fairfax, Minnesota Benefits of Broadband dated November 15, 2010 See attached report by the University of Minnesota titled Sibley-Renville Fiber-to-the-Home Economic Impact Study dated December of 2010 See attached report by Joseph Fuhr, Professor of Economics at Widener University titled The Hidden Problems with Government-Owned Networks. See attached report to Governor Mark Dayton and the Citizens of Minnesota titled Governors Task Force on Broadband dated December of 2011.