MN municipal broadband network reboots to cut losses

By Tom Steward Watchdog Minnesota Bureau

MONTICELLO, Minn. — The sign outside FiberNet Monticello’s offices might as well read “Under New Management — Again.”

“I think I have a great opportunity to help the city move forward and get us on the track and change the perspective that Monticello has within this industry,” said Brian Estrem, new general manager of FNM.

“We’re not only reducing our costs but we’re getting seasoned professionals here working for us to make a good system become a great system,” said Jeff O’Neill, Monticello city administrator.

The transition comes as negotiations continue between the municipal broadband network and bondholders to reach a settlement over the network’s suspension of payments on $26 million in revenue bonds, which would return about 30 cents on the dollar to investors. The network loses about $900,000 annually, including projected bond payments.

“We’ve made a really strong good-faith effort to work with bondholders to come up with a settlement amount that enables them to recover some of their investment and allows the city to move forward,” said O’Neill.

As local officials reboot the struggling muni-network, a city consultant’s candid report underscores the challenges ahead given FNM’s drain on city coffers, declining customer loyalty and vulnerability to cut-throat private competition.

“Businesses should pay for themselves. There is zero reason to accept a permanent subsidy for FNM,” states the CCG Consulting report provided to Watchdog Minnesota Bureau. “… The first order of business ought to be to get the business to at least pay for its own expenses and capital.”

Compiled by one of the network’s architects, Doug Dawson, the $11,000 draft report aimed to assist the city in evaluating issues facing FNM amid a contract proposal by then general manager Mark Pultusker.

Despite recommending against extending Pultusker’s contract at $360,000 per year, Dawson noted progress in several areas, including reducing annual operating losses to $400,000.

The study also credits FNM for saving residents $1.7 million to $2.5 million on their cable bills annually due to a price war sparked by competition with private providers.

“The savings are significant and are more than what the City originally anticipated,” states the report. “… Clearly if FNM was to fold shop then much of the community savings would disappear. And perhaps that savings is the largest economic development benefit of the business.”

At the same time, the analysis provides a behind-the-scenes snapshot of the problems that have come to define a system rolled out as a model muni-network in 2009.

• Technical glitches: “There have been significant cable TV quality issues since the launch of the system. There have been a number of channel outages where from one up to a large number of channels would be out of service.”

• Billing glitches: “It was discovered that nearly 20 (percent) of customers had something wrong with their bill. Many customers were getting services they weren’t getting billed for, and in the most extreme cases there were customers who were getting billed nothing.”

• Competitive pressure: “FNM is in a particularly vulnerable position. There are five cable providers in your market including the satellite providers. There is no comparable situation to yours anywhere else in the country. But this means to me that you have to be even more cautious about making cable investments than most companies.”

• Customer satisfaction: “I suspect that there has been some reluctance to use FNM due to the perceived problems with your network. While many of these problems have been cable-related, one has to suppose that your network doesn’t have the greatest reputation in the City.”

• Taxpayer subsidies: “If you believe that the business needs a permanent subsidy it would be time to be having a discussion about whether it is worth keeping the business open for $900,000 per year. The citizens would be saving $1.7 (million) to $2.5 (million) per year, but the City would be spending a significant portion of that savings to keep the business afloat.”

”We’re saving more as a community than we’re paying to support the system, plus we’re getting a product that we needed to be competitive in this world,” said O’Neill. “I think most people would agree, at least in this community, although it’s been painful to use liquor funds to create this advantageous position, it truly has resulted in overall betterment of the community.”

While FNM serves about one-third of city businesses, the report suggests the city target more business customers due to higher margins. The latest figures filed with federal regulators reveal an across-the-board decline in FiberNet phone, cable and Internet customers at the end of 2013.

“My role right now is to stabilize the network, come up with a new marketing plan, increase revenue, reduce cost expenditures where I can and bring a better, more stable product to the community, go out and market that,” said Estrem, who brings extensive telecom experience to FNM.

Previous general manager Mark Pultusker said city officials face another challenge moving forward: Reaching agreement over his exit after about 18 months on the job.

“What people don’t recognize is, when I started with FiberNet, it wasn’t even a start-up,” said Pultusker. “It was pathetic what I had to do. I mean, having a company that’s in the cable business work from 8 to 4:30 and after 4:30, you don’t get anything? I basically threw out almost everything the city had purchased except the fiber in the ground.”

Contact Tom Steward at tsteward@watchdog.org