Opinion

Broadband Consultant Double-Dipping In Taxpayer Money

Michael Bocchieri/Getty Images

Johnny Kampis Contributor

Taxpayer-funded broadband networks are expanding and becoming more popular and more expensive.  The Taxpayer Protection Alliance Foundation’s (TPAF) website of “broadband boondoggles” shows that these networks are failing at an alarming rate.  That hasn’t stopped the new gun-for-hire Magellan Advisors from recommending localities build new networks.  Now, Magellan has upped its game to try to build even more of these networks.

Denver-based Magellan Advisors will manage the design and implementation of government-owned networks in Rock Falls, Illinois, Mont Belvieu, Texas, and Newport, Tennessee, after previously conducting feasibility studies suggesting those cities build their own networks.  So, basically, Magellan did a feasibility study to say that these localities should build a network and now Magellan is building the network.

Magellan has conducted such studies telling at least 200 local government entities they should build broadband networks. It announced recently it’s conducting another study in Tennessee – for the Johnson City Power Board – with a report due by the end of July.

Magellan recently got to double-dip in Chatham County, Georgia, getting a contract for a $65,200 study in early 2016 from the county before then getting a similar contract to conduct a $65,500 study for Savannah, the county seat.

After local bureaucrats paid Magellan more than $130,000 in taxpayer money to conduct the studies, they then decided to survey area residents about their level of broadband access.  Magellan determined that Savannah is underserved. Well, that’s not exactly the situation. Savannah is served by about two dozen providers of high-speed internet, with Comcast, the market leader, in the process of upgrading its network to offer gig speeds to residential customers and 10 gig speeds to businesses.

After extensive internet research, there was no evidence of any broadband consultants – of which Magellan is the leader – telling a community that it shouldn’t build its own network. And almost as rare is the community that bucks the advice of its consultant and chooses not to build.

John Honker, president and CEO of Magellan, didn’t respond to a request for a comment.

I’ll take Broadband for $800, Alex

The work done by such groups should be considered “Jeopardy research” because bureaucrats already want to build a government-owned network on the backs of taxpayers or ratepayers, they’re just looking for confirmation. They already have the answer, they’re just looking for the question.

The three cities listed in the recent press release from Magellan will offer gigabit-capable services to its residents. A gig is more of a sexy term – Rock Falls utility manager Dick Simon referenced his town as “Gigabit City,” for example – than a practical speed. That’s two-fold: a gig is a much faster speed than is necessary to stream video on multiple devices simultaneously and many communities that have built gigabit-capable networks have found the service too expensive to attract customers.

Watchdog.org found through an open-records request last year that Opelika Power Services in Alabama, which spent $43 million to build its own gigabit-capable broadband network, only had one customer for the gig service and no customers for its next highest tier offering download speeds of 300 megabits per second. (Gig customers have since increased to five.) At monthly rates of $500 and $250 for those two tiers, respectively, the costs may be too high for potential customers to bear. More than 1,500 residents subscribed to the 30 mbps service that costs $45 per month.

The new projects

Newport Utilities plans to spend nearly $22 million on its project, with state (via a Community Development Block Grant) and federal (via the U.S. Department of Agriculture’s Rural Utility Service) taxpayers sharing the load. It hopes to offer high-speed internet to most residents of Cocke County by partnering with the Morristown Utilities Commission.

Newport Utilities General Manager Glenn Ray said in late March the utility had sent its plan to the Tennessee comptroller for approval.

The Daily Caller pointed out Cocke County residents already have plentiful internet options, with nearly two-thirds of them enjoying access to speeds that are three times the national average – despite Magellan claiming the county is underserved.

The Rock Falls City Council recently passed an ordinance that will allow it to issue up to $13 million in bonds to design, build and begin operating its broadband system.

“The decision to move ahead did not happen overnight,” Mayor Bill Wescott said in his State of the City address in February. “It came about as a result of listening to our members of the business community and our residents.”

Magellan projected a profit in six years – but that’s based on a penetration rate of 45 percent of available business and residential customers.

The lone dissenting council vote on the broadband plan came from Rod Kleckler, who said that he’s worried the city, which has plenty of low-income residents among its 10,000 population, won’t be able to attract enough customers to pay off the debt.

“For this city to borrow $13 million to start from ground zero and we don’t have anyone with the know-how, to me it’s too much of a risk,” he said.

Kleckler notes, too, the city already has multiple internet options, with which most residents he’s talked to seem satisfied.

Kleckler also pointed out that Magellan has a financial incentive to recommend the city move forward, given that it now also has the contract to build the network.

“If you pay a consultant $2 million are they going to tell you no?” he asked.

Tom Struble, technology policy manager at the free-market oriented R Street Institute in Washington, D.C., told TPAF that he doesn’t think the practice of hiring a third party is necessarily bad because many local government officials don’t have the technological know-how to handle such issues as pole attachments and rights-of-way. Struble added, though, that he’s heard some horror stories about rate gouging after private companies take over the permitting process.

“It could be government arbitrage or shady rent seeking, which is inefficient and can be a barrier to deployment because those third parties have a commercial interest,” he said. “But if you have one company doing it [without overcharging] for a hundred or more small cities that could be an efficient way of doing that.”

Magellan rebuffed

Lakeland, Florida, was one of the few cities to turn down Magellan’s overtures. Mike Brossart, the city’s chief financial officer, was wary of Magellan’s financial model that projected at least 40 percent of Lakeland Electric’s customers would sign up for internet, on top of facing a 1.5 price increase on electric rates, to pay for the project with a $220 million to $270 million price tag.

“It’s highly speculative and we’re not in the business of being highly speculative with the citizens’ money,” Brossart told The Lakeland Ledger.

In Stark County, Ohio, Magellan has recommended a 130-mile, middle-mile fiber-optic backbone that’s estimated to cost $22.5 million. Providers could build the last mile out to the owners of facilities who want broadband.

“An additional benefit of the middle-mile fiber backbone, is that it would provide political sub-divisions the ability to develop their own fiber initiatives,” Magellan wrote in its report.

What’s a gig?

But in its analysis of the local market, Magellan found during a random sampling that most addresses already have at least two provider options and nearly every residence could access speeds of 50 megabits per second, or twice the broadband standard set by the Federal Communications Commission. The 10 businesses sampled could access speeds above 18 mbps.

As Stark County leaders continue to mull building that expensive backbone, local private providers, including AT&T and , are now planning to upgrade their networks to offer faster speeds

MCTV President Robert Gessner a survey conducted by a research company for MCTV found that residents are actually more interested in paying less for their current internet speeds than more for a faster connection. Less than one-fifth of survey respondents had even heard of gigabit internet.

The notion of an adequate speed for a lower rate isn’t uncommon. The Tennessee Department of Economic and Community Development discovered in a study commissioned last year that less than a quarter of state residents subscribe to broadband, although 87 percent of people have access to it.

Taxpayers and local politicians must be sure to avoid the new snake oil salesman Magellan when they recommend building a taxpayer-funded broadband system. This snake oil is expensive and unnecessary.

Johnny Kampis is an investigate reporter/researcher for the Taxpayers Protection Alliance Foundation