Giggin' for Dollars in Opelika: Scent of a Birmingham Sewer?
November 1, 2017 | View PDF
There's a different scent in the wind on Goat Hill with Felon Hubbard in the rear view mirror. House Speaker Mac McCutcheon has shown himself a different Spirit than his predecessor he once shilled for, recently highlighted by efforts focused on reducing waste and revising our State budgeting process. More hidden from public view, some political junkies were pleased how quickly McCutcheon rebuked shady, vulgar 'political business as usual' Riley, Inc. type fundraising tactics to further signal a "High Plains Grifter" was no longer Speaker of our State House. The 'Canary in the Drummond Mine' appears further pressed for oxygen.
Josh Moon (Alabama Political Reporter, 10/18/17) covered the press conference to formally dub the 'Committee on Fiscal Responsibility' to be Chaired by Rep. Chris Pringle, which many in our State pray lives up to the nomenclature. "Its task is to give taxpayers the maximum return on the dollars they send to Montgomery," McCutcheon said. "(The committee) will search for waste and abuse and find ways to save money." Pringle said he thought the task like searching couch cushions for extra money. "I told the Speaker that it reminded me of the old Clint Eastwood movie where instead of going to all the trouble of mining for gold in the mountain, they instead just search under the saloon for all of the gold coins that have fallen through the cracks in the floor boards," Pringle joked. "That's kind of what we're doing," according to Mr. Moon's report. McCutcheon further asserted the committee would work in conjunction with the budget reform committee, taking up legislation proposed by that special committee.
There's some hope they'll find enough revenue to attenuate forecasted shortfalls in the general fund budget, where spending (some driven by increased input prices) far exceeds expected revenues. With 'big ticket' items like prison reform in the mix, McCutcheon admitted some new revenue sources are under consideration, but didn't volunteer any specifics in the APR report. Assuming no 'Billion Dollar Bob' type traditional Republican proposals are on the table, there's indeed a new Speaker in town.
As Felon Hubbard's influence becomes less palpable on Goat Hill, this pollutant's foul omnipresence in the District 79 area (from still being heralded on buildings and street signs to obtaining corrupt govt. school radio contracts) is most notable among the minions who shilled for him in open court (bankers, clergy and mayors to congressmen) before sentencing in Judge Walker's Lee County Circuit Court. The most ubiquitous Hubbard minion to keep steaming forward with the sort of 'business practices' deemed honorable and successful by the current BCA crowd is Opelika Mayor Gary Fuller. As long as the consequences earned by Felon Hubbard do not come to fruition (many forecast the former 'Spender of the House' will not spend one day he's earned behind bars) it is a rational response to continue exhibiting such parasitic hubris.
Opelika became Alabama's first "Gig City" in 2013 offering broadband internet services to their 12,000 households over a $43 million fiber-optic network constructed and operated by Opelika Power Services [OPS] the city's sole electric utility provider. Opelika was one a few hundred US cities to install their own broadband networks, chasing the common pipe dream(s) that economic development driven by politburo desires are more effective than those motivated and disciplined by market forces. According to Dr. George Ford (http://www.phoenix-center.org/perspectives/Perspective17-11Final.pdf) the incidence of the phenomenon has slowed, "in part due to the shortage of federal subsidies these networks typically require and in part due to the numerous and often spectacular financial and management failures of these government-owned networks ("GONs") in cities like Provo-Utah, Burlington-Vermont, Bristol-Virginia, and Groton-Connecticut."
The PR campaign to justify this government over-reach into providing what could otherwise be done by private entities has intensified these past months. According to Mayor Fuller, Opelika's network, in its fourth year of operation in 2016, was "on pace with our five-year plan to be at break even." As explained in the Phoenix Center's PERSPECTIVE article cited above, "this rosy assessment is entirely at odds with the city's own books. The city's telecommunications service has experienced large and continuing financial losses through 2016, accumulating millions in financial losses during its four years of operation. Before 'break even,' these millions in losses must be recovered."
The Phoenix Center's analysis of OPS broadband network's financial health used the city's financial statements showing the city has lost about $14 million dollars on the network side, a significant burden for this small community. Their financial losses are predicted to mount through 2020, as the network will continue to generate insufficient revenues on an annual basis to accumulate losses of nearly $19 million. By any traditional financial accounting/analysis, OPS's broadband network is unlikely to ever be "profitable."
Some, mostly smaller cities (who fail to understand fundamental economics w.r.t. economies of scale/scope) have taken on the substantial financial risk of constructing and operating their own broadband networks, often in direct competition with private companies. Opelika is one of the few cities across the US exposing their residents to this unnecessary risk. The City of Opelika provides several "Business-Type Activities" - e.g., electricity, sewer services, garbage collection and more recently telecommunications services. Operating an electric utility provides some advantages to the city's broadband network; already established RoWs, employees with existing knowledge about network construction, distribution and customer service, along with other assets which can be shared between the two.
Municipal electric utilities offer another exploitable (like blood in the water for these political sharks) advantage - i.e., monopoly profits! Records show the electric division produced annual operating profit  for the city of about $5.5 million. Little surprise cities foolishly operating electricity and broadband networks shift network cost to the electric side. Opelika's accomplished subterfuge follows this established pattern of shifting broadband network cost to their monopolized, highly profitable electric division to cloak the financial losses generated by broadband.
Opelika forecasted $43 million in cost to the city for broadband. The city initiated the construction of the network in 2011 when OPS (not the telecom division/side) borrowed $28.1 million. Revenue to finance annual interest payments of $1.44 million, which include expenses and depreciation from assets acquired with those funds, is paid by monopolized 'captive' electric ratepayers. Tens of millions of dollars is an alarming amount by any reasonable 'perspective' for a municipality of about 12,000 residences.
Our first scent of the sewer wafted more odiferous as Mayor Fuller continued his financial 'ledgerdemain' asserting OPELIKA's Aa3 bond rating implied their broadband network hasn't negatively impacted the city's financial condition. Those like Dr. Ford are not easily fooled, pointing out, "What the mayor fails to mention is that the debt for the broadband network is secured by a first lien on the net revenues of the electric system, not the city." The PERSPECTIVE article further notes Moody's 2014 bond rating downgrade of the city's electric utility (on the $28 million bond) from Aa3 to A1 to reflect the utility's "financial support of the city's relatively new telecommunications enterprise and the long-term risks posed by exposure to the sector's competitive market forces."
Mixing electric and telecommunications division financial reports 'muddies' impacts of the broadband network. A full accounting of the finances of the broadband network was approximated by the Phoenix Center interpolating an estimate of the city's electricity operation "as if" the broadband network was never constructed. Comparing reported mixed financials of the electric and telecommunications divisions to Phoenix Center estimates display the financial impact of the unsubsidized broadband network.
OPS's financial results were very stable; the municipal utility purchases electricity, which is distributed over its network. Dr. Ford assumed electricity revenues and power expenses are unaffected by the broadband network. His 'counterfactual' is a calculation of non-power expenses of the electric division, free from the influence of the broadband network. Between 2007 and 2010, the four years before construction began, non-power expenses (depreciation and other costs) grew about $0.4 million annually. They applied a linear trend based on expense over this period to approximate the non-power cost of the electric division for the 2011 to 2010 period using data from the city's financial statements.
Finances of the standalone electric utility resulted in averages about $4.6 million annually, consistent with the financials prior to the construction of the broadband network (at $5 million for 2007 through 2010). Combined results display the cross-subsidy from the electric to the telecommunications division. When the divisions are combined, the outcome is much LOWER than for the standalone electric division, but the joint outcome still remains positive in all years except 2014. Monopoly profit from the electric division was sufficient to cover broadband network losses, but this does not imply the broadband network had minimal financial impact. Prior to the broadband network, the city benefitted from the internal transfer of millions from the electric division, and now those transfers are substantially lower, impacting ALL taxpayers.
The true [net] financial impact of the broadband network is the difference between the combined divisions and the standalone electric utility. For instance, in 2013, the standalone electric utility would have had a positive income of $3.38 million. The combined divisions, however, only had a positive income of $1.54 million. Thus, the broadband network reduced the city's income by $1.8 million (= 1.54 – 3.38), raising cumulative losses to $2 million when added to the cumulative loss of $0.16 million in 2012 according to the Phoenix Center's analysis.
Dr. Ford found the financial impact of the broadband network shockingly large. 2016 annual financial losses estimated $2.9 million; only slightly smaller than the $3.5 million loss in 2015. Over the four-year life of the network, cumulative losses are $13.7 million. This loss to the city equals about $1,140 per household in Opelika. At the rate of loss accumulation, the Opelika network is unlikely ever to be "profitable," according to these estimates.
Differences between actual losses of the broadband network and those reported for the telecommunications division by the city are also alarming. 2016 reported a loss for the telecommunications division of $1.36 million (operating losses plus interest expense), about $1.6 million below the actual loss computed in the PERSPECTIVE article citing, "the difference is, in part, related to the shifting of broadband expenses to the electric division, including (but not limited to) the $1.4 million in interest expenses assigned to the electric division but caused by the broadband network. Other hidden expenses include the expenses related to the assets purchased with the $28.1 million loan and assigned to the electric division. The margins of the electric utility also were rising prior to the construction of the broadband network. Over the life of the broadband network, the city reports cumulative losses for the telecommunications division equal of only $6.45 million, when actual losses are closer to $13.7 million."
Dr. Ford forecasted financials using simple models projecting revenues and expenses to 2020 predict annual losses decline slightly over the years as telecom revenue increases. Addition of broadband network to the city's business services promises almost $1 million loss in 2020; cumulative losses by 2020 are $18.6 million and given the realities of actual network "breakeven" losses are expected to accumulate long past 2020. The PERSPECTIVE article asserts, "The broadband network has resulted in a sizable financial hole from which there is little hope the city will ever emerge."
When pressed by an unmixed analysis of Opelika broadband system finances, Mayor Fuller alleged this sort of financial assessment wrongfully allocates the cost of electric grid modernization to the broadband network. "Grid modernization" rhetoric is another commonly used 'slight of hand' evoked by cities trying to justify 'cross-subsidies' to broadband from their electric division. Dr. Ford points out Smart Grid applications do not require fiber optic connections to households; home metering and real-time pricing can be accomplished using much cheaper and readily available technologies. Ford cited the manager of Chattanooga's city-built fiber network (also heavily subsidized by electric ratepayers) admission fiber was not necessary for grid modernization.
The PERSPECTIVE article finding, "Financial audits indicate that only about 4 to 6% of the costs of a broadband network are reasonably assigned to a municipal electric utility for grid modernization," was one of the most glaring illustrations of the misinformation campaign thrust upon the public reading Opelika City Council minutes from 2010 hanging their hat on this 'ledgerdemain.' The article further cites Moody's downgrade of Opelika's electric division's $28 million debt from Aa3 to A1 was not based on grid modernization but because those funds were being used for "financial support of the city's relatively new telecommunications enterprise." Moody's due diligence did not conclude modernization was sufficient to cover the debt for the fiber network.
As in many States, Dr. Ford notes Alabama law limits Opelika's broadband network to OPS's geographic area. Sen. Whatley has submitted several bills to permit Opelika's broadband network to go beyond the city's limits and perhaps beyond county lines. Thankfully the bills always die in committee which is unusual in a State filled with once big govt. Democrats now turned Republican to redistribute wealth to those plugged into getting taxpayer subsidized contracts. Private-sector networks are more difficult to control and competition is the worst nightmare of failed businessmen desperate for crony contracts, like former Speakers who can't perform on existing loans but think it a sign of a good 'businessman' to use the power of their office to secure even more loans at stockholder's expense.
Unlike Mayor Fuller and recently installed (into Felon Hubbard's district by eliminating the general election) Rep. Lovvorn, I think Sen. Whatley's heart was in the right place advocating for rural broadband. Most lawmakers are not trained in the realities of market driven results over command economies and are suspicious of those advocating for any position. I think Sen. Whatley finds it odd the legislation I bother him about (most recently 'the right to repair' for farmers) given he knows I'm not a lobbyist and can't be bought. The odd look he gave me when I forecasted a private entity would emerge to provide broadband when the time was ripe spoke volumes. Now that we in fact see broadband coming out to rural areas as economic theory predicted, hopefully more pro-govt. growth legislation of this sort is put to rest.
Accomplished industrial organization economist Prof. T. R. Beard further noted, "The track record for municipal fiber is very poor. A study published by the University of Pennsylvania Law School, which financially evaluated twenty municipal systems using an approach that understates cities' costs, concluded that the majority were not even financially viable, while others had payback periods approaching 100 years. Many sponsoring cities suffered defaults and reductions in bond ratings. I am worried Opelika is well along this path. Opelika is a great town, and I am concerned this will burden them for many years." Beard's analysis makes one wonder how much of this indebted infrastructure will be inoperative and obsolete when Opelika finally breaks even (in reality) which grows increasingly more difficult to reconcile with Fuller's 'ledgerdemain.'
Another local economist, Prof. Alan Seals, also alarmed by poorly reported 'Gig City' financials corresponded with Mr. Alexander 'Andy' Bell (after coping Mayor Fuller in a missive asserting intentional omissions, failing to contact OPS, etc.) who offered no additional data or alternative explanation/perspective to refute Seal's conclusions. The Associate Professor responded with, "... the proposal to expand the fiber network beyond Opelika's city limits is such a terrible idea that I found it impossible to present any other side. I think it is "disgraceful" to use the income from electric rate payers of OPS as the basis to build and expand this fiber network - it is a fact that this has already happened. I also believe your claims of financial solvency of the telecom side of OPS are fiction and I would love to see actual evidence to the contrary. As far as the university is concerned, it does not have a position on this matter. I do however have an opinion and I also work at Auburn University. So, if you want to skew that in some way, go ahead. I am prepared to face the fire because I have nothing to hide. Perhaps, I will see you tomorrow at the committee hearing on this matter." Prof. Seals still has not received a response from Andy Bell or anyone else to refute the bifurcated analysis showing the OPS 'moneychangers' result. Given the ironic nomenclature, I'd hope Alexander G. Bell would despise cross-subsidy of this sort which morphed into one of the most durable redistributive govt. monopolies in US history. Giggin' and lyin' for dollars is as alive and well today as it ever was when Felon Hubbard controlled the Speaker's gavel.
There can be no dispute Mayor Fuller was informed of 'problems' with their presentation of financials. In the Opelika Observer (4/12/17) Prof. Seals wrote, "Other municipal broadband systems have not fared as well. For example, the city council of Provo, Utah sold its $39 million fiber network to Google for $1. In Groton, Connecticut, the city's residents are still paying for a $38 million network sold for $550,000. Four city officials in Bristol, Virginia, home to the latest spectacular failure of a government Internet system, are serving time in the penitentiary." In my last interview on the matter before going to press Seals said, "these GON (Government Owned Network) examples look eerily similar to what's unfolded in our first 'Gig City' in Alabama."
When writing on this in the past, readers asked why I'm so adamant on the issue. It is simple, I'm a friend to those who prefer not being victimized by theft - political or otherwise. I'm a reliable enemy to those who wish to engage in theft. I despise the estimate (looking at the data) Opelika's taxpayers and captive ratepayers appear to be subsidizing broadband to the tune of about $6/mo. per household. At the last Lee County Voters League meeting one in attendance was adamant about fighting OPS (who now appears to feel the crunch of Fuller financing) wrongfully billing her. I have just as much disdain for this 'ledgerdemain' as those directly taxed by Opelika's 'occupational tax' who live outside the jurisdiction and cannot vote on those directly taxing them. To those who claim it is 'de minimus' and/or 'a wash' - OK, get the govt. out of the way to let be a de minimus wash.
I'll close in the sincere hope future 'OPS I did it again' legislation which would spread this sort of cancer outside municipalities is no longer submitted on Goat Hill. It is also my sincere hope and prayer this wrongdoing may be addressed and justly prosecuted as we've observed in other fraudulent broadband expansions in the US. Using captured utility consumers to subsidize ongoing folly as we observe in Opelika evokes a growing odor similar to a Birmingham sewer. Would it pass the Davis & Hart smell test? If the Alabama AG or Alabama Securities Commission are unmoved, perhaps FINRA (Financial Industry Regulatory Authority) or MSRB (Municipal Securities Rule Board) type disciplinary bodies will investigate. No doubt the FBI is familiar with the roadmap to AU with carryovers from the Hubbard/Lowder 'public servant' influence (more recently PUBA, Ticketgate, Softball and Basketball coach scandal, etc.) in the District 79 area - in spite of a newly installed university president who asserts nothing is broken...
Postscript: to my readers who keep asking me to write on recent State School Board issues, I spoke at some length with Board member Betty Peters who has confirmed some of your worst fears. While I'm sorry Peters will not be running for reelection, I'm delighted to report there is an effort afoot (kudos to Loretta Grant) to get her to write for the Alabama Gazette when she's less pressed for time.