Alabama Gazette - The people's voice of reason

Giggin' for Dollars in Opelika as forecasted: OPS they did it AGAIN!

 

November 1, 2018

How do you make $14 million as the first Gig City in Alabama? Spend about $60 million...

Some readers may recall last November's piece entitled, "Giggin' for Dollars in Opelika: Scent of a Birmingham Sewer?" Few columns have generated more nastygrams from politburo types and other lotharios of leviathan in Alabama. The Hubbard 'spin machine' is in overdrive with the 'fire sale' of Fuller's Folly as one of our most notable local corruption fighters dubbed the endeavour. Inveigled as a tremendous "Win-Win" result to continue 'business as usual' that many find easy to believe witnessing the usual Riley, Inc. type tactics reminiscent of our "High Plains Grifter" days. The 'Canary in the Drummond Mine' has lost his oxygen, but the fallout will be felt for many years. Spender Hubbard's traditional Republican, big govt. corporate welfare queen influence attenuates on Goat Hill, but this pollutant's omnipresence in the District 79 area (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, congressmen, et al] before sentenced by Judge Walker.

The most ubiquitous Hubbard minion keeping this sort of 'business as usual' practice alive in East Central Alabama is Opelika Mayor Gary Fuller. Consequences earned by Felon Hubbard unfulfilled (many forecast the former 'Spender of the House' will not spend one day he's earned behind bars) and our Ethics Commission abandonment of their duty, it is rational for the corrupt to continue exhibiting such parasitic hubris and predation upon our citizens and taxpayers. Mayor Fuller was the most persistent politburo member championing Opelika as 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) economic development driven by politburo desires are more effective than those driven and disciplined by market forces. According to Dr. George Ford (http://www.phoenix-center.org/perspective/Perspective17-11Final.pdf) the incidence of the phenomenon had 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 government over-reach into providing what could otherwise be done by private entities intensified. 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 had lost about $14 million dollars on the network side, a significant burden for this small community. Financial losses were predicted to mount through 2020, as the network would 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 was 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 was one of the few cities across the US recklessly 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 a city's broadband network; already established RoWs, employees with existing knowledge about network construction, distribution and customer service, along with other shared assets.

Municipal electric utilities offer another exploitable (blood in the water for these political predatory sharks) advantage - i.e., monopoly profits! Records show the electric division produced annual operating profit [2010] for the city of about $5.5 million. Little surprise cities foolishly operating electricity and broadband networks shift network cost to the electric side. Fuller's Folly in Opelika these past years followed this established pattern of shifting broadband network cost to their monopolized, highly profitable electric division to cloak 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, included expenses and depreciation from assets acquired with those funds, paid by monopolized 'captive' electric ratepayers. Tens of millions of dollars was an alarming amount by any reasonable 'perspective' for a municipality of about 12,000 residences.

Mayor Fuller continued this financial 'ledgerdemain' asserting OPELIKA's Aa3 bond rating implied their broadband network did not negatively impact the city's financial condition. Those like Dr. Ford were not easily fooled, who pointed 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 noted Moody's 2014 bond rating downgraded 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."

Comingling electric and telecommunications division financial reports 'muddies' the impact(s) of the broadband network. A more luminous analysis of financing 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. Mayor Fuller says Opelika's future got a little brighter with this fire sale - perhaps it will allow a little more light and investigation into the matter... another Felonious Folly to prosecute?

OPS's financial results were very stable; the municipal utility purchases electricity to distribute over their network. Dr. Ford assumed electricity revenues and power expenses unaffected by the broadband network. His 'counterfactual' calculated non-power expenses of the electric division, undistorted by 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. The counterfactual 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.

'Standalone' electric utility finances resulted in averages about $4.6 million annually, consistent with financials prior to construction of the broadband network (at $5 million for 2007 through 2010). Combined results display the cross-subsidy from the electric to telecommunications division. When the divisions are combined, the outcome was much LOWER than for the standalone electric division, but joint outcomes are positive in all years except 2014. Monopoly profit from the electric division was sufficient to cover broadband network losses; this does not imply the broadband network had minimal financial impact. Prior to broadband, the city benefitted from internal transfer of millions from the electric division, but now those transfers are substantially lower, impacting ALL taxpayers.

The true [net] financial impact of the broadband network is the difference between 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 drag of broadband scandalously 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 were also disturbing. 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 those related to 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 predicted annual losses decline slightly over the years as telecom revenue increases. Adding broadband network to the City's business services promised almost $1 million additional loss in 2020; cumulative losses by 2020 are $18.6 million and given the realities of actual network "breakeven" losses were forecasted to accumulate long past 2020. The PERSPECTIVE article asserted, "The broadband network has resulted in a sizable financial hole from which there is little hope the city will ever emerge." Now we have the rest of the story as Paul Harvey would say...

Dr. George S. Ford at the Phoenix Center was heavily cited throughout last November's column revisited above. I asked for his thoughts on recent events in Opelika:

"OPS ONE cost the city, or rather its constituents, over $60 million in debt and losses, and the value of the network is only $14 million. The city's captive electric ratepayers remain on the hook for $28 million in debt and they have already covered some $16 million in losses and pay more than $5 per month in higher electric bills to do so."

"The city was misguided to build the broadband network in the first place. It's market value is 25 cents per dollar invested. All along, however, Mayor Fuller has touted its financial success. He testified before a committee at the State House all was well."

"Mayor Fuller has been attacking people for years who questioned the financial integrity of the OPS ONE network. There is no question now that the Mayor has been misleading Opelikans, among others, about the network. The media, the taxpayers, the city's captive electric ratepayers, and perhaps state and federal officials should investigate the city's handling of the network and its sale. In Bristol, Virginia, nine persons connected to its failed broadband network pled guilty or have been convicted in corruption schemes."

"The idea the network failed because it couldn't extend to extremely rural areas around Opelika, say Loachapoaka, only serves to confirm the Mayor's ignorance of the basic finances of a broadband network. The network failed serving low-cost customers. Adding in high-cost customers would have only made matters worse. Moreover, losses outside city limits would have been paid for by those living within city limits - the captive electric ratepayers. I'm sure those outside the city limits would love a subsidy from payers within the limits, but you have to ask who is representing the people of Opelika in such a scheme?"

"If it's any consolation, Opelika was not the first nor the last city to lose millions on a municipal broadband network. Even today, despite the near 100% failure rate of municipal systems, city officials and candidates in other cities, including Shreveport-Louisiana and Eatonton-Georgia, continue to call for municipally-built broadband systems that will leave taxpayers holding the bag."

When pressed enough by an unmixed analysis of Opelika broadband system finances to finally evoke a response, 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 stressed Moody's downgrade of Opelika's electric division's $28 million debt from Aa3 to A1 was not based on grid modernization but because funds were being used for "financial support of the city's relatively new telecommunications enterprise." Moody's due diligence also did not conclude modernization was sufficient to cover the debt for the fiber network.

I asked Dr. Ford for a follow-up quote on this specific issue, "The city will tell its electric customers they are burdened with $28 million in debt for the smart grid. Investigation, even a cursory one, would reveal that there is nowhere near $28 million worth of fiber being used for smart grid. And, if any is being used for smart grid, which is an unanswered question, there are other technologies that could do the same task for pennies on the dollar. Sadly, Mayor Fuller has turned to blame shifting for OPS ONE's failure. The Mayor remains unable to take responsibility for his own financial irresponsibility. The financial hole Opelika is now in, and has been in for years, falls squarely in Mayor Fuller's lap. I was at a meeting last week where someone told me that Opelika was touting the benefits of its municipal network to other cities. You have to question the intelligence, and/or integrity, of someone recommending spending $1 to get $0.25 back."

Let's begin to "THINK" through some of the updates and explanation of this recent 'fire sale' in Opelika. The buyer(s) do not 'really' assume debt. The City received $14 million to pay off $13.5 million in warrants held by the Broadband operation; $28 million in debt remains on the power side of [OPS] Opelika Power Services. I pray the media and other more powerful investigators address that specific issue. They don't use the fiber grid management system and there's no reason for this telecom company [Point Broadband out of West Point, Ga.] to take it. I've found no reporting on how much fiber is left in their grid management system. It may provide an 'eye opening' cost per mile at $28 million in debt since independent audits assign about 5% of fiber network cost to grid management.

Most of the $43 million in debt appears on the electric utility side. Easy to "THINK" the $14 million to only cover the debt shown on the broadband side was more Fuller 'ledgerdemain' to make it look like they paid the debt... OPS he did it again! This leaves electric ratepayers stuck with the $28 million remainder, not including the network $16.5 million loss since it began operating - i.e., the $14 million payment from Point doesn't even cover those operating losses. Overall, the network cost were about $55 million, so it was sold for about 25 cents on the dollar. Not bad compared to other recent muni-broadband space 'fire sales' which would've been avoided if Fuller and his minions' efforts were thwarted a decade ago. Some may recall when a righteous local politician (more interested in competition and benefiting citizens than Fuller predation type schemes) tried to bring improved service to Opelika in 90s for hundreds of thousands of dollars not tens of millions.

OA News reporter Lily Jackson (10/16/18) was among the first to report the city of Opelika would sell OPS ONE quoting Mayor Gary Fuller with, "It was a great day for our community when we brought world-class fiber and infrastructure to the City of Opelika - not unlike what happened when the railroads came through. and the interstate." Fuller, much like Mayor Rahm Emanuel, never misses an opportunity to use a govt. inflicted crises to champion more govt. Not that I think either understand govt. intervention killing competition in the rails is what aided & abetted the distortion into the interstate debacle. Imagine the high speed rail and incredibly low cost bulk transport we would enjoy if predatory govt. practices had stayed out of the railroads; imagine the incentive for OPS to be more competitive if we'd not suffered the rural electrification acts and improvements in DC and solar were not discouraged by this subsidy these past several score; how much more quickly would data transport have unfolded without Fuller Folly type predation across the nation? Sadly most who come out of twelve years of govt. school can't distinguish between market v. command economy results, more trained to champion these soviet type outcomes instead of being able to compare.

Emily Enfinger (10/17/18 Opelika-Auburn News) reported, "Point Broadband's purchase of OPS ONE is the second transaction between the company and a municipality. This sort of transaction is both a similar and recent experience for ITC Capital Partners." ITC is the parent company of Point Broadband. "In early August, Sunset Digital Communications, an ITC Capital Partners' company, finalized its purchase of Bristol Virginia Utilities. The Virginia utility was sold for $50 million, roughly three years after the agreement was first publicly announced, according to a Bristol Herald Courier report." How's that for ironic similarity... can we expect similar prosecution and guilty pleas in Opelika, Alabama?

The O-A News reports and Opelika Observer (10/17/18 Morgan Bryce & Robert Noles) articles on the sale of OPS ONE to Point Broadband spilled much ink explaining employees retained would receive competitive benefits/pay in the transfer to 'business as usual.' Bryce & Robert wrote, "The City council approved elimination of 12 positions due to the transition, but those affected will have the opportunity to apply for other openings with a point of preference in hiring." Nice to see the City does understand what it is like for these 12 individuals to suffer loss due to their actions. Seems they had little to report on loss inflicted upon the 12,000 residences these past years.

Dr. Ford noted Alabama law (as in many States) limits Opelika's broadband network to OPS's geographic area. Sen. Whatley submitted several bills to permit Opelika's broadband network to go beyond city limits and perhaps beyond county lines. Thankfully the bills always died in committee, 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 stockholders' and other productive businesses' 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. Fuller and Hubbard/Lovvorn types look to redistribute at others' expense, maximize govt. paychecks received, etc. The odd look I received years ago forecasting a private entity would emerge to provide broadband when the time was ripe spoke volumes. Now 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. Imagine how much more quickly a true 'Win-Win' result would've come to fruition without Fuller's Folly impediments by his predatory government distortions, rules and practices.

When asked for comment on last year's column, accomplished industrial organization economist Prof. T. R. Beard noted, "The track record for municipal fiber is very poor. 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 made one wonder how much of the City's indebted infrastructure will be inoperative and obsolete when Opelika finally breaks even (in reality) which grew increasingly more difficult to reconcile with Fuller's 'ledgerdemain.' When asked for a follow-up quote for this column Prof. Beard said, "The fire sale of Opelika's broadband network is, unfortunately, not the last chapter in this sad fiasco. The good people of Opelika, and their children who stay in the city, are now on the hook for tens of millions of dollars for essentially nothing. This debt could amount to several thousand dollars per household."

Another local economist, Prof. Alan Seals, was by far the most attacked and vilified for sounding the alarm of Fuller's Folly noting poorly reported 'Gig City' financials. Prof. Seals copied Mayor Fuller in response to a missive asserting intentional omissions, failing to contact OPS, etc., yet still no additional data, alternative explanation or perspective to refute Seal's conclusions has ever been provided. The Associate Professor responded with, "... the proposal to expand the fiber network beyond Opelika's city limits is such a terrible idea I found it impossible to present any other side. I think it 'disgraceful' to use 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'm 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 did not received a response from anyone to refute the bifurcated analysis showing the OPS 'moneychangers' result, it appears he has endured retribution for exercising his first amendment right and academic freedom to address economic issues of this sort. Thankfully it seems a little more difficult for the High Plains Grifter and his minions to silence good folks at AU than in Saudi Arabia. Nonetheless Giggin' and lyin' for dollars remains alive and well today as it ever was when Felon Hubbard controlled the Speaker's gavel.

One can't stress enough there's no dispute Mayor Fuller was informed of 'problems' with their poor 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." Most revealing Prof. Seals noted, "These GON (Government Owned Network) examples look eerily similar to what's unfolded in our first 'Gig City' in Alabama." I pray these issues of comingling funds, fraudulent reporting, etc. are righteously pursued now more exposed to the light and the documented harm done - this would indeed make Opelika's future a little brighter.

At a Lee County Voters League meeting last year one member in attendance was adamant about fighting OPS (appearing to feel the crunch of Fuller's Folly) 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 subsidizing this redistributive result. Mayor Fuller has recently been promoting his commission to fight crime in Opelika - perhaps a good place to start would be in the Mayor's office and way of conducting 'business as usual.' He claimed to want input from all in the effort, but went to great efforts to impede it... not that anyone who could espouse the foolishness he's seems to believe these past weeks would understand how taking from those least able to endure what he's transferred from them would increase the likelihood to participate in or be victims of crime.

Added financial pressures of Fuller's Folly means little to the Felon Hubbard crowd who have no empathy that most in our area couldn't weather an unexpected catastrophic expense of one or two thousand dollars. Of course, 'Win-Win' rhetoric is easier to sell when the theft is taken in $6/mo. installments. Using captured utility consumers to subsidize ongoing folly as we observe in Opelika evoked a growing odor similar to a Birmingham sewer. Perhaps we can bring a little more "Davis & Hart burn" back to Felon Hubbard's turf. If not, our Alabama AG must tell us why this has NOT been pursued this past year by yet another recent incumbent installed by the Riley, Inc. machine without election.

In closing, it is clear Mayor Fuller will NOT take responsibility for his reckless actions exposing Opelika to unnecessary risk and debt. Time for voters (even in our uncompetitive ballot restricted State) to discipline this at the ballot box and not embarrass themselves again waiting for a long overdue court conviction to do the job as we observed removing Hubbard from Dist. 79 in Lee County. The first to put me on notice of OPS 'ledgerdemain' was county Commissioner John Harris who's spread himself thin these past years. Harris made this folly an issue running against Mayor Fuller last election cycle to be 'steamrolled' by the Hubbard machine. Harris' run for Rep. Bandy's vacated seat blocked one of the Opelika city council members (a Fuller's Folly enabler) and another machine candidate in the primary. This paved the way for a bright young candidate entrepreneur (who actually knows/understands how the real world works) to win the run-off. This leaves Harris as the incumbent in a write-in campaign against the Fuller machine candidate [LaGrand] as the only name allowed to be printed on the ballot for county commission District 5. Will voters show they've had enough of machine candidates taking from the hard working citizens of our county? If incumbent Harris wins as a write-in, it will be the fourth victory of this sort in recent memory. If so, it will send a message which may get noticed well outside the Opelika area.

Postscript: to readers asking me for updates on ineligible candidates (e.g. both duopoly candidates in State School Board Dist. 2 race if the '5 year window' rule is followed) and Ethics Commission malfeasance, I'm currently getting info, statutes, phone interviews for another 'follow-up' Alabama Gazette column - many thanks for your patience... I applaud Sect. of State Merrill's efforts to push the Ethics Commission to do their job.

The views of submitted editorials may not be the express views of The Alabama Gazette.

 

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