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March 03, 2011

FairPoint and Vermont (and the other Carriers)

Yesterday I wrote a response to FairPoint Vermont President Mike Smith's interview on WCAX's You Can Quote Me. In a response to my post, which was posted on vermonttiger.com, Mr. Smith characterizes my post as a "rant" and accuses me of "vindictiveness". In fact, I'm grateful to Mike Smith for helping to launch the Vermont Telecommunications Authority (VTA); there are good things to say about FairPoint (see below); Smith raises interesting points which deserve responses (also see below); and I'm hopeful that the VTA will be able to work with FairPoint as it already is with other service providers.

Some Good Things About FairPoint (there are more)

  1. Even through its bankruptcy, the company has made a good faith effort to keep the promise it made to the Public Service Board to build out residential broadband to 100% of 50 designated exchanges. It looks that'll get done although understandably a little after the original schedule.
  2. The company has done a much better job of investing in Vermont than Verizon, its predecessor.
  3. FairPoint workers have made an extraordinary effort to shield their customers from the effects both of the problem-plagued cutover from Verizon's back office computer systems and bankruptcy.
  4. Bankruptcy drastically reduced FairPoint debt – bad news for the debt holders but good news for Vermont since capital can now be spent on network improvements.
  5. FairPoint hired Mike Smith as its Vermont President. I'm sure he is as fervent an advocate for Vermont within FairPoint as he is for FairPoint within Vermont.

The company has asked for freedom from the kind of regulation it was under when it was a monopoly provider. I think it should get that flexibility, both in fairness and so Vermont can get better service through increased competition.

Interesting Points Which Deserve a Response

In his Tiger post, Smith says:

"…this state has plenty of middle mile networks (think of the middle mile as an interstate).  If you are going to provide stimulus funding it should be directed to the last mile (to the home) where the need is greatest in Vermont.  The Vermont Telecommunications Authority stimulus funded project simply overbuilds existing privately funded middle mile networks.  It is a waste of taxpayer's money and duplicates existing networks and does not bring meaningful last mile broadband to Vermonters."

Actually Mike Smith understates the reach of the FairPoint network by comparing it to the interstate; but fiber does not go far enough into rural Vermont. We need to get fiber close to every neighborhood and have it be abundant (and inexpensive) in order to support the affordable high speed last mile services that Vermonters need. The last mile is the town roads and driveways of the Internet. There's no point in building last mile unless there's something to connect it to the rest of the world. In some places, the fiber which VTA received the stimulus grant for will be that connection and it will go further out into the boondocks than FairPoint fiber does. Remember, the feds only gave grants for unserved and underserved areas, and that's what VTA targeted. However, in getting to underserved areas, fiber in the VTA project will parallel some existing FairPoint and other carrier fiber. The VTA tried to put together a consortium which could use all existing fiber builds and be purely additive but FairPoint, as its right, declined to join such a group (see below).

Even if the VTA wanted to build last mile connections with the grant money as Smith suggests (which would certainly compete with FairPoint), the law behind the grants doesn't allow this money to be used for this purpose. VTEL did get last mile grants and loans of over $100 million from another part of stimulus and will use this federal money to compete with FairPoint and other carriers. Waitsfield Champlain also got last mile money. FairPoint sought but didn't get a last mile grant in the first stimulus round and didn't apply in the second round. I'm the first to admit that, once "free" capital is available, private companies (and states) are forced to compete for that capital. You can argue that there should never have been a stimulus bill; but, once there was, it was dangerous for Vermont or any carrier not to try to get its share of the money.

Smith also said:

"…no one argues that when I was Secretary of Administration I was instrumental in creating the Vermont Telecommunications Authority. Others are now interpreting my thoughts.  So let me set the record straight on what I was thinking.   I always envisioned this authority working in a collaborative effort with the private sector, not going in direct competition with them.  By deciding to become a competitor the VTA loses all objectivity and credibility in the industry.  In fact, this has happened and it didn't need to be so."

No question that Smith was instrumental in creating the VTA and assuring that it had $40 million of revenue bonding authority.

Revenue bonds have to be paid back out of revenue so, had it issued them, the VTA would have needed revenue. The only services it is authorized to provide are wholesale communications like fiber backhaul and tower rental; these are services which are provided by telecommunications carriers – but often not at an affordable price or with enough capacity and coverage in rural areas. The VTA was meant to remedy this lack; that means competing with those who sell low capacity service at very high prices.

However, Smith is right that it's preferable for the VTA work collaboratively with the private sector than to compete with it. When conventional telecommunication funding became unavailable in the great recession, all eyes turned to stimulus funding (I was then Vermont's Chief Recovery Officer responsible, among other things, for coordinating our response to competitive stimulus grants). Many Vermont service providers applied individually for first round broadband stimulus funding for both last mile (retail residential and small business) and middle mile (wholesale and "community anchor institutions"); FairPoint was among the applicants. My office did what it could to support these applications. However, except for a small mapping application, Vermont struck out in the first round of broadband grants.

In contrast to that, the electric utilities followed a strategy developed in a meeting between Governor Douglas, Vice President Biden, and me of making a single ambitious coordinated application for Smart Grid funding. They succeeded and Vermont was awarded the largest Smart Grid grant per capita in the nation. I resolved to try the same strategy for the second round of middle mile broadband grants and asked the VTA (which has an independent board) to be the umbrella applicant. VTA agreed and issued an RFP to service providers inviting them to participate in a combined application (or a combined project possibly using VTA funding if stimulus money were not available) for all unserved and underserved areas of Vermont. We (the VTA and the Recovery Office) also aggregated demand from community anchor institutions including state government, hospitals, schools, libraries and others, both to give the grant request added impetus and to provide a revenue incentive to carriers to participate.

There were conditions. Networks built partially with government money had to be open access. Participants had to agree to offer service to all anchor institutions within each region they proposed to serve and to charge not more than $500 for a gigabit per second of transport at each location. This price was not an arbitrary number; it is close to what is charged in urban areas and was meant to bring our rural areas and institutions into parity with their urban competitors. A gigabit is 1000 megabits; the going price in some rural areas from existing carriers including FairPoint was hundreds of dollars for a t-1 (1.5 megabits).The difference is huge. However, there is also profit potential in drastically lower prices; many more customers will buy broadband at the lower prices; the resulting economic development will create more customers.

We hoped that most or at least many carriers would participate just as all of the electric utilities did. It wasn't to be. Although we had discussions with most carriers, in the end only Sovernet decided to meet the conditions and be a sub-applicant in the VTA application. VTEL decided to apply on its own; my office decided to support that application as well as the VTA application despite our initial strategy of putting all eggs in one basket since there was only one carrier in the VTA application and the state would get better coverage if both were funded. FairPoint decided not to be part of a combined application and not to apply on its own. In the end, the feds did decide to fund both VTA and VTEL for middle mile. Separately, VTEL and Waitsfield-Champlain received federal funding for last mile projects. Under federal law, funding for these two types of project is separate and cannot be moved back and forth.

So, to make an already long story short, VTA is collaborating with a private carrier – as Mike Smith says we should be – on a middle mile project; but that carrier is, Sovernet, not FairPoint. It could have been both. Sovernet, not the VTA, is FairPoint's competitor and Sovernet will contribute $12 million of match but will certainly benefit from state and federal money. Rural Vermonters will benefit from both the VTEL and the VTA/Sovernet projects. Last mile providers will be able to reach residential customers much more cheaply because of the availability of wholesale fiber near more places.

Opportunities for FairPoint and the VTA to Collaborate

  1. FairPoint has applied to the VTA for state-funded grant money. Applications for this program exceed the funding available and I don't know how the FairPoint applications will do – but they will be fairly considered.
  2. FairPoint can retain existing customers and attract new ones by providing high capacity last mile connections from the middle mile being built with the VTA grant when that fiber comes closer to the customers than FairPoint's own fiber. Carriers often buy and sell from each other to enhance the reach of their networks.
  3. It may still possible for FairPoint to sell access to its fiber to Sovernet and VTEL to use in their builds if the price is right and enough is available. These are properly private business decisions.

Note: Although I am a Board member of the VTA, this post is purely my own opinion. I am writing it to set the record straight on the founding of the VTA and the applications for stimulus grants, which I was heavily involved in first as Chief Recovery Officer for Vermont and then as Chief Technical Officer. Most important I am writing this to help assure that we do use stimulus money to achieve the universal cell coverage and affordable broadband which Vermont needs and deserves.

Related posts:

The First E-State

Flash! Vermont Legislature Passes E-State Bill

Vermont Broadband Stimulated with $45.6 Million

Fiber to the Neighborhood


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