Editor’s note: Earlier this week, President Obama reiterated his call for “net neutrality” and Internet regulation. He also praised city-government built fiber-to-the-home projects, city Greenville, N.C. as an example. But Strand Consulting, a research firm, believes differently, citing a study of fiber plans in Leverett, Massachusetts as an example. The city is “handcuffing its citizens for the next 20 years,” the firm says. We have broken their analysis into three parts.

Leverett, MA is handcuffing its citizens for the next 20 years.

 Some are intrigued by the fiber to the home (FTTH) case in Leverett, MA, LeverettNet. It’s an an interesting case worthy of discussion. Here are the facts:

A. It is a municipal project, and this means that the municipality is moving into a commercial market where private operators operate and compete.

B. Property taxes are used to finance part of the project, and the citizens of Leverett are forced to pay for the project for the next 20 years, regardless of whether they use the infrastructure.

C. The city of Leverett will probably over time create a telecommunications monopoly where no competitor will dare to enter in future.

D. The city of Leverett has created a path dependent technological strategy that they will not be able to adjust should conditions change in future, e.g. should the prices of other networks fall or should residents find alternative networks more suitable.

Part one: Examining the social costs of metro fiber projects

Part three: Do FTTH projects really drive economic growth?

There is no doubt that a private telecom provider would love to get the conditions guaranteed to Leverett’s Municipal Light Plant (MPL). Private providers would like to be able to charge households for access to their infrastructure, even if they didn’t use it. Private providers would have no problem to offer a compulsory contract with a set rate for 20 years. The model chosen in Leverett is tailored to a monopoly and will eliminate any form of competition in the long term – AT&T, Comcast and Verizon would love the model from Leverett, if they could get it.

Part One: Facts about the case in Leverett

Here are the facts laid out in the case study made by Susan Crawford and in this Q&A from the Leverett municipality.

1. The town of Leverett has created a bond for $3.6 million to be paid back in 20 years at 4% interest.

2. There are 630 households in the city. This means that the loan per household equals $5714 per household.

3. Each property is assessed an extra property tax increase of $25/month. This must be paid by every property owner for 20 years regardless of whether they regardless of whether he/she uses municipal fiber or not. That’s $300 per year in paying back the principle on the loan. For perspective, this is equivalent to a nearly 5% property tax increase for property owners in Leverett.

4. As for paying for broadband service, one option is to charge a flat rate of $61.30/month (which would include the projected fees for internet and phone service, taxes, access, operation and maintenance), a rate that’s locked in for 20 years. It is not ideal from a consumer perspective to have a set rate for 20 years. If the past is any indication, prices for substitute technologies will fall. However the city may move for tiered rates to exploit some residents who are willing to pay more and to recover costs more quickly.

5. The interest fee is only assessed on those households that subscribe to the service. That being said, the subscription fee is based on service and interest.

6. If many households subscribe, the payoff time is quicker and the total amount paid in interest will be lower. However if few subscribe, the payoff is delayed and the total interests fees grow. That being said, it if doesn’t work out, the finances grow worse and worse.

7. In practice then, the price of broadband is set at $86.30 without getting a TV product in the package.

Let’s look at the numbers in relation to a city of 20,000 households. Using Leverett’s model and assuming a similar population density, a city would borrow $115 million. For many municipalities, this would mean indebting themselves even further than they are today. Assuming a median house price of $200,000, the property tax burden would need to increase by $300/household annually or $6 million. This would be equivalent to an 11% increase in property taxes, assuming the average property tax rate of is 1.3% of the property value.

Part Two: The social consequences

(C) Strand Consulting