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Holland BPW Fiber to the Premises Capital Recovery Models

Holland BPW Fiber to the Premises Capital Recovery Models

A copy of Holland Board of Public Works' (HBPW) presentation as prepared for delivery to Holland City Council by Becky Lehmann, November 8, 2017.

Republished here for ease of viewing on https://hollandfiber.org

https://cityofholland.civicweb.net/Portal/MeetingInformation.aspx?Org=Cal&Id=481

Daniel Morrison

November 08, 2017
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Transcript

  1. Joint Study Session

    FTTP Capital Recovery Models
    November 8, 2017

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  2. Downtown “Expanded Pilot”
    • Construction is underway right now
    • Signing up customers to 3-year commitment
    under approved rate structure
    • Drops are being constructed for those that
    sign up
    • While this has limited capital exposure with
    a highly probable successful outcome, use
    of this model beyond the downtown has a
    high amount of risk associated with it
    FTTP Capital Recovery Models

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  3. Downtown “Expanded Pilot”
    FTTP Capital Recovery Models
    • 79 Applications (50 Internet, 22 Enhanced Internet, 7 Multi-Dwelling)
    • 11 already activated (original pilot customers)
    • 63% of minimum desired take-rate (126 customers)
    • 74% of original revenue projection
    • 12 year Internal Rate of Return = 4.8% (calculated with current applications)

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  4. Cumulative Cost/Revenue Curve
    Cumulative Cost / Revenue Curve
    August 2, 2017
    $-
    $350,000
    $700,000
    $1,050,000
    $1,400,000
    Year 1 Year 3 Year 5 Year 7 Year 9 Year 11
    Revenue
    Cost

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  5. Current Recovery Models
    • Section 4.3 of the approved fiber rate book
    • Net revenue test
    – Cost of extension of service is compared with
    present value of 4 years of “net revenue”
    – Net revenue = Incremental revenue from the new
    customer – incremental cash operating expense to
    serve
    – If PV of 4 years of net revenue => extension cost,
    then no contribution is needed from the customer in
    support of the extension
    – Else customer contributes the difference up front
    FTTP Capital Recovery Models

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  6. Current Recovery Models
    • Net revenue test - Continued
    – Works well for a new single customer with a
    dedicated connection (Active Ethernet service)
    – Will not work well in shared gigabit service
    extensions where multiple customers are
    needed to justify the extension
    – Downtown extended pilot took on risk for the
    construction cost
    – Different models are needed to achieve
    acceptable risk for growth
    FTTP Capital Recovery Models

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  7. Shared Gigabit Rate Structure
    • Internet - $85
    • Enhanced Internet - $220
    • Multi-Dwelling Unit - $25 per tenant
    • 100 Mbps Transit - $40
    • 1000 Mbps Transit - $60
    • 1000 Mbps Enhanced Transit - $140
    FTTP Capital Recovery Models

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  8. Service Layers of Open Access
    FTTP Capital Recovery Models

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  9. Potential New Recovery Models
    • Up front contribution in aid of construction
    (group of customers)
    – Group forms a customer representing legal entity:
    Association, LLC, or other
    – HBPW signs agreement with entity and receives up
    front payment for extension of service
    – Entity dedicates asset to HBPW, which maintains
    the system through rates
    – Contract with entity could have special provisions
    such as restricting service to a geographic area
    FTTP Capital Recovery Models

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  10. Potential New Recovery Models
    • Partial upfront contribution in aid of construction
    with credit assurance instrument
    – HBPW installs extension to area supported by
    partial payment from a legal entity, usually would be
    a developer
    – Entity provides a credit assurance instrument in
    amount equal to the value of the remaining cost
    – After some defined period, say 5 years, of net
    revenue, the HBPW is able to draw upon credit
    instrument for remaining shortfall
    FTTP Capital Recovery Models

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  11. Potential New Recovery Models
    • Net revenue evaluation with a group of
    customers (Demand aggregation)
    – BPW identifies take rate commitment
    requirement by geographic area
    – Demand aggregation occurs through
    marketing and neighbor to neighbor interaction
    – Once interest levels are sufficient, three year
    commitments are obtained from those
    customers
    – BPW then builds out to that area
    FTTP Capital Recovery Models

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  12. Potential New Recovery Models
    • Example: Natural Demand Aggregation
    – HBPW identifies geographic zones and
    number of committed customers needed by
    zone
    – Once expressions of interest reach a certain
    threshold, 3-year commitments are obtained to
    provide enough capital recovery assurance to
    build out that area
    – This amount could be all or some part of the
    capital cost
    FTTP Capital Recovery Models

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  13. Current
    Expressions
    of Interest
    FTTP Capital Recovery Models

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  14. Potential New Recovery Models
    • Binding commitment from single entity to
    pay for construction over extended
    timeframe
    – Taxing/Special Assessment authority commits
    to repay construction over a period of time
    – Authority dedicates assets to HBPW ownership
    and HBPW maintains through rates
    – Required construction costs are calculated
    based on the area
    – Could be done within the City of Holland
    footprint
    FTTP Capital Recovery Models

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  15. Potential New Recovery Models
    • Example: Same as water extensions
    – HBPW identifies zones of potential fiber development
    – Residents and business owners in zones circulate
    petitions to drive to a sufficient interest for the
    Assessing Authority to read in an assessment
    – Assessment provides the HBPW assurance of capital
    cost recovery
    – As with water service, the assessment could be two
    parts, “pass” and “drop”
    • Everyone in the zone would be assessed the “pass”
    • Those hooking up would be assessed the “drop”
    – Potentially the four-year revenue test could absorb the drop cost
    FTTP Capital Recovery Models

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  16. Legislative Risks
    • House Bill 5099 recently introduced
    prohibiting the use of local funds for
    providing broadband Internet service
    – We provide an open access network that
    encourages competition
    – We do not use any tax dollars
    – We have already proven to be successful
    • Likely to be seen again in a different form
    FTTP Capital Recovery Models

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  17. Recommended Next Steps
    • Continue learning from experiences of rolling
    out a new service downtown
    • Capitalize on broadband development
    opportunities throughout existing larger fiber
    footprint
    • Maximize the node for downtown by hooking up
    other customers in the adjacent areas
    • Reach consensus on the way forward for
    expanding Shared Gigabit beyond downtown
    FTTP Capital Recovery Models

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  18. Specific Questions
    • Is there consensus on utilizing all proposed
    capital recovery models where they make
    sense?
    • For the Shared Gigabit Service inside the
    city limits, is there a preference between
    using special assessments or demand
    aggregation?
    • Is there alignment that we should be
    maximizing the current assets and being
    opportunistic regardless of location?
    FTTP Capital Recovery Models

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  19. Staff Recommendation
    • Inside the City
    – Carve city into geographic nodes
    – Pick one area and calculate cost for construction
    – Evaluate demand aggregation and assessment
    models for cost recovery
    – Present options for feedback
    • Outside the City
    – Take advantage of opportunities that present
    themselves and use a model that fits
    • This will continue to grow revenue to support overall
    development of the broadband utility
    FTTP Capital Recovery Models

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  20. High
    Level
    Node
    Layout
    FTTP Capital Recovery Models

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  21. Current Expressions of Interest

    - potential next project footprint
    FTTP Capital Recovery Models

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