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

Transcript

1. Joint Study Session
 FTTP Capital Recovery Models November 8, 2017
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
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)
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
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
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
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
8. Service Layers of Open Access FTTP Capital Recovery Models
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
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
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
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
13. Current Expressions of Interest FTTP Capital Recovery Models
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
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
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
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
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
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
20. High Level Node Layout FTTP Capital Recovery Models
21. Current Expressions of Interest
 - potential next project footprint FTTP Capital Recovery Models