Holland BPW Fiber to the Premises Capital Recovery Models

Joint Study Session 
FTTP Capital Recovery Models
November 8, 2017

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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

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Downtown “Expanded Pilot”
• 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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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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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

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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

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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

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Service Layers of Open Access

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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

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• 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

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• 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

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• 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

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Current
Expressions
of Interest

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• 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

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• 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

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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

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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

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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?

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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

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High
Level
Node
Layout

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Current Expressions of Interest 
- potential next project footprint

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Holland BPW Fiber to the Premises Capital Recovery Models

Holland BPW Fiber to the Premises Capital Recovery Models

Daniel Morrison

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