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Fiber-optic options charted
Expansion into Collinsville would take $37M in bonds

Sunday, December 2, 2012

By MICKEY POWELL - Bulletin Staff Writer

Martinsville could start earning a profit in six years if it expands its fiber-optic telecommunications system citywide and into the Collinsville area, a consultant has determined.

The city would need an estimated $37.2 million in bond funds to expand the system that much, an executive summary of a feasibility study done by CCG Consulting LLC shows.

Interim City Manager Leon Towarnicki acknowledged that is a lot of money, especially with the city’s financial constraints.

But “it’s something we need to consider” based on information in the study, he said.

The study examined three options — expanding the system in Martinsville, expanding it citywide and into the Collinsville area, and expanding it citywide and throughout Henry County.

“By building (out the system in) both towns (Martinsville and Collinsville), you increase the chance for success and are also able to generate a lot more cash” because of the larger the potential customer base, the summary states.

However, expanding the system throughout Henry County would be “too risky,” the summary adds, since that would require “a very large bond with large annual debt payments.”

Martinsville installed its fiber-optic system in the late 1990s to supply high-speed Internet, phone and information-sharing to city government buildings, electrical substations and traffic signals.

Over the years, as costs for communications services climbed, businesses asked to use the system, and the city agreed. The system now has about 30 private customers.

The city paid CCG, a Maryland-based communications consulting business, about $40,000 to study whether expanding the system to generate more revenue for the city would be feasible.

In surveys, CCG found “overwhelming support” from Martinsville households for “the city entering the communications business,” according to the study summary.

About 360 households were surveyed. Of them, 82 percent said the city should offer communications services to both homes and businesses. If city services were available, 64 percent of those surveyed said they would buy Internet service, 84 percent said they would buy telephone service and 81 percent said they would buy cable television service, the summary shows.

“These are among the highest percentages we (CCG) have ever seen in this sort of survey,” it states.

The city lost a court battle a few years ago to take over the local cable TV system, and City Attorney Eric Monday has said it would not pursue that again.

Still, Martinsville could partner with a private company to provide cable TV through the city’s fiber-optic lines, the summary shows.

After receiving the financing, it would take the city about 18 months to expand the system to the point that new customers could be served, the summary states.

Martinsville would need a bond of about $20.5 million to expand its system just in the city, according to the summary.

CCG based that sum, the summary states, on “a conservative assumption” that the city would need a debt service reserve fund to cover a year’s worth of bond payments and that bonds would capitalize three years of interest. It did not give a dollar figure for the debt service fund.

If 60 percent of homes are served, the city would lose a little money — the summary did not say how much — for four years before it starts making a profit, the summary shows. The profit could be as much as $13 million by the year 2037, it shows.

To expand the system to Collinsville at the estimated cost of $37.2 million, Martinsville would see net income after five years if it serves 60 percent of homes in both Martinsville and Collinsville, the summary shows. By 2037, CCG expects the city would have $28 million in profit under that scenario.

In both scenarios, the city would have to sign up 42 percent of residential customers in either locality to break even and make an expanded fiber-optic system “sustainable in the long run,” the summary states.

Expanding the system countywide would require an estimated $145.2 million in bonds and the city would have to serve 62 percent of city and county homes to break even. Having to achieve that percentage would “increase the risk of the project significantly,” according to the summary.

Population is the key factor.

Because the Collinsville area is densely populated, Martinsville’s system likely could sign up multiple households there, Towarnicki said.

Yet the population in many others parts of the county is less dense, he said, so “you’d have to extend so many miles of fiber-optic cable only to pick up a handful of customers” and that would be less cost-efficient.

The summary does not detail the methods that CCG used to arrive at its conclusions or take into consideration potential business customers.

Towarnicki said he has not yet been able to discuss the feasibility study in detail with CCG employees, but he would guess that obtaining new business customers for the system would lower the expansion costs.

Also, the summary does not say how much debt payments on bonds might be.

The study assumes the city would sell revenue bonds. It indicates, though, that if general obligation bonds are used, the city could get a lower interest rate and closing costs and it would not need a debt service reserve fund.

General obligation bonds require a public vote. Revenue bonds do not.

It will be up to Martinsville City Council to decide whether to expand the fiber-optic system.

Council members have not yet received copies of the feasibility study, according to Mayor Kim Adkins.

Towarnicki said the study is roughly 100 pages and its contents are highly technical. On Friday, he continued to review and edit the study because he had found some typographical errors he wanted to correct before posting it on the city’s website, which he plans to do early this week.

He expressed confidence in CCG’s findings. The firm is “one of the foremost consultants” in the communications industry, has done “probably hundreds of these studies” and is knowledgeable of costs associated with communications systems and “where the technology is headed” in the future, he said.

CCG has suggested that the city establish a citizens advisory committee to evaluate the feasibility study. Council members have indicated they want to do that, and the committee would be comprised of residents with expertise and/or a high degree of interest in communications matters.

The committee would be responsible for making a recommendation to the council on whether expansion should be pursued.


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