PROVO When the city of Provo launched an ambitious $39.5 million fiber-optic network and gave it a hip, digital-age name, city leaders joined national groups trumpeting iProvo as an example for other cities around the country.
On Tuesday, a Los Angeles think tank with a history of promoting free-market ideals released a study that says iProvo is a bad example and should serve as a warning to other cities interested in creating a government-owned network to provide cable TV, phone and Internet services to residents.
The Reason Foundation report criticized early iProvo decision-making and concluded iProvo's financial problems were inevitable and will only get worse.
Provo leaders and others strongly rejected the study's conclusions. They said iProvo continues to add new subscribers the latest figure is more than 8,100 and is meeting targets set in March that would result in 10,000 subscribers by August 2007. They also said the study was one-sided, incomplete and contained little new information.
The study's author, Steven Titch, told the Deseret Morning News the city should try to sell its iProvo assets before its debts grow any larger.
"Currently, liabilities outstrip assets by $2 million," the report states. "This gap will widen and it will become increasingly difficult for iProvo to ever pay off the debt on its system or realize full value of its investment."
Marietta, Ga., invested $35 million in its network and sold the assets for $11 million.
Mayor Lewis Billings questioned the report's integrity, saying late Tuesday that it appeared Reason did not contact any city employees in preparing its report, a sign, he said, of "a weak process" that was inadequate and subjective.
"I'm not fazed at all by a flimsy paper like this," said the third-term mayor, who tied his political future to the project, testifying before Congress and serving as a spokesman for city broadband projects with the American Power Association. "This is a Chicken Little, sky-is-falling paper that I believe set out to try to discredit the iProvo project. We know this isn't a project for the faint of heart, but it is a project we want to go forward and make successful."
In March, the Provo City Council approved a $980,000 loan from surpluses in its electric utility to the iProvo project. The loan was necessary to make the first payments on the $39.5 million bond approved by the council nearly two years ago. The loan initially was interest-free, but the City Council added 5.38 percent interest after Qwest Communications protested.
The council also set aside another $2.1 million in this year's budget to make up for expected shortfalls this year.
Reason complimented Provo for completing construction of the network on time, unusual for city broadband projects, Titch said. Also, the city's costs are lower and its risk lessened because it operates as a wholesaler, having built the network's backbone but hiring private companies first HomeNet, now Veracity and MSTAR to provide video, phone and Internet services. Those companies pay Provo a fee for each subscriber.
The model was forced on Provo when the state Legislature refused to allow cities to compete as service providers.
Other U.S. cities have tried to do it all, and residents of Lafayette, La., voted recently to fund a $125 million project in which the city plans to build the network and then market and provide services. Billings traveled to Louisiana to endorse the project.
"The cautionary tale of Provo is that operating as a wholesaler is not enough of a hedge against the financial and logistical problems that occur when a city seeks to compete with commercial service providers in a competitive business sector," the report said. Spokesmen for iProvo's chief competitors, Comcast and Qwest Communications, said again Tuesday their companies believe it is improper for governments to enter their markets.
Both companies said they haven't changed their prices in Provo, while Billings and the Reason study said they have. Billings also said those companies didn't offer cable and Internet services to every Provo resident before iProvo was built.
"Today, every home in Provo has the ability to have cable and Internet access," he said.
Comparing prices between the groups is difficult, though the study provided a chart. One issue is the differences in products. At 15 megabytes per second, MSTAR, for example, provides Internet services in Provo that are three times faster than Qwest (5 Mb/s) or Comcast (4 Mb/s). The Reason Foundation reported that before transfers, iProvo lost $1.36 million in fiscal 2003, $1.42 million in fiscal 2004 and $1.67 million in 2005. It expects iProvo will lose at least $2 million in fiscal 2006.
The previous losses were confirmed Tuesday by a source close to the project, but that source and others said several aspects of the report were incomplete.
"Our initial response is it has many inaccuracies we take issue with," said Kevin Garlick, recently moved by Billings from his post as director of the Energy Department to temporary full-time responsibility for iProvo. Garlick's leadership helped produce a $16 million surplus in the electricity fund that is the source of the loans to iProvo.
"Our target for the year, set in March, is 60 new (subscriber) installations a week," Garlick said. "We're over 60 per week so far for the year."
That should get iProvo to 10,000 subscribers by June 30, Garlick said. However, he recently told the City Council that initial projections putting iProvo at break-even with 10,000 subscribers need to be adjusted because fewer subscribers are signing up for two or three services. Now Garlick says break-even will come between 12,000 and 15,000 subscribers.
The study harshly criticizes Provo's selection of HomeNet as its first service provider, calling the decision a "disaster."
Garlick essentially agreed, though he defended the choice as well-researched but sabotaged by HomeNet's performance. He said the Reason report's narrative about HomeNet is in error when it states the city asked HomeNet to leave. HomeNet asked out of its contract and soon filed for bankruptcy.
"We wouldn't be honest if we didn't say the major setback of the project was the decision to use HomeNet," Garlick said. Billings and Garlick said they need more time to thoroughly review the Reason report but expect to issue a rebuttal in the future. Billings said the rebuttal would be sent to residents.
Garlick said the report was created to discourage other cities from being "adventurous."
"This is trying to build a case to use in a public setting that cities are not performing well," he said.
Titch said the Reason Foundation does have an agenda of encouraging governments to stay out of free markets, but he said the study was not commissioned by any group and that he was not asked to look at Provo. He indicated the scrutiny was prompted by Provo's national status as a city to watch.
The organization's vice-president of research, Adrian Moore, confirmed that Comcast and Qwest have not contributed to the think tank. Moore said AT&T has given money to Reason in recent years but wasn't interested in the study. AT&T is not a player in the Provo market.
Reason is a not-for-profit think tank founded in 1968. It clearly states at the front of the iProvo report that it supports libertarian principles of individual liberty and free markets. In the form it filed with the IRS in 2004 to maintain its tax-exempt status, it explained that revenue from Reason Magazine "enables the Reason Foundation to foster a greater understanding among the general public of the application of reason and logic."