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Australian firm proceeds with plan to take over struggling UTOPIA

Published April 30, 2014 11:06 am

Macquarie Capital Group pushes for new citywide utility fees to fund the Utah network's overhaul.
This is an archived article that was published on sltrib.com in 2014, and information in the article may be outdated. It is provided only for personal research purposes and may not be reprinted.

The Australian investment giant Macquarie Capital Group wants to move ahead with plans to finish Utah's troubled fiber-optic network known as UTOPIA and deliver lightning-speed data, video and voice capacity to 155,000 homes and businesses in UTOPIA's member cities.

Having studied the partly built public network at least since December, Sydney-based Macquarie says it can build out the network, make it financially viable, assume the business risks and boost cash flow, ultimately retiring millions of dollars in public debt.

Starting Tuesday, the global firm specializing in public-private ventures began its public efforts to persuade cities from Brigham City to Payson to go along.

"We're now very confident the project is feasible and very confident we can deliver on the proposal," said Nick Hann, senior managing director with Macquarie.

Macquarie already has begun pitching its in-depth plan to UTOPIA's 11 members cities along the Wasatch Front in private meetings, and late Tuesday took the results of its in-depth review by consultants, engineers and lenders to elected officials in Orem.

Leaders from other cities belonging to the municipal network formed in 2002 will attend similar meetings in West Valley City and Layton as the week unfolds, with cities having 60 days to decide whether they're in.

"This is great news for us," said Midvale City Manager Kane Loader, who represents his city on UTOPIA's governing board.

Others, though, are raising concerns.

Macquarie's proposal includes a new utility fee on all residents of cities that opt into its plan. Estimated at $18 to $20 a month, the charge per household would apply even for residents who don't want its basic Internet service with speeds of 3 megabits per second.

"This is a billion dollar project and that's where you get the billion dollars," said Royce Van Tassell, vice president of Utah Taxpayers Association. "It's a really difficult ask, to say to people who may never use it, `We're going to require you to pay for the network for someone else.' "

UTOPIA — short for the Utah Telecommunications Open Infrastructure Agency— was conceived by city officials 12 years ago to give businesses and homes access to Internet download and upload speeds of one gigabit per second, some 200 times faster than rates available at the time from private vendors.

The network has sputtered for more than a decade, dampened by mismanagement, construction failures that left the grid partly built, sour deals with vendors and low sign-up rates from potential subscribers. An even bigger problem has been its heavy debt.

Bonds issued to build the network have racked up more than $500 million in public debt, backed by city sales and franchise taxes but meant to be paid off by revenue from a customer base that has never fully materialized. In recent years, UTOPIA managers even enlisted attorneys to study the costs of closing the network down.

Macquarie entered the picture in late 2013.

Known for transportation projects, Macquarie Capital Group is a subsidiary of Macquarie Group Limited, an Australian investment and management firm with 70 offices in 28 countries and a market capitalization of $14 billion. It has at least $1 billion in U.S. investments, including several key transit projects in Western cities.

If its UTOPIA proposal succeeds, it would be among the company's first investments in a fiber-optic network.

According to Macquarie's detailed UTOPIA study, the firm believes thinks it can deliver a finished network on a guaranteed timetable and run it profitably in a 30-year concession contract with member cities, which will continue to own the grid. Under that contract, governments would ease out of network management, instead setting benchmarks that Macquarie then would meet.

The network would be open on a wholesale basis to private Internet service providers, who could in turn sell their retail services such as Web access or video-on-demand to customers over Macquarie-run fiber.

That network access is considered crucial to winning support from Utah legislators, who have long been wary of UTOPIA's competition with the private sector.

More importantly, Macquarie says its finished grid would indeed allow for premium-service speeds of up to a gigabit, comparable to offerings by rivals such as CenturyLink and Google Fiber, which took over Provo's city network in 2013 and is now exploring Salt Lake City as a second Utah market.

Macquairie's plan also builds in so-called "refresh" costs, for ongoing investments to upgrade the network as technology advances.

To Loader, who with other officials has fought since 2006 to make UTOPIA work, Macquarie's plan could mean fulfillment of the network's original vision for full wired public fiber, with vast economic development and innovation potential for member communities.

"Some of the things that they were dreaming about 10 years ago may now be coming true," he said. "The possibilities for this are just endless."

He said even the 3 megabit per second transfer speeds of the basic service Macquarie is proposing would be comparable to existing cable and DSL services, but at a price well below standard Internet bills in most Utah's urban markets.

Still, while Macquarie represents a potential savior for the project, its new proposed "availability fee" may make the plan a hard sell in some circles.

Orem residents firmly rejected a proposal in recent years to raise taxes to fund UTOPIA construction. Several public officials in other member cities have been voted into office based on their staunch criticism of the network's burden on taxpayers.

But Hann, with Macquarie, said the new fees are crucial to delivering a completed network at a competitive cost and avoiding past problems with some cities having more access than others.

He likened the fees to similar charges levied for other core utilities, such as water and electricity.

"What's new is that it's being applied to broadband connectivity, essentially saying it's a basic utility everyone should have," Hann said.

tsemerad@sltrib.com

Twitter: @Tony_Semerad