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Audit: Problems still plague money-losing UTOPIA network

Published August 1, 2012 11:50 pm

State examiners say network still losing millions; agency says new plan in place to move forward.
This is an archived article that was published on sltrib.com in 2012, and information in the article may be outdated. It is provided only for personal research purposes and may not be reprinted.

After nearly a decade of operations, the high-speed broadband network known as UTOPIA continues to lose millions of dollars each year.

And despite new management and an ambitious five-year turnaround plan, it appears to be making at least some of the same mistakes that landed it in financial trouble in the first place, according to a scathing Legislative Auditor General's report issued Wednesday.

The audit, the result of an 18-month investigation by state examiners, blasted the Utah Telecommunication Open Infrastructure Agency for poor planning, mismanagement and wasting money.

"UTOPIA's board members, staff, and outside consultants readily admitted that mistakes were made during the rollout of the network," the report states.

But UTOPIA Executive Director Todd Marriott says the report focuses too much on the past and not enough on the innovative and positive changes that have been put into place over the past several years to affect a turnaround of the struggling network.

"I think we've been addressing them [the mistakes] for sure, but we welcome the audit," he said. "It allows you to fine tune and get better. We had to make a lot of changes, and we continue to do so."

Yet state auditors, who point out that the network lost $18.8 million in fiscal 2011, aren't so sure.

UTOPIA's current five-year plan calls for the network to be built out only in areas where there are sufficient potential customers to cover the cost of construction. It is a strategy that is aimed at avoiding some of the problems of the past, such as when UTOPIA spent $1 million to build its network in an area of West Valley City that drew 27 customers.

But the auditor's report indicates that UTOPIA isn't following its new plan in some of the key areas where it is focusing its efforts today.

"In fact, while observing UTOPIA's latest efforts to complete the network in Centerville and in its legacy areas, we found that many of the agency's past practices have not changed," the report said. "For example, the agency has not followed its commitment to invest funds only in those locations where 25 percent of residents have agreed to purchase the service."

The report suggests a number of solutions to UTOPIA's issues, including more complete business plans, adopting better control over funds, more openness with the public with its records and meetings, improved management and better oversight.

UTOPIA was organized in 2002 by community leaders in more than a dozen municipalities along the Wasatch Front.

At the time, they believed that private telecommunications providers in the state were unwilling to bring the benefits of high-speed Internet and other broadband services to their communities. In all, 11 of the founding cities, from Brigham City in the north to Payson in the south, pledged about $500 million over 32 years to back the bonds that UTOPIA sold to finance network development.

The network, though, has been plagued with continuing losses and over-optimistic projections. It has yet to earn a profit and now has a negative net worth of more than $120 million, which means that if all of UTOPIA's assets were sold it would still owe that amount to its creditors.

The auditor's report cites a number of reasons why UTOPIA wound up in dire financial straits:

Construction • UTOPIA planned poorly for the construction of its network, and it was a mistake to build sections of it in different cities at once. Also, $10.8 million was invested building the network in locations where there are no subscribers.

Connection fee • Originally, UTOPIA did not charge customers a connection fee or commit them to a similar subscription contract that other companies such as Comcast did, which the report says was a mistake. Today, UTOPIA charges $2,750 to install the fiber-optic network into a home.

Interest rates • UTOPIA structured its debt (bonds) so that it couldn't take advantage of declining interest rates, which means it is locked in to paying 7 percent on its bonds.

Set top boxes • UTOPIA once purchased $3.3 million in television converter boxes for the network that were soon outdated. Because of slow construction of the network, only 32 percent of the boxes were ever used by customers. Ultimately, UTOPIA sold the remainder at a fraction of their original cost, according to the report.

Rep. Brad Daw, R-Orem, who requested the audit early last year after hearing "a lot of flak from Orem residents," believes UTOPIA is still in trouble.

"Whatever they're doing isn't quite working," he said Wednesday after reading the report. "I expected a fairly negative report but I didn't expect it to be this negative."

Daw had spoken to Orem mayor James Evans on Wednesday about the report but acknowledged that as a legislator there isn't much he can do right now.

"I would like to see a lot more oversight," he said. "They are clearly wasting a bunch of taxpayer money and we need to get that under control."

Although Marriott asserts that plans and procedures are in place that will allow UTOPIA to fulfill is promises, state auditors point out that such assurances have been made before.

"Our concern is that UTOPIA has created ambitious plans in the past but its performance has consistently fallen short. Each time, outside consultants have been asked to examine the agency's new business plan, and each time the consultants have certified that the plan is achievable and financially sound," the report said.

It added that because of poor execution by UTOPIA, its business partners, or both, performance has fallen short of expectations.

Despite the criticisms, UTOPIA chairman Kane Loader, who also is Midvale's city manager, contends that positive changes have been made and the agency is turning things around.

Since 2007, the project's original contractor has been let go, and the management team has changed. The network has launched competitive pricing for customers, and records show that the average revenue per customer is meeting projections. Loader and Marriot expect that by 2015 UTOPIA will begin to break even.

"All of the things pointed out in the report have already been acknowledged by UTOPIA and acknowledged for several years by the cities," Loader said. "That's the only thing brought out in the report. But it doesn't talk about the things we are doing to make this a success. I think we're on the right track."

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UTOPIA cities and what they'll pay in 2013

The 11 Utah municipalities that have pledged a portion of their sales tax revenue to back UTOPIA's bonds are expected to pay nearly $13 million next year to help keep the fiber-optic system afloat.

City2013 Pledge

Midvale $778,700

Brigham City $430,039

Centerville $427,697

Layton $2,146,598

Lindon $395,126

Murray $1,580,908

Orem $2,801,924

Payson $259,920

Perry $105,494

Tremonton $324,459

West Valley City $3,593,091

Total $12,844,956

Source: UTOPIA, Office of Legislative Auditor General