TO: City Council, City of Palo Alto
FROM: Stephen Kroes, Vice President, California Taxpayers' Association
SUBJECT:   Cal-Tax opposition to fiber-to-the-home project

The California Taxpayers' Association opposes the proposed "fiber-to-the-home" trial (FTTH), which will be discussed at your April 5 council meeting.  We believe the project would incur significant financial risk for the city, which translates into risk for taxpayers.  Cal-Tax also believes it is inappropriate for the city to enter into competition with the private sector in this or other lines of business.

The financial risk is significant.  Having reviewed the city staff report from December 14, 1998, it seems clear that your staff is aware of the financial risks and has enumerated them well.  According to their report, it would take 28 to 100 years to recover the costs of this project. The city would lose over $200,000 in the first year, and losses would continue for some time.

The city's experience with the existing fiber loop shows some of these risks -- it has been losing money, because market penetration and revenues have fallen short of expectations.  This is not surprising. Telecommunications is a business where rapid change is the norm.  The constantly evolving telecommunications market makes it very difficult to forecast revenues for a venture like this.  There is a tendency to overestimate revenue projections for government enterprise projects, especially when an interest group is pressing for a project or service.  For this reason Cal-Tax urges caution as the council considers financial estimates prepared by advocates for the proposal.

The proponents of FTTH stake their entire case on the notion that fiber optics will be the best mode of communications for decades to come.  The truth is, no one knows what will develop, even in the next five years.  A lot of talent and resources are being devoted to developing advanced communications technologies, including satellite and other forms of wireless data transmission.  If the city invests greater amounts in fiber technology, it runs the risk of having too much money invested in an obsolete system.  Taxpayers may be left responsible for a long-term financial burden for an investment gone bad.

Government should not compete for private business.  Taxpayers are very concerned about a growing trend toward "municipalization."  It is the opposite of privatization: cities, counties, and special districts seek to enter what had been private businesses in order to generate profits.

Besides subjecting their taxpayers to significant financial risk, these kinds of operations are a misuse of the powers of government.  Almost any business could undercut its competitors if it could be exempt from income taxes, property taxes, issue tax-exempt debt at low interest rates, and avoid some of the regulatory burdens placed on its competitors.  Government agencies hold these advantages and can therefore unfairly compete against the private sector.  Government should not compete head-to-head with the private sector, not because the private sector is inherently better than the public sector, but because the two have different roles.

Even the proponents of the FTTH project acknowledge that "there can be little effective competition against a fiber system once it is installed."  Future competition would be stifled if the city decides to provide telecommunications services directly to residential customers. By stifling competition, Palo Alto residents could miss out on potential innovations and the benefits of price competition in the future.

Our nation's telecommunications system is rapidly moving away from the paradigm of natural monopolies and moving toward an era of competition.  We urge the city council to leave the door open for future competition, avoid placing taxpayers at risk, and keep the city government focused on its appropriate role by voting no on this proposal.

If you would like to discuss this matter, I am happy to talk with you at your convenience. You may reach me directly at (916) 930-3103 or by email at steve@caltax.org.