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News item: "Anaheim Suit Says Telecom Partner a Virtual No-Show" - Los Angeles Times.

News item: "City Sues Partner in Fiber-Optic Network" - Orange County Register.

Anaheim's effort to become a "virtual community" was watched closely by other cities. It was a public-private partnership fostering technological advances. Could it be a way for cities to upgrade their telecommunications wiring and make money, too.

That was two years ago, when the city and FirstWorld Communications Inc., then known as SpectraNet, entered into a contract to provide cheaper and faster communications service for residents and businesses.

Was it too good to be true?

Apparently so.

On May 13, in Orange County Superior Court, the city of Anaheim filed a breach-of-contract lawsuit against FirstWorld Communications Inc., charging that FirstWorld reneged on their deal to finance a $275 million digital network. Anaheim would be paid a commission for other cities joining the system (Santa Ana decided against joining the system last year). Consumers were to gain faster access to the Internet, as well as hundreds of cable channels. Businesses would also have more efficient services.

Anaheim City Attorney Jack L. White told The Times that the company has fallen behind and apparently will never complete the work. "They basically said they don't plan to do anything more," Mr. White said.

A FirstWorld spokesperson in Denver, Leslie Aun, was quoted by The Times as saying the company hopes to reach a "satisfactory settlement" with the city. She refused to comment on the lawsuit, except to say it was "unfortunate."

According to the city's suit, FirstWorld was to make $45 million in rent payments over 30 years for using the city's existing fiber-optic lines, which the company promised to expand. It paid the city only $1.9 million to date, according to Mr. White. The suit seeks $45 million in damages and completion of the project that has been stopped on its first phase.

Mr. White told The Register, "They have informed us they don't intend to honor the contract" and do not have to make payments to the city under federal telecommunications rules. "It is rather shocking, in my view, that a company like this would negotiate a contract matter two years ago and then totally disavow it because they want to do something else."

The company, according to city officials, refused to provide progress reports on the work and lost interest in the project as it focused on being a national Internet service provider.

According to The Times, some experts see Anaheim's misadventure as an example of the risks involved in municipalizing a business that has long been in the domain of the private sector.

The newspaper quoted Robert Poole, executive director of the Reason Foundation, "It does certainly illustrate the lesson that government, just like business, needs to be careful about expanding to areas that are not their core of expertise. It seems like a very poor job of risk assessment was done before they entered into it."

Pacific Bell had criticized the partnership idea in 1997 and was one of several unsuccessful bidders. This plan would make the city a communications provider, compromising its ability to regulate the telecommunications industry.

Cal-Tax also warned Anaheim, expressing concern in a 1997 letter to the mayor. "We think it is a serious mistake for the state and its subdivisions to engage in services generally provided by the private sector," wrote Cal-Tax President Larry McCarthy. "Taxpayers are harmed when a taxable economic activity is taken over by government."

"It is rather shocking, in my view, that a company like this would negotiate a contract matter two years ago and then totally disavow it because they want to do something else."

- City Attorney Jack L. White.

- The Times coverage was by Richard Marosi and Daniel Yi; The Register coverage was by Marla Jo Fisher.