Explaining the hullabaloo around LUS Fiber and why it matters

From The Advocate

LUS Fiber has long been touted as one of Lafayette’s great assets, our most laudable accomplishment, the physical embodiment of our desire to be a center for technology innovation and the enabling infrastructure that makes that future possible. But now, Fiber is under siege, accused of receiving a series of illegal subsidies worth millions of dollars from its sugar daddy LUS, which some believe has been intentionally trying to prop Fiber up. 

If these allegations are all true and the penalties are large enough, the financial viability of Fiber could be at risk. But even if they’re not true, they still threaten Fiber’s stability, eroding trust and creating confusion about a very complicated issue right as we’re gearing up for a new administration and new council who will run Fiber. 

That’s why before we rush to judge these new developments as either clear proof of government malfeasance or a baseless witch hunt driven by political actors, it’s useful to understand the specifics of this debate and why it matters.

OK, so what’s the alleged wrongdoing

Before we get too far, we have to mention the Local Government Fair Competition Act. It’s a state law that, among other things, prevents LUS or LCG from subsidizing Fiber’s operations. We’ll get more into what all this entails later in this article. 

There are essentially three allegations that Fiber somehow violated that law. The latest is that LUS has paid $8 million over several years to Fiber for what Mayor-President Joel Robideaux says is a redundant and dubious power outage monitoring system. He has requested an audit from the Louisiana Public Service Commission on whether these payments violate state law, and even went so far as to insinuate that these payments may have been intentionally used as a backdoor subsidy from LUS to Fiber. 

This episode comes on the heels of revelations that LUS paid $1.5 million to Fiber to connect dozens of sewer lift stations that were never hooked up. Former LUS and Fiber Director Terry Huval preemptively had Fiber pay LUS back with interest for the unused services and requested an audit from the LPSC. In June, the LPSC’s audit was released confirming that the payments were an “unintentional appropriation” that nonetheless represents “acts of noncompliance with the LPSC’s Code of Conduct with respect to affiliate transactions.”

Beyond those incidents, Fiber critics have long beat the drum that LUS has grown its telecommunications budget by millions since Fiber was built, thereby providing a backdoor way to chip off consistent revenue. And a similar accusation could be hurled against LCG, which has also seen its telecommunications budget soar since Fiber started offering services.

What these allegedly point to is a systematic strategy of propping Fiber up through backdoor subsidies, in violation of state law. For obvious reasons, if true, that’s a big freaking deal. 

The stakes are higher than you realize

What most people don’t know is that Fiber has a sword hanging over its head. If it’s ever unable to cover the cost of its debt service, Fiber must be shut down, its assets and debts assumed by LUS, and LUS’s rates automatically increased for all ratepayers enough to cover the cost of servicing Fiber’s debt.

In that scenario, the citizens of Lafayette would largely lose their ability to use Fiber since the Fair Competition Act prohibits LUS from selling telecommunications services on its own. Meanwhile, the city of Lafayette would still be responsible for paying back the debt left from building Fiber, which includes more than $100 million in revenue bonds.

In theory, if this were to happen, LUS could sell Fiber’s assets to a private operator. But as it stands today, Fiber is probably worth less than $50 million, given its debt load. A high bidder — like Cox or AT&T — could decide that it makes more sense to buy out the competition and keep it shuttered than try to incorporate Fiber’s network into their existing infrastructure.

Before these allegations, this threat was mostly theoretical. Fiber has generated enough revenue to pay for its operations, its debt service, and its imputed taxes and still have more than $7 million per year available to make capital investments. 

But if it turns out there was a repeated pattern of skirting the law to prop up Fiber’s financials, the millions in penalties and lost revenue that may arise from these violations could bring Fiber dangerously close to the edge of financial insolvency.

The root of the problem: Fiber’s identity crisis 

What makes this whole situation so complicated is that Fiber suffers from a bit of an identity crisis. It is both a department of LUS and an independent business entity, yet it can’t operate freely as either. 

If Fiber were just another department of LUS without the constraints of state law, subsidies wouldn’t be illegal. Shortfalls in revenue could be covered by transfers from the funds with authority and capacity to allocate that money to Fiber. LUS does this all the time, essentially propping up sewer and wastewater services with money from the electric system. Obviously, the city budget couldn’t afford to subsidize Fiber with millions of dollars every year, but there wouldn’t necessarily be anything illegal about doing so if it was needed.

Because of the Fair Competition Act, Fiber can’t just operate as an LUS department. The legislation was passed during Lafayette’s fight for its right to build Fiber, and it was designed to protect private providers from facing what they regard as unfair, government-subsidized competition. The gist of what it requires is that Fiber has to compete on a level playing field with the private sector.

For example, LUS can’t give money to Fiber, but it can loan money at market rates. And it has done so, to the tune of more than $26 million. These loans were primarily to cover Fiber’s startup costs, as well as a $5.8 million operational loan in 2011.

Also, Fiber still has to pay taxes equivalent to what it would if it were a private operator. This year that equals $1.1 million paid into the city’s general fund.

The stickiest wicket that Fiber has to navigate in this law is that it can’t give/receive any services for free to/from LUS or LCG. Instead, everything has to be given a value. This is a situation unique to Fiber, as other municipal utilities, free of any type of Fair Competition Act, are able to treat their fiber networks as just another division of the utility. While on the surface setting these values might sound simple, it creates room for uncertainty through differing interpretations of how to value something.

So let’s go back to the allegations involving the power outage monitoring system. Looked at one way, it’s a debate over justifying costs. Huval based the system’s value on the total economic benefit to the city’s economy of using the system to lower outages from one hour to 40 minutes. Robideaux, on the other hand, argues the pricing should be set based on the actual costs of delivering the service. But there’s a huge gap — literally millions of dollars in costs — between these two approaches. 

Huval commissioned LEDA to produce a study that calculated a $2 million annual benefit to Lafayette’s economy by reducing the length of outages by one third. So he determined the value to LUS of this service was half of that, or $1 million per year, so that’s what LUS paid Fiber.

But if Robideaux’s right and the price should be based on costs, Fiber should have been charging LUS a small fraction of that $1 million. That’s because this version of POMS was a software-based system that leveraged existing hardware and therefore required very little money to set up and operate. 

What’s ironic is that if Fiber were an independent business entity, everybody would be high-fiving each other for figuring out a service they could sell for $1 million per year while only costing them thousands of dollars to operate. 

But that’s not how the system works, because Fiber isn’t just a business nor is it just government. Instead, it operates in a complex purgatory between the two.

An unprecedentedly uncertain future

Given Fiber’s regulatory straitjacket, perhaps we should consider ourselves lucky that as it stands today, Fiber is, on the surface, succeeding financially. But even if Fiber wasn’t running against these allegations, it would still face an uncertain future. 

For one, its debt service payments and operational costs have ballooned — with its debt service increasing from $3.3 million to $10.8 million per year from 2018 to 2019 — but its revenue growth has been almost nonexistent. At the same time, Fiber’s competition has been increasing as AT&T deploys its own fiber network and Cox introduced gigabit service. Plus there’s potential new competition on the horizon from 5G wireless offerings.

Then, amid all this, we’re having an election that will totally change the face of who’s in charge of Fiber. Come January, at a minimum we’re going to have a new mayor-president and a new five-member city council. Four of those could be incumbents who get re-elected, or all five could be starting their first term. And with new leadership in place it’s not certain if they’ll decide to make Fiber Director Teles Fremin’s interim appointment permanent or find someone else to fill that role.

In other words, literally every single decision maker with authority over Fiber could be different next year. And we have no idea if those newly elected officials will be supporters of Fiber who want to expand Fiber parishwide or detractors who’d rather see government get out of the telecommunications business altogether — or if they’ll fall somewhere in between. All we do know at this point is that there’s more uncertainty around Fiber than there has been in years. 

Without a doubt, these allegations of financial impropriety against Fiber and LUS demand answers. And to that end, Fiber’s fate is essentially in the PSC’s hands and in those of whoever wins this fall’s elections.

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About the Author

Geoff Daily created FiberCorps and helped launch the Lafayette General Foundation. He now works as a launch strategist.

3 Comments

  1. For the life of me I cannot understand why people continue to think government interference in the market place is a good thing. This is not just about Fiber, it is the whole concept of politicians we don’t really trust, making plans behind closed doors to deceive opponents and the public, (textgate I think you’re calling it) to achieve vague and risky “economic goals”. Admittedly, I fought against the city going from utility fiber line infrastructure provider into the retail “fiber” business service and content provider. For the very reasons we are seeing now. It went from being a great infrastructure value for commerce, like streets, to retail outlet. But its very definition the government that has changed from government to a business, with little or no over site. And when word get out, its to late to fix. So the public eats it. Whats really funny is when Joel was our Representative and Mike Michot was our Senator, they co sponsored a bill to basically gut the “Fair Competition Act”. The very act Joel is siting. Those of us who opposed the retail fiber plan, asked them to amend the structure so no “In Lieu of Tax” now being paid by Fiber, even while losing money, would only have to be paid on “profit”, not gross revenue. If they had, we wouldn’t be having this bad of a problem. And that is what government involved in business gets you, more subsidy spending or less tax collection, but always less money for services the government should be providing.

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  2. @Tim your points are well taken, and I agree with you on some (having the backhaul network be a public utility that others can re-sell to consumers), but without LUS Fiber, there would be no competition for Cox, and so I doubt they would have rolled out their inferior “gigabit” service. So what we have is a market failure, which only the state can remedy (especially where natural monopolies like utilities are concerned). So either Cox would be more highly regulated by the state, or the state would introduce a public utility to provide a competitor and enforce market discipline on the likes of Cox. I don’t think having the state do less than either of these would lead to satisfactory outcomes.

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  3. Mr. Supple, much of your argument is based on the idea that “we” don’t trust politicians nor that “we” think government is very good at anything. You and I could not disagree more. I trust my council representative quite a bit — so maybe you should vote for someone else next time? And if I trust local government enough to maintain other forms of infrastructure for distributing goods, services, and information, I am perfectly fine trusting it with doing so with the core infrastructure for the twenty-first century, telecommunications. In fact, I trust them more. When I have the, albeit rare, difficulty with my LUS Fiber service, I call them up and I get not only a person on the phone, a rarity in itself, but a local person who cares about the quality of my service. When was the last time anyone from AT&T or Cox cared when you called, sir? The same goes for the other “pipes” that conduct electricity, water, and sewerage to/from my house. Having lived a number of places in the USA, including in Baton Rouge with the nightmare that is the business called Entergy, I assure you that I trust my local truly public utility a great deal more than any private enterprise to do what is right. I am not ideological in this regard, as too many are, huffing and puffing about what government/business ought to do. Here, the evidence is all too clear: LUS is a public good, and LUS Fiber is a forward-looking public good whose existence is now threatened by legislation designed to make it difficult for cities like ours to do the right thing, and now plagued by a mayor who has little else to do than to raise as much stink as he can before he leaves office.

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