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The Utopia conundrum: Who do people want to believe?
Armed with a new feasibility study that projects the loss-plagued fiber-optic system can turn things around, Utopia has convinced eight of its 11 member cities to back another $62 mil- lion in bonds to complete development of its network.
Yet University of Denver professor Ron Rizzuto, who eight years ago correctly warned those same Utah cities chances were slim the Utopia network would succeed, once again is skeptical. He doubts the turnaround plan is as feasible as represented.
"Over the next 10 years they're going to continue to have more cash going out than coming in," Rizzuto said. "So it looks like they're not going to be able to pay their bills for the next decade."
Utopia Executive Director Todd Marriott, though, offers a far different take.
"We are going to be successful," he said, explaining that ever since he joined Utopia two years ago, his efforts have focused on developing and implementing the turnaround plan.
"This is going to work."
Such disagreements are common and have been ever since 2002. That's when Utopia was organized by community leaders who believed the state's private telecommunications providers were unwilling to bring high-speed Internet and other broadband services to their cities.
Buoyed by initial feasibility studies commissioned by Utopia that also promised the system would be a huge success, 11 cities from Brigham City in the north to Payson in the south pledged $500 million over 32 years to back the bonds that Utopia sold to finance network construction.
Utopia's history, though, has been marked by years of missed projections and mounting losses — this even as its technology earned praises from users. Earlier this year, it called upon its member cities to begin covering its bond payments, something the original Utopia promoters and their feasibility studies suggested never would happen.
Supporters of Utopia — the name is short for the Utah Telecommunication Open Infrastructure Agency — for the most part dismissed critics such as the Utah Taxpayers Association as either hired guns or pawns of Qwest and Comcast, the state's incumbent telecommunications providers.
However Rizzuto, a finance professor who has studied municipally owned fiber-optic networks across the country, was retained by The Salt Lake Tribune to independently review the feasibility study prepared under Utopia's direction by the Virginia-based broadband construction firm, Design Nine.
Utopia's turnaround plan is based upon its member cities launching a separate entity: the Utah Infrastructure Agency. It would issue the $62 million in bonds and be in charge of marketing and completing network development of the network.
Using data supplied by Utopia, Design Nine plugged that information into a program that models the potential performance of broadband networks. The results showed the UIA would lose nearly $65 million over the next seven years before turning a $348,567 profit in 2018.
In 2019, though, the spreadsheets project the UIA would earn nearly $22 million, money that could then be used to reduce more than $500 million in Utopia debt its member cities are on the hook to pay over the next 30 years.
Rizzuto, however, said Design Nine made a mistake in calculating the projected profit in 2019. For that year, it added the network's depreciation instead of subtracting it from the projected pre-tax earnings as it had done for earlier years.
"It really should only be $3.3 million profit. So even if you want to assume Utopia's initial numbers and Design Nine's model is correct, they [the UIA] are going to be generating a lot less cash than they are expecting," he said.
West Valley City Mayor Mike Winder concedes the city faces a difficult decision as it considers whether to instruct its representative on the newly organized UIA board to vote to issue the additional $62 million in debt.
"We already are on the hook for $145 million over the next 30 years, and if we do nothing [to further support Utopia and the UIA], that money is gone," he said. "So my inclination is to take another $5 million more and see if we can't dig ourselves out of this hole."
Winder said he is encouraged by Utopia's recent performance in Brigham City, where municipal leaders late last year set up a special assessment area to issue $3.7 million in bonds for the network's benefits. The revenue to pay the bonds is being generated by approximately 1,600 city residents who agreed to pay either $3,000 up front or some $5,500 each over the next 20 years — approximately $22 a month — to hook up their homes to the network.
Utopia has a "take rate" of 31 percent in Brigham City, which means that 31 percent of that city's residents are taking at least once service — high-speed Internet, television or telephone service — over the network, Winder said.
And under the new turnaround plan, network operators expect to do even better.
"They told us they are expecting to get take rates as high as 40 percent to 50 percent," said Design Nine President Andrew Cohill, who indicated achieving and acceptable take rates is key to the UIA's success.
Rizzuto, however, questioned whether the Utopia network can actually reach its take-rate goals.
"Those seem to be pretty aggressive projections," Rizzuto said. "What they don't seem to be thinking about is how their competition is going to react. And their competition isn't going to be requiring a $3,000 payment up front."
Utopia boss Marriott, however, said the strength of the new UIA plan is that the network will be built out only into areas where at least 25 percent of residents and businesses have signed up for service and agreed to pay the connection fee.
Although the Design Nine feasibility study said the UIA model projects it will take up to 30 years to move the project into the black, it said that time period could be substantially shortened if targeted take rates are exceeded.
Marriott, on Wednesday at the Payson City Council meeting, said the UIA would be profitable in three years — an announcement that runs counter to Design Nine's model projecting no black ink until 2018.
Yet even his optimistic projection failed to convince Payson's leaders to agree to pledge additional tax money to back the UIA bonds.
"We simply can't afford it," said Councilwoman JoLynn Ford. "We already are in debt up to our eyeballs."
Payson joined Tremonton — the northern Utah city's network is 96 percent complete — and Perry as the only cities declining to participate in the UIA's bonding plan.
"From what I've seen so far, I would not be putting any new money into [the UIA's plan]," Rizzuto said. "To me it appears that would be throwing good money after bad."