Funding a municipal network

Our coalition has been looking at funding models for a Northampton municipal network.

The Ammon, Idaho funding model

One intriguing idea is being used in Ammon, Idaho. Its municipal network has its monthly fee broken down into three costs:

  • Maintenance and operations. This is the cost to maintain the network. This is currently $16.50 per month. This includes running a network operations center and maintaining the network.
  • Installation. This is essentially a residence’s or business’s share of the cost to build and connect to the network. It is $22.00 per month, payable over twenty years at a low interest rate. Ammon’s installation fee runs from $3000 to $3500, so this is the amount you are paying back at a rate of $22.00 per month, less interest charges.
  • Service. This is the cost of Internet service. Multiple vendors compete to be the actual Internet Service Provider, using the infrastructure provided by Ammon. One vendor charges $9.99/per month. Ammon doesn’t keep this money. Instead, the city passes it on to the ISP that you selected. If you don’t like the service you are getting from the ISP, they provide a network portal where you can shop for a different ISP.

Consequently in Ammon you can get 1-gigabit per second fiber to the home for as low as $48.49/month. That’s actually less than the $49.95/month that Comcast charges for up to 15 megabits per second to the home. That’s right — they get 66 times the speed for less money than Comcast’s lowest priced plan!

Some Ammon subscribers though pay just $26.49/month for the same service. How do they do this? They pay their installation fee in full up front. For the rest of time, the residence or business always pay $22.00 per month less. Moreover, if they sell their property, the new owner doesn’t have to pay a new installation fee. The city keeps track of residences and businesses that have paid the fee in full.

How Ammon’s model might work in Northampton

It’s an interesting model that might make sense in Northampton if we build a municipal network. So we’ve been crunching the numbers. If you could “buy” a connection on a future municipal network, what would it cost? Our assumption is that the cost to “buy” a connection is based on the cost to construct the network divided by the number of subscribers on the network. There are two principle factors:

  • The number of subscribers to the network. This will be quantified as a result of the first phase of a study the City Council has approved. The Census Bureau estimates there are about 10,000 residences in Northampton. So if fifty percent of these residences subscribed to the network that would be 5,000 subscribers. We learned from the Greater Northampton Chamber of Commerce that they have about 2000 members. We don’t know how many of these members have a physical business location in Northampton. Assuming 1000 members do and fifty percent opt to join the network, this gives a combined pool of 5500 subscribers.
  • The cost of the network. Ballpark estimates we were given range from $10M to $15M. The second phase of the city’s study will determine a realistic cost to construct and stand up the network.

Buying a network “share”

So with this information it’s possible to get an idea of the “per subscriber” share of the network construction costs. To simplify this, let’s call each connection a “share” of the network. Based on the cost of construction and the number of subscribers, you can get a sense of the cost of a “share”. (Sorry, this is an image and is not accessible. You can view it online here. Please check our math!)

Potential share of construction cost per network subscriber

Based on 5500 subscribers (probably a lowball number), the cost of a “share” would range between $1818 and $2727 per subscriber. Obviously, the more subscribers the better. Your “share” could be as little as $1000 if there are 10,000 subscribers and the network costs $10M to build, or as high as $4286 if there are only 3500 subscribers and the network costs $15M to build.

Paying off your “share” over time

While some people might be able to buy a “share” up front, most would probably want to pay down their share, eventually owning a “share” of the network. What might your monthly cost be to buy your “share”? We are assuming that over ten years you would pay an even monthly fee. We expect a 2% annual percent interest rate because we expect that’s what the city will get due to its AAA bond rating. With that in mind, here’s what your monthly fee could be:

Potential share fee per month, based on 10 year repayment at 2% APR

After ten years you would be “paid up” and your monthly fee would drop by this amount. Of course, if you have spare cash, come into a windfall or win the lottery, you might want to pay the balance sooner. The network would keep track of the amount you still owe and report it on your monthly statement.

How this approach could save the city even more money

If we assume 5500 subscribers and it costs $13M to build the network, the per subscriber cost would be $2364. Assuming a 2% interest rate on municipal bond, and assuming all $13M were borrowed, a ten year bond would cost the city $14,354,098. Spread over 5500 subscribers, this would raise the cost to $2609.83 per subscriber.

Some may choose to pay their $2609.93 up front to help fund the network’s construction. If a municipal network decides to adopt this model, this could be a good way to reduce the cost of financing the network’s construction.

Suppose 1000 subscribers paid their $2609.93 in advance of construction. This would provide $2,610,000 that the city would not have to borrow, reducing the municipal bond needed to $10,390,000. This would save the city $325,861 in interest over a ten year bond.

(Residents might also want to pay a portion of the fee, say $1000, to help reduce the cost of the network. It would also demonstrate community spirit!)

There are some obvious limitations to this approach. For example, the number of subscribers will fluctuate over time. Does a “share” really have any meaning? If the “share” price drops, should those who paid more get a refund for the difference?

The point is, this model is interesting and deserves further discussion as a funding model if a municipal network is built in Northampton.

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