A Performance Audit of the Utah Telecommunication Open ...

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One consequence of the slow growth of the network is thatUTOPIA has used a large portion of its bond proceeds to coverinterest expense and operating deficits. The balance of this chapterdescribes the reasons that more of UTOPIA’s investment capital hasnot been used for its intended purpose–to build the infrastructure.UTOPIA’s Infrastructure InvestmentIs UnderutilizedFor UTOPIA to reachbreakeven, plannerspredicted it must havea 30 percent take rate.As mentioned, UTOPIA’s original financial goals were not metpartly because of disruptions in the construction schedule and a loss offederal financing. UTOPIA also saw a large number of subscribersdrop the service. As a result, the agency’s average subscription rate hasdropped well below the critical 30 percent rate, the point at whichUTOPIA begins to cover its costs. Currently, Lindon is the only citywith a subscription rate that remains higher than 30 percent.UTOPIA’s Subscription Rate Needed to Cover Costs WasPredicted to Be 30 Percent. The subscription rate (often referred toas the “take rate”) is a common measure of the success of a fiber-opticnetwork. The take rate represents the percentage of addresses whereservice is available.A 2003 feasibility study predicted that UTOPIA was likely toachieve a 55 percent take rate within ten years. The analysis, preparedby an independent consulting firm, was based on the results of a localmarket survey and the experience of other municipal networks in otherstates. The study also predicted that if the project reached a 30 percenttake rate, the network would begin to have a positive cash flow and beable to operate without additional financial support. In effect, the 30percent take rate was identified as the breakeven point beyond whichthe agency would operate as a self-sustaining enterprise.Only Lindon Has a Subscription Rate in Excess of 30 Percent.According to early feasibility assumptions, Lindon is the onlyUTOPIA member city with a sufficient number of subscribers tosupport the cost of the network. As of April 5, 2012, access to servicehad been provided to seven of the nine construction areas or“footprints” in Lindon. Of the 4,024 addresses where service isavailable, 1,357 subscribe to one or more UTOPIA services. Thatequals a subscription rate of 34 percent. The residential areas alonehad a subscription rate of 36 percent.- 14 -A Performance Audit of the Utah Telecommunication Open Infrastructure Agency (August 2012)
While Lindon is the only city that currently has a subscription ratehigher than 30 percent, at one time, Orem and Payson appear to havehad subscription rates higher than 30 percent. However, due to a lossof subscribers, the take rates in those cities have declined. For example,Orem has 3,553 addresses that have subscribed to services at one timeor another. Of those, over one-third (1,275 addresses) have droppedthe service.Lately, UTOPIA has focused a new marketing effort with some ofits legacy neighborhoods where infrastructure has been installed but isunderutilized. Those efforts have yielded modest results. FromNovember 2010 to July 2012, through construction largely fundedthrough UIA, UTOPIA’s subscriber data shows it has gained 281additional subscribers in Orem. Even so, Orem’s take rate amongaddresses where service is available has dropped to 23 percent. As aresult, Orem, as well as Payson, no longer has a sufficient number ofsubscribers to generate the revenue UTOPIA needs to recover itsinvestment in those communities. Because service is not available tomany addresses, only 9 percent of all Orem and Payson residents andbusinesses subscribe to UTOPIA.As shown in Figure 2.2 (page 8), as recently as April 2012,UTOPIA offered services to 58,100 addresses. That means thenetwork service has been completed near the street address and isavailable for service. Of those available addresses, 9,340 subscribe tothe service, for a system-wide take rate of 16 percent. However, theresidential areas appear to have higher rates of acceptance than thebusiness and multi-dwelling units. System-wide, the residential takerate is 21 percent. Therefore, even the residential sector is still wellbelow the critical 30 percent breakeven point needed to generate apositive cash flow.While some areas ofthe network appearadequately utilized, thenetwork on the wholeremains underutilized(16 percentsubscription rate).We are especially concerned about some footprints whereUTOPIA has made a large investment but has very few subscribers.For example, one highly underutilized footprint is located in WestValley City. UTOPIA has invested over $1 million to install cable,cabinets and conduit systems in an area that has only 27 subscribers.The investment in that section of West Valley is not capable ofproducing the revenue UTOPIA needs to cover its costs.Under UTOPIA’s new business model, which is financed throughUIA, the potential for return on investment is one of the most criticalOffice of the Utah Legislative Auditor General - 15 -
Page 1: REPORT TO THEUTAH LEGISLATURENumber
Page 5: DigestA Performance Audit ofUtah Te
Page 9: Table of ContentsDigest ...........
Page 12 and 13: will be funded through UIA financin
Page 14 and 15: the organization’s general manage
Page 16 and 17: UTOPIA Did Not Reach Its Goal to Bu
Page 18 and 19: UTOPIA did notachieve its goal toco
Page 20 and 21: Figure 2.4 Summary of the Agencies
Page 22 and 23: efinancing, the maximum amount pled
Page 26 and 27: factors in deciding where to build.
Page 28 and 29: completed in a timely fashion and h
Page 30 and 31: Figure 2.10 Seven Years of Operatin
Page 32 and 33: Figure 2.11 By 2010, UTOPIA Had Spe
Page 34 and 35: plan did not anticipate the difficu
Page 36 and 37: end of 2010, 3,698 former subscribe
Page 38 and 39: Uncollected revenuesfrom retail pro
Page 40 and 41: agreed to provide UTOPIA with a $66
Page 42 and 43: As problems mounted, the board deci
Page 44 and 45: The data in Figure 3.2 shows that,
Page 46 and 47: As stated previously, two possible
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Page 50 and 51: UTOPIA Has a New Development PlanAi
Page 52 and 53: Centerville and in its legacy areas
Page 54 and 55: UTOPIA shouldidentify specific area
Page 56 and 57: e applied. Not surprisingly, we fou
Page 58 and 59: act in its entirety. Also, the agen
Page 60 and 61: Manual, which describes how local a
Page 62 and 63: in public, the executive committee
Page 64 and 65: separate public body that must comp
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Five‐Year Plan Summary 2Agency (U
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Five‐Year Plan Summary 4cities’
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