L.A. Faces New Snag in Push for Fiber Optic Network

By HOWARD FINE

Staff Reporter

Once again, L.A.’s hopes for wiring the city with a fiber optic network appear to be waning, the result of deteriorating capital markets in the telecom sector.

Seven months ago, city officials heralded a franchise agreement with Denver-based WINfirst to build the network that would provide alternatives to traditional cable service.

But industry sources say that the company is pulling back from L.A., Seattle and several other metropolitan markets and instead focusing on Sacramento, the only market it has largely built out and that has customers signed up.

WINfirst President and Chief Operating Officer Frank Casazza declined comment.

WINfirst, which had raised $850 million, has been unable to raise the additional capital necessary to begin construction in those markets, according to various reports. A glut of fiber worldwide and the global economic slowdown have combined to slow capital flows to telecom projects.

“It’s no surprise to me that they appear to have pulled back,” said Rohit Shukla, president of Larta, a regional technology alliance. Through last year, Shukla sat on the L.A. city Information Technology Commission, which recommended that the city pursue a franchise agreement with WINfirst.

“Given the condition of the market right now, it doesn’t make any sense for them to execute on such an ambitious plan,” he said.

Company made payments

L.A. city officials, who were stung a year ago by the failure of Princeton N.J.-based RCN Corp. to follow through on its agreement to build fiber optic networks in five of the city’s 14 cable franchise areas, are not giving up on WINfirst. They note that the company made required payments of $650,000 in December; those funds are being used to support public access programming on local cable outlets.

“We have not heard anything from WINfirst about their pulling back from L.A.,” said Dora Gallo, chief deputy to Councilman Mark Ridley-Thomas, who chairs the council’s Information Technology and General Services Committee. “Obviously, based on the news you’re conveying, we are going to contact them immediately, seek to sit down with them and see where they are. There may still be something the city can do to assist WINfirst.”

Construction of the fiber optic network was not slated to begin until this September, according to the franchise agreement with WINfirst. The agreement requires that half the project be completed by 2007, with the entire network finished by 2009.

The city did get WINfirst to agree to pay a $29 million performance bond if it doesn’t finish the project. However, the performance bond only applies if ground is broken on the project and WINfirst were to subsequently walk away. It does not apply if construction doesn’t begin, since the bond proceeds would be used primarily to repair any streets or utilities that were disrupted.

The city does have recourse if WINfirst backs away from building a network in L.A. before construction begins. “Not beginning construction would be a material breach of the franchise,” said city Telecommunications Regulatory Officer Greg Fuentes. “Besides, those franchise rights are worth something. Someone else might want to come in and purchase them, for example.”

Given current market conditions, that would be unlikely to happen anytime soon.

Weak bargaining position

That points up the city’s weak position in so-called “overbuilding” of fiber networks. Thanks to the national Telecommunications Act of 1996, the city has no authority to force private sector companies to follow through on franchise agreements. Since these fiber networks require hundreds of millions of dollars in up-front capital, the city is at the mercy of the telecom industry and the capital markets that drive the industry.

However, Shukla said, the city could do its due diligence better so that additional problems are not faced in getting a system built. “City officials need to be more rigorous in what they approve not in the terms of the deals themselves, which are rigorous, but on who they cut the deals with,” he said.

When the WINfirst contract came before the council last July, a report from City Administrative Officer Bill Fujioka warned that WINfirst might not have the capital necessary to build out the fiber network. That report was cited by councilmembers Janice Hahn and Nate Holden as the main reason they voted against the agreement.

But the warning was dismissed by the remaining councilmembers who voted for the franchise agreement. One of those was Alex Padilla, the new council president who was also chair of the information technology committee.

“At the time this came to us, there was every reason to believe that WINfirst had both the will and the wherewithal to build the project,” said David Gershwin, chief deputy to Padilla. “We had staff reports by the truckload saying that WINfirst could do the job.”

Gershwin stressed that if WINfirst pulls back before construction, the city would not lose any money on the deal. “It would be just unfortunate that the prospect of real competition to the cable companies would be delayed,” he said.

In a sign of the reduced ambitions in the L.A. market, another fiber-optic overbuilder, Altrio Communications Inc., has applied for just one of the city of L.A.’s 14 franchise areas, this one in the San Fernando Valley. Altrio, which already has franchise agreements in Arcadia and some beach communities, has raised a total of $180 million.