THE TRUTH
About Spencer’s Municipal Communications Utility

History of the SMU Communications Utility

The people of Spencer felt the level of service they were receiving from the incumbent providers was inadequate. Spencer Municipal Utilities (SMU) had already constructed a limited fiber optic network to serve it’s electric substations and to provide a connection between schools and the Iowa Communications Network. In 1997, a grassroots citizen group requested a referendum to create a new communications utility operated by SMU. In May 1997, 91% of the voters approved the new utility.

SMU spent the next year creating a preliminary design and cost estimate. The estimate found that a new, state-of-the-art network to serve all three utilities could be constructed for between 16 and 20 million dollars. To make the system financially feasible, SMU would need at least half of the cable TV and telephone market. To test whether this level could be reached, SMU asked customers to sign a statement of support if they intended to make SMU their communications company. Over 60% of Spencer households signed and returned a card.

In 1999, contracts were awarded and construction began. In areas where the system was complete, cable TV was turned on beginning in the fall of 2000. Broadband internet was available in the spring of 2001, with telephone service following later that year. Construction was completed in early 2002.

Funding

From the very beginning, SMU realized that one of the long-term uses of a communications network would be to provide control and data acquisition for the electric and water utilities. Starting with an existing fiber optic backbone, SMU expanded the system so that every home and business was reached, allowing for the eventual use of the system for remote metering, load control, etc. Therefore, Spencer’s electric utility owns and operates the system backbone (fiber optic and coaxial cable), which it financed through the sale of electric revenue bonds and cash reserves. This portion of the cost was approximately $11 million. The communications utility pays the electric utility an annual lease payment of approximately $360,000 for the right to use the system. The water utility also pays to use the system.

The new communications utility owns the parts of the system that specifically deal with communications services such as cable TV, telephone, and Internet. This portion of the network cost approximately $8 million, and was financed by a loan from the electric utility at an interest rate of 4.5%. The communications utility also own 100% of the network that lies outside of the electric service territory.

Despite claims to the contrary, no tax dollars have been used or ever will be used for Spencer’s communications utility. The bonds sold by the electric utility for its portion of the system are supported only by the revenues of the electric utility, not by taxes. By the end of 2005, the communications utility will have paid over $1 million in principal and another $2.9 million in interest to the electric utility. And the interest rate being paid on that loan-4.5%-makes it the electric utility’s best cash investment in terms of rate of return over the last five years.

Financial Track Record

The SMU Communications utility has operated in the black for the last three years. As you might expect, the system did not break even in 1999, 2000, 2001, and 2002 as the system was still under construction. During the first full year when service was available community-wide, 2003, the utility broke even. In 2003, the net income after all expenses was $426,000. That number amounted to just over $1,000,000 in 2004. At the current pace, the SMU communications utility is expected to have a net income after expenses of approximately $1,750,000 for 2005. Below is a summary of the year-by-year financial results (from the annual audit report):

* Includes retail sale of services, wholesale service, and investment income
1 Includes net income after all expenses, including depreciation and interest
2 Communications utility became fully operational in March 2002
3 Estimated year-end results

Since being established, the SMU communications utility has operated entirely on its own. It has not borrowed any additional funds from the electric utility. Meanwhile, as financial performance has improved over the past three years, the communications utility has begun to re-invest in the community, providing over $200,000 to economic and community development projects since 2003.

Communications Effect On Electric Rates

Unlike what you may have heard, the presence of a communications utility in Spencer has had no effect on electric rates.

Have electric rates gone up in Spencer? Yes. SMU raised electric rates by approximately 7% in 2002…the first electric rate increase in 21 years. Rates were also increased approximately 7% in 2003 and another 10% in 2005. SMU also instituted an Energy Cost Adjustment in the fall of 2005.

1. The reasons for these recent increases have absolutely nothing to do with the presence of a communications utility. What are the factors at play?From 1990 to 2002, SMU’s cost of power increased 49% with NO increase in rates to the customer.
2. In 2004, SMU experienced a 17% increase in power costs from its largest supplier, the Western Area Power Administration. An increase of approximately 20% will be effective in 2006.
3. SMU’s electric utility is investing $13.6 million to purchase just over 1% of the new Council Bluffs Energy Center Unit #4. $8.75 million of this investment was borrowed (through the sale of electric revenue bonds) at just 3.84% interest. By borrowing the money at times when rates were near record lows, SMU will save a great deal in interest. However, repayment of the debt began in 2005-two years before the plant becomes operational.
4. Low interest rates on SMU’s other reserves and cash on hand meant overall investment income of the electric utility went down by two-thirds between 2000 and 2003.

Yes, electric rates have gone up in Spencer. But as you can see from the information above, the increases have nothing to do with the communications utility. Electric rates are going up everywhere, even in towns without municipal communications.

People in Spencer still enjoy one of the lowest electric rates in Iowa. Plus they have the peace of mind of knowing that their investment will stay in the community to go back to work for them.

The Myth Of Subsidies

Municipal opponents also falsely claim that in Spencer and other towns, the electric utility “subsidizes” the communications utility. Nothing could be farther from the truth.

One of the advantages of having multiple utility services under one company is that they can be more efficient through the sharing of resources, such as buildings, office equipment, etc. However, even when it comes to shared resources, Spencer’s communications utility pays its own bills. It rents warehouse and office space from the electric utility. The garage bays where communications vehicles are stored are leased.
The income and expenses from one utility are kept separate from those of the other utilities. It’s not just a good way to do business, but in Iowa, it’s the law.

Communications Effect on Taxes

Another false argument made by municipal communications opponents is that taxpayers are at risk. This argument is not true because taxes don’t pay for utility services…the people who use the services pay for them.

Spencer’s municipal utilities-electric, water, and communications-are supported solely by revenues from the services they sell. They are NOT supported by tax dollars.

Not only are taxes not used for utility services, SMU actually helps keep taxes lower in Spencer. Under Iowa law, municipal electric and water utilities aren’t required to pay taxes. But every year, SMU transfers 5% of its total electric and water revenues to the City of Spencer to use for any purpose. This money-over $400,000 a year-helps keeps taxes lower.