November 30, 2005

AFN spin-off or sale looks likely

City councilors indicate support for options committee’s preferred action

By Vickie Aldous
Ashland Daily Tidings

City Councilor Russ Silbiger listens at a council meeting earlier this year. He says he has made AFN a priority since his election. Daily Tidings file photo

An Ashland City Council majority has indicated support for a two-pronged strategy to pursue selling the Ashland Fiber Network while also working to spin it off as a separate, nonprofit enterprise.

Councilors gave a preview of their positions on AFN at a Tuesday night study session where the AFN Options Committee delivered a report recommending the city work simultaneously on both courses. Council members don’t make decisions during study sessions, but Mayor John Morrison polled members for their views on the controversial issue.

The AFN Options Committee recommended the city negotiate with three potential buyers and contact investment banking firms that could aid in a sale of the city’s cable television and high-speed Internet service. At the same time, the city should put measures in place to spin off AFN so that, should it not be sold, the city could take that route, according to the report.

Having a spin-off plan could help the city get a better price if it does sell AFN because buyers would know selling wasn’t the city’s only option, according to committee members.

The council will make a formal decision about whether to pursue the strategy at a 7 p.m. meeting Dec. 20 at the Ashland Civic Center Council Chambers,1175 E. Main St. Councilors also will take public input at that time.

Councilor Russ Silbiger said he has tried for seven years, as a resident and while on the council, to help turn AFN around.

“I have failed in that task to get the city to get this to work. We need to get out of this. We need to sell it or spin it off. ... Every day we sit here, we’re adding another $2,000 to the debt. Every day we don’t make a decision, we’re adding to that and it gets spread around to everybody,” said Silbiger, referring to the interest accumulating on AFN’s $15.5 million debt.

Several councilors said they favored the options committee’s strategy, but were more in favor of spinning off AFN in order to maintain some local control over cable television and Internet services.

“It’s the most benefit to us if we can keep the infrastructure somehow in our hands,” Councilor David Chapman said.

Councilor Cate Hartzell said she will need more information before she decides on AFN’s future, but believes a spin-off would help maintain community control.

The options committee estimated AFN could be sold for $5 million to $10 million. Although that amount is not enough to fully cover the debt, selling AFN is the alternative with the most financial certainty, according to the committee’s report.

If AFN becomes a nonprofit, the committee suggested the nonprofit take over $6.5 million of the debt while the city keeps responsibility for $9 million and also loans the new entity $750,000 for initial working capital.

Committee member Paul Mace said rather than imposing an unpopular fee on electric bills to cover the debt payments, the city should impose a budget cap. As overall city revenues continue to rise with the population, the excess money could be used to pay off the debt.

“That is an option we will be looking at,” Morrison said.

Shed the bureaucracy

Committee members said AFN is hopelessly crippled by government bureaucracy and must behave like an agile, private business in order to succeed. For that reason, they do not believe AFN should continue as a city department.

AFN technical staff members have had innovative ideas, but those ideas never made it up the ladder to be presented to the city council for possible approval. When the council has had to make decisions, the process is lengthy and all deliberations must be made in public where competitors see AFN’s business plans in advance, according to committee members.

“In my business, I would rather shoot myself than do that,” said Mace, who has run software companies. “I consider it fatal. Competition is half the battle in business.”

As a city department, AFN also has to pay a share of “central services” — the cost for city hall operations, which includes the work of the city administrator, finance director and attorney.

Mace said AFN grosses approximately $2.5 million in revenue, but has had to pay almost $500,000 annually in central services charges.

“As a business, I could farm out those services and have $400,000 left over,” he said.

The city assesses 70 percent of central services charges based on each department’s budget, with 30 percent based on departmental use of equipment and other factors, according to Mace.

The city pays benefits that equal 45 percent to 50 percent of employees’ salaries, while the norm for private industry is 25 percent to 35 percent, he said.

Committee member Don Mackin said there are very few communities in the nation where two entities using cable — in Ashland’s case, AFN and Charter Communications — can both operate and succeed. Ashland is too small to support duplicate systems, and the result has been depressed prices for both entities that make it difficult to make money, he said.

Mace cautioned that the competitive picture in Ashland will grow worse as companies offer new wireless services in Ashland and telephone and cell phone companies add more telecommunications products that will compete with AFN.

But Mace said he believes AFN’s fiber optic cables could prove valuable in about five years because they may be the only viable method for delivering telephone and television services over the Internet.

“When that day arrives, the owner of fiber will be in a commanding position. Our unanimous opinion is that the value of the infrastructure in the future will be realized,” he said, noting that the spin-off option could preserve that option but would require patience from the community.

Staff writer Vickie Aldous can be reached at 479-8199 or valdous@dailytidings.com.