Disconnected When will MLGW's telecom venture get taken off hold? by Jim Hanas The Memphis City Council's fifth-floor conference room was filled to near-capacity with suits from the telecommunications business Tuesday for what was to be a "philosophical" discussion of a very pragmatic matter: Should Memphis Light, Gas & Water, the city's publicly held and dearly beloved municipal utility company, be getting involved with a private company to get into the telecommunications business? Although plans for it to do so have been in the works for almost 18 months, Memphis Networx -- the utilities' joint venture with Kansas-based A&L Networks (now Aptus Networks) that intends to build a $110 million fiber-optic network in Memphis -- has become a hot issue in the council. Tuesday, MLGW management turned out in force to present what the utilities' president Herman Morris described to the council's General Services & Utilities Committee as a "clear, concise, and convincing presentation." More than two hours later, council members had heard a range of arguments for and against MLGW entering the telecom biz. Proponents promised enhancement and equality of competition and new revenues that would allow the utility to maintain its current rates. Detractors, principally cable giant Time Warner, emphasized the risk to the public money being staked and detailed how, far from simply enabling competition, MLGW's venture aimed to offer telephone and other telecom services directly to business and residential customers, bolstered by the unfair advantage of being teamed with a municipal entity. All this to address a question that, in the minds of MLGW's powers that be anyway, had long ago been answered. Of course MLGW could get into the telecom business, as part of a joint-venture if necessary. The Tennessee legislature had said so, and so, implicitly, had the council when it approved the utility's annual budget, which included a $20 million loan to Memphis Networx to get the venture rolling. Someone, however, forgot to tell the council. This became clear two weeks ago when Memphis Networx' application for a franchise to "construct, maintain, and operate a telecommunications system" came up before the council's General Services & Utilities Committee. As council attorney Allan Wade described in some detail at the beginning of the session, city ordinance directs the council to grant such franchises without discrimination to all eligible applicants, provided there is space available for the systems so proposed. The first order of business before the committee, an ordinance granting an identical franchise to Texas-based CapRock Telecommunications, breezed through the committee with minimal discussion. Memphis Networx officials, on the other hand, found themselves across the table from an array of competitors, primarily representatives from Time Warner Communications, the major competitor of any would-be telecom start-up. An internal memo was produced (see "Anatomy of a Memo"), courtesy of Time Warner attorney John Farris, that seemed to suggest the applicant had something to hide and had tried to hide it by moving documents from MLGW to its private partner, A&L Networks, to shield them from public view. "I find it offensive that people are actively involved in trying to shield financial records from this council and this city," charged committee chairman Brent Taylor, making way for a whole nest of council objections. Councilman Rickey Peete expressed concerns about the nature of the public/private relationship between MLGW and A&L. Joe Brown challenged the legality of MLGW lending money to Memphis Networx without a resolution from the council. TaJuan Stout Mitchell worried about the impact on MLGW's rate-payers and council chairman Barbara Swearengen Holt questioned the rationale for getting a "sound utility" involved with an unknown private company or with telecommunications at all. "I'm not ready for it," said Holt. Sidney Shlenker's name came up as a two-word cautionary tale. Councilman E.C. Jones -- who declared that he would never, ever support the venture and that he wished to hear no more about it -- could later be seen having a few big-bellied laughs in the hallway with Time Warner President Dean Deyo and other cable brass, who loitered around City Hall well into the late afternoon on this particular Tuesday. Meanwhile, not 30 feet away, council newby Ed Ford found himself being chatted up by Ricky Wilkins, a council chamber fixture and attorney for MLGW's gestating joint-venture. Ford had not expressed an opinion about the deal, and while Wilkins may or may not have been successful in providing the councilman with one of those, he at least managed to slip Ford a business card and a friendly farewell handshake. If this was not in fact a lousy deal, as council members seemed to fear, then at least it was a lobbying failure and a PR debacle. Suddenly Memphis Networx had a fight on its hands and the vote on the matter was delayed until after the joint-venture is approved by the Tennessee Regulatory Authority. A hearing before the TRA is scheduled for March 29th. The formation of Memphis Networx was swiftly approved by MLGW's board of directors, along with the $20 million loan that made it possible, in a perfunctory meeting in Millington last August. The origin of the deal, however, dates back to 1998, six months after Mayor Willie Herenton's hypothetical proposal to sell the utility was summarily scuttled amid public outcry. The utility company issued a request for proposals in September of that year, seeking a private firm with which to partner for a telecom venture. Last March, the project was awarded to A&L Networks, a newly formed subsidiary of A&L Underground, a Kansas-based utility construction firm that has held contracts with MLGW on and off for more than a decade. That same month, the utility's board of directors approved $450,000 to be spent on a study to explore MLGW's options for getting into telecom, and in August the plan was unveiled, as was partner A&L. The proposed network, jointly owned by MLGW and A&L as the sole members of Memphis Networx, would be a "carrier's carrier," meaning it would not offer retail service to customers. It would not be in the cable business or Internet business or telephone business, but instead would sell space wholesale on its network to those who are in those businesses. It would be the road, not the truck. At the time, Memphis Networx' potential competitors -- principally BellSouth, Time Warner, and Nextlink -- were publicly sanguine about the deal, saying they were well accustomed to competition. All, however, have been active in the battle against it. According to MLGW general counsel Max Williams, Time Warner has obtained some 4,000 pages of internal documents concerning the utility's telecommunications plans via opens records requests since August. The memo presented to the council two weeks ago came from that take, as has other information that Time Warner officials point to when arguing that Memphis Networx either unlevels the competitive playing field (a complaint unlikely to arouse much sympathy given Time Warner's recent merger with AOL) or exposes MLGW to undue risks. Many of the objections raised by council members two weeks ago, unsurprisingly, appear to have been ripped straight from the Time Warner playbook. Opponents of the deal highlight the fact that while Memphis Networx was billed on the front-end as a wholesale "carrier's carrier," its franchise application includes the possibility of providing service to "end-users" and to "small commercial and residential customers." Officials with MLGW and Memphis Networx say that the intended plan is still to be a "carrier's carrier," not a retail operation, although, when pressed, they do not rule out the possibility of offering retail service at some point in the future. Either way, competitors, such as Time Warner, question the need for the additional network. "There are really more fiber-optics cables in Memphis than in most U.S. cities," says Dean Deyo, president of Time Warner Communications of the Mid-South. "There's a full network from Time Warner. There's a full network from BellSouth. There's a network from Nextlink. There are dozens of telecommunications companies in this town." Memphis Networx' business pitch rests on the premise that there isn't enough telecom infrastructure in the city and that it's keeping business away. Deyo, however, says he doesn't see such a demand. "If there was a need, there would be a company out there saying 'I need this and I can't get it from anyone else,'" he says. (See "Get Ready for War, MLGW," page 22) Competitors are also concerned that MLGW's relationship with a private telecom provider might affect their own ability to compete. Adelphia Business Solutions, for example, is one company that plans to construct a network for business clientele here in Memphis. It received franchise approval from the city council in August, but is still waiting to hammer out a pole-attachment agreement with MLGW so it can begin laying cable. "We are all for competition. Competition is good," says Adelphia general manager Rush Sedberry. "From our standpoint we are concerned because we have to partner with MLGW. We want to make sure that our partnership with MLGW is not impacted negatively by a special partnership." State legislation governing municipal utilities' entry into the telecom business is very specific about how such public/private relationships must work. The private arm cannot receive preferential treatment from its public partner, and the public partner cannot subsidize the private venture. Time Warner's Deyo, however, thinks Memphis Networx has already been coloring outside the lines. "We're concerned by some of the things they've done so far to cut some corners and to do some things before they probably should have," Deyo says. In particular, Time Warner's open records requests unearthed documents detailing network construction undertaken by A&L -- apparently intended to be transferred to Memphis Networx -- under way as early as last June, two months before MLGW went public with its joint-venture plans. MLGW vice president for construction and maintenance Wade Stinson confirms that A&L Underground, at its own expense, has laid conduit which could later be fitted with network cable to serve emerging subdivisions, but says that it has not been sold, and might not be sold, to Memphis Networx. As far as laying fiber-optic cable to serve Networx, Stinson says various negotiations are in the works but that no cable has been laid. Time Warner also points to the fact that A&L has never undertaken such a project before. Through its A&L Networks subsidiary, which has since changed its name to Aptus Networks, it has been courting municipal utilities to enter such joint-ventures. And while its target is to enter into some 25 such agreements, Memphis was the first. Burlington, Vermont, became the second city to get into business with Aptus earlier this month when voters approved the plan in a March 6th referendum. "If this was a great deal, then A&L Construction ought to come in and just do it," Deyo says. "Our concern is that, obviously, A&L Construction couldn't do this without the city of Memphis being involved and people are looking at the credit and backing of the city of Memphis." All of this has allowed Time Warner to paint the MLGW/A&L deal in a shadowy light and to present council members a portrait featuring abuse of public funds and a hallowed institution in imminent peril. "At the end of the day, if they spend $110 million and a lot of it comes from First Tennessee Bank or some place like that and they go belly-up or have problems meeting their loan commitment, who are you going to sue?" Deyo asks. "At the end of the day, the person that's got the money is MLGW and the city of Memphis." Of course, Deyo is hardly an innocent bystander. As Networx attorney Wilkins told the council two weeks ago, "Our adversaries here want to try to get their hands on every piece of information they can get to try to throw up any number of roadblocks to prevent this company from providing a telecommunications network in the city of Memphis." So what does Aptus bring to the deal? Ed Powell, who left BellSouth last year to become CEO of Aptus, is candid about what MLGW brings to the table. "They've got capital, they've got brand, they've got customer relations, rights of way, and an operational culture," he says. As far as capital, Memphis Networx will be funded with a $16 million loan from MLGW, another $14 million raised by Aptus from private investors, with an additional $80 million coming from loans. According to 1997 financial statements provided as part of its proposal to MLGW, A&L Underground is not exactly swimming in capital, with assets totaling just over $9 million. More recent financials for Aptus, filed with Memphis Networx' application for franchise now before the council, have been sealed. What Aptus has to offer, according to Powell, is a set of technical skills specifically designed to help utilities enter the telecom market. "A&L Underground has a lot of relationships with electrical utilities," he says. "There's a lot of concern in the electric utility industry about deregulation that's making a lot of them look at telecommunications as an alternative revenue source." Through partnerships with tech-company Nortel and Arthur D. Little, a consulting firm responsible for the $450,000 study authorized by MLGW's board last year, Powell says Aptus has put together the skills that utilities need to make the transition. "We came up with some major core competencies that successful telecom companies have that utility companies don't have and we set up Aptus to have those core competencies," he says. And what of the perception that A&L, a construction company, is ill-prepared for the telecom biz? Two years ago, A&L was just a hole-digging firm, after all. Just like MLGW. "Two years ago, MLGW was digging holes and me and my colleagues were out building telephone companies," Powell says. "We just didn't work for Aptus. Aptus has recruited some of the best talent the industry has to offer." Which, according to MLGW senior vice president for operations Larry Thompson, is the principal virtue of taking the joint-venture route into the telecom business. "We either had to go out and hire telecom folks to get experienced people or we could joint-venture with someone else who can possibly react quicker than a municipal entity to hire folks away from other telecom companies, which is what most everybody is doing," he says. And according to projections for the venture, Memphis Networx could be a boon to rate-payers as revenues start pouring in. According to its franchise application, Networx revenues could top $90 million by 2009. All along, the pitch has been that the additional revenue will allow the utility to maintain its rate structure. As if to punctuate that point, MLGW has announced that it plans to cut electric rates by 1.1 percent, the first electric rate cut in the utility's 61-year history. "Memphis is a distribution center," says Thompson, offering a variant on the win-one-for-the-home-team pitch shared by all of Memphis Networx' proponents. "We're known for that. Now what the heck makes distribution go? There's two things. Communication and transportation. Now we've got transportation. We've got everything that it takes except state-of -the-art communication. We will have it after this system's up." Provided it doesn't get put on hold by the council or the TRA. Asked about the snarl the venture hit before the council two weeks ago Aptus' Powell says, simply, "I wish I'd been there." Powell was there this Tuesday, as were other representatives from Memphis Networx and their opponents from Time Warner and BellSouth. And MLGW's case seemed to be gaining ground, despite a litany of utility/telecom ventures gone wrong -- from Glasgow, Kentucky, to Anaheim, California -- read aloud by Time Warner's Deyo. "This opportunity today," Networx attorney Wilkins told council members, "after all is said and done, is designed to open competition in the Memphis area." And council opposition -- vehement two weeks ago -- seemed to be softening, although it did stop short of getting the vote to the full council on Tuesday. Provided the deal makes it past regulators next week, the franchise vote is likely to come before the council April 11th in what is sure to be a hot ticket for telecom suits everywhere. Get Ready for War, MLGW Utility Will Have To Play Rough To Enter Telecommunications. Once there was a little corporation called Memphis CATV, formed by Memphis attorney William Farris to get into the then unheard of cable television market. A shrewd politician who had run for governor, Farris got a franchise from the old City Commission back in 1966. Critics said the city had "given away its birthright," and they held up the pole-rental contracts with MLGW that Memphis CATV needed to build its system. By taking on national financial partners and doling out stock to influential Memphians, Farris and Memphis CATV prevailed, but building the system took an eternity. It was 1978 before the first 1,000 subscribers were hooked up, and 1983 before the company, which changed its name to Memphis Cablevision, really got rolling. Then as now, there was a confusing new telecommunications vocabulary, exciting new features like 24-hour headline news and 35 channels of programming, lots of talk about a communications revolution, and some thumpingly false prophecies. "Cable is nothing but a minor annoyance, the subject of discussion at cocktail parties," said the then general manager of WMC-TV. Over at WREG-TV, the general manager predicted that Cablevision's impact on advertising and audience share would be "insignificant because they don't have the audience." Listening to all this with a certain bemusement was Dean Deyo, who came to Memphis in 1979 to be the general manager of the struggling company called Cablevision. The rest you know. Cable changed everyone's television habits. Cablevision became a division of Time Warner, which merged with AOL, which is still the subject of discussion at cocktail parties but somewhat more than a minor annoyance. Now MLGW, the local utility monopoly, wants to break into the telecom business, where Time Warner/AOL enjoys a monopoly in the lucrative cable sector. The stakes are high, the players know it, and they certainly know each other. After all, they've been partners -- literally joined at the pole -- since the early days of cable television. Deyo is now president of Time Warner of the Mid-South. He's leading the lobbying effort at the Memphis City Council aimed at stalling or derailing MLGW's plans. William Farris' law firm and his son John Farris represent Time Warner. John Bobango is a lawyer in the Farris firm and was, until last year, a Memphis city councilman. Bobango has been lobbying his former colleagues. BellSouth, formerly South Central Bell, is another interested observer. BellSouth has its own network that can carry Internet service as well as phone traffic, and more than 500,000 local residential and business customers. Then there is MLGW, which has transformed itself from plain Jane utility company to local icon to telecom player in the few short years since 1996 when the barriers to competition between long-distance and cable providers were removed and the door was opened to utilities. Last summer, without discussion or debate, MLGW got approval from its board of directors to partially fund a $100 million telecom venture, Memphis Networx. "Memphis can be the intersection of the Internet and the interstate," says investment banker John Slater, arguing that telecommunications infrastructure can do for America's Distribution Center in the next century what roads, railroads, rivers, and airports did for Memphis in the last century. As the new guy in the game, Memphis Networx is in a somewhat similar position to Cablevision 25 years ago. At that time, the three television networks seemingly provided all the programming and channels anyone could want. Who needed 24-hour news when news "belonged" to Walter Cronkite, John Chancellor, and Howard K. Smith? But where Cablevision made it by selling 89 percent of its stock to national partners, 53 percent of Memphis Networx would be owned by MLGW, a publicly owned utility. Joe Werner, head of telecommunications for the Tennessee Regulatory Authority (TRA), says the board will likely ask company officials whether utility ratepayers are, in effect, subsidizing a risky entrepreneurial venture. The hearing before the three-member panel is scheduled for March 29th. Does Memphis Networx have the political clout to get its proposal through the city council and the TRA? "We're kind of learning more about it every day ourselves," says IBEW union leader Brent Hall. Mayor Herenton is not especially friendly with MLGW President Herman Morris and may sit this one out. That leaves it up to the local business community and the Memphis Area Chamber of Commerce, which would seem to be natural allies for a proposal to reinvent America's Distribution Center. Anything less than a forceful, personal appearance by top executives at FedEx, which is the city's main economic engine and information-technology specialist, will be a sign that Memphis Networx' claim of a telecom infrastructure deficiency is just hype. Monopolies do not give up power willingly. MLGW, better than anyone, should know that. Apparently, it does. Last Friday, it announced for the first time in its 61-year history "a 1.1 percent electric rate decrease for MLGW customers, now placing the measure in the hands of the city council." What a coincidence. --John Branston