Politics & Government

Proposal to lease Click network to private company leaves Tacoma leaders uneasy

Tacoma-owned Click is a money-loser, the city’s utility bosses say, and the reins should be handed to Kirkland broadband company Wave.

But Tacoma City Council members said Tuesday they need a lot more information before signing off on a 40-year lease and relinquishing control of the $200 million utility.

If both the Tacoma Public Utilities board and Tacoma City Council agree on a deal, Wave could take over operations as soon as the end of September, said TPU spokeswoman Chris Gleason.

In a letter of intent signed by Wave CEO Steve Weed, the company says the offer is good only for 60 days. But Tacoma Council members said they need more time to mull over the options.

Wave has more than 430,000 customers in Washington, Oregon and California, including Seattle and the Kitsap Peninsula, and is owned by private investors. It employs more than 1,000 people and makes more than $350 million per year, according to information from the company.

If Wave takes over operation of the city’s fiber network, TPU bosses say viewers will have more programming choices, faster Web speeds, and a long-sought opportunity to bundle cable TV, Internet and phone service into one package.

TPU’s power customers would no longer have to subsidize Click to the tune of $8 million or $9 million per year, and Wave would pay for annual upgrades to the network, according to TPU Director Bill Gaines.

But it also would mean the end of Click. City leaders would cede policy decisions about the municipal network to a for-profit company. Click’s 93 employees would also be out of work, unless TPU or Wave hires them. About two-thirds of Click’s employees are unionized.

Tuesday was the first time the full Tacoma City Council — as well as Click employees, customers and the public — heard about the particulars.

Alice Phillips, business manager for IBEW 483, one of Click’s unions, said the Wave proposal “came out of left field.”

“A lease and possible layoff of employees is setting me back on my heels,” she said.

Wave’s board has already approved a letter of intent with TPU, which states the TPU board and City Council would have to approve the nonbinding letter to begin serious negotiations with the company within 60 days.

Tuesday’s presentation lasted more than an hour. At the end, Councilman Robert Thoms said he has a lot of concerns.

“The taxpayers of Tacoma paid for this. I look at it as an asset that needs to be managed properly first before we do anything else, to do no harm, to protect our citizens, to protect our investment,” Thoms said. “Right now I have more questions than answers.”

Councilman David Boe called the presentation “disconcerting” and likened it to visiting a car dealership.

“ ‘Hey, I’ve got a great deal here, and it’s only good for 60 days.’ This is a little bit bigger than an automobile,” Boe said.

But Councilman Joe Lonergan said if Wave really wants to lease Click, 60 days is probably a flexible deadline.

“If this is a good deal for them and it’s a good deal for us, 60 days isn’t hard and fast. We have more control,” Lonergan said. “A 40-year decision is difficult to make in 60 days.”

Councilman Anders Ibsen said he felt the proposal was “well-intentioned,” and “it’s clear we have to do our best to make Click sustainable.”

But he said he was skeptical a private company would have the best interests of Tacomans at heart.“When you have a privatized model, you can’t escape the need for shareholder profit,” Ibsen said. “It looks like a predetermined outcome that was arrived at.”

Mayor Marilyn Strickland said after the meeting that she thinks the lease agreement is a “solid proposal” that she could support, but she wants citizens to also have their say. The city is planning two public meetings in April.

Council members also said they want to have a broader discussion about strategic priorities for the Click network.Wave sought a formal agreement with Click as early as 2012, Gleason said. The utility initially brushed it off, but both parties have talked seriously for the past two years.

Under the draft 40-year agreement, Wave would pay TPU $2 million a year and make $1.5 million in annual infrastructure upgrades, which increases with inflation. Wave would operate the network and maintain the city’s 1,500 miles of fiber. For around $1 million, Wave would also buy some of Click’s other property, including the trucks used to service customers.

Over the length of the agreement, TPU would receive $80 million in lease payments and $60 million in upgrades, while avoiding the estimated $240 million cost of operating a cable and Internet utility.

Click was formed in 1997 with great fanfare and helped Tacoma brand itself for a time as “America’s No. 1 Wired City.” But Gaines said Click’s yearly losses, coupled with a 10-percent per year subscriber loss, has now put the utility in a bind.

“We don’t think that’s fair and we don’t think that’s sustainable,” Gaines said.

Consultant Dave Vondle told Click in 2014: “Sell, lease or close Click as soon as reasonably possible, and within one year at the latest.”

Gaines said leasing the city’s fiber infrastructure to Wave makes the most financial sense compared to every other option. With the current model, Click would lose roughly $60 million in 10 years. With Wave, TPU would come out $78 million ahead in today’s dollars in 10 years.

If Click abandoned cable service and only sold wholesale Internet access, it would cost the utility $9.6 million in today’s dollars over 10 years, according to Click estimates.

Strickland, who was briefed on the deal’s specifics by TPU’s executive team, said when Click was first created, Internet service was considered a “boutique product.” Now it’s essential, she said last week. Census estimates show more than a quarter of Tacoma’s households do not have Internet access.

“When you think about the things you have to do, without access to the Internet it puts you at a disadvantage,” said Strickland. “There’s still a pretty significant portion of our community that doesn’t have Internet access at home.”

Strickland said broadband Internet access can be an equalizer across communities. Wave might charge lower rates for population dense but disadvantaged communities such as Salishan.

So far nothing in the letter of intent would compel Wave to do that. Wave CEO Steve Weed says the company is working on a low-income package for qualified families in the “near future.”

Tacoma makes sense for Wave, said Weed, the company CEO, because the company already serves Seattle and the Kitsap Peninsula.

He said cable television is not the company’s focus — broadband access is. Cable packages are offered at cost to the customer, with the company making profit from its Internet customers.

“We don’t really care if they buy cable from us. We do care about having the fastest Internet broadband out there,” he said last week.

His market research in the Tacoma area shows customers are interested in faster service, including gigabit speeds, which allow users to download a gigabit of information in one second. Weed said the company would have to upgrade Tacoma’s network before offering that level of service.

For years, Click’s cable service was cheaper than Comcast, its only competitor in the cable marketplace. In 2010, the utility’s rates were 40 percent lower than Comcast’s.

But over the years the rate difference has vanished. After a recommended 17.5 percent rate increase this year, Click’s most popular cable package would cost $60.99 — $5 more than rival Comcast. It would still be less expensive than Comcast service outside of Click’s territory, at $66 to $75.

Even with this year’s proposed rate increase, Click will still lose money, Gaines said.

If the deal goes through, Wave would not increase rates by more than 5 percent per year in 2016 and 2017.

Wave would then be able to offer a package of cable, Internet and phone service, which Click has been unable to do. Wave also offers more video-on-demand services than Click’s network currently does.

Click general manager Tenzin Gyaltsen said Monday that Wave will be able to keep rates down because it’s much larger than Click. This includes having an advantage over Click during negotiations for broadcast and pay-TV programming, he said.

“They would have better buying power than we would,” Gyaltsen said.

It’s no secret that TPU brass have sought a new business model for the beleaguered utility. A consultant recommended a few years ago that Click offer a bundle of services — Internet and phone in addition to cable TV. But when leaders proposed doing that in 2012, the Internet service providers who currently buy wholesale access to Click’s fiber network — Advanced Stream, Net-Venture and Rainier Connect — protested. TPU board member Bryan Flint, said since then, the ISPs kept a promise of bringing in 6,000 new Internet customers.

Those companies would negotiate with Wave, not Click, for wholesale access to the city’s fiber network. The companies are currently on a month-to-month agreement with TPU.

Doug Miller, board member for Advanced Stream, said Tuesday he’s worried Wave will swoop in and take all of Advanced Stream’s customers. Gaines has said TPU is working on a three-year contract with all three ISPs to prevent that from happening.

Flint said he’s been pushing utility leaders to think about how they can use the municipal fiber network to better the community. Leasing the infrastructure long-term could mean the city would cede policy decisions to Wave and lose the advantage of holding rates down, he said.

The Wave deal “looks like a financially good deal, I just don’t know that it’s the right deal for Tacoma,” he said.

There is a very real risk for Tacoma if it leases the network, said Susan Crawford, a law professor who wrote “Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age.”

“Being locked into any one provider that doesn’t have a civic purpose is a risk for Tacoma,” Crawford said. “The risk is that Wave can become just a creature of private equity and be bought by Wall Street concerns who will squeeze the most out of the network and not be concerned about upgrades or reaching additional households.”

She said it might make more sense for Click to abandon its role as a cable provider.

“You can make such a high margin on high-speed Internet access without being subject to the ridiculous demands of the programming industry,” Crawford said.

TPU Board member Monique Trudnowski said she doesn’t think Click should have been competing with private businesses to begin with, and it distracts from the utility’s mission of conservation and keeping electric rates low.

“Any time there’s an opportunity for government to get out of the way, it’s important to me,” Trudnowski said. “I think Click has served a great purpose.”

The biggest obvious downside to the lease, she said, is all of Click’s employees who would now be out of work. Trudnowski said she believes many could get jobs at Wave because of their local knowledge.

Wave will interview all Click employees interested in working for the company, Weed said. Currently, Wave has more than 100 job openings; Weed said the company expects to hire another 80 people if the city agrees to the deal.

TPU’s Gleason said the utility will strive to hire displaced Click employees elsewhere in the city. Those who don’t land a job with Wave or the city will receive a severance package, she said.

About two-thirds of Click’s workforce is unionized. Wave’s is not. Weed said the company pays a competitive rate based on wages in the industry.

Many Click employees learned of the lease agreement Tuesday at the same time as the City Council, Gleason said.

What happens if the council and the TPU board do not approve? Gleason said she doesn’t have an answer.

“All of the roads lead to us not being in this business any longer,” she said.