City Loses Millions on Fiber-Optic Network.

Council Orders Plan for Leasing of L.A. Cables

For years, L.A. city officials have talked about collecting tens of millions of dollars in additional annual revenues by leasing thousands of miles of excess fiber-optic cable to the private sector. But confusion, conflicting agendas and internal turmoil among various city agencies and officials have resulted in the city frittering away most of those potential millions.

The loss of revenues was so great -- estimated at between $10 million and $50 million a year -- that it prompted Councilwoman Laura Chick to introduce a motion to force city agencies to come up with a plan by March 17. The motion unanimously passed the council earlier this month.

"I never realized just how much fiber is out there that could be leased out," said Chick, who is one of three members of the council's Information Technology Committee. "If we had a chance to do this earlier, I'm disappointed that the city let the opportunity slip away. This (motion) is a way to expedite things so that we don't lose any more new revenues."

Much of the excess cable, which exists in two separate city-owned networks, sits unused while private-sector deals move ahead at a fast clip. Two weeks ago, RCN Corp. signed a major deal to use Southern California Edison's fiber network.

Currently, there are about 15,200 miles of city-owned fiber-optic cable. About 6,000 miles is bundled in a 165-mile-long network set up by the Department of Water and Power, and the rest in a 260-mile network split between the Police Department and general citywide use. About 100 miles of that network is operated and maintained by Metropolitan Fiber Systems.

(By comparison, Pacific Bell's fiber-optic network in L.A. County has an estimated 180,000 miles of fiber.)

So far, only about 10 percent of the two city networks have been leased out, generating $4.5 million a year. But officials estimate that half of the networks ultimately could be leased to other public agencies and the private sector. Estimates of the additional annual revenues range from $10 million to $50 million a year or higher.

"This is a tremendous opportunity that the city has let slip by," said Rohit Shukla, president and chief executive of the Los Angeles Regional Technology Alliance, a high-tech support and lobbying group. Shukla served as co-chair of the city Telecommunications Task Force, which issued a controversial report last summer laying out guidelines for the city's telecommunications policy.

"There could have been all sorts of creative marketing arrangements and dialogues set up with the private sector, but the city never considered it a useful asset," he said.

Fiber-optic networks are almost always overbuilt because it is profitable to do so. It costs only 5 percent to 10 percent more to install double the amount of fiber needed once the piping is laid down. Thus most entities that install fiber for their own use have extra capacity they can lease out.

DWP stops leasing cable

The DWP has leased out 25 percent of its fiber network, which is netting the agency about $4.5 million a year. The 10-year leases are with telecom service providers, schools and other government agencies, including some city departments.

But the DWP stopped leasing out new fiber two years ago. All the leases it currently holds were signed between 1995, when the network was completed, and the first quarter of 1998. DWP officials say there is at least another 25 percent of the system that could be leased.

The lack of new leases may be about to come to an end, however. DWP officials say they are in final negotiations on a package of deals that would involve leasing out a "significant amount of fiber" with private sector entities, including one major deal. This package may come before the DWP Board of Commissioners next month.

Why did the DWP stop leasing fiber two years ago? That's where the finger-pointing begins. DWP officials say they were asked to stop by some members of the City Council and other city agencies.

"There has been some controversy in the city in how to go about these ventures," said Bruce Haymer, assistant director of marketing and customer service for the DWP. "There have been concerns inside other city agencies that might want to use some of the network that it would all go to the private sector and leave them stuck. Also, there are concerns outside the city about whether the city should be competing with other service providers."

But Councilman Mark Ridley-Thomas, who has chaired the telecommunications committee, said it was the office of Mayor Richard Riordan that asked the DWP not to lease out any more fiber until a citywide policy could be put in place.

Who was at fault?

Some guidelines for such a policy were put forward in the Telecommunications Task Force report issued last year, but the issue was quickly caught up in the debate over cable Internet access and no detailed plan for leasing out fiber has been presented to the City Council.

Riordan's office acknowledged asking the DWP to stop leasing fiber two years ago, but pointed out it was only intended to be a temporary halt.

"The request to stop leasing new fiber was only meant to be temporary to ensure the city was not duplicating its investment in these fiber resources," said Chris Modrzejewski, the deputy in the mayor's office handling the issue. "The request was fulfilled and the inventory of fiber was turned over to the city within a matter of a few months."

Others have privately suggested that the DWP's own internal turmoil may have contributed to the delay. Throughout 1998, then General Manager David Freeman cut 2,000 positions in the agency as it geared up for competition on the electric utility side.

One outside observer suggested that the pressure may have came from Pacific Bell, which might have seen this as a threat to the marketing of its own fiber network. But Pacific Bell officials say the company did not bring pressure to bear.

"Sure, there might have been some competition, but we would have countered with pitches to potential customers saying our system is better, broader and more reliable," said Pacific Bell spokesman Bill Mashek.

The larger city network, which was completed in November, is not being used by anyone at present. City officials are preparing a request for proposals for an outside firm to install switches and "turn on" the inactive fiber. The earliest that portions of the system could be leased out would be this summer, according to Jim Cram, assistant general manager of the Information Technology Agency.

How much should be leased?

But Shukla and others outside City Hall who are familiar with the network said the city has moved too slowly in getting the contract out and that portions of the network should already have been leased. The activation of the fiber network, they said, should have been left upto the lessees.

And there are conflicting accounts about how much of this network could or should be leased out. The ITA's Cram said that only a small stretch of fiber - a 30-mile segment from downtown Los Angeles to San Pedro -- can be leased. The city itself is leasing the rest of the huge fiber ring connecting all the police division stations from the DWP, he said.

But others who have looked at the fiber network disagree. One former City Hall aide said the city has owned an 80- to 120-mile stretch of fiber for at least three years. That system runs down the Westside, cuts across Wilshire Boulevard and then follows the Southern Pacific Railroad right-of-way to the south and east of downtown, the aide said. While that fiber is operated and maintained by Metropolitan Fiber Systems, the source said the city could have been leasing out part of that network all this time.

"It is a sad thing to see the passage of time when the city could have been getting some revenues for this system," the source said. The former aide cited a lack of expertise with fiberoptic networks and a lack of leadership on the leasing effort within the city: "It simply wasn't one of their priorities."

Shukla agreed that there has been a lack of focus on leasing out of fiber.

"There was no plan, no central point to turn to in order to get this moving," he said. "So what you are seeing right now is confusion and conflicting goals. Meanwhile, the technology is moving so fast that much of the pipe or fiber might be outdated before outside users can sign agreements to use it."