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The Devil Came From Kutztown

Midway between Allentown and Reading, Pa., lies one of those remote Pennsylvania burgs, loaded with charm and antique shops.

Residents of Kutztown, nestled in Northeast Berks County, might have to travel 16 miles to a larger city for a dose of nightlife — but to find a choice among broadband cable providers, they don't have to leave their own homes.

That distinction could make Kutztown unique in Pennsylvania, and it's what makes it the touchstone for a legislative battle that has drawn battle lines between municipal utilities and private industry.

When the dust settles, in the localities' view, cities could be prevented from operating their own electric power stations or town-run golf courses.

Business interests counter that government has no place in private enterprise beyond the provision of "necessary services" like road repair and power delivery. It's bad public policy to move into business realms where the community is already served by commercial enterprises, opponents have claimed.

Ground zero

For cable operators in Pennsylvania — where three of the first U.S. cable systems were built in the late 1940s — the debate began in 2001.

That's when the borough of Kutztown went public with plans to leverage its investment in fiber, placed to service its power utility, by expanding into video and Internet delivery.

Traditionally, municipalities have expanded into cable operations because there's no area provider, or to supplant a poor performer.

Not Kutztown. It has long had cable service. provided by one of the industry's founding companies — Service Electric Cable TV.

"There was never a call from the franchisor to the franchisee to contact us about complaints, lack of service offerings," said Service Electric's corporate manager of administration and telecommunications, Gary Day. "There was never any of that."

Cable executives read about the broadband discussions in the press, and weren't officially contacted until late in the process, he said.

Before his cable stint began four years ago, Day was an executive assistant in the government of nearby Allentown. The city had a lot of money at that time, he said.

"The economics are a lot better in Allentown; it's a bigger town," he said. We looked at telecommunications and it didn't make sense.

"We tried not to duplicate the private sector. The private sector means jobs, taxes, all kinds of good things."

But regulators in Kutztown assert they are not merely duplicating private industry, but expanding upon it in a way that will encourage business growth — especially through the provision of multiple high-speed data options for residents and businesses. Private cable companies tend to focus strictly on residential data delivery.

Consumers also apparently respond to the municipal operator's urging to keep their cable and data dollars "at home."

"We average two services per customer," said borough manager James Vettraino. "We're meeting or exceeding [growth] expectations."

Went for fiber

When William Penn founded the first borough in the area in 1662, he urged newcomers to the Americas to "establish original social forms," according to a local history.

Kutztown officials figured they lived up to Penn's challenge in the current millennium through the manner in which they decided to get into the cable business.

Rather than build a hybrid fiber-coaxial cable system, the leaders of the 5,067-resident community opted for a more futuristic build — fiber-to-the home architecture.

In 2001, Optical Solutions Inc. of Atlanta responded to the city's request for partnership proposals and designed a passive optical network for Kutztown. Partner CEI Networks Inc. of Pennsylvania provides phone and data services.

In all, the 1.6-square-mile community spent $4.6 million for a full build-out, with the equivalent of 15 aerial miles of cable plant.

SE's response

Service Electric's immediate response was to slash prices.

What had been a $36-per-month, 57-channel enhanced-basic package was slashed to $25 per month — a move Service Electric said will lengthen the recovery of its investment on its recently completed upgrade. Its Kutztown system is now two-way capable at 750 Megahertz, with fiber-to-feeder architecture.

In addition to digital cable and cable-modem service, Service Electric offers pay-per-view and is rolling out HDTV.

Hometown Utilicom, the city's offering, was open for business in August 2002.

It charges $16 for a 10-channel broadcast-basic tier. Expanded basic costs $29.75 — more than what Service Electric charges for more than 100 channels.

The municipal broadband system doesn't have all the same channels as the incumbent. Notably, city officials said two major regional sports networks — Comcast SportsNet of Philadelphia and the Yankees Entertainment & Sports Network — were deemed too expensive for the operation's basic package.

Hometown Utilicom offers bundled discounts. For instance, a 64 Kilobits-per-second modem service carries a stand-alone price of $15, but bought with either phone or video service the charge drops to $14.63.

High-speed data charges are comparable: Service Electric offers an 800 Kbps service for $29.95. Hometown sells data for $30 at up to 768 Kbps, but consumers can save 75 cents to $1.50 if they buy data plus other services from the city.

The borough says regional telephone provider Verizon Communications Inc. has yet to deploy digital-subscriber-line service in Kutztown. And city officials say Hometown Utilicom's local phone service, with an entry-level price of $11.63 for unlimited local calling, also undercuts Verizon.

While Service Electric offers phone service in the Lehigh Valley, it does not offer phone service in Kutztown.

The municipal system uses direct mail and local newspaper ads to market its wares, but word-of-mouth has been the best promotional tactic, said Vettraino. So far, the city has attracted 442 customers.

Though citizens outside the community have asked if Hometown Utilicom would build out to them, that's not financially feasible.

The municipal-owned system is also unlikely to link up to other localities, Vettraino said. Business plans call for a 40% rate of penetration.

"No. That's not viable," Service Electric's Day said of the city's projections. He wouldn't state his company's sub count in Kutztown, adding the company's still analyzing the impact of competition.

But 40% is "greater than I have," Day said. "What do they think the market is?"

But citizens support the municipal broadband operation because they know Hometown Utilicom is the reason the average basic cable rate in town is $25, Vettraino countered.

Idea spreads

More Pennsylvania cities seem to be looking into broadband, either through partnerships or as a municipal utility.

Pennsylvania Cable & Telecommunications Association president Dan Tunnell said a dozen Lehigh Valley municipalities are analyzing the broadband business. Such potential partnerships have prompted the creation of a municipal broadband consortium, which trumpets the success of builds such as Kutztown and Reedsburg, Wisc.

More cities recognize revenue possibilities within the business community, a segment generally ignored by private cable companies, said Tony Sachetti, founder of the consortium and also marketing applications manager for Optical Solutions Inc., Kutztown's infrastructure partner.

In the past, a decision to launch municipal broadband data services has been more a matter of dissatisfaction with an incumbent. But now, citizens want cable more cheaply, and localities know they can make it happen.

"We're getting daily contacts," Sachetti said.

Next Week: The politics behind municipal overbuilds.