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How did Burlington Telecom become a high-stakes balancing act?

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Published March 3, 2010 at 6:40 a.m.


Ten years ago, on Town Meeting Day 2000, Burlington voters authorized the first $6 million in bonds to create Burlington Telecom. City leaders promised that a state-of-the-art, publicly owned cable, Internet and telephone network would be cheaper and provide better service than its out-of-state competitors. At that time, they were Adelphia Cable, which is now owned by Comcast; and Verizon, which has since sold its landline business to FairPoint.

Burlington Telecom has mostly delivered on the promise, but it has come at a massive cost. Today, BT is fighting for its life. The enterprise is on the verge of a loan default that could leave Burlington taxpayers in the hole for $17 million, and potentially as much as $50 million. That could do a number on the city’s credit rating — and perhaps, the state of Vermont’s as well.

What turned a progressive municipal experiment — that has inspired many other communities to consider creating similar telecom systems — into a train wreck?

The names of two sixtysomething men — Jonathan Leopold and Tim Nulty — are on the lips of the state regulators, city officials, legislators and citizens who are trying to untangle the mess.

The most talked-about development is that Leopold, the city’s chief administrative officer, chose to violate state regulations by pumping $17 million in taxpayer money into BT over the course of two fiscal years. The violation began in early 2008 and councilors weren’t directly briefed about the extent of the problem until May 2009.

But Leopold claims he inherited vexing problems from Nulty, BT’s founding father and first general manager. Leopold and BT general manager Chris Burns maintain that Nulty grossly mismanaged the enterprise during his five-year tenure. BT was “very badly off financially” when Nulty resigned in October 2007, Leopold says, necessitating a rescue operation that he and Burns have since been struggling to carry out in the midst of a historic recession. The $17 million had to be borrowed from city coffers to pay bills because BT could not get private financing at a time of panic in the credit markets, Leopold says.

Nulty insists that BT was in good financial shape when he left and that Leopold and Burns subsequently steered it off a cliff. A combination of incompetence and subterfuge accounts for the crack-up, Nulty charges, describing Burns as “a poor manager” and accusing Leopold of using taxpayer funds that BT didn’t actually need.

Who’s telling the truth?

Players not directly associated with either the Nulty or Leopold camps say both are to blame, to some degree, for what happened to BT. Those passing such judgment include former Mayor Peter Clavelle, who served as BT’s midwife; former City Council President Kurt Wright, who received confidential BT reports from Leopold as chairman of the city’s board of finance; and members of citizens’ committees created to give advice to Burlington Telecom.

“Everybody has dirt on their hands,” declares Jan Schultz, a Progressive who serves on a BT advisory committee. Schultz includes the city council in that assessment. He notes the council received increasingly negative financial reports from Leopold throughout 2007 and 2008, “but they weren’t interested.” Schultz says the data were “complicated and councilors didn’t have the expertise to deal with it.”

If You Build It, Well…

BT’s problems are said to have originated with a massive overrun in the cost of constructing the city-owned fiber-optic network that today delivers landline phone service, high-speed Internet links and cable television to about 4800 Burlington households and businesses. The build out’s price tag was initially estimated at $22 million. The technologically advanced system, which has yet to reach about 15 percent of city homes, will ultimately cost at least $45 million to complete, Leopold figures.

All the while it was overshooting its anticipated expenses, BT was underachieving on the revenue side, Leopold adds. He says the number of subscribers was 25 percent below what had been projected for late 2007, producing a $1.3 million shortfall in BT’s anticipated revenues. In the month prior to Nulty’s exit, Burlington Telecom recorded a $206,000 net cash operating deficit, according to detailed sets of financial data that Leopold provided during an interview in his office last week. A tsunami of red ink was cresting and threatening to wash away BT, the Leopold-Burns narrative suggests.

In fact, one only has to look at the city’s financial report for 2007 — the one handed out to voters on Town Meeting Day — to see that Burlington Telecom owed $5 million to the so-called “cash pool” at the time and had roughly $300,000 in accounts receivable. Likewise, in a report to the city’s board of finance in November 2007, Leopold explained that BT’s capital expenses had been underestimated by $3.5 million — for that year alone.

Nulty, an economist who has worked for the U.S. Congress and the World Bank, rejects all of Leopold’s figures as well as the finding of the Blue Ribbon Committee assigned to assess the BT situation, which places the price of the build-out overrun at $15 million. Nulty says the cost of building BT’s network was only a couple of million dollars more than had been calculated, mainly due to the high price of the tunnel work required to bring fiber to hundreds of households. Burns, who was then in charge of engineering, oversaw the build out, Nulty notes. “Chris never said anything about overruns,” he says.

The enterprise did sustain a $4.5 million loss of potential revenues due to Adelphia Cable’s nine-month state-level battle to prevent BT from becoming a competitor, Nulty notes. But BT was nonetheless poised to become profitable when he left, Nulty adds, calling that “an impressive performance for a startup.”

Leopold is lying about BT’s finances, Nulty contends. “This guy is under a criminal investigation that could possibly put him in jail,” Nulty alleges. “Of course he’s going to try to smear his predecessor.”

Nulty leveled similar charges in a memo to board members of East Central Vermont Community Fiber Network, Nulty’s current telecom project. As worrisome questions began to arise about similarities to BT, Nulty clarified for his bosses: “The problems in Burlington are not problems with the economics of BT itself, but of sloppy, bungled or improper behavior by the city administration.”

Leopold calls Nulty’s accusation that he could face a jail term “an incredibly ugly smear that has nothing to do with the facts.” Nulty has no evidence that Leopold is a target of the criminal probe recently initiated by the state, the city’s top financial officer says.

Nulty adds, “If I had made the kind of shambles of BT that Leopold says I did, why would I now be offering to put up my own money to try to save the thing?” Nulty is part of a recently formed nine-member group calling itself Reboot BT that has told Kiss it can rescue BT from bankruptcy if it is put in sole charge of the business. Members also say they are willing to invest in the bailout. Kiss has neither accepted nor rejected the “Gang of Nine”’s offer.

Guilt by Association?

The blame game between Leopold and Nulty explains a lot about what went wrong at BT. But others are implicated, too. In a report to the city council in December 2007 — six weeks after Nulty’s resignation — Leopold had warned that “the business and financial model we have been working with and the underlying assumptions behind it are not viable and have not been achieved.”

Fears of an impending crisis were never communicated to BT’s own management team then or in subsequent months, says Jeremy Patrie, who oversaw the operation’s technical side for eight years until his resignation last June. “If we were running a deficit such as that, it wasn’t communicated to us until pretty much a year after Nulty had left,” Patrie recounts. “We would have been told to button down all expenses, and we weren’t told that.”

In that same report to the council, Leopold noted that the budget-busting capital expenditures had enabled BT to make its network available to 15,500 Burlington households — 2000 more than had been projected. The build out is 90 percent complete, Leopold told the council then, using a figure that has since been revised to 85 percent.

In addition to aggressively marketing itself to those 15,500 households, BT should have been seeking opportunities outside Burlington, Nulty argues. He notes that the system’s techno “hub” on lower Church Street was designed to accommodate many more hookups than Burlington alone could ever supply. By 2007, several towns around the state were inspired by BT’s seemingly successful model to consider spinning their own fiber webs, and were potentially receptive to linking into the Burlington hub.

But Mayor Bob Kiss rejected that option, saying that BT should complete its own build out before prospecting for business outside the city. Nulty called Kiss’ veto a “huge mistake” and cited it in 2007 as the key cause for his decision to leave BT. Kiss has since reversed his stance. Even though the Burlington network isn’t much closer to completion today than it was in 2007, Kiss now suggests that salvation for BT lies partly in finding partners in other municipalities.

Nulty maintains that BT could be profitable, “if it were well managed,” solely by tapping the Burlington customer base. “Getting outside customers would be icing on the cake.”

Marketing was another weakness. BT wouldn’t be flirting with financial calamity today if Burns and Leopold had implemented a ready-to-roll advertising campaign, says former BT marketing chief Richard Donnelly, now a member of the Gang of Nine. By the end of 2007, Burlington Telecom had recorded a roughly 30 percent “take rate,” Donnelly calculates, referring to the proportion of potential customers who had signed up for services. A series of mailings and a door-to-door solicitation drive had been planned in conjunction with Methodikal, a Burlington marketing firm, with the goal of raising the take rate to 50 percent, Donnelly recounts.

Even if only 40 percent were persuaded to sign up, BT would have about 2000 additional subscribers today, with resulting revenues large enough to ensure “there wouldn’t be this crisis now,” Donnelly says.

The marketing pitch was to have a “buy-local” spin, with Burlington Telecom emphasizing its identity as a homegrown, community-controlled entity — in contrast to BT’s privately owned competitor Comcast, a conglomerate based in Philadelphia. “The marketing campaign was about branding BT and aligning it with a set of shared values,” says Donnelly, who now works for Efficiency Vermont, an energy- conservation utility.

But the marketing plan was aborted by Burns and Leopold, he adds. They wanted to focus on closing deals with likely customers rather than reaching out to the broad mass of prospective customers, Donnelly explains. The Burns-Leopold decision to kill the marketing campaign was “off the reservation of rationality,” Nulty adds. “It made zero sense.”

For his part, Burns says Donnelly “had the ability to market as he chose.” He claims Donnelly was fuzzy about the plan and his own performance. “It was hard to get an understanding of how many calls were being made, how many sales there were,” Burns recalls, saying, too, that Nulty “never created a formal sales team.”

Kiss says BT should have been striving harder to sign up Burlington businesses — an approach favored by Burns. The mayor estimates that only about 250 businesses — out of 2000 — are currently BT customers.

Such a priority would be misplaced and would also squander scarce resources, argues Patrie, the former operations chief. “The whole reason for BT was to serve Burlington residents,” Patrie says, recalling how dissatisfied homeowners were with Adelphia. Besides, he adds, “There’s a lot of competition in Burlington for the business telecom market.”

But Craig Settles, a California-based consultant to municipal telecom operations around the country, says such publicly controlled networks can succeed only if they sign up large businesses and institutions. The “churn” — or turnover rate — is too high among residential customers to ensure financial stability, Settles argues. “You’re in a world of hurt if you rely only on households,” he says.

Donnelly adds that he tried again in 2008 to launch a marketing campaign. It also “fizzled,” he says, because Burns and Leopold “weren’t responsive to it and lacked understanding of marketing in general.” The two were by then “totally focused on other things,” Donnelly says.

The Blue Ribbon Committee as well as outside consultants have noted that BT has never been marketed effectively. All concurred that the program needs a vision — and cash — in order to succeed. “I get three, four, five, six pieces from Comcast every week at home and at my office,” says former City Councilor Andy Montroll. “All I get from BT is my monthly bill.”

Managing Risk

Management decisions have contributed to BT’s woes. Former workers say morale suffered when Nulty left, Burns took over as general manager, and Leopold got directly and deeply involved.

“The new management wanted to give BT a much more corporate structure,” Patrie says, explaining that involved “the compartmentalization of everything.” It was isolating, and “the sense of it being a team effort was lost.” Burns’ style left many BT employees with “the feeling that it was just a job, nothing more,” Patrie says. “And that’s particularly dangerous for a startup.”

Jacqueline Griffin, a former customer service representative, agrees that “under Chris Burns I was made to feel like an hourly employee. There was no communication at all.” If she sought to talk with Burns about some issue, she would be referred to someone else in management, Griffin adds. “It was just circle talk,” she says.

Nulty, by contrast, “was just so pleasant that you’d want to do anything for the guy,” Griffin declares. “He was also entirely focused on customers.”

Burns literally built barriers in BT’s office, Donnelly points out. Doors that Nulty had removed were put back in place when Burns took over, Donnelly says. “It was a noise issue,” Burns says in response. “And they were only half-doors, wood on the bottom and glass on top.”

When Griffin announced last July that she was quitting, Leopold called her into his office for a chat, she recounts. “He was asking me why, and then he started correcting my grammar,” Griffin says. “I was thinking, ‘God, you’re such a jerk.’”

A big problem plaguing BT from its inception, many sources say, has been the absence of expert oversight. As Patrie puts it, “No one at city hall had any background in running a telecom operation.”

Schultz, a member of a citizens’ advisory committee for BT, says the group never got the information it needed from Leopold and Burns to make meaningful assessments of its financial situation. “It became much more secretive after Nulty left,” Schultz says. “When he was in charge we felt we had access to information — or at least seemed to have access.” Schultz says he was “very frustrated” by Burns’ approach, suggesting, “It was a very serious mistake to hire an engineer to manage BT.” Despite his frustrations, Schultz says he has stayed involved with the advisory committee “out of loyalty to the Progressives.”

A commission should have been established to oversee BT in the same way that these citizens’ panels monitor the performance of city departments such as Burlington Electric, says Schultz, echoing the view of Democrats on the city council. “It’s not a transparent operation without a commission,” says Ed Adrian, a Ward 1 Democrat who led the council’s charge against Leopold’s handling of BT’s finances.

Wright and other Republicans joined Progressives on the city council in opposing a commission structure for BT. There were already two citizens’ groups watching BT, Wright says. And he and other council members were constantly warned by Leopold of the importance of keeping some BT financial information out of the public domain due to fears that Comcast would use it to steal customers, Wright adds.

The concept underpinning BT may itself be seriously flawed, Adrian suggests. He notes that Burlington Electric is able to function well financially because it enjoys a monopoly: Every home and business in Burlington must buy BED’s electricity. “You can’t have a non-monopoly utility model and expect it to do well in an environment of competitive telecom,” Adrian says. He adds that marketing BT as an ideologically attractive entity may not prove effective. “Most people don’t spend a lot of time thinking about the social ramifications of signing up with a particular telecom provider,” Adrian argues. “They’re mainly concerned about service and price.”

Civic pride might not be a great selling point these days, especially since BT has become a huge tax liability for the city — and its citizens. The irony? Despite all of BT’s difficulties, almost everyone in this saga acknowledges it’s a technologically superior network. They also agree it can still be successful. But how? Kiss doesn’t exactly inspire confidence. Ever the optimist, the mayor predicts, “It’s going to work out.”