KPU Looks at Financial Impact
By Mary Kauffman
January 30, 2007
GCI's entry into the Ketchikan phone market was made possible through an agreement between GCI Communications Corporation and the City of Ketchikan (doing business as Ketchikan Public Utilities). Under the agreement, GCI will use facilities owned and operated by Ketchikan Public Utilities - a publicly owned telephone service that has been the predominate phone service provider in the Ketchikan area for many years.
Phone service options were expanded for local consumers when the Ketchikan City Council approved the adoption of an interconnection and resale agreement with GCI Communications Corporation on July 12, 2006. Later the Regulatory Commission of Alaska (RCA) approved the resale and facilities interconnection agreement between GCI and the City of Ketchikan (Ketchikan Public Utilities) on November 14, 2006.
In its approval of the agreement, RCA noted the proposed interconnection agreement between the City of Ketchikan (KPU) and GCI establishes the rates, terms and conditions for local interconnection, number portability, dialing parity, access to rights of way, local resale, and collocation. The terms of the agreement were also determined by RCA to not be discriminatory to a third party and to be consistent with public interest, convenience, and necessity.
As GCI continues preparations to provide an additional phone service option to local consumers, KPU Telecommunications is looking at the financial impact this might have on their current phone operation, as well as any possible impact on electric and water consumers.
In a memorandum addressed to City Manager & KPU General Manager Karl Amylon and to the Ketchikan City Council, City Finance Director Bob Newell addressed the possible financial impact this new phone service option might have on Ketchikan Public Utilities.
In Newell's memo dated January 18th, the City Finance Director clarified that he based his financial impact analysis on a forecast prepared by GCI regarding its plans for the next three months. As a caveat Newell wrote, " Unfortunately, the forecast is incomplete and lacks many of the details necessary to do an adequate analysis. Therefore, we have been forced to make certain assumptions that may not reflect what will actually take place."
One assumption is that GCI will have 1,905 local customers by June 2007. This would represents approximately 20 percent of KPU's current local phone customers. Based on this assumption and the assumption that 70 percent of GCI's projected customers will be business customers and 30 percent will be residential customers, Newell projected that KPU Telecommunications would lose $426,000 annually in billing revenue from its former customers and would gain $341,000 annually in billing revenue from GCI for wholesale services.
Since the telecommunications market trend is to bundle Internet and DSL services with other local phone services, Newell also included an estimate for the loss of revenues for KPU from these services. Newell wrote, " Assuming that KPU Telecommunications also lost 20 percent of its Internet and DSL customers, we projected that KPU could lose as much as $276,000 annually in revenues from Internet and DSL services." He continued, "This brings the potential annual loss of revenues to $361,000 ($85,000 + $276,000).
Newell concluded by saying, "Again, I want to reiterate that this analysis is based on incomplete information and sketchy details about GCI's plans for offering local phone service to the community of Ketchikan. The actual loss of [KPU] customers and revenues could be higher or lower..."
Ketchikan City Manager & KPU Manager Karl Amylon also provided a written memo on the subject to the Ketchikan City Council. Amylon said of the anticipated 1,905 local customers projected by GCI, "Although my office believes this is a somewhat aggressive and unrealistic expectation, GCI is unwilling to distinguish between the number of work orders and anticipated customer migration from KPU. Regardless, the long-term financial implications to KPU cannot be ignored."
Assuming a worse case scenario that the number of work orders approximates the anticipated number of customers migrating from KPU to GCI, Amylon wrote, "The projected loss of users could approximate twenty percent of the KPU's local telephone customer base."
"The Finance Department and Telecommunications Division have initially estimated an approximate annual revenue loss of $361,000," said Amylon. "As Mr. Newell points [out] in his memorandum, the estimate at best is incomplete and subject to multiple variable," he said.
Amylon concluded his written comments to the City Council saying, "While a preliminary estimate only, should GCI double or triple its load forecast in subsequent quarters, the burden placed on electric and water consumers will dramatically increase."
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