Once seen as a national model, Monticello's broadband network can no longer pay its bills.

The city, about 40 miles northwest of the Twin Cities, notified banks and bondholders Wednesday that it will no longer make debt service payments on $26 million worth of revenue bonds that were sold to build the fiber optic system in 2009.

The system, FiberNet Monticello, offers high-speed Internet bundled with phone and cable TV as a municipal service that competes with private companies.

The firm that's been operating the system, Hiawatha Broadband Communications, is also leaving. It filed a 90-day intent notice in late May to end its contract early. The City Council will meet Monday to discuss what's next.

City administrator Jeff O'Neill said that the city has no intention of abandoning FiberNet's 1,700 customers, including about 130 businesses.

"This system isn't going anywhere," he said. "We're not going out of business."

Despite the problems, he said the city has one of the fastest Internet systems in the country that has driven down prices and improved services by providing competition. But Tom Steward, investigative director for the Freedom Foundation of Minnesota, said that Monticello is a "cautionary tale" and a reminder that cities should stick to providing basic services like filling potholes.

"It shows you need to be really cautious when you're thinking about getting into competition with private providers," he said. The foundation is a nonprofit think tank that has inveighed against municipally owned liquor stores, golf courses and telecommunication networks.

Frustrated business owners

The city began exploring the idea in 2005, under pressure from Bill Tapper and other business owners frustrated by the high prices and "lousy" phone service from TDS Telecom, which has served the community of nearly 13,000 for years.

"My employees would have to take stuff home and do it from their home computers because we couldn't upload big files and we couldn't do it in any reasonable length of time," said Tapper.

"Telephone service would go down for hours, and sometimes for an entire day, he said, "obviously a disaster" for his firm that distributes cabinet hardware to customers around the country.

Other business leaders on an advisory committee convinced the City Council to hire a consultant to study the economic viability of building and operating a municipal fiber optic network. The results showed that a new system could produce enough revenue to pay for its construction and operation, and the council brought the idea to voters in a 2007 referendum. It passed with 74 percent voting to move forward with a city broadband system.

What the city did not expect, said Tapper, was that as soon as revenue bonds were sold in mid-2008, TDS would sue Monticello on grounds that the city did not have authority to build such a system. The city eventually won the lawsuit, but it could not build anything for a year until the dispute was resolved.

"The one-year delay because of the lawsuit was the determinative factor that sent FiberNet down a much harder path than it should have had," said Christopher Mitchell, a telecommunications researcher for the Institute for Local Self Reliance, a nonprofit that advocates for city-owned broadband networks.

The city also did not expect TDS to build its own fiber optic network to compete with FiberNet shortly after TDS sued the city.

Competing juices

Things got worse for the city when Charter Communications, the cable company that serves Monticello, cut its subscriber rates sharply in late 2011 and for a few months offered its premium cable and Internet package for about $60 a month under two-year contracts. That's less than half of what Charter has charged for similar service in other Minnesota communities, Mitchell said. It's also about one-third of what FiberNet charges for its deluxe video and Internet package with faster speeds, O'Neill said.

Steward said that Monticello should not have been surprised that the incumbent companies would aggressively combat the city's new network.

"You're going after private industry's lifeblood and I think it's naïve to expect that they won't do whatever's necessary almost to stay in business," he said.

But Mitchell said the city's only choice in 2007 was to do nothing and face the likelihood of no improvement in services, or force the issue by offering its own city system. "Monticello has the fastest speeds in the state for broadband now, and some of the lowest prices for services, and yet the city is being told that it failed because they haven't been able to make enough revenue," he said. Tipper agrees. He says the city did everything right and doesn't deserve blame for the failure.

O'Neill is optimistic that the financial problems can be worked out. Because the bonds are guaranteed by revenue from FiberNet, taxpayers are not on the hook for them, but a default could affect the city's credit rating.

Under the terms of the bonds, Monticello is not obligated to make any payments unless FiberNet produces the net revenues to do so. Even so, O'Neill said, the city has been making payments by taking loans from its municipal liquor fund, which makes money from sales in city liquor stores. Going forward, he said, Wells Fargo Bank as trustee of the bonds will use funds from a debt service reserve fund -- basically an escrow account -- to make bond payments of about $880,000 in December and nearly $970,000 due next June. "That gives us over a year to determine a strategy for moving forward with a new plan and new operations," O'Neill said.

Tom Meersman • 612-673-7388