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HomeMy WebLinkAbout2004-03-18 Utilities Advisory Commission Summary MinutesUAC Special Meeting on FTTH, March 18, 2004 – Approved 4/7/04 Page 1 of 26 UAC APPROVED MINUTES SPECIAL MEETING ON FIBER TO THE HOME MARCH 18, 2004 Rosenbaum: Good evening, this is a continuation of the special meeting of the Utilities Advisory Commission that started yesterday, March 17. Let’s take the roll, starting on my left. Dawes: Dexter Dawes, present. Melton: John Melton, present. Rosenbaum: Dick Rosenbaum, here. Dahlen: Elizabeth Dahlen. Bechtel: George Bechtel, present. Rosenbaum: Before we begin, let me mention that we had a little review in the newspaper yesterday. I’ll just read the first paragraph. “The first half of a well- publicized Palo Alto Commission meeting to discuss a recommendation to offer fiber optic cable to all City households was mainly dominated by older gray men who spoke in an almost foreign technological language.” I guess it’s a good thing we have you here with us, Elizabeth. And, who knows, perhaps we’ll do a little better tonight, but we’ll see. All right, yesterday we heard from staff, we heard from the consultant, we heard from members of the public, and tonight we have returned the issue to the Commission. We will have questions of staff and perhaps a little discussion and then we’ll be ready for motions. So, colleagues, do you have any questions for staff? Dawes: (inaudible) because these are typically more expensive than current sources of supply, and it seems to me that if we are willing to take the risk of higher electric rates to reach an objective – in this case, it’s renewable power – that this was a reasonable benchmark against which to compare the risks that the ratepayers might have to pay off some or all the bonds. So the question I sent to John was give me the numbers on what the possible impact of renewable power rate increase might be when fully implemented versus what the rate increase that the inability to service our bonds through revenues of the fiber system might be. And so that was my question to John and he sent the answer to me by e-mail but I put having my dinner before reading my e-mails, so I didn’t see it. So, hopefully, he can either remember it or recite it to me. Thank you. Ulrich: Good evening. What I believe Commissioner Dawes is asking, those of you that have been following our attempt to increase our portfolio of supply following the change in contract with our Western Area Power Administration which changes significantly at the end of 2004. One of our plans – and one that all of you reviewed and approved by City Council - is to dramatically increase our portfolio renewable resources. Those that are defined as renewable are not our hydro resources but those that would come from UAC Special Meeting on FTTH, March 18, 2004 – Approved 4/7/04 Page 2 of 26 wind, biomass, and other obvious renewables. The Council approved of an increase up to ½ cent in our current rate which could be used towards procurement to eventually get to the 20% of our portfolio. So, in doing the math as Mr. Dawes asked, that would translate based on current rates and assuming the average customer which we use as kind of a benchmark that uses 650 kilowatt hours per month and that translates to a low $40 range for the bill. If you utilize the whole ½ cent, that would translate into $3.25 a month if we were using the 20% portfolio of renewables. We think, however, with the ½ cent premium, we probably will not have to spend that much in actual purchase price because the price of renewables is coming down. So, to give you kind of a round number, somewhere between $1.30 and $1.60, so if you want to round it off, $1.50. I think your comparison was with in our report that if the fiber system, the $40 million did not fend well in the financial world, customers didn’t come, and we had to sell the system and then take all the loss and still have to pay the bonds, what would that mean to the average customer. Again with the 650 kilowatt hour a month, that turns out to be 70 cents on the bill of every electric customer. Now the assumption there is that you use the electric customer as the form of helping to pay for the bond or to be responsible for it should we have to pay it off. So there are a few assumptions in there but that would be the comparison. Hope that wasn’t too long of an answer to your question. Dawes: No, that was perfect. Basically, as I said, I’m trying to get some perspective on this as it relates to some other benchmark that is out there. So, thank you, John, it does answer for me. Renewables might be double what a really worse case in the fiber system might be. Rosenbaum: Elizabeth… Dahlen: May I just ask a question, John, with regards to the average residential customer we’re assuming is about 650 kilowatt hours per month. What about our large customers, the large businesses within Palo Alto? Maybe if you could give some perspective on what percentage of our electricity is sold to those businesses and what the range is in terms of kilowatt hours they’re using per month because of course the fees are higher for them. Ulrich: Sure. I didn’t come prepared to give you the total dollar amounts of some of these larger customers, but kind of a magnitude, we have probably in the electric world somewhat of a unique customer base in Palo Alto. We have 65,000 residents and roughly 28,000 customers, but 20 of those 28,000 customers pay somewhere between 50% and 70% of the entire electric bills. So, they’re very important and you can see the dramatic difference between the amount of electricity used by the large customers versus the residential. I must point out, though, that it’s quite the opposite on the gas side of the business and of course it depends on the time of the year. Dahlen: Thank you, John. Rosenbaum: Are there any further questions? George… UAC Special Meeting on FTTH, March 18, 2004 – Approved 4/7/04 Page 3 of 26 Bechtel: I have a number of questions, some generated from last night and others from reviewing the information. So, if the Chairman will indulge me, I will move down through various pages and ask those that haven’t been answered already. One of those is that a separate organization is proposed to deal with programming matters. If we set up a separate organization, I’m interested in the form a separate organization might take. We talked about a review board that could review the programming and take charge of that. I see something that may be a little larger than that, would really be a separate utility as we talked about and that telecom utility would be in charge of programming, let’s say, selection of the programming but would rent services from the City. So, basically we would see one organization being a service provider and another being responsible for the infrastructure, the network, and so on. So, if one were to think about that, I’d be concerned about the cost saving that we talked about, about sharing people. Basically, we’d be outsourcing some mission to one organization and back and forth. The second is the separate organization would not report to you but would have a different structure. So, I’m wondering whether that had been discussed among you at staff level or with the City attorney, and so on. The different forms that this other organization could take would provide the arm’s length relationship to protect the interest of those people who are concerned about programming and government control of that. Ulrich: I think you’ve covered a number of areas in your questions. I’ll see if I can focus on the ones that you’re interested in. I would not say that we have not spent a very significant amount of time to delve into the kind of structure or the best governance to have. We thought the best approach is to determine that this is a business we want to be in, but then we have to structure it for several reasons, one, we would have to be real clear about the governance related to the federal communication expectations and other legal requirements, particularly that we would have to have an arm’s length relationship with the City because you’d have to negotiate and have basically a franchise agreement with the City that would be as fair to anyone else who has a franchise so that you’re not giving the City or the fiber utility any additional benefits beyond what would be given to anyone else. The other part is related to the content, and there are some requirements that the content be decided upon independently of the government organization. So, I think our plan would be to look at all of those things and then determine what would be the appropriate governance to manage and operate the utility. I think many of those alternatives could work depending on what would be the obligation for how the business was structured with all those things in mind. The existing utility we currently have could be part of the organization by being responsible for the maintenance and operation, for example, of the infrastructure and do it on a contract to this other entity that might be there. So there’ll be a number of things that you could do, but, candidly, we have not spent a lot of time doing that. In your business plan you can see the staffing recommendation which, I think, is not what you’re referring to. You’re looking at the overall governance and how it would work in relationship to the City government who essentially would own it. Bechtel: Let’s talk about the last point you raised. Of course you talk about the staffing, and, let’s say, we set up a, what I would call, a telecom company or telecom line of business or so on and that staffing is appropriate for that. But we’ve also talked about perhaps using some of the City staff, your staff and the other departments, so we UAC Special Meeting on FTTH, March 18, 2004 – Approved 4/7/04 Page 4 of 26 probably could get some savings along those lines. But let’s come now to the fact that if we have not settled governance and we’ve not dealt a lot with that, and let’s say we recommend to the Council and the Council decides go ahead with a referendum or a straw vote or what have you, a Charter change in the November election, I see it would be very difficult to write arguments to propose something to the citizens to vote on without having the governance issue dealt with almost right away. One of our former Commissioners, Rick Ferguson, sent us an e-mail and he pointed out some of the timelines in a very nice letter I received today. The timeline is fairly critical. We really don’t have a lot of time to prepare for an election in 2004. So, I believe in many cases – at least I personally believe – that governance issues far outweigh the technical issues or design issues that you’re proposing to spend the money on. So, I’m almost persuaded that we should spend $200,000 in dealing with the governance issue and making sure that we have our hands wrapped around that before I would spend money asking for bids or asking for proposals for system design. That’s very strong in my mind tonight. Another issue deals with the finances. We’ve talked about leaving the money in Palo Alto. Some very good points were raised last night about this utility saving our money. But in our financial plan, nowhere do we list a line item that says transfers to the General Fund. Certainly if we use a pro forma plan, there is profit after, say, year 4, 5, 6, depending on how penetration does. So there are monies there. Certainly we have cumulative cash of $50 million, let’s say. There’s money there. That was not in there. I think we need to also present that as part of our financial plan of how this new utility would return money to the City. If we don’t include that, I think we’re really misleading people. We’re talking about keeping this cash sitting in this new entity’s cash box, and that’s certainly not what we had in mind. I don’t believe we also covered franchise taxes. Were franchise taxes included in some of the operating expenses? Heitzman: Generally speaking, the franchisee passes on the taxes to the customer. That’s what Comcast does. It’s just a transfer from the customer through the franchisee to the City. It’s a 5%… Bechtel: It’s about $3 as I recall looking at my Comcast bill. Ulrich: As I mentioned earlier, we would have to have a franchise agreement with the City, and my assumption would be that we would be on equal footing with the current incumbents and they pay a fee and that is an income to the City, so the City does get money from this business and that’s part of the cost of doing business in Palo Alto. Bechtel: Now, what about property taxes? Ulrich: What about property taxes? Bechtel: I’m assuming that operations that have equipment here also pay property taxes to the state, at least to the county. This entity would not, is that correct? Ulrich: That’s correct. UAC Special Meeting on FTTH, March 18, 2004 – Approved 4/7/04 Page 5 of 26 Bechtel: So, basically, the return to the citizens of Palo Alto is through the profits of this plus other revenue, of course paid certainly by the ratepayers, by the people that sign up, would be the franchise taxes. Those two are the sources of revenue for the citizens, at least going back into the General Fund. Heitzman: The cash that we build up, the reason it doesn’t say it goes to the General Fund is because the consultant and we felt that this is a policy decision. We recognize that this money is here, but the portion of that goes to the General Fund is something that City Council or someone in the governance mode would make a decision about. So, we’re just saying this money is available, how it gets distributed would be a policy decision. That’s why it doesn’t say it in the plan. A third source of money for the citizens is, of course, any savings they get because this is a lower rate they pay so there is money left in their pockets. So you might say there are three things: the franchise fee, the cash however it gets back to the City, and whatever savings because it’s a lower-cost service. Bechtel: Presumably it’s a lower-cost service, and I guess that’s our intention certainly to do that. The other issue that was raised last night and in the past has been our pricing. One of the speakers talked about cost plus pricing. That would be in line with what we have done certainly in our other utilities where we pay for the commodity, we pay for the distribution. In your discussions, did you ever talk about pricing along the lines of cost plus pricing? And that leads me to a second part of that which I thought was a very innovative way which is an a la carte plan where you pay by the channel and so on rather than paying by a tier, you pay by the channel. Did you ever discuss that with Neil at all? Heitzman: First of all, the idea of cost plus pricing is done mainly in what we have a monopoly in, so we know that eventually we’re going to recover all these costs. As it is, with the pricing that we have, which is more market based but trying to stay below the market price, we would recover all the capital costs in roughly 14 years. That’s a pretty good horizon as it is. So, to try to mimic a monopoly pricing, you would probably have to push your payoff out 30 years like you might have on Calaveras Dam or some other piece of property that you might have a monopoly business. So there’s kind of a tradeoff between the fact that we’re being competitive, we’re trying to recover our costs. There’s nothing to say that once we’ve recovered our capital costs, we can’t go to cost plus pricing or something else that we feel is more appropriate. But I think part of the idea is to get that paid off in a reasonable amount of time since it is a competitive business and is more risky than your monopoly business is. The idea of a la carte pricing, in fact the idea of pricing altogether, I think, is something we need to recognize. In this business plan we’re proposing a starting point. By the time, let’s assume everything goes forward as business happens, a lot of this product packaging and pricing will have to be determined by the marketing professional to meet market conditions and so forth to make sure that we’re competitive in the market. So, I wouldn’t look at these prices as absolute or the pattern that we have here as absolute. It will be developed using information from customers such as customer focus groups, work with customers, other competitors’ pricing and so forth to come up with packages and prices that meet market demand, the customers’ needs, and still meet our revenue needs. So, whether we went to a la carte or UAC Special Meeting on FTTH, March 18, 2004 – Approved 4/7/04 Page 6 of 26 something like that, if that is something the customer base shows a great interest in, I am sure something will be developed. Bechtel: Well, again, I’m assuming that my colleagues will vote along with me affirmatively to recommend this to the Council and the Council will recommend to go ahead as well. So let’s talk about that. If we propose the same old, same old service, I believe we are not going to gain the attention of people in Palo Alto and I don’t believe necessarily they will support it. I believe that our surveys have been very positive, and people really believe, as I said last night, that the City is doing a good job, with our City Auditor’s results on that. But I don’t believe we can just promise that the future will be better and that we’ll look at things in the future. We’re trying to sell a $40 million system, and with the expectations of our citizens being very, very high, I think we’re going to have to be more innovative. And I think, again, I’d rather see money spent elsewhere rather than designing the system in the next month. Dealing with issues like that, how do we package this so it’s an innovative product or line of products? I’m not sure that Neil and Uptown is the right person to talk to us about products. Every time we’ve heard him in the last – and I don’t mean to be critical of him but I know what I’ve read – and it’s pretty much conventional sorts of programs, very popular, very appropriate for rural areas, not so appropriate, I believe, for an embedded city like Palo Alto in a 2-1/2 million people metropolitan area surrounded by two large cities on each end of us, and also having some really great people offering services. So we’re going to have to do a better job, I believe, in coming up with products. I don’t think we can put them off in the future and say, “Look, we’ll think about those things and we’ll do more surveys,” and we’ll ask them. I think we’re going to have to make proposals to people in order to get them really interested in this system. Heitzman: First of all, the plan that Neil and his partner did is, as you said, pretty plain vanilla, but the intent here, this is a business plan and what we’re trying to show is that there’s very solid basis for this business. One of the surveys was very particularly designed specifically to find out how customers would respond to a 10% discount, and the basis of that survey is where you finally filter it through all the market analysis and overstatement adjustment and so forth to come up with these penetrations. So the plain vanilla of a 10% discount is what comes from a solid basis. It comes from customer input that has been de-rated and so forth to make up for those who say they will do one thing but don’t do it. And then you get these revenue streams out of that. So it was done in a way that – yeah, the competitors, Comcast and people that these guys have worked for before, it’s done the way they would do it. Now, that doesn’t mean we are unable to be more creative, but for the business case, which is going to be the financial basis and so forth, you have to have a solid base and that’s what they strive to do. We are in our next phase, there’s a public input funding that we are asking for and that is the phase where you could spend some time with focus groups and so forth, getting a little more creative in the design and coming up with something tailored for Palo Alto. I think that’s part of what we want to do, but we have to be able to move into that phase to do that kind of work. The other thing is, too, you don’t want to lay all your chips out two years before you actually get billed because your competitors will say, “Heck, they’ve researched that, they got all that data, and that’s what the customers want, why don’t we do it first?” So there are issues in that regard, too. UAC Special Meeting on FTTH, March 18, 2004 – Approved 4/7/04 Page 7 of 26 Ulrich: Mr. Bechtel, I think it would be helpful to go back some of the first questions you asked. You’ve said them several times and pretty soon I’m going to start to believe those are the tactics you’re suggesting we follow. You’ve mentioned the governance versus looking at the cost of construction. The reason we put the report and recommendation together the way we did was it allows our owners to give us direction on what are the kinds of things that are the most important to do. It also gives you the option to recommend funding to do all of them or some portions of them. I happen to think it would be important to also know more accurately what the cost of construction would be based on today’s environment as opposed to the continual guessing that starts to get a life of its own. If you repeat $40 million enough, it will all of a sudden it becomes the actual price to do it. So I think it’s important to know that, but I think what’s paramount is that all of these issues that relate to what the public should have knowledge of and vote on should be laid out in the form of the appropriate questions to ask in the ballot. So I think it’s important to get the governance model, recognize what changes would have to be made in the charter, ordinances, or the kind of business structure you mentioned earlier so the public can vote on that, have an understanding of what we’re going to get. That’s going to take crafting of the legal strategy and the business strategy, and that requires us to spend more time and effort on it. I thought it was important to provide this final report so we can now make the decisions and have the community involved in do we want to go ahead and do this and to what extent, how fast, and, as we point out in this report, how it fits in with the other important issues that the City has to grapple with so that the community decides if this is the important thing to do. So that before anything would go on the ballot – and you recall in the document is kind of a timeline – some of those things can be done in parallel depending again on how much time and speed you want to have and how much money to spend. So we can then agree on the date and what should go on the ballot. Some of those are all going to be based on the ability to get them on the ballot in the right format so it meets the requirements of the county for the election. So I think we ought to talk and spend as much time as necessary so you get confidence and comfort that we laid out a plan that allows for getting the answers to all those questions before we ever ask anyone to vote and encumber ourselves for a $40 million project. The other area is the one you mentioned a bit about the services. We thought it was important to be able to point out the kinds of services that what we’ve heard from the community they would like to have and focus on whether could we make some money on that and set up a viable business; if so, when there’s a lot of track records from other places that have done this. But when you start moving off into the more innovative areas, which I think is probably the most exciting part of this, why build this thing if it’s not going to have the ability to take us into many, many years down the road and provide innovative services that people can’t even think about now but could be added on. I think that’s the real strength of this, is that you can do that; and, again, this is a community that will own this system so we’d be motivated and focused on providing the kinds of services people would want to have, and we wouldn’t care if it wouldn’t fly in Redding or somewhere else. So I look at all those questions and those things you’ve said in a very positive way that we can pull all those together, and, again, we would never ask the community to vote for something that they didn’t have a full picture of risks and rewards. UAC Special Meeting on FTTH, March 18, 2004 – Approved 4/7/04 Page 8 of 26 Bechtel: Well, I appreciate the fact that you put the proposal to us certainly in a dollar form which I think we always like for the next phase anyway - that’s what I’m referring to, with various line items. I’m sure we can tinker with the line items and maybe that’s what I’m doing tonight. So what I’d like to do is turn it back to the Chair or others of my colleagues for more questions so I can digest what you said and take my next stab at some other things later on. Rosenbaum: Thank you, George. Do we have further questions? John… Melton: I wanted to sort of pick up on your last comments and focus more specifically on the timeline, particularly the November 4th ballot. From the report, it seems pretty clear that while you don’t have all your legal opinions in a row yet, something is going to have to go on the ballot for the people in the City to approve in connection with the (inaudible) all the existing customers we have would stop being subscribers to the dark fiber ring and would become subscribers to the commercial offering that the FTTH top tier would provide. Heitzman: We have many different types of customers that use the dark fiber. We also have about 20-30% of those customers (inaudible) the utilities and so forth. So there is an amount of fiber that’s in the ground not fully utilized. This is in answer to your first question. What is not utilized is available or whatever is needed for fiber to the home would be studied and we would determine how much of that fiber we would use, how much we would supplement in order to leave some for other use, for utility use or whatever, or other City use and then use what we can without starving ourselves somewhere else. So as far as utilizing the system, it would be integrated and take advantage of what we have to the extent it doesn’t damage it somewhere else. When you look at our customer base, it would be my belief that you would lose a small amount of the customer base with fiber to the home. Our customers tend to be a different type of usage than would be using the fiber to the home system. A lot of is customers who want to have proprietary routes and so forth. Melton: Good. So my conclusion from last night was that because none of this revenue was included in this plan that this is sort of a contingency, the carry forward of some or substantially all of our existing $1.2 million last year of dark fiber revenues would be folded into the revenue base of this new concern. Heitzman: In other words, the business plan does not consider that dark fiber revenue as part of its revenues. So that dark fiber revenue would largely be added to the business plan. Melton: Is that a statement or a question? Heitzman: I’m stating it is not rolled into the business plan and it would be added to the business plan. How’s that? Melton: Thank you, Blake. That’s what I wanted to hear. UAC Special Meeting on FTTH, March 18, 2004 – Approved 4/7/04 Page 9 of 26 Heitzman: Okay. Dawes?: Second question raised by the gentleman who left before he made his speech, the General Manager of Comcast whose letter I read last night. He covered a number of points. Clearly he thinks it’s a difficult business to manage and makes it clear he thinks the City’s biting off a lot in that regard. But that’s not the part that worried me. I think we’re up to that task. What did worry me was the inherent conflict of interest he talked about, a regulator and a competitor all in the same breath. I’ve always been under the assumption that while the City grants a franchise and the company bills the franchise fee to its customers and pays it over to the City that that’s where it stops, that there is no continuing obligation or no continuing regulation that goes on with, I guess, the exception of what becomes an agreement at the time that that franchise is either (1) extended or (2) novated over to a new owner, a.k.a. Comcast where the City Council has extracted promises and commitments to upgrade the system which in fact they’ve done. Clarify for me what regulatory authority they, the City Council, has over the incumbent provider. Ulrich: I’ve got to say that I’m not an expert on the current franchise agreement. That’s not part of the Utilities and so I don’t have a day-to-day working knowledge of it. Our Director of Administrative Services is responsible to the City Manager for administration of that contract and negotiation of it. From what I know of it, I don’t see that there would be – this is not legal, it’s just my opinion – a conflict between the parts of the City doing that. The City Council is always the decision-maker on decisions like that and they approve our rates and they also live in the City. So I don’t see where that would be a conflict. As I mentioned earlier, my expectation is that this business would have an arm’s length relationship with the City and that we would negotiate terms and conditions of the franchise agreement just like anybody else, and I’m sure our legal advisors would make sure that that happens. Dawes: One short paragraph in which he says in here “because of the potential conflict arising from the City’s dual role as a regulator and competitor, all regulatory actions taken by the City which may fall with a heavier hand on us than on the City would potentially open a legal due process claim.” I don’t know if that’s a threat of litigation or what it is, but can I assume that this was taken into account by our legal staff in acknowledging that they didn’t see anything wrong with going ahead with this thing? I have some other comments about their opinion and the write-up, but at least they haven’t said no yet. Ulrich: Of course always when you have a document like that, you’re not sure exactly what their meaning is and it’s unfortunate they’re not here to explain that. But in my expectation, you’re always going to get someone who is going to throw up something and say this could be a legal issue. Some of what you’re talking about has been considered, but, again, this is part of our continued due diligence before we make a recommendation that would go to the ballot or ask the City Council that it would have thorough legal review. We are not intending to set up a company that would be a risk to the City. UAC Special Meeting on FTTH, March 18, 2004 – Approved 4/7/04 Page 10 of 26 Dawes: Thanks, I wanted to respond to the issue of cost plus pricing that Mr. Hoel raised last night and George talked a little bit about. When you’re running basically a fixed-cost business which this is in large measure, cost plus pricing doesn’t mean anything because the volume is what counts and I totally agree with what your response was, Blake, in which you indicated that once we have a positive cash flow, we’re servicing our debt, we’re making transfers to the City coffers, then we’ll look at rates, too. If we’re coining money until it’s coming out of our ears, then we’ll consider a rate cut just like we would if the electric company did the same. So it’s a fixed versus unit subscriber issue. Last item on my list at this point is process. This process – and I guess the whole so- called Palo Alto process which I find somewhat nauseating – I tend to be a cut to the chase kind of a person and we’ll get into this a little later on tonight – but I am clueless as to what this proposal is all about. We’re not asking the City Council to do anything other than to create a priority. If this is going to be on the November ballot, we’ve got to do something, do something quick, make up our minds, and I just don’t know why it’s not an up or down recommendation rather than this sort of beating around the bush. And, how are you going to get from here to there in November and basically beat around the bush? Ulrich: Was that a question? Dawes: Touche, yes it was. Ulrich: Who were you directing that to? Dawes: I’ll direct it to Blake. Ulrich: So we’re all together on this. As you know, we spent a lot of time putting this together in our recommendation, and it’s done in an environment that we believe that requires this kind of scrutiny before the decision is made. I think that’s what you pay the staff to do, not to give you a “everything’s going to be fine and trust us.” It’s trying to show the process we believe is important to do along with the risks and rewards of this business. I doubt if there will to be very many times when you’re going to have a staff sit up here and talk about a $40 million endeavor that is not part of the existing utility but we believe is one we’ve studied, spent a lot of money on and it’s one that we’ve built a recommendation in that we’re asking that you consider and take forward to the City Council. Dawes: More about this later, but thank you. Rosenbaum: John, let me follow up on this last point by Dexter. You know I’m always interested in process. I used to be on the inside and knew what was going on. This business plan was dated last August and our original intent was to hold the meeting that we held last night in September. And according to the newspaper, the City Manager’s office held things up because they wanted, I guess, a more balanced presentation. Six months later, what we get is the original business plan plus a very bland non-committal 9- page report from staff which says very little along with a recommendation, which I quite UAC Special Meeting on FTTH, March 18, 2004 – Approved 4/7/04 Page 11 of 26 honestly regard as gratuitous, that we ought to tell the City Council how to set their priorities. Clearly, not much was accomplished in the six months and it might be helpful to us if we could understand just what’s going on with the Utility and the non-Utility staff. Ulrich: Well, I’m not going to move very far in that direction. It appears that you’ve already come to some conclusions which I’ve never even thought of before so you have far more insight into this than apparently I do. I operate, I think, an organization and do what I believe is most appropriate on behalf of the people who pay my salary, which is the City and the customers in the Utility and that’s what we’ve done. I’ve communicated with you on numerous occasions the delay, if you want to call it that, of putting this together. But I think ultimately – and that, I guess, will be borne out – as we go forward that was a prudent thing to do and that the report I gave you, that you have, is a first class product. You have to decide what you’d like to do with it. We have a recommendation. I think there are a number of prudent steps that need to be taken including the involvement of the City Council and the residents on whether this is a project that should get a high priority as something of this magnitude should. But clearly there may be other things within the City that have higher priority that need to be considered in context to this one, and I think it’s appropriate to present it that way. Rosenbaum: I guess normally the Council sets its own priorities and I assume if the City Manager takes the view that, you know, Council - we can’t get to this unless you tell us what we shouldn’t be doing. That’s one thing, but I’m not comfortable with a recommendation that we attempt to tell the City Council what they ought to do with their priorities. That’s why I bring up that point. And the other thing is clearly very little was accomplished in six months. There were people who were worried about getting this on the ballot in November and this sort of a process is clearly not going to come to a conclusion in June and perhaps we have to think of something much simpler if we want to have a ballot issue ready by June. Do we have further questions? Elizabeth: I just wanted to follow up on some of the comments that were made last night by the residents and interested parties. There were many comments and I would say sort of a myriad of different opinions and thoughts with regard to the business plan. This is the business plan that we are evaluating, the one that was provided by Uptown. Lots of different ideas on how this could be rearranged, changed, modified. There were a couple of thoughts that I thought it might be nice if you could address. Specifically, one was the City provide the infrastructure for this fiber to the home but not run the service offerings. Others would be running those services. We simply provide the operation maintenance, construction of the utility portion of it. I know I’ve talked with you about this before so I’d thought it might be helpful, if you have a chance, to respond to that concern from the residents. The second one is the issue of whether or not you could offer this service as just an internet service, not having the three play package but internet only. I thought it would be nice if you could answer. UAC Special Meeting on FTTH, March 18, 2004 – Approved 4/7/04 Page 12 of 26 Heitzman: I’ll take the latter one. When you consider the costs – and it actually helps with the first one – when you consider the costs of the infrastructure and the type of revenue streams you could get just from the internet, you can’t afford to do it really unless you just want to do it as a public interest thing and consider that you’re not going to get your money back. The reason the business plan has the three services is because it takes those three services to get a sufficient revenue stream to support paying off the debt and so on. Now, within the plan, just to be clear about it, the way it’s set up, the video service is in the plan basically a monopoly City offering. The phone company is a third- party CLEC offering. The internet is modeled to have competitors on the system. But the customer survey information tells us that citizens are interested in seeing us participate and basically very solid about our service and wanting to see us as a service provider. So that’s one reason why we’re there. Ulrich: Let’s just add a little to that. In the earlier view, and we got a lot good input from our consultant on this, we looked at can we be a business or basically own the infrastructure and lease it or rent it out to others? We made some attempts in that area when we were doing the trial and we have had openings to potential partners in this and have not gotten very far. This is an interesting business and some of it is based on in a sense a monopoly in a propriety ownership of something so it precludes others from being a partner. We’re open to that and would look forward to having that kind of a relationship if it turned out to be the best for all of us. The other part, though, is that this has always been envisioned if we are going to be an ISP or we’re going to provide video services, we would always be available for someone else to come and provide those kinds of services, provided they pay the appropriate fee for coming on and either be in competition. We look at that as a way of providing alternative service options to the residents so you get some competition and you get services that people want. So we’d be an open access. The model that’s put together is the one that we think has the most financial interest for the customers who want to sign up for the popular services and allows for competition which would then allow us to collect money from people using it, and I think it would do the public good by having a way for competition to take place. When I mentioned about the ownership or doing the infrastructure somewhat in response to Mr. Bechtel about the governance and whether somebody else should make the decision about the programming and then the Utility operate the system, I was saying of course we would be open to that. That ultimately has to be the decision of the City and how they want to do it. But we’re very good at owning and maintaining and operating and providing high-quality service on infrastructure – that’s our superior area – and can do it well. So these are the options where we see the monies can be made but it’s got huge potential for other competitors to come on and try to provide additional services. Does this get closer to where you’re… Dahlen: It does, and I think it’s helpful for everyone to understand all of the different options that you have explored and you have gone to great lengths to evaluate their feasibility. This is the plan you’ve come up with and I think it’s important to know. Dawes: Actually, I didn’t understand whether or not the openness to having additional operators come on extended to television or not. At one point you said that’s going to be UAC Special Meeting on FTTH, March 18, 2004 – Approved 4/7/04 Page 13 of 26 proprietary and later on in your discussion, you seemed to imply that we would open to everybody, telephone, internet, and also TV. But I don’t get it at this point. Heitzman: The plan models it as if we’re the sole provider. The reason it’s that way is because it’s just an expensive operation for a second party to come in. It doesn’t mean that we would disclude them from coming in. It’s simply that odds are if we’re here on television or the video, other people won’t want to come in. Dawes: So we can say this is an open access system but the City will be providing TV or video and anybody else who wants to come in and provide video against us, that’s okay. The bandwidth is adequate to handle both sets of services. Ulrich: Right. It’s going to be a matter of how do you price and provide that access. What would be the terms and conditions of… Dawes: It’s unlikely, but we’re open to it. Make me an offer. Ulrich: Right. The other part I think you mentioned was this part about being on the telephone side. The business model assumes there would be a CLEC or someone that would contract with us to provide that service. We would not be, the City would not be the telephone provider. Dawes: I understand. Would you have more than one telephone operator? Ulrich: Sounds kind of exciting to me. Dawes: Do CLECs compete with each another for customers? The answer to that is yes, too? Ulrich: Sure. Dawes: Good. Ulrich: Not that I’ve thought about the business model for that. Rosenbaum: George. Bechtel: Coming back to the same point raised by others about open access and so on, and other people on the system and wholesale versus retail, reminded me that many e- mails that we got – by the way, I counted 29 e-mails from 5 individuals in the last 2 weeks but all of which were very, very helpful – but one mentioned, I believe, the mission statement. I’ve read the mission statement various times and we have one for CPAU, and I was wondering whether that got exercised much in your review or is this Neil’s proposal? I find that rather weak, and I particularly think we could solve some of the problems if we address the mission statement and put in the words we’re talking about tonight about open access, wholesale/retail model, and so on, just so the mission statement is on page 1 of 85 in the Uptown report. It says the City of Palo Alto’s UAC Special Meeting on FTTH, March 18, 2004 – Approved 4/7/04 Page 14 of 26 broadband business venture would provide excellent value to its citizen owners and will be the preferred broadband service provider through a combination of excellent customer service, fair pricing, and enhanced product performance, all done in an environmentally sustainable manner. I think if we spent some time, and not necessarily tonight, but at least gave us, gave people an indication of what we’re talking about, and really talk about what is the mission? Let’s put some time on that. If we did our mission statement, I think we could describe what we’re really trying to accomplish to everyone. So, back to my original question, did you discuss this at all in your meetings and this was considered the best you could come up with? Heitzman: I’ll take the blame for it, how’s that? George, basically, this is modeled after – maybe I shouldn’t even say this – if you look at the utility mission statement, this is kind of a paraphrase, putting the titles in the same spots and verbs in the same spots. We wanted to be compatible with our current mission statement. Maybe that’s an afterthought when you look at the purpose, maybe it’s not the right one. Ulrich: What I was looking at, Mr. Bechtel, in the presentation last night, slide #24 says does fiber to the home fit with the strategic plan and while the audience may not be entirely familiar with the strategic plan, all of you on the UAC except for Mr. Melton have been over the strategic plan with us numerous times. And, as you know, we measure our results around how well we do our strategic plan. The reason for putting it in slide 24 is to show how fiber can fit, and Objective 1 is customer satisfaction through delivery of valued products, invest in utility infrastructure, provide superior financial performance, unique advantages of municipal ownership, and deliver products in a competitive market. We’ve had that in our strategic plan for a number of years so we shouldn’t be going off into some area if we don’t believe it’s part of the objectives of the utility. So we can always make the mission statement a little better if that’s what we’re trying to do. Bechtel: Well, come back to how I started the evening with, is basically in support of your proposal and then trying to make it so that other people in this town can support it, people who are not so familiar with it as the people in this room, the people who were here last night, and those of us here at the table. So I think a mission statement – I’m not sure it should be in the ballot argument – but perhaps properly done could describe what this venture is all about. So I really wanted to come to the point whether you’re satisfied with it or with it just kind of as Blake said – I think he answered the question, which is, modeled on our own electric utility. Maybe we ought to go back and look at our missions statement again there as well. I think that the wholesale versus retail, we need to really have that open access. Those are the kinds of words I really think we do have right up front so that people very clearly from wherever they’re coming from know what we’re talking about. Ulrich: Well, I want to totally agree with that. We don’t want to get into the position as the newspapers say we’re just talking about, what is it, foreign technological language. I think it’s important we’re able to communicate this. Again, this is a very important decision, a lot of money in an area that will be new to many people in Palo Alto. We’re open to – I think I mentioned it last night – is be able to go out and have meetings in UAC Special Meeting on FTTH, March 18, 2004 – Approved 4/7/04 Page 15 of 26 neighborhoods to talk about this and get more input from people in the community on what we should be doing. Rosenbaum: I’ve got one very small point. Last night I had a little back and forth with Manuel over the question of whether the 1-year term offered by SBC for their internet, which is currently priced at $30, was renewable, and I said it was and Manuel said it wasn’t, that you would have to go to the monthly rate which is currently $50 a month. I did a little research, and I am correct. I wonder does the staff agree that I am correct so that we’re all on the same page? Ulrich: I know you and I had a chance to discuss this a little bit and our objective is never sit here and disagree over an item like this in particular. When I went back and looked at the website, and we also made additional telephone calls, I now have more information than I ever thought I cared to know about the marketing plans for not only SBC but for Alameda Telecom and also Comcast, and I’m not sure which one is the best. But to get to your point, you stated that the $29.95 – and this is going to be a good advertisement for them because they’re going to get full marketing tonight on this – that the $29.95 is an introductory offer. If someone calls SBC they’ll be pointed towards the basic package or the one that looks like the best value is the standard plus package, and you can have it for $29.95. The only way you can get it according to Sales and also discussion, you have to sign up for it on the internet. And then, where the intriguing part comes in is, as Mr. Rosenbaum pointed out last night, is what happens at the end of the year? Well, when you talk to them on the telephone, they’ll readily tell you that the contract, the year is over, and if you don’t renew it, it reverts to, depending on which package you select, the $49, the $54.90, anyway a higher price. However, you have the option, if there is a continued special package available, to pick up on that without reverting to this month to month. So, what it seems to be, comes the end of the year and whether they call you or not, but you call them on the telephone, they will offer you whatever the package is at the time. If it’s still $29.95, you can have that; if it’s something else, you can have that. So I take that as you can rely on the $29.95 for 12 months and then depending on what happens at the end of that whether they’re still aggressively marketing it or offering these packages, you can have whatever package is there for that additional year. It turns out that Comcast has a similar program, different period of time, but you can get it for $19.99. And they offer higher upstream speed for that $19.99. However, that’s only for four months and then you go to the $42.95. So I think there is really good marketing out there. Oh, and by the way, in the small print, if you want the special deal with SBC after the 12 months, you must also order and have part of the program, either a long distance or a local toll, as part of your package. So there’s a number of fine print and an excellent marketing effort. There was no intent last night to get into an argument or dispute on that. Rosenbaum: John, I think a simple yes would have been a sufficient answer. Ulrich: No, I put a lot of time into making those phone calls and I think (inaudible). UAC Special Meeting on FTTH, March 18, 2004 – Approved 4/7/04 Page 16 of 26 Rosenbaum: I guess I was trying to distinguish between the teaser rates offered by Comcast, which everybody understands are teaser rates that are not renewable, and what SBC is at least at the moment offering. Ulrich: We could learn something from this and have our own teaser rates. Rosenbaum: All right, if there are no… Bechtel(?): Mr. Chairman, may I just add an addendum to that? I have my SBC bill and they’re very clever. I originally signed up for DSL for $49.95 some years ago. I called them up and when they extended me their offer, they’re showing (inaudible) a $20 discount. The $49.95 is still there, but I’m getting a $20 discount. So the net is correct but they are holding their options open to dump that discount. Rosenbaum: Yes, well clearly that’s true, there are no guarantees anywhere, but that is the current situation. Elizabeth… Dahlen: I just wanted to point out that this is excellent marketing that we’re doing tonight for our incumbent providers. Just kind of note, within the business plan, I know there are questions with regards to perhaps the message and content of the mission statement, but if you turn over to page 3 of this report, the paragraph ends with the term “FTTH dynamic and vital” which I definitely caught because those are two words that are typically not used by government bodies. So I just want to praise them for that. Ulrich: We’ll remove it quickly. Dahlen: Perhaps it was an oversight. Ulrich: We don’t know how to spell that. Dahlen: One of the questions that came to mind in going through the business plan that I did want to bring up is with regards to the content channels that would be provided. There is a list in the report with regard to the channels that are provided by the incumbent providers. There’s also a comment with regards to what the national cable co-op could get in terms of the cable channels they’re readily having access to and then there’s the additional channels that we would have to go out on the market and purchase. They indicate in the report that those channels that the co-op has access to are indicated with an asterisk. I just have to point out that I never found which channels that co-op does offer versus the channels that we would have to go out and buy. I don’t know the offerings that the co-op has and I think there are some key channels that would be critical to our customers and I wouldn’t mind if you could just say something about what channels are not provided and the cost considerations of going out on the market to get those channels. And before you answer, Blake, I have one additional question with regard to the ethnic channels because that was a point that was made in the report that there were not enough ethnic channels available from the current providers. We have also received a lot of e- mails with regards to what the current providers do provide and the variety of ethnic UAC Special Meeting on FTTH, March 18, 2004 – Approved 4/7/04 Page 17 of 26 programming. But, setting that aside, the concern with regards to getting these special ethnic programs – and we have a very diverse, multi-cultural community here in Palo Alto – so there are many different ethnic channels that would be of interest I’m sure to the customers. What are the cost considerations? It would seem to me that these are very specials channels that may be costly to get and you’d be having to provide many different ethnicities when you go about getting that type of content. So has any analysis gone into that that goes beyond what’s mentioned in the report which is essentially this is something that we’re going to provide? I’d just like to see what the meat is behind that. Heitzman: Of course this is a moving target as far as what’s available to the co-op and what the competition is providing. First of all, I guess you could recognize that we have other municipalities, other small businesses that are using the co-op and they are providing the service that is being used by their customers. So I wouldn’t say that using the co-op would put you at such a disadvantage that you can’t attract customers. When we were getting into this programming, we looked at several alternative sources to the cable co-op which are available and we haven’t been able to follow up to see exactly what we could do with them. There are other sources of programming available other than the co-op and some of these sources have very interesting programming that’s not available at other places. There are some issues there that we have to deal with and see whether we can capture that line of programming. So I guess what I have to say is that we’ve looked at it but there’s no conclusion exactly how to deal with this. The additional channels that you’re more concerned about as being more expensive aren’t really these ethnic channels. The ones that are really more expensive are the ones like HBO and there’s some kind of (inaudible) with ESPN and so forth that you get tied into a bunch of other bundles that you may not want but you have to buy the whole thing. So those are actually the expensive ones that are more difficult. Some of those are handled through the national co-op and some of those are not. But that’s really where the twisting starts happening at some of these popular sports channels. Maybe not everyone wants to subscribe to it but you have to subscribe to it in order to get it for anybody. There are issues like that you have to deal with. But that’s where we go to partnering. Partnering is something we want to do in the next phase to tie down some of these partners that can potentially provide us with the kind of programming that we want. Dahlen: Just to clarify on that, so some of the key channels like ESPN and HBO and some of the really attractive ones are not currently available through these co-ops? Heitzman: No, I’m not saying that. I’m saying that that type of channel is the one that is expensive. Most of those are available to the co-ops, but there are a few that aren’t. They’re more of the big, but lower, like Starz, I can’t tell you exactly which ones they are, but there are a couple of those that aren’t available to the co-ops. Ulrich: I might add, more anecdotally, I had an opportunity earlier this week to meet two utilities directors that had fiber coax systems and talking about this content because, as you recall, earlier we were concerned about the competitive difference between what a Comcast could provide because of their huge size and what this co-op could provide. I think Neil addressed the customer base and the ability to buy the program and not have a UAC Special Meeting on FTTH, March 18, 2004 – Approved 4/7/04 Page 18 of 26 significant cost disadvantage. But in talking to both of these people I found that they were quite satisfied with the co-op and being able to get the products their communities would like to have. We did not get into the cost difference. My assumption was that if there was a particular set of programs, that the customers that wanted that, they would be willing to pay the cost for that product even if it was higher than some other channel because that was something they wanted. So we could, if it was available and it had a higher price, we would make that as an offer to those individuals who wanted to purchase it. Dahlen: So that would become a special package for those customers. Ulrich: Sure, again that’s the beauty of owning a system, you can provide the content that people want. Rosenbaum: Alright, seeing no further questions, let’s see if we can put together a motion. Dexter? Dawes: I gave some thought to this whole issue and how to get the ball rolling with the Commission, and would like to offer up this motion as an alternative of just a straight endorsement of staff’s recommendation. I’m sure it will be debated and probably changed as we go through the evening. I will read it and then I’ll pass it out. My motion is the UAC recommends the City Council authorize the formation and construction of the FTTH project pursuant to the FTTH business plans Phase I dated May 7, 03, and Phase II dated March 17, 04 subject to an advisory vote to be placed on a November 04 ballot. UAC recommends no additional funding for the project until the project is approved by the City Council. Upon approval additional funds for public relations and legal analysis (but not engineering design) be authorized pending the advisory vote. So with my comments earlier about cutting to the chase and abbreviating the Palo Alto process, this is my suggestion. So, John, here is one for you if you want to have a copy. Bechtel: Second. Dawes: The second part addresses the process issues which is ‘we’ve done it guys and gals, gray haired old men and young women’ and that the Council has got to get off it’s duff and make a decision. If they say ‘go’, we’re going to go like crazy and put it on the ballot and keep on going. That’s my statement. Rosenbaum: Thank you Dexter. Before getting to George’s comments as the seconder, I’m having a little trouble with the last phrase. ‘Upon approval of additional funds for public relations and legal analysis without engineering design authorized pending the advisory vote’. That has a clear meaning but it escapes me at the moment. Dawes: Well it means that staff has asked for $390,000 be authorized and I’m saying that my intent is to say that once the City Council has accepted this proposal, that they then would authorize additional funding. Additional funding was in the two items on page 9 of 9, they call the public information program, I’m saying it’s PR that’s $50,000. UAC Special Meeting on FTTH, March 18, 2004 – Approved 4/7/04 Page 19 of 26 Engineering design and specifications, we don’t need it until the public says go or no go. I don’t see putting any money into system design until we have a project and I don’t know what ‘conduct business process, performance testing, and remediational analysis’ is $70,000 so I threw that out. Then it says ‘conduct preliminary legal assessment of a legally defensible path for establishing an FTTH business very important because we still have some stumbling to go along that path at $70,000 so I guess I would say we recommend the City Council authorize $120,000 between their approval and the vote. Rosenbaum: Alright, I think that clarifies the intent. So the UAC is recommending that if the City Council approves the project, that the City Council also authorize the $120,000 to be spent prior to the November advisory vote. Dawes: Subject to Mr. Bechtel’s approval, I agree that that’s the way we will rephrase this. Rosenbaum: Alright, George as the seconder would you like to comment on the motion? Bechtel: I think the easy decision tonight is to say no, don’t go ahead. Tell the Council we don’t believe in going ahead. I think that’s really easy for us to say. It’s too expensive, we don’t know whether Palo Altans really want it or not, do they really need the City’s services, I’m happy with what I have today. All of those are things that make it easy to say not to go ahead but I’m going to support Dexter’s motion. I think we have feedback from our City that Palo Altans are, for the most part, happy campers. Our own utilities surveys on this particular project and on other surveys, say they are happy with the utilities. So I believe our staff can pull this off as much as we talk directly to them and ask them why they… what was happening during that six months last summer. I think we all know what went on. I think we ask a lot of questions about wanting legal advice and I know our own City staff is pulled in a lot of different ways. I really do believe that is why you couched the motion, or your proposal in the way you did to make this a top five priority as opposed to the simple and direct way that Dexter did. But I like Dexter’s approach, it cuts to the chase. I believe that the financials, I believe Dexter is the one on the Council here that is the most knowledgeable, maybe not most knowledgeable but most opinionated perhaps, the most direct and the one I can count on to look at the risks from a financial point of view so I’m happy with that. In the past, I’ve always been supportive of this as much as I’ve been critical of some of the details thinking we ought to say more, we ought to promise more, we should be more direct. That’s the reason I’m supporting the motion. The last item, before I turn it over to my colleagues, I do want to talk a little bit to the issues that Dick raised about clarifying the motion. I believe we need to spend more money than Dexter has proposed because I believe we’re not sure what the nature of that vote is going to be. Now certainly, they will count this as advice to the Council so we’re not really dictating or writing a motion for them so they can deal with this as they will but I think the intent of this was that we need at least, the money we need to spend is on preparing for a vote in November so whatever money is needed, I would support. Rosenbaum: It will be that we have to have something before the Council in June, I think staff will be hard pressed to come up with a statement supporting an advisory vote by UAC Special Meeting on FTTH, March 18, 2004 – Approved 4/7/04 Page 20 of 26 June never mind getting any legal analysis and some determination of what the City Charter requirements might be. So John I would prefer the wording that we have but you are certainly free to propose an amendment or maybe you and Dexter can work out something acceptable. Dawes: Let me clarify something Mr. Chairman. You said that you thought in your experience it would be difficult if not impossible for staff to pull together the required, what I call legal issues, to go on a November ballot such as a charter amendment. So the timeline then would look like, subject to an advisory vote in November, assuming a ‘yea’ then there would be another ballot proposition, say in the Spring of 05, which would deal with the legalities of the situation. Rosenbaum: If necessary. Dawes: If necessary. Rosenbaum: John, is that thinking acceptable to you? Melton: Yes, you certainly have much more experience than I do on what the time frames are to get these things accomplished. If that’s not a feasible idea, then we shouldn’t propose it. Rosenbaum: Elizabeth? Dahlen: I think I’d like to just take a moment to offer some of my thoughts on the matter. And I will get specifically to the recommendation made by Commissioner Dawes. My experience is not in the telecommunication business. However, a technology has been put in front of myself and my colleagues. It’s not clear to me how exactly how we selected the technology or why but I am relying on staff and consultant’s conclusions that this is the right technology to be looking at and evaluating although some may question that. As we sit here today, and as a UAC member, I am looking at this in terms of what this technology brings to the customer, the Utility, and the City. I think it’s important to bear in mind, the big picture here, is that we’ve been asked to evaluate a plan that at the end of the day provides faster Internet access. The business plan expects that roughly 2/3 of the users will not be buying at speeds faster than 2 megabytes per second which is what you can get today from the existing technologies. This implicitly says that people do not need the 10 megabits per second based on what I’ve seen in the documents. Now if we proceed with this business, what does that imply? Well, we have to also provide cable TV and telephony to make this business case work. And right off the bat we can see this implies we will be competing with some very big companies who have a very strong vested interest in Palo Alto. Given that competitive landscape, the City of Palo Alto Utility will not be the first to market, they will be the third, fourth, depending upon the service area to market and to complicate these matters, getting into this business, the service business area, implies that the City must set up separate entities to provide these services as well as separate oversight boards to oversee the activities and to address content issues et cetera as was clearly laid out in the business plan. This will not be easy nor has it been done by the City of Palo Alto before. Hence, there are many UAC Special Meeting on FTTH, March 18, 2004 – Approved 4/7/04 Page 21 of 26 unanswered legal questions to which my colleagues have been referring to this evening. On the face of it, these look very complicated and involved. I think we’re all aware that in the last month the City has invested a lot of time and effort into looking into these legal questions and trying to come up with their best analysis of what the landscape looks like. I think we saw some of that in the write up from the City. Financing and setting up these entities will require large majority voter approvals and in many cases, as we saw in the reports, a 2/3 majority approval. The financing of the business center itself, may have a negative impact on the General Fund and the electricity rates as was pointed out in the report. The latter point being particularly concerning to our big electricity customers who would be impacted the most if this business were to go south. And I think we’ve also heard the details as to how large those impacts could be, or at least the framework of them. I think it’s also important to note that the existing technologies will likely continue to improve and new technologies may emerge to compete. Essentially what I have done is to summarize what’s been presented to myself and my colleagues in these documents in the reports by the City staff and by the consultants. Hence, there is the question that begs to be answered as to why would the City of Palo Alto want to go into this business. If Palo Alto had chosen to go down this path five years ago, we would have faced a very different market situation and that window has closed to us. Today the landscape looks very different. We have a lot of competitors and we have a lot of significant risks. It’s not apparent to me that the incremental benefits to the citizens of Palo Alto are commensurate with the time and effort that will be required to make this a successful business. Particularly bearing in mind all of the issues, the risks, and other concerns that have been brought to light in these documents and by members of the public today, and in the newspaper articles that have been written on the subject. Hence, had we had the original recommendation that was provided to the City, I would have had a very difficult time going forward with that. However, I have looked at the motion that’s been offered by Commissioner Dawes and seconded by Bechtel and I’d like to offer an amendment to it which would read something, and the purpose of this amendment is to make clear that this recommendation would be asking City Council to make a recommendation to the voters and hence, I’m going to offer the following wording; The UAC recommends that the City Council evaluate the FTTH project pursuant to the FTTH business plan Phase I dated May 7, 2003 and Phase II dated March 17, 2004 and provide a recommendation to the voters which should be, and then we can argue over the details here, subject to an advisory vote to be placed on the November 2004 ballot. I think it’s important to make clear that we would like the City Council to make a recommendation to be carried out to the voters. I am also concerned with the wording here of the formation and construction of the FTTH project because I think those words implies that this recommendation is going forward with the formation and construction of the project so I would ask if Commissioner Dawes would be willing, I’d like to amend that portion of it. I also want to raise the issue with regards to $120,000 of additional spending. This motion has been asked, recommended to put an issue on the ballot for the November ballot. We’ve already heard that there are issues with regards to whether or not this money could be spent before the timeline of June. I believe that the City has done a lot of legal analysis. They may not have all of the answers right now but they have been a thorough as possible to prepare the documents here today. I’m uncertain and I would like to flesh this out a little bit more UAC Special Meeting on FTTH, March 18, 2004 – Approved 4/7/04 Page 22 of 26 with my colleagues as to the necessity of any additional funding and I would think these documents could go to the City Council for evaluation and from there, and based on their recommendations, be formatted into an issue that could be put on the ballot for an advisory vote. I’ll open up that discussion to my colleagues. Rosenbaum: Alright, let’s pursue Elizabeth’s point. Perhaps we can try to clarify the significant difference that you feel… Bechtel: Point of order, Mr. Chairman, I did not hear a second for the amendment. Rosenbaum: That’s a very good point but what I was going to suggest is that we attempt to clarify the intent of the amendment and perhaps it will become clear. So, as it’s worded now we recommend that the City Council go ahead with this project but then we say subject to an advisory vote. Are you objecting to ‘subject to an advisory vote’? Is your point that City Council ought to make a definitive statement and then submit that to the public? Dahlen: That is exactly my point, that the City Council make a definitive statement and submit that to the public. Not that we say to go ahead with the project as it’s described, in my mind, with the wording authorize the formation and construction of the FTTH project. Rosenbaum: Remember there are two issues here. We are making a recommendation and the recommendation that appears to have three votes is that we recommend this project go forward. There is a secondary issue which I thought you were getting to, that it is, as it’s worded now, it says the City Council should go ahead but subject to an advisory vote which might in a sense be letting the City Council off the hook. Are you suggesting the City Council make a definitive statement and then submit that to the voters? Dahlen: Yes, that is what I’m recommending. Rosenbaum: Alright, with that understanding, Dexter what would you think of accepting that as a friendly amendment? Dawes: Let me take a stab at what Elizabeth is getting at, I’m still not quite sure. It would seem the UAC recommend the City Council approve the FTTH project business plan and either authorize or approve or propose an advisory vote be placed in the November ballot. Let me improve on that, the City Council approve the business plans and propose and or schedule an advisory vote for the November ballot. Is that what you’re after? Dahlen: No, not quite and I’m not sure I got all your wording there. What I’m recommending is that we say the UAC recommends that the City Council evaluate the FTTH project. UAC Special Meeting on FTTH, March 18, 2004 – Approved 4/7/04 Page 23 of 26 Dawes: That’s not acceptable. We have to make a recommendation up or down. We’re not going to bounce the ball back to the City Council and say it’s up to you. Either we’re going to give guidance, do it or don’t do it. Rosenbaum: Elizabeth, I think it’s implicit that the City Council will evaluate our recommendation. It’s not necessary that we say that. So I’m back to my original question. Do you object to the subject to an advisory vote rather than saying the Council approve and schedule an advisory vote, is that a significant point of your concern? Dahlen: Actually, I think the most significant point is whether or not we approve going forward with the FTTH project. And given Mr. Dawes comments, I would not vote for that and do not recommend going forward with the project. Let me retract my friendly offering there. Dawes: No, It’s our job to be very specific and make recommendations and not to punt. So I’m glad to hear you have an opinion. That’s what we’re here for. Bechtel: I was wondering whether it would be acceptable to Commissioner Dahlen that the City Council place an advisory vote that would authorize the formation and construction of the project on the ballot. In other words, we are recommending to the Council that they put an advisory vote that would, in fact, the voters would be approving the formation and construction and if they vote up the project goes ahead and if they don’t they vote it down. Essentially it’s the same thing but our recommendation is just for the advisory vote. Rosenbaum: I guess my thought, and Dexter could respond, is that the word authorize and advisory are perhaps inconsistent. I think advisory is the correct word if at this time if indeed something is going to be done in November. Rosenbaum: Alright, I think it’s my turn. We all have to weight the benefits versus the risks. My personal evaluation leads me to the conclusion that we should not go forward. I’m going to talk at a greater length than I usually do as to why I reach this conclusion. Municipal utilities historically exist because the private sector was unable or unwilling to provide reliable service at a reasonable price. This was certainly true for electricity many decades ago and it’s true of telecommunications today in rural America. Small towns are often characterized by having an outmoded cable system, no digital capacity, certainly no cable modem. The telephone company has no interest in making the investment required for DSL. In my sense there are many parts of rural America cut off from modern communications and in that situation I think it makes perfect sense for a municipal utility to provide telecommunications. Without that you have an impact on the desirability as a place for the people to live and there is also a serious effect on economic development not to have these services. And providing this service makes a great deal of sense and indeed may be vital to a town’s survival. What are the benefits of a municipal system in Palo Alto. Let’s run down, let’s start with video. We would be the fourth entry into the market. Comcast has just modernized their system, they provide digital channels, as many as you want, they provide high definition UAC Special Meeting on FTTH, March 18, 2004 – Approved 4/7/04 Page 24 of 26 service. We have satellite providers, two in number. They provide all digital service. On occasion we hear comments about poor service from Comcast. For some reason, I have never heard any customer of one of our satellite systems complain at all. The business plan, in terms of price does call for a small reduction in price relative to Comcast but as it turns out the satellite dish providers offer yet a lower rate so that the business plan recommendation is somewhere in between what Comcast charges and what is available to anyone today who is concerned about the cost of Comcast. So all in all, it’s hard for me to find any significant benefit as far as video is concerned. Now what about broadband, the second leg here. We already have two competing suppliers with modern systems and including reliability. In terms of price, the business plan suggest we charge $40 a month for service that SBC is already offering $30 a month. Clearly this makes no sense and it’s in the business plan that way because the incumbent monthly charges was not updated, the business plan goes back to August. And clearly we would not attempt to compete with such a price differential. But if we indeed, we would have to lower our price to $30, this would have a very significant effect on our finances and will reduce the margin that staff has suggested exists, quite a bit. Now, the one benefit of fiber to the home clearly is speed. There is no doubt about that. Unfortunately, the enhanced speed is of little to no use to the general user of the Internet. There are no killer applications which require ultra-broadband. Conceivably these might be developed in the future but this is going to be a very slow process. If nation-wide broadband is going to be defined by the capabilities of DSL and cable modems then there is not going to be any market for applications which require ultra-bandwidth and they simply will not be developed. High speed is vital to people who are trying to move large files in and out of their home computer and clearly the system that is being proposed would enable them to do that readily at a price far lower than they could get that service from SBC. Now back in the Fall of 2002 when we had a public hearing, when we had one speaker who had a great deal to say, we asked him to submit something in writing and he did. He used a phrase which I thought was very apt. He referred to what was being suggested as ‘bandwidth welfare’. I think that was just the right term. The system that is being suggested will provide a vital service to a few people at the cost of submitting everybody to the risk of a $40 million investment. Another benefit that’s been suggested and this is more in terms of marketing, is bundling. I haven’t said anything about telephone because everybody knows about telephones. But clearly if we offered all three services we can bundle them and the customer just gets one bill. As a consumer, this has never had a great deal of appeal to me but all the marketing gurus seem to think this is wonderful so I assume there has to be something to it. And the point is made, that we could offer three services where the incumbent only has two. But the reality is Comcast is very soon going to begin offering telephone service. This has proved to be enormously successful to Cox in San Diego offering telephone over cable and I’m sure Comcast will get there soon and they will have the three services. Poor SBC, they’re in a little more difficult position because their missing service is video. There actually is commercially available equipment which enables you to transmit video over ordinary telephone copper wire. Its in commercial service with a number of small phone companies because they are trying to compete with cable modems in their area. UAC Special Meeting on FTTH, March 18, 2004 – Approved 4/7/04 Page 25 of 26 I’ve never heard any of the larger phone systems, the Baby Bells, had any interest in them. What SBC has announced they are going to do, and I haven’t seen the roll-out yet, they are going to partner with one of the satellite dish companies and market their service so they too will be able to offer three services on one bill. So, it doesn’t seem as if we’re going to have any bundling advantages. Alright, that’s my analysis of the benefits. What are the risks. The main one is financial. Will the combination of price and penetration in a highly competitive environment yield sufficient revenue to cover our costs? That is the risk, we’ve got projections that this is not a problem, they are projections and essentially you’ve got to invest the $40 million and then find out. There are technological risks. The one everybody talked to is wireless. I’m going refer specifically to Wi-Max which is grown-up Wi-Fi. I don’t think this issue has been properly addressed. There would be no reason for Palo Alto, in lieu of a fiber system, to offer a wireless system. We already have two sources of broadband, what’s the point of offering a system that would be comparable in bandwidth to what we already have. And there is a second difficulty. This whole project has not been staff driven, it’s not been driven by City Council. It’s been driven by a group of residents who are interested in the gold-standard for communications which is fiber to the home. So any effort by the Council or the staff to suggest an alternate, would number one, be met with derision and number two, would cause all political support for this project to disappear. That is not the threat. In my view, if Wi-Max turns out to be technically and financially feasible, and by that I mean if somebody can offer two or three megabits of band-width with reasonable reliability and security for $25 a month, you will have a very powerful competitive challenge. Not only to the City if they were in the business, but also to the incumbent providers. And I’m confident that the incumbent providers would attempt to raise all sorts of legislative and regulatory barriers to keep that from ever happening and I suspect if we were in the business, we’d be right in bed with the incumbent providers objecting to this service. The second technological risk has to do with who will survive in the fiber to the home business. And also, what is the best system. This is technology that’s in its infancy. Two cities that have installed it, Kutztown, Pennsylvania, Bristol, Virginia, very small; Grant County also very small. They’ve got an installation. As we hear from Jeff Hoel, quite often there seems to be more than one way to go about this. I don’t know that this has all been figured out but I think in a couple of years probably the market will determine what is the best system. And the market is likely to determine which of the suppliers are going to survive a shake-out which I’m sure will occur. So in a sense, we are both too late and too early. We’re too late because over the last couple of years, both of the incumbent providers have improved their systems and lowered prices. And we’re too early because we don’t know if Wi-Max will be feasible or just another over-hyped technology and we really don’t know what the best approach to fiber to the home is going to be. So it’s for these reasons that I do not think that this is a project that the City should pursue. UAC Special Meeting on FTTH, March 18, 2004 – Approved 4/7/04 Page 26 of 26 If there are no further comments, I think we are ready. Let me once again, read the motion as it’s currently stated. MOTION: The UAC recommends that the City Council authorize the formation and construction of the fiber to the home project pursuant to the Fiber to the Home Business Plan Phase I, dated May 7, 2003 and Phase II dated March 17, 2004 subject to an advisory vote to be placed on the November 2004 ballot. The UAC recommends no additional funding for the project until the project is approved by the City Council. Upon approval by the Council, the UAC recommends that an expenditure of up to $120,000 be authorized for public relations and legal analysis but not engineering design. I think we are ready for a vote. All those in favor please say aye. “Aye. Aye, Aye.” Those opposed. “Aye (meaning nay), Nay.” That motion passes on a three to two vote. I personally want to express my thanks to the staff and all the members of the public who have been with us for these two years. And I’m pleased that the UAC has taken a stand, although not ‘the stand’ and is ready to move this up to the Council for the next level of decision. Thank you all. Adjournment 21:19:57