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HomeMy WebLinkAbout1985-10-01 City Council Summary MinutesCITY COUNCIL MIEIUTES Spec'al Meeting October 1, 1985 CITY OF DAI0 ALTO ITEM PAG E Item #1, Selection of a Cable Franchisee ADJOURNMENT: 11:30 p.m. 6336 6362 6 3`3 5 10/1/85 F1 Special Meeting Tuesday, October 1, 1985 The City Council of the City of Palo Chambers, 250 Hamilton Avenue, at 7:30 Alto met on this date in the Cowlcil p.m. PRESENT: Bechtel, Cobb, Fletcher, Klein, Levy, Renzel, Sutorius, Woolley ABSENT: Witherspoon SELECTION OF A CABLE COMMUNICATIONS FRANCHISEE (PRE 7-•3) CMRc 517:5 Mayor Levy said the public hearing was concluded, and they were now into the more detailed evaluation of the applicants. He suggested they use as a guide, the breakdown staff used in the staff report with five categories for comparing the two applicants, which were the technical and construction, financial, ownership and structure, local commitment, and service and rates. Each of the applicants would speak for five minutes then return to Council for., questions of the applicants and further discussion. Councilmember Klein clarified the two applicants would speak for five minutes after Council had covered all five of the topics. Mayor Levy said he suggested the plan of going to staff and going to each applicant be followed fur each of the five topics and then after each of those had been covered in detail, there would be an overall discussion and questions. He expected it would take at least the remainder of the evening to cover the five categories. Thy; elements of discussion were 1) technical and construction; 2) financial; 3) ownership and structure; 4) local commitment; and 5) services and rates, which varied from the order they appeared in the staff report. Depwty City Manager Larry Moore referred to staff report (CMR: 417;5) that contained the staff recommendation to Council and reflected in the view graph was the relevant information that was .selected from the chart. Looking specifically at the system design and construction plan, the chart was separated into two categories: 1) Category A, technical futures; and 2) Category B, construction and maintenance plan. He would highlight the more important areas in each of the submittals of the two cable companies. Relative to distribittion'plant, City Cable Partners would provide two cables, one with 5509 megahertz capacity, the other without electronics. The first cab' which he `ailed the A Cable would be activated initially. The B Cable would be subject to a number of conditions which if successfully met, would be activated in year four. Comparatively, thedistribution plant for the Co-op would provide two cables of 550 megahertz throughout the service area. The A Cabl- would be activated initially and the B Cable up to 50 miles /ouid be activated without conditions by the end of year five. Relative to the head -end for City Cable Partners, the head -end would be located in Mountain View as part of the Mountain V i ew system and it would be shared between Mountain View and Palo Alto service area. A hub was planned specifically for the Palo Alto service area. Comparatively, the Co-op head -end would not be shared and would be located in the Palo Alto service area. With respect to interactive capability for City Cable Partners, the system would be capable of providing two-way services as those services became technically and economically viable by insertion of nodules and amplifiers, approximately 50 miles to the A Cable would be electronically equipped for full two-way use, .odules would be added to the remainder of the cable as demand required and cable telco hybred propcsal for two-way services in the interne would be available. In effect, that meant for the entire system 5G miles would be two-way and the telephone company technology wou''d be used to provide two-way capability for the balance of the system. Comparatively for the Co-op, it would provide a full interactive capability from the cable distribution plant from time of construction that would be augmented by head -end equipment that woreld provide the necessary frequency translation,network; protocol and status monitoring. Effectively that meant the system would be two-way to all householde. Both companies -gad agreed to the same technical performance standards. The second category --construction and maintenance plan-- for City Cable Partners, 100 percent of the, occupied households in the service area would be passed within 18 months after commencement of construction subject to 6 3 3 6 10/1/85 the lintyl:xtcnsion policy. Last Monday night City Cable partners provided a modified line extension policy 'related to the town of Atherton. for Cable Co-op, 100 percent of the h;;uses in the service area passed would be passed within 18 months after -construction. Councilmember Renzel asked if some of those extensions were dependent upon financing agreements and so forth, how 'cng did they have to wait if; for example, City Cable Partners was awarded the franchise, what the timing would be of getting cable laid and what the effect would be if tray were unable to secure the kind of financing they expected. Norman Sinel, Arnold & Porter, said he was not sure their most recent proposal was in respect to line extension; it was based on financing. As he,understood it, they were prepared to wire all homes in the service area, provided that there were at least 40 homes per mile in the areas they were working on. There are a few areas that had homes that had a density of less than 40 per mile. He understood their suggestion was that unless they could pre -sell a certain number of homes, such as 20 in a mile, they would not provide service unless the potential customei was prepared to pay the cost of materials for the installation, which could be relatively expensive because the house may be back some number of acres from the closest drop. point or to provide alternative service negotiationg with the consumer so ultimatley in the wide extension policy and he thought it was an appropriate question at some point to address specifically to them, a new line extension policy, there maybe some residents who ultimately did not receive service at a price that would be remotely affordable. Councilmember Renzel asked under Joint Powers Agreement as the principal awarded of the franchise, what were the obligations to surrounding communities that were less dense than ours. Mr. Sinel said under the Cable Act there was a responsibility to franchise and to prevent the discrimination against class of user by virture of the economics of their area and that could be red lighting the poor or it could be red lighting the rich. A good faith judgment had to be made as to whether the composite of the system was one that was not discriminatory. It was fairly traditional in the industry when dealing with rural areas to have a line extension policy otherwise they ended up spending $5,000, $10,000, or $15,000 just to connect one household. As tie understood it, the line extension policy that City Cable provided last week, which was ° a change from the one that was initially proposed by them, a change from 50 households per mile to 40 households per mile was one that accommodated the needs of Atherton and made a significant difference in the number of residents in Atherton that would now be served just like any other residence. Councilmember Renzel said if she understood it correctly, one of the applicants was proposing to build the system within 18 months of the beginning of construction and the other was proposing to build the system within 18 moi; .hs of the award of the franchise. Mr. Sinel said the applicants, were starting their 18 month period from the point at which they had received appropriate authorization,, they would take out permits and had to make licensing agreements to use poles. There was a six month differential inthe construction period as one of the companies wished to build in a little leeway because there were penalties for them not completing. His recollection through the negotiations was both of them had primarily the same type of construction arrangement. Councilmember Sutorius asked, with the information on the revised line extension policy proposed, if staff and the consultants had; an opportunity to run through the impacts of the revised policy with respect to the operating st atements . Mr. Sinel responded nu. Councilmember Sutorius said with regard to serving all areas in phase I with forty or more homes Per stile, as he understood the mater i a l , then would view rural Page Mill as an area with 138 residences, and asked if the company paid or would it remain a Phase II area. Further, Stanford Industrial Park would not be, served other than through an interconnection arrangement that was being pursued with Pic Bell and a portion of Menlo Park, which was a commercial area. east of Bayshore, would also not be sew red in Phase I. 6 3 3 7 10/1/85 Mr. Moore said, generally Councilmember Sutorius' comments were correct. There would be portions in the service area even with the revised line extension policy that would not be included in the Phase I service. Councilmember Sutorius asked with respect to the manner in which the subscribers could be relieved of lineextensioncharges by application of the pre -subscription equivalent to a 12 month pre -subscription if at least twenty-five households pre -subscribed, how would it be interpreted with respect to the remaining residential Phase II area that is rural Page Mill. If there were 138 households in that area, if twenty-five residences within that area, regardless of their proximity to one mother, were to pre -subscribe, would that relieve the area of line extension charges. Mr. Sinel said no. The twenty-five household number which was in the initial policy which had a fifty household per mile number suggested it should be twenty-five households per mile and not twenty-five households pre -signed per mile because there were not twenty-five households in a mile. Mayor Levy said they would be hearing from the applicants and if the questions were more suitable for the applicants, then hold off until Council spoke to them. Councilmember Sutorius said in the materials that were at their places yesterday evening from City Cable there was a reference in the material to an attachment, but the attachment was not at their places. The item was identified as a confidential item and as representing the status of current negotiations on an agreement regarding constriction of the system. He asked staff to comment on their opportunity to review that item and how the item could be approached during the sessions. Mr. Moore said the docemnt referred to was approximately fifty-four pages in length and between last night's meeting and tonight's meeting, staff did not have an opportunity to go through it with the care that was required in order to give it a complete analysis. He thought it needed to be pointed out that it was a confidential document, but negotiations were ongoing at this point and the information reflected in the document might not necessarily be the information that would finally be agreed to between the two parties. Councilmemeer Woolley said her question referred to page 15 of the staff report, not the chart. In the paragraph at the bottom of page 15, the statement was made that as operational issues began to arrive, it was poseible the management of the Mountain View system would have to make certan priority judgments between the requirements and standards of the Mountain View franchise and those of the Palo Alto franchise. She asked what kinds of operational issues staff had in mind. Mr. Moore said there were a couple of issues involved with reference to that statement. Staff had not had an opportunity to review the Mountain View agreement in order to actually make the comparison that would be required, but the essence of the statement that by having to share head -ends with the Mountain View system, the operator would be responsive to two different clients and there might be occurrences where different judgments would be necessary for each ofthe service areas, and in situations like that as %hey might occur, staff could not always guarantee those kinds of things would be judged in favor of the Palo Alto service area. Councilmember Woolley , asked if the programming would be the same for both areas. Mr. Sinel said they did not know whether the programming would be the same; obviously the companies had the right to program, each area consistent with their franchise °eireement and their rights to program. That was the concept underlying the statement that there was a head -end serving two different cabs systems, with two different ownership structures, with two different franchise agreements. The payments for the use of the head -end were to be negotiated between City Cable Partners and Viacom of Mountain View on an operational basis. There might be times when the needs of the two systems were different and management of the head -end had to decide where to put the resources whether to " send them to one prob l em or another or to come down and deal with the Palo Alto hub and so there just might be some management disruptional problems. 5338 10/1/85 Councilmeu'ber^ Woolley clarified those problems would be of a very technical nature; that since Palo Alto had its own hub and Palo Alto also would have its own studio facilities, that except for some, perhaps rare incidents, the two areas would be treated separately. There would be no necessity of both of them having the same programs since the hubs were separate. Mr. Sinel thought it was possible to have different programming. If the major facility for receiving programs from the satellite was located next to the mountains, they would head -end, but there might be situations when the two systems were attempting to program differently and they did not have the capacity to do so. Councilmember Woolley said she would like to hear more about that from the applicants. The chart mentioned the City Cable Partners as providing a B Cable without electronics, and also the interactive capabilities for the A Cable not being supplied for the entire A Cable by City`Cable Partners but for part of that. They had also been talking tonight about the line extension policy which would mean there might be some areas that would not be cabled. She asked if the consultants, when looking over the financials, took into account or considered that the money that was spent for putting the electronic on the B Cable for providing interactive capability for the A Cable for serving all homes within the area, did they evaluate the two companies so that they were sure that difference in policy was reflected and was that risk taken into consideration. Woody Britton, Price Waterhouse, said he would address that in more detail in the financial section but in looking at the overall magnitude of the areas of expenditures, and the relationship to the industry standards, etc. those facts were taken into consideration. Specifically, that they were talking about two systems that had some ditinct characteristics. Councilmember Woolley asked what the magnitude was of those different expenditures. Mr. Britton responded he would adress that in the financial section. Councilmember Woolley asked if Pac Bell was respon able for any cf those or would the Co-op be responsible for all of them. Mr. Britton stated that wider the arrangement as proposed, Pac Bell would be responsible for the expenditures, however, it was likely those expenditures would translate directly into the amount of the lease payments which were proposed. Councilmember Woolley said she thought that was fixed. Mr. Britton said the agreement made a presumption with reypect to the construction costs and did not commit to a fixed cost at this time. Councilmember Woolley said she thought they were dealing with a fixed cost contract and would like to know more about that when they got to the financial. section. Councilmember Klein admitted to a bit of frustration hearing questions constantly being answered by saying they would, get to it later. He would like to get some of those answers and not call for them later 04. He questioned the head -end and its joint use whether it was desirable or not to be able to share with Fountain View. He asked Mr. Sinel if there were some examples of_.. similar arrangements around the country. Mr. Sinel said hz knew one where a small system was sharing a head -end with a larger system and the larger system changed, taken the nature of its system at a time when the cable industry was pulling back from what it was and the smaller system was tagging alon,`:and having trouble forcing its agreements, in part because it was sharing a head -end. Here they did not have a small system tagging along to a very large system. He did not think it -should be overblown; it was part he believed, in the staff report a common sense concept that when trying to do two things with two different groups from the, same place, they had to have an effective management to make "sure that one or the other of the franchisees did not take a back seat. He could not give specific examples as to where the hardship would fall if at all. 6339 ,10/1/85 Councilmember Klein said he wanted to know what the possihle problems were. Mr. Sinel said assuming the FCC, as it has had standards which were less than the standards in the agreement, conversations went on between Mountain View, City Council and the Mountain View system, and they determined to have loose set up performance standards. Also, assuming they had a company that was not basically performing to a higher performance standard because they wanted to and that was why it was difficult to discuss some of those because he assumed those companies would perform to a high standard. Also, assuming the performance standards were valid and enforceable based on Federal policy, they were stronger than the Mountain View standards and the operators at the head -end determined to reduce their costs in Mountain View because they were having trouble with Mountain View and wished to change the standards of the nature of the signals which were being pumped out at the head -end and made a decision that they would run the risk ^f violating the agreement in order to accomplish something in the head -end that was tied to another system. It was difficult to im yine those companies dolt)? that but that was a problem they would not face if they had separate head -ends. It was a viable system and the Mountain View system was nOt_viable. Councilmember Klein asked for figures as to what the magnitude was of the savings by using the head -end in Mountain View. Mr. Britton said a rough order magnitude would probably be on a $1 million to $1.5 million capital cost. Councilmember Klein asked Mr. Britton if he was saying it would save $1 million to $1.5 million in construction. Mr. Britton responded yes. Councilmember Klein said regarding two-way communication, they heard a lot of testimony from members of the public last night and a week ago with regard to that. He would like to address the technical feasibility, desirability, what was the present state-of-the-art, where it was being used, what was the economic experience with it and what were the comparative costs of the two proposals. By comparative costs, he meant as an add on; if they did not have any tow -way capability at all, presumably they were at 0, how much extra would it cost for City Cable to put in what it proposed and how much extra would it cost for Cable Co-op to put in what it proposed. Mr. Sinel said regarding the technical side of it, they should separate out two-way capability and interactive service. The two-way capability was the capacity to let signals move up and downstream on the cable. The Co-op was proposing to put in an amplifier that would pass signals in both directions throughout the entire system, whereas City Cable was proposing to put in such amplifiers for about 50 miles of its trunk then rely on the telephone to get its signals up to the head -end. If the purpose of having a signal pass back up to the head -end was a selection of Pay; Per View, the hybrid cable telephone system was used in many places and was perfectly adequate in providing that service. Once they had two-way capability, and again it depended upon how much they began with in the system, and in both systems the amount band that would go upstream was relatively small, they could provide interactive services based on what equipment was in the head -end and what equipment was in the household. In terms of economically viable services, dealing with residential subscribers for interactive services, he was not sure that any. currently existed. There certainly were uses of cable by business users which were essentially closed circuit connections from one location to another where cable companies were soaking some money by providing bandwidth to businesses. It was not the save thing as the interactive services that people were generally discussing when they talked about having the capacity in their household to link ther computers into their work place and stay;, home. Those were clearly as acts of broadband technology that at some point in the future would probablybe viable. They were not currently viable to far as was known throughout the country. It was something to be worked towards. Beth of the companies have proposed various research and development projects to get at the use of that, but as far as he knew, there was nothing going on in the country that was of a substantial enough business viability to suggest ,they would need a system for current activity that was fully two-way and ,interactive with fairly major computers in the head -end to deal with taking messages from a lot of different . places .and switching- them around. The co't aspect related to compone is dealing with the amplification system in the 6 340 10/1/85 distribution plant, which was not a major aspect of the cost. Significant costs were at the head -end, depending upon the nature of the service that it would provide. Consumer devices, depending upon what a'consumer wished to do, ,were quite costly. The consumer devices might not have anything to do with what cable system would provide, but the head -end computer equipment would. Councilmember Klein asked what was the speculation about interactive looking out over the next decade. Mr. Sinel said there was speculation among a lot of people that there were services to be performed and people to make money from the services. He was not sure whether the cable industry believed in general that it was a service for the cable industry to perform as an industry as a whole, or a service for the telephone company to perform, or a service for a hybrid communication industry to perform. He thought there were by and large many large cable operators who did not wish to engage in that business because they did not believe it was worth their investment and they wanted to focus on providing programming - some of it entertainment, some in public service, and then programing to the public -- and leave the data issiees either to closed circuit business connections, which they could do on- , one shot basis or telephone company. There obviously has been a .eioud on the regulatory aspects, whether it -was interstate or intrastate camnerce and the relationship between the State Public Utility Commissions, the FCC, and the local jurisdictions in dealing with these issues. The FCC had recently taken hold of the matter in the Cox case dealings in Nebraska, suggesting they could outlaw State PUC's to interfere with the cable operator's efforts to enter into this business. The aggressiveness of entering into the business depended upon the community and this was about the -strongest community that anyone had ever seen to support such services and the aggressiveness of the cable operator to mant`to engage in those kinds of activities. Councilmember Klein asked why Mr. Sinel saw this community as being better than some other ones for the economic delivery of those services. Mr. Sinel said based on the public hearings he attended in Palo Alto and other places, the number of people in this community who seemed -to be familiar with and comfortable with the computing sciences and the use of computers, its proximity to Stanford and to the computer industry, they had a group of people who were not exactly the same as people he had seen in other markets. Mr. Britton said he could not be more precise than Mr. Sinel with respect to the costs of adding Interactive capabilities. He suggested the question he posed to Cable Co-op who incorporated some of those aspects in their proposal. Vice Mayor Cobb asked what the difference was between the Co-op bid to have electronics in place throughout the system and the Partners suggestion to only go a portion of the system. He asked if what they were talking about was putting electronic amplification in various strategic locations in the network. Mr. Sinel said City Cable would have 50 miles, it would have that capacity. Co-op was proposing the entire system with that capacity.. The major practical difference might be related to how one could experiment with services, but it might well be that their services to experiment with, the City Cable will have the amplification system. Vice Mayor Cobb said he assumed it was that difficult.a problem to come back in and add the amplification capability at a e l ater time if it turned out that it was needed or to expand the amplification capability. Mr. Sinel said that was correct. The only issue was how much they had to be sure they had a marketable service before putting in new capita` costs. Vice Mayor Cobb said they slid not, know yet what the form and nature of that two-way communication would be, particularly as it reached out .to become interactive. He asked if it was premature to have the amplification in place now rather than put in place later . in °exactly the form it needed to be to answer the needs as those needs developed. Mr. Sinel said he did not think it was premature in this community. 6341 10/1/85 Councilmember Suto"s pus said they have had oral and written commuriicatioii addressed to the Council concerning assignments and frequencies and the :potential of competition or conflict and intrusion into the 144 to 148 mega hertz amateur band and it would seem that was a problem they should be able to solve. He wanted to know how ::hey should address it when they finally take action, what, kind of.. direction or step was necessary to protect that megahertz amateur band. Mr. Sinel said he had talked with both of the companies and each one had a slightly different solution to the problem. He would give a mechanism, that should actual complaints be brought to the attention of the City Manager, to take certain steps to, resolve it rather than at this stage to take any steps to tell them how to design their systems=, There was a good faith disagreement between the amateur radio operator and those who constructed first class cable systems as to Whether or not there was actually interference. Councilmember Sutori;is clarified Mr. Sinel, saying to dispose of it in the agreement, perhaps by a reporting process or a monitoring process. What he needed to know before finishing up was did they do anything about this tonight or tomorrow night, or do they do something about it when the agreement came back for final signature. City Manager Bill Zaner said the response Mr. Sinel gave was a good one. It :as a problem they recognized, and they have talked to both of -the companies and ,thee understood the problem. They would either incorporate in the agreement provisions to allow them to remedy the problem if it arose or work- out some other arrangement with the companies prior to the signing. In any event, it seemed to be the technical problem they now, understood and would attempt to deal with should a problem arise. Mayor levy said he would turn to the two applicants and would flip a coin to determine which application spoke first. Heads would be for the Co-op and tails for Partners. It was heads and he asked the Coop to speak for ---five minutes on the subject of system design and construction to be followed by Partners to speak five minutes on that @.=3pic covering it in anyway they wished, and return to the Council for questions. John Kelley, Cable Co-op, said he got involved in this project because he was concerned about one thing and that was developing a cable system that would offer a telecommunications alternative to the telephone network. It might be somewhat ironic that Cable Co-op has signed an agreement with Pac Bell. The egreement said they would execute the agreement with Pacific Bell if they were awarded the franchise, the Palo Alto cable system. In working with Pacific Bell_, one of the primary advantages they had found was their dedication as a company and its professional organization to telecommunications. By that they meant interactive -telecommunications. The Council had asked a number of questions about whetheror not that was economically feasible; how meth it would cost; whether is was technically feasible and whether they should be doing it in the first place; and whether this wasethe community in which to try and really build an interactive .:able communication system. First of all, it was possible, people had been doing twos -way communication at Brown University for a number of years. It was his understanding Stanford was installing a two-way network us; rig both sytec protocols and some other protocols that were being developed to operate with a system developed by Xerox. Ther-e.might be other protocols developed in the future, but the simple point was that it could be done technically. The second point was how much did it cost. If they used an estimate of approximately $500 per mile for -the reverse channel amplifier, that would give '-;.bout a quarter of a million dollars. If they wanted to inflate that, they could call it ;50},000. What they were really talking about was whether they were going to put it in now or five years from now or ever. If they planned to put it in later, the only real cost was the interest they were carrying on that capital, which over five years was on ' the' order of $100,000 to $150,000, Ale thought it .made sense to do that. Both applicants said .they were prepared to expend. a fair. amount of money on installing head -end equipment, -staff and 'i`eserve equipment for use at terming'-. and subscriber locations. They would not be able to get to tit? home unless they build a two-way interactive system. That would make a large differE qce -to many people - in the community. It was true' they could use the telephone network . for two-way systems; it was true Pac Bell was implementing Proje t Victoria and would be able to operate at speeds of 100 watts or 63.42 10/1/85 higher; it was true there was equipment available from i"elebic that would allow that pushed even further, but was also true they could do the same thing in a cable network. Cable Co-op had the unique opportunity to demonstrate that capability and to begin work on it now. Who would use it - Stanford students who wanted to reach computers at Stanford that interconnected with Sun -nit, knowledge workers at a number of companies in the area; he could not even list them all, but mentioned some of the primary ones; Hewlett Peekard, Xerox Park, Stanford Research International; they all lived, worked and used comouters in the community. Cable Co-op could offer people an alternative primarily in very high speed data communication. Does anyone wantto buy this service rignt now? He thought Stanford was very interested in buying the service now. Stanford students would be shocked if they were not able to communicate with their computers from their homes in the same way they could do that from their offices and on campus, Perhaps more importantly, they had already had expressions of interest from companies such as Xerox to develop very high speed services, speeds above 56 kb and probably would like to work on developing a 10 mb service. The question being asked was whether they should wait until 1990 to begin ;he work where there was communication between individual users in their homes and major institutions. That form of communication was at least as important as the type of communications to be found between institutions and that was one of the primary economic advantages that it still drove main frame computing, which was where most of the computing horsepower still existed. The staff report said the lease price was not fixed and he believed that was referred to sgain tonight. In some very remote sense that was true. The possibility existed that they would pay more for the lease than was set forth in the financial projections but in the agreement struck with Pac Bell it was clarified that eventually only arose if the total mileage of the plant exceeded 10 percent above the 465 miles projected. In othe'= words, they would have to build over 511 miles of cable plant before there would be any affect on the lease price. Within the range of about 408 and 511 miles, the lease price wouli be absolutely fixed. Israel Switzer, Officer, Director, and Shareholder in City Cable Partners said he was a consulting engineer with 30 years of direct experience in cable television and his practice included projects and experience in this country, Canada, Europe, the Middle East and South America,. He wanted to clarify the position of two-way and computer communications in cable ``1'.V. systems of today and the near future and the more distant future. They would build a two-way capable plant with an actual operating two-way in certain areas in which they were confident of early need and use. Two-way capable was upgraded to operating two-way by putting in additional amplifier modules and filters and then adjusting them for proper operation and the cost based on direct end recent experience in Mountain View was $2,000 per mile, not the $500 that was previously quoted. They invited Price Waterhouse to go over to Mountain View anytime and audit those figures. Two thousand dollars per mile multiplied by 465 miles of plant in the community came to almo::t $l million and it was not just the interest on $1 million of equipment sitting up there and being used perhaps only 10 percent or 15 percent of its capability; there were other costs, which were substantial. The electric power those amplifiers consumed was equivalent to about 2500 25 watt light bulbs burning night and day and the power cost alone was about $4,000 per month just to keep those two-way modules lit and they required maintenance because they were electronic. The maintenance requirement was based on actual experience in Mountain View where they had two-way throughout the whole system, at least about two additional technicians, and with overhead and__. all the extras that wenton, that was almost $100,000 a year. In the future when they really could build and commission two-way 5, 10 ` and .15 miles in a month or so, they wou l d and the modules could be sent by overnight express. The moduleswould be plugged in, and the time-consuming part was getting them all adjusted, which could take weeks. Why should they, or, any other cable operator, be wearing out amplifiers, dissipating electric power, adding maintenance burden then for any greater service area or any earlier than was actually required. Regarding the two-way services that would trigger the upgrade to operating two-way, his experience and the experience in many other systems was that the usual application of, two-way was to provide video links in support of local origination and public access and videocircuitssuch as those that operate in Mountain View. Then there were data communication requirements. There were some communities, which were just as heavily loaded with data requirements as Palo Alto; Naperville, Illinois, for one; Fairfax County where he designed and has technical preview over a very large cable system, ten times the size of this one; the CIA; Boeing; FBS; and dozens of high-tech government support, 6343 10/1/B5 government oriented firms. The cable system in that area has built $10 million worth -of institutional, of C Cable. They had a full time department. City Cable Partners had a surprisingly few number of business customers actually using their data services and they were actually operating service up to 1.5 mb. One of the reasons was that as they offered those high capacity circuits and they put them out at the going bid, the telephone company ran them at, they found in the next round of bids, the telephone company bid 10 percent to 15 :percent lower and there was an advantage to the users -- the price of a T-1 circuit in that area came down from about $1,200 a month to 1800 a month but it was not as easy to get those businesses. In conclusion, the data business in the home was not standing still. Telephone service worked very well; he was sure there were thousands of telephone -oriented modems in student homes and computer -users homes. Councilmember Fletcher asked if anyone from Pac Bell who might know something on this topic was present. She asked how it would work if Pac Bell.xas the installer of the system, would they then compete or was there potential. Mr. Kelley introduced Phil McDonald, the Director of Engineering for one of the subsidiaries. Phil could speak to the question of what it would cost to operate and iaintain the system and whether or not the telephone system could deliver competing services and he thought the answer to that was yes. The other question was whether or not they would be able to compete with the telephone system for delivering the same service, which he believed -Mr. Sinel spoke of earlier; it..appeared as though, under a very recent FCC ruling, they - would have a fair amount of latitude in competing in those areas. The California Public Utilities Commission had offered to receive applications from cable companies and they intended to file those kinds of applications in the future. He asked Mr. McDonald to comment on the feasibility and the cost of providing those services. Mr. McDonald, representing Pacific Bell said it was very difficult to respond to an abstract issue that was raised in the emotional sense. They designed a very clear-cut system in the traditional cable mode that was capable of returned transmission, although it was limited, it was still very effective. Pac Bell, in the original bid and now in support it discussions with both of the contenders had always promised to be able to provide the utmost in service that was available today and in the future. In many of the companies in the Bay Area, particularly in Menlo Park and eaio Alto, they had services that far exceeded that which was promised now on'the same medijm. Hewlett Packard for instance had a little trench on Page Mill Road that they built because the common carrier, Pacific Bell could not respond to some of their needs and they built the capacity or that system with far more sophisticated electronics and communications within a year. It was relatively easy to access the cable system and provide two-way with a modest capacity and with the type of access to the homes and the businesses that the cable will have, was no reason revenue could not be turned up in a modest means, small numbers but as education and training became more available to the public, particularly with the hackers and the technologists in the area they were very excited about the prospect of that service. So the cable company that provided that type of capacity- and that availability and provided the advertising and the encouragement to their members and the public and their customers, that cable company would return revenue very soon. The cost of installing the electronics was debateable; it was a matter of buying the correct ty0e of amplifier with modules that plug allowing return, their filters and part of the amplifiers. He had some estimates but it was not a magnitude that would exceed the figure given by Mr. Kelley. He did not believe it would exce'dits outreach--incl ding maintenance and installaton over. $500,000 to do that. However, with education, publicity, and advertising, the revenue would soon become a' factor in the business plan. In traditional systems there was reluctance to provide the bast of support and that type of advertising. He would oe very excited with the prospect of providing two-way communication for video and fir data on this system. Vice Mayor Cobb_said he wanted to, give Mr. Switzer a chance to continue his comments -also and would like the Co-op to respond -as well. -;'The way he had originally written the question down before, this evening was, what market data were available with respect to public demand for interactive services and other advance features they had been discussing here,. and he would be. interesteuYin their answers to that. Mr, Switzer said with respect to market experience for consumer two-way, the most notable and really the only practical subscriler two-way nervice-going was the cube service which Warneramic started in Columbus and extended to other new system, 'notably Pittsburgh, Dallas, and a group of suburbs in Northwestern Chicago. -All of those systems had economic problems and had been sold except for Colt:e,us. Very soon the only two-way of that kind operating would be the sort of original system in Columbus. Some two-way in support of Pay Per View movie ordering had been put in, a fairly extensive installation, San Antonio, Texas by Rogers and some in Portland by Rogers. That was being watched fairly. closely. With respect to data, he found it incredible that one could base that kind of consideration on surmise when there was so much practical experience available as tm what actual data business was available. The Cox situation in Omaha was mentioned. They set up a separate'subsidiary funded very generously from their head office in Atlanta and started out to sell to industrial customers in the Omaha area and they were selling very aggressively, so aggressively that the telephone company there objected to the Public Utilities Commmmission and it became a test case that the FCC ruled very recently. Cox was about to shut that down, it had become almost a moot case because the results were so disappointing. He was contacted by MCI, the largest non -AT&T telephone long distance operator and his responsibilities were to advise and help implement the use of two-way cable at the local bypass so they would be able to connect subscribers then by a two-way cable. They were operating several thousand circuits that way in various parts of the country: but it was very tough and by no means was a glorious example of the non -television use of two-way cable. Mr. Kelley said as Mr. McDonald mentioned, HP hes built their own network for exactly those kinds of purposes. It was true the HP network did not service the home. Stanford was building its own network for much the same purposes, emulating Brown which had been doing it four a number of years and in both cases, he believed they were t'sing the same high teen equipment. Stanford had been considering implementing the Eatherne Protocol Nctwork. The point was taken that if they were against the serv4ee that was free, it would be very difficult to compete unless they were also offering such a service or unless their service had different characteristics, different functional characteristics from the competition. One of the most significant things in the modem market in the last year hes been the explosion of sales of higher speed devices --2400 Sod modems, 4800 Lod modems, 9600 bod modems and variable speed high speed modems which did not sell for $300. They sold for more than $600 to $2,000 range at which point they began to compete if they could offer comparable service --service at the 9600 bod level or at the 19.2 kb level. They could go faster as well and it was the point Xerox was interested in. It was his understanding that until there were some major changes made in the phone network, they could not go at 56 kb or 64kb point-to-point unless they were leasing very expensive T-1 lines or unless they opted for fiberoptic installation. Mr. Switzer's point about getting into the home was interesting. How many 'people in this community would want to operate at high speed to their homes. That was a function of one very important development in the computer industry. Looking at the screen, they were talking about characters and they could get by relatively small at low speed. As the, computer industry 'changed and as people bought more and more Macintoshes and faster higher performance 68000 bit machines, people would want to go faster until there was a wide -spread adoption.of a good data compression which they did not have yet. In `the short-term, people who wanted to use high performance systems in their homes would have to go at higher speeds or they would not do it at all and that was exactly what people at Stanford, HP and SRI would want to dog He could not give a number of the people like that in the community. It was probably below 500 and in the early years they would be operating at somewhat of an operating loss in providing that service. They have not assumed a nickel in our proformas for those kinds of services. The point was unless they started making those opportunities as they seized those opportunities; they might lag behind and in a competitive situation, might lag behind the telephone network when it implemented higher speed data commmunicat1om protocols. He thought what they had wasan opportunity and intended to se`.ze it. Mayor Levy asked the two applicants and staff to keep their responses dowry to two minutes. 6345 10/1/835 Cuuteei liee .ber Klein said it seemed they were developing policy that every question asked be granted equal time for the other applicant and he did, not believe that was required. There were some questions which might apply only to one applicant and not the other and he did not think they needed to have absolute equality in the situation. The questioner was in control and should ask the question to whomever she or he wanted. Vice Mayor Cobb said his next question was strictly for Co-op and the one after was for Partners. His fellow -up question to Mr. Kelley's comments was that a great deal of what they heard both from Co-op and from its supporters had put enormous emphasis on the subject they were talking about. Almost to the exclusion of talking about the kind of basic service that, according to everything he had read, still were the things that paid the freight rig and the groceries in cable systems. He asked if Mr. Kelley's assumptions were wrong and Mr. Switzer's were correct that the market for, that kind of interactive use simply did not develop with anything like the speed with which he currently anticipated despite his best efforts, and what did that do to the rest of his assumptions throughout the system -- did it hurt them or did it operate okay. Mr. Kelley responded, as he had mentioned, they have not assumed one nickel in revenue from those services and it did not change anything else it would c!o. They chose Heritage primarily becaese of its vast experience and its ability to market the bread and butter. Vice Mayor Cobb said they just heard from the Co-op a few moments ago abort a signed agreement with Pac Bell and asked what was the status of City Cable Partner's negotiations with regard to the possibility of Pee Bell being the construe for of their system. Mr. Switzer said they were actively and currently negotiating with Pac Bell toward that end. He did not think the presentation of a concluded agreement should be part of the competitive process.. They could have signed, yesterday and handed the Council a paper today, but they did not want to sign under those circumstances and believed they and the community were better off if they finished`, their negotiations after a franchise award rather than under some kind of eime pressure before. Councilmember Sutorius asked if there was any significant difference between the technical design and their activation plans ccwpared to what was already contained in the proposal. Mr. Switzer said no major difference existed. They believed an agreement with Pac Bell would allow them to conform with their undertaking so far. Councilmember Sutorius said so that it would be an 81 channel or 82 channel A Cable and a shadow cable just essentially the way it was presented in the materials they had now. Mr. Switzer said yes. Councilmember Woolley asked the Co-op who would be providing the electronics for the B Cable, whether that was part of Pac Bell's responsibility, and secondly who would be providing the interactive capability for the A Cable. Mr. Kelley said that in the current agreement there was a provision for +mat was known as change orders which allowed to augment the system when they asked to have it augmented. The first build would not have any amplifiers in- most of the B Cable. The addition of the amplifiers for the 50 miles of B Cable which they heel committed to would be undertaken as a change order and that was reflected in.•their performance. The electronics for the interactive aspect of the A Cable was part of the package they negotiated. Ccencilmember Woolley asked for a rough estimate of the cost for the electronics for the B Cable as they were added. Mr. Kelley said they were budgeting about $7,000 a mile. Councilmember Woolley said Mr. Kelley mentioned the amplifiers and filters for the tWo-way capability would run around $500,000 for the whole system, but that did not include head -end costs. She gathered from Mr. Sinel, specialized equipment `was necessary .at the head -end in order to make use . of two-way capabilities, and asked what was the cost. 6346 , O/1/85 Mr. Kelley responded $240,0000 was budgeted over the l985 -l^67 pee iud. Councilmember Renzel asked Mr. McDonald it Pac Bell had done any marketing surveys to evaluate the demand foe uses other than the phone system end modem system. She assumed that because of Pac Bell's ieterest, and knowing that the phone company usually did a lot of good marketing work before they introduced new things, that would have something they might have done and asked if they had any results from that. Mr. McDonald said a lot of surveys were conducted when Pac Bell presented their first proposal at the beginning of the competition. They would not get people to pin down and say yes they would or would not, but they got a lot of people that said if it was made available their company would like to have that service. The university environment was certainly supportive of it. There were probably many studies underway in the marketing arena, but he believed they were all proprietary to Pac Bell and did not believe he should be answering that euestion. Councilmember Renzel said that it was months, if not more than a year ago, that Council indicated they had hoped that both applicants would negotiate with Pac Bell and she just heard Mr. Switzer say that City Cable Partners did not feel they should be concluding in negotiation with them under the pressures of this immediate decision, and she wondered what prompted this more recent negotiation when there had been a rather substantial period of time to do that negotiation. Michel Guite, City Cable Partners, said one of the difficulties that any bidder in a cable franchise situation faced was the ability to negotiate with any supplier, whether that supplier was for capital, plant, programming or whatever, was very different after an award for a cable franchise compared to before an award for a cable franchise. The reason was simple. Before an award for a cable franchise the entity they were negotiating with was bringing something to the table, perhaps in addition to their service they were also bringing whatever political value they carried to the table. That caused the price to go up. They had been deeply concerned throughout the process, not specifically about Pac Bell or TA Associates, not specifically about anyone of the many entities they were working with, but they had found over time that in all of those situations the deal they struck after an award was simply more favorable for the subscriber. That was the ultimate rate and that was their position in regard to Vac Bell, which they felt would ultimately lead to the best possible price for all subscribers. Councilmember Renzel asked Mr. Guite if he was suggesting if they got the franchise, they they would be able to negotiate a cheaper lease price than Cable Co-op. Mr. Guite said with better terms than they were now able to strike, which was not to imply any lack of confidence in Pac Bell or any other entities they were dealing with, just a reality of life, that to reach an agreement when theywere in: a stronger position singly lead to a better agreement; A better agreement meant lower costs for subscribers, lower costs meant less risk for all in the community and that was their main objective. Councilmember Woolley said she wanted to come back to the first question she asked- staff which was referring back to the staff's report where it stated that operational issues might begin to arise concerning the use of one head -end and she would like to hear from City Cable Partners in that regard. Mr. Switzer said there were a large number of examples of shared head -ends in this area and he deferred John Dolan. John Dolan said it was common to see head -ends shared in the Bay Area. For instance, Viacom had two large operations, one in Marin County called Big Rock, another in the East Bay. There were differenct kinds of programming and it had operated on a day-to-day basis without any problems. In fact, the companies could work together ana` did. Another very important thing to point out about the head -end was the head -end served all customers. If something happens to that head -end, it effectedboth communities, if it was fixed for one, it was fixed for all. 6 3 4 7 10/1/85 Mr. Switzer said Portland and S attic sfvr-. also exampIJs of 1.3i-qe shared head -ends. It was certainly nwre direct aid s i 1iple to have a head -end right here in Palo Alto. A head -end for a cable system required a tower of about 100 to 150 feet in height, several satellite receiving antenna, and it might require some microwave equipment. He had to put head -ends of that type through zoning procedures in California, more specifically in the San Fernando Valley in Los Angeles, and he did not want to go through that again in terms of delay, and public aggravat►on, and he thought it would be much simpler if they used an existing head -end in an industrial area that already had a for=er, which ewould save both the time and the trouble. There was a substantial amount of capital cost saving, air conditioning, building and heat. There, was a million dollars in the head -end at Modntain View and every dollar of capital cost saved was a savings ultimately to the subscriber, If Council would be prepared to assure them they ceeld indeed put satellite antennas, 1 100 foot tower and a microwave antenna at some reasonable place in Palo Alto, they might very well change their minds. They thought they were doing it in the better interest of the community, and frankly, that was their prime motivation. Councilmember Fletcher said she seemed to remember the presentation at the Pac Fell building and asked the Cable Co-op what they visioned building and also to answer the other question about whether they saw any difficulty in the shared facilities. Mr. Kelley said they intended to build a 9,000 square foot facility, which was mentioned in the bid. It would be about 1.5 miles from the intersection of Embarcadero and Middlefield; where it would be located exactly was still subject to negotiation with a number of parties. They would have to go through zoning procedures and get reviewd by the Council before the final signing was adopted. They would have a microwave tower, satellite reception facilities, and other ,equipment. The main hub system would be located halfaa-block away at 350 Hamilton at the Pac Bel Switching Center, their central office. The studios would be co -located with the head -end aed one of the things they were particularly interested in doing was building a large, fully equipped state-of-the-art studio in the same facility where they would place the head -end. The head -end itself was a relatively small portion of the 9,000 square foot facility. As to the operational difficulties, he agreed there were many opportunit es to oeerate different systems with a single head -end. What they had was a system that had a number of different systems operating out of one head -end, namely the systems for Palo Alto, East Palo Alto, Stanford, Menlo Park, Atherton, and unincorporated San Mateo County. It was a bundled system to begin with. It might make sense if they wanted to work with the same company to tie into one head -end and it might make sense in certain instances to have a shared head -end between different companies, but the point staff was making was very well taken, namely that`if they were going to have one set of personnel and two different masters, ultimately they would have problems. They envisoned having one system with one master and hoped they would not have those kinds of problems. Mayor Levy asked City Cable Partners how the City of Palo Alto could be sure that eventually they would see two-way services with the system that City Cable Partners was providing them.. What were the standards by which they would define it as being technically and economically viable and how could they rely that in fact, at a tie that was appropriate, they would see two-way service, if that time was not now. Mr. Switzer said they could provide that, at the City's call, unless they can demonstrate it was not viable. If there was a real use for the system, and it was viable, they were obligated to provide it. His company and the people in it had spent most or 'much of the last 15 years working in, and perhaps pioneering in, making interactive services work. That was why the company was formed in the first place. There was no real proof that anyone would provide two-way services except their comeitment to try and do so and those services were the initial commitment that have caused all of us at City Cable Partners to be here in the first place. Mayor Levy asked for comments from Counci lmembers. Vice Mayor Cobb said he would like to try and pull all of, the information together at one time, and would preferto hold his comments until he heard the other subjects discussed. 6348 10/1/85 Li �7 said L L.. L.. L... I.,tr k s x L £�,, 1_L and . caiiei saiu he would try to make this remarks as brief all .t.G the point, and still do justice to tho subject and then Mr. Britton would larfiy the majority of the item. There were three things with regard to . the briefing on finance. First he wanted to_make sure Council and all of the interested parties were aware of the participation by Price Waterhouse and its extent. Secondly, Mr. Britton from Price Waterhouse would go through in some depth., the financial material that was received from the companies. Re would then like to spend a moment or two discussing an issue that had received some interest, which was the question cf risk. FIB'assumed some of those questions would be raised during the q..stion period with Mr. Britton. He wanted to spend a moment on the brief history of _the financial data they had received and .make sure Council and both applicants were aware of where they had been and how they had gotten to this position. When the City issued the Request for Proposal, they requested that financial data be included. The financial data was to be provided on forms that .were designed essentially by Price Waterhouse, so they had been involved in the process ever since the beginning. When the RFP's arrived, and they might recall four companies made presentations, the analysis of the RFPs, including the financial data, was done by the consultants, Arnold and Porter along with Price Waterhouse. Those proposals were rather lengthy, which Council was asked to read within a short length of time. The Council at that time reduced the number of applicants to two, the two that were here, and instructed staff to negotiate the best arrangement with both of those firms and return to Council. At this point they have concluded those negotiations and as a part of the negotiations, in the agreement signed with both companies, there was a provision which required the companies to provide them with a financial plan. That plan would be presented this evening. The plan itself was outlined in the staff report that they were working from. The basic content was shown in the narrative on pages 12 through 14 -end in addition to that, it was shown on the chart which would shortly be up on the board. When the companies were asked to 'provide a financial plan, they were to respond to us in three broad categories: 1) A financial forecast. The city wanted the companies to spend some time telling what they thought their expenses and revenues would look like in the future; 2) the actual financing plan, i.e., how would they construct the system and operate it, where would they find the funas, how would they get the money, and how would they raise the capital n& essary to make the system work; and 3) current financial data, i.e., information about their existing operation so that we had some way of looking at their internal financial structure in determining whether or not the company appeared to be sound and well managed. When the data was received, which combined ran to several hundred pages of financial material, Price Waterhouse was recalled since they had done the original analysis Lack at the RFP stage. We asked\them to look at the data and help us as a staff to answer two very simple questions. The first question was whether or not the assumptions that the two _applicants had used in their data were in fact reasonable. Price Waterhouse had some good experience in the cable T.V. field and combined with the experience accumulated by the staff and that of the general consultant from .Arnold and I°orter; we wanted to be sure the assumptions those companies were making With regard to finances were in fact reasonable and based on some kind of rational data. The second question we asked Price Waterhouse to work on was assuming the assumptions were in fact appropriate, given those assumptions were accurate, would the plan that each of the companies presented to use in.fact work. Price Waterhouse:was asked to look at both of those questions, we did not ask the to make a recommendation to us. At that point we did not want them to tell us which plan was better or worse, we. wanted to know,if the two plans were feasible and would they work. Th€ Conclusion was, after we received the analysis and the assistance from Price. Waterhouse, that' both plans Would, in fact, work. They were substantially different. Not only were they different in the way they accumulated the capital to build and operate the system, but they were different in their finan ,ial forecasting. We believed both plans r,ould work. That information was outlined in the staff report on pages 12 to 15. Mr. Britton would put some view graphs up on the board and go through in some detail the assumptions made by each of the companies and the results that those assumptions lead to. When_that was: completed and after Council had finished their questions, he would try to deal with the risk questions. Mr. Britton said he would read the section of the franchise agreement Mr, Zan€r referred to to .set `the context for the '''financial plans, "As consideration for the franchise granted herein, the company, shall throughout the term of this agreement Maintain adequate financial resources to performs on a timely basis all obligations pursuant to this agreement'. This agreement is 5349 10/1/85 expressly conditioned upon the submission by the company to the City Manager with a copy to the Members of the City Council of a financial plan demonstrating that as of the effective date of this agreement, the company, has said resources or will obtain said resources in accordance with the financial plan." That was the context in which they were considering the plans which were submitted. On the view graph was a comparison of the financial plans and what they were working with tonight were the financial plans originally submitted by the applicants in late August of 1985. Subsequent to that, there had been some additional information and some other variance, analysis, etc, that was submitted but they would find the differences were such In the subsequent information that the real messages could be drawn from the original submissions. The first category was plant miles, and Cable Co-op heed projected 475 plant miles and City Cable 488 miles. It should be noted that the portion of underground area miles was roughly the same. The difference in the miles was a different estimation technique and he suspected other cable companies were involved, they would come up with different numbers, as well. In the next category there was a real distinction between the cost estimates for underground miles, which were traditionally much more expensive than aerial miles, as well as a significant cost differential, particularly in the area mile category, between Cable Co-op and City Cable Partners. There was a comment in the staff report to the effect that the aerial miles the Cable Co-op had projected, the dollar amounts might be, at least in their experience, at the low end of what he called a reasonable range. They heard this evening there apparently was a fixed cost arrangement in place now. That concern might be alleviated, bute he had not seen the agreement itself. The distinction in the estimated costs per mile could be seen. The next ,category was plant equipment costs, and he would try to break out the perimeter category of costs and put them on a comparable basis. Putting them on a comparable basis was a little tricky because as they knew, one company had proposed that the telephone company would construct the system and they would lease it. Pac Sell had different construction periods and different plans as to what they were going to cable first, etc. He attempted to put them on as comparable a basis as ,possible and in doing that, made a couple of adjustments for assumptions. He presented the Cable Co-op numbers as if they were buying the system as opposed to leasing it so that they could see the actual dollar outlays on a side -by -side basis. With respect to City Cable Partners, he made the assumption that they constructed all 448 miles of their plant= -in the first 2 years, assuming that they did not have a line extension policy, again for comparibility purposes. He would address some of the issues brought up by Council- with respect to differences in the type of systems that were proposed. The first one was head -end land and building. Cable Co-op had a significant amount of money there, $1.98 million -- because they planned to build, construct and outfit, a head -end. They could see that City Cable Partners had the significant less money. They planned to share a heed -end with Mountain View and he suspected those dollars were related to rub sites and possibly studio facilities. The difference in the aerial plant cost per mile was then reflected in the next category where they could see that city Cable Partners was estimating fewer miles as higher cost estimate for aerial plant miles, similarly for underground plant miles. Included in those cost estimates were the differences between whether or not the electronics were put in place or at least how much were put in place for the 8 Cable. The cost differences for those were reflected in those two categories -- aerial plant miles and underground plant miles. Cost differences, with respect to computer facilities at head -end site, were reflected in the very first category, head -end, Nand and building. The difference could be seen in the drop and connect costs, materials, and equipment to go from the pole to the base. Part of that difference had to do with drop costs which were estimated at roughly $40 per house for single family residences and $90 for t lti-family residence by Cable Co-op: The $40 probably would be very difficult to achieve,'nowever, they should get clarification on the fixed cost nature of the contract they had with Pac Sell. City Cable Partners had a significantly larger amount there, part of that appeared to be related to how they had classified some of their costs. He did not have the full answer to that but suspected possibly some of the costs were related to feeder. cable which might be included and underground and aerial plant miles "ay Cable Co-op were included in that category and some clarification on that fact might be appropriate from the applicants. In case of converters, the number of converters and therefore converter casts, total' cost ;would differ significantly depending upon how many subscribers they forecast.:, Program origination equipment was just that, studio; and ,other evipment for initiating programing, relatively close and something that was always present in every accounting report. In total dollars City Cable Partners was projecting on as comparable a basis as he 6 3 5 0 10/1/85 coup get it: $19,2 million in construction costs Cable Co-op $17.3 million. To put those in & frame of reference, Cable Co -or ryas .projecting, 1) more miles; 2) additional electronic; 3) a head -end. They were still estimating it was going to cost roughly $1.9 million less than City Cable Partners' plant equipment costs. Regarding how to finance the development of those systems, and what he meant by system development was the initial construction of the system, which was about 448 miles or 465 miles, this was where the contrasts which had been referred to during the public hearings and in other statements really came into play. Going down the line items -- Bank debts -- Cable Co-op had secured a loan commitment from National Cc -operative Bank for $85. million; City Cable Partners had secured a loan from Bank of America for $13.2 million. This was where the big differencecame in. Cable Co-op planned'for financing from Pac Bell for $11.2 million to finance the distribution plant. Pac Bell was going to lay out that money and'what they were going to expect was to get it paid back, earn a profit and get interest with carrying costs on their money. In addition to the distribution plant, which was the underground and aerial plant miles, the actual wire in the street, they had al so planned to finance the converters, the box that was on top of T.Y.; so they could see the $2.27 million there. It should be noted the` head -end was not included in the lease financing as proposed. With respect to equity capital, City Cable Partners planned a limited partnership offering of $9.2 million. They planned and had obtained interest from certain venture capitalists and investment bankers to go to the marketplace, offer the transaction or deal and attempt to raise $9.2 million in equity. Co-op had only a small amount of equity proposed in the first couple of years of the project when the bulk of the system was constructed, which was $117,000. It should be noted, parenthetically, that under the arrangement Cable Co-op had proposed, the members wou'1 be paying in equity every month as part of their bill in essence that they paid to the cable company. By approximately` 1992,; ,•,C,able Co-op projected those numbers would have paid in roughly $3 million in equity so they did propose equity coming in over time, but during the critical construction period they proposed only a very small amount of equity. City Cable Partners' plan on the other hand, assuming they were successful in raising the equity, would result in a capital structure that was roughly 60 percent debt, 40 percent equity. Regarding interest rates, Cable Co-op under its commitment with National Co-op Bank had a rate which was prime plus 2 percent. City Cable Partners had a rate which was prime, plus 1.75 percent, not that terribly dissimilar. Suspected lease financing, the rate which is inflicted in the lease financing being provided by Pacific Bell, was 15.5 percent. Compared to prime plus 2 percent, prime was running on the order of 9 1/2 percent, so the bank debt cost approximately 11 1/2 percent to 12 percent today and the lease financing as proposed today would be approximately 15 1/2 percent. Cable Co -up projected prime would start out at 12 percent conservatively and reduce to 10 percent, City Cable Partners projected prime would start out at 11.25 percent conaervatively and ruduce to 10.25 percent. The next category, refinancing, res ndication, Cable Co-op in its plan anticipated that it would refinance the system in 1993. The refinancing was needed for a couple of reasons, the primary reason being that Pacific Bell had to some extent, back -loaded the lease payments, and the refinancing would allow them in 1993 to get a very large lease payment, which would, bring them whole in terms of principal repayment as well as the interest which they had desired tc earn on the money they haci advanced to Cable Co-op. In 1993, they have an expression of interest from National Co-op Bank in their commitment which said that Pac Bell was interested in pursuing that refinancing and in fact would like right of first refusal on that refinancing at, the appropriate time. City Cable Partnersalso contemplated a little :activity ill the 1991,, to 1994 time frame. City Cable Partners proposed a limited partnership arrangement and as part of testing the feasibility or viability of their plan they went through a series of computations to say what the rate of return was that Pac Bell would be able to offer to a limited partner investor and would that rate of return withstand the test of what Pac Bell knew was required of marketplace. They contemplated structuring the arrangement as such that there was a resynd3cation; i.e., through One mechanism or another the original limited partners were able to realize the appreci ati on In . the system in 1993 and they made a series of assumptio'ls tOth respect to what the sales price of that system would he and what the rate of return would have to be so Cable Co-op was contemplating a . refinancing for purposes of funding lease payments, and City Cable Partners was contemplating a resyndication for meeting rate of return requirements to the limited partner investors. The next category was revenue. The revenue number was the amount of money that ended up in the company's bank accounts from checks or debit accounts from individual 6351 10/1/85 subscribers. It was the i osult of a sort of algorithm, a multiplication algorithm, which was households passed tines the penetration rate giving affect to how many pay units they were going to sell and ending up with a number which was the dollar revenue. Regarding households passed, Cable Co-op had assumed, at least by 1992, that they would have passed a significantly higher number of homes than City Cable Partners. There was a legitimate difference in the opinion' as . to how many households there were out there and secondly, Cable Co-op had anticipated some growth in the number of households in their projections. With regard to the average: enumber..of, subscribers., ,at, 1992 City Cable Partners actually projected they would have more subscribers, basic subscribers, than Cable Co-op -- a difference of roughly 4,000. The penetration rates again in 1992 were different. Cable Co-op had projected a penetration rate of 33 percent and he calculated penetration; rate as the average number of subscribers, basic subscribers, divided by the households passed. City Cable Partners had a ratio of 43.5 percent. Pay to basic ratio was the ratio of the number of units -- units being an abeolete number of units of HBO, Cinemax and other premium services sold, as a ratio to the number of basic subscribers. Cabe Co-op had projected they would sell 1.3 premium services to each basic subscriber of pay services; City Cable Partners projected 1.4. The recent trends in the cable industry were it had been difficult to hold or achieve previously thought of as dueable pay to basic ratios and in light of industry norms and in light of what he knew people were actually doing, both of those numbers might be optimistic. The average revenue per month per subscriber had been a subject of discussion by the witnesses. Cable Co-op projected for 1986 it would start out achieving $33.00 per subscriber; City Cable Partners, $27.00. Thirty-three dollars per subscriber was optomistic. The more predominant amount for a new -build system which was'. undergoing a initial major marketing thrust and where there was a lot of interest by the subscribers in this new medium was more along the order of the $27 per month range. The numbers for 1992 were on an uninflated basis; both of the companies had assumed an inflation factor and he- had uninflated them to give a better basis for comparison. Looking at the critical period, which was 1985 to 1992 -- it incorporated the two years of consrrction and the first 5 years of operations The total revenue, which was from all sources including advertisirg revenue, was the same amount projected by the two companies during that period of time., With regard..to.operating expenses, what was included were daily ongoing expenses. It was not included in here for Cable Co-op, intentionally, so to get them on a comparable basis, was the lease payments which it was making to Pacific Bell for distribution plant and for converters. Interest expense was also not included for either company. So those were truly the operating expenses. There were some contrasts in the service numbers. Origination numbers wore very close and the selling* general, and administrative numbers were not that far off given the varying revenue plans that had been put forth. He suggested the number to focus on was cumulative for our same critical period. They would see that City Cable Partners had estimated they would be spending roughly $3.5 million dollars more in operating expenses than Cable Co-op, a more conservative projection in that regard. The n-xt category was; interest costs. They saw the interest rates which were being charged by Co-op Bank, Bank of America, and Pac Bell. In the case of Cable Co-op , those numbers included the, interest on the debt that it owed to National Co-op Bank and it included the estimate of that portion of the lease payments which ie was making to Pacific Bell, which could be considered to be interest expense. He estimated over that period they would have $16.4 million in interest and City Cable Partners $9.9 million in interest; their only interest expense being that related to their pay4ent of debt service to Bank of America. He termed the last category negative variances planned :and what he tried to get at in the category and what he worked with the stuff on was what happened should a plant not turn out as they anticipated, that maybe they were a little bit optimistic une way or. another or not conservative enough with respect to their operation costs, construction costs, etc. The first category was source of contingency equity, which meant where did the money come from if there was a cost overrun or a larger than anticipated operating deficit and the .bank said,they,would give them more money, but they would like them to , put the money in as well or the bank would not give any More money. Neither company at this point had described in their financial plans a commr;tment for contingency equity. The next category, source of contingency debt; if they needed more debt money, where did thet come from. both companies had contemplated thdt need. Cable Co-op in its commitment from the National Co-op bank, the bank said, assuming there was reasonable prospects of repayment and assuming all the otherprudent kinds of things that any bank or businessman would think of, they would loan 20 percent more than what Cable Co-op now had and than turned out to be 6352 10/1/85 assuming they borrowed $11..5 million; $1.7 million. In the case :f City Cable Partners, the Bank of America said essentially the same language. Assuming some reasonable prospects for repayment and subject to the analysis at that time, they would loan $5 million in additional contingency money. The last category merited some attention and what he tried to do was simply give the staff a feel for the order of magnitude of revenue reduction., i.e., how much they could miss their revenue targets by before they could not pay the debt service; which meant interest in this case. It was reasonable to expect both banks and lenders would be willing to work with both companies extensively in terms of rescheduling the principle. The discussions became more` -serious when they could not pay the interest and they had a o -a performing loan or they had a non performing asset. He attempted to calculate or est{mate those break points. The assumption he made was that there were two types of expenses,. variable and fixed; variable expenses being such things as programming costs, which were often paid to a third party vendor and based on subscribers, and therefore varied with the demand levels, franchise fees, contract -costs, and other things which almost contractually varied directly with the amount of business they were doing. He assumed t.+e rest of the costs were fixed. The analysis came out that Cable Co-op could in essence withstand before it could not make its interest payments a 15 percent reduction in the revenue amounts that it had projected and City Cable Partners a 30 percent reduction. The distinction and the reason for the differences basically cane. from two sources. One was the fact that Cable Co-op had more highly leveraged its financing approach, had more financing, and had a fixed obligation to it in terms of interest payments. and secondly to the fact of the actual interest rate on the debt itself, the fact that their money as currently contemplated was more expensive than that which City Cable Partners had secured. The comparison was a 15 percent to 30 percent . By way of summary, as Mr. Zaner sa°d., Price Waterhouse was engaged to help the staff understand the financial plans that were put forth; they were not engaged to make a recommendation grid they did not do that. With respect to the essence of the comparison between the two, as Mr. Zaner had stated, they both complied with the franchise agreement whicle he quoted in terms of meeting the requirements for a franchise plan. In terms of the financial risk which they presented should any one of them encounter financial difficulties, they posed two distinct kinds of risk. Cable Cu -op had their money in place right now. City Cable Partners did not; they planned to go to the marketplace and raise $9.2 million. They had not done that yet, they had to do it; so City Cable Partners had some risk associated with it. On the other hand, the Cable Co-op had a highly leveraged plan which gave them a higher risk level on an ongoing operation basis once the plant is built. City Cable had a lower risk level in that regard because they had in fact financed a major portion of the system with equity. So there were two different kinds of risk, one in terms of ability or proven they had raised the money; the second, the ongoing risk of operations once the system was underway. Mr. Zaner said with regard to risk, when'the Council evaluated the proposals that were given to them almost two years ago from the four applicats; one was a proposal to look at a municipal system. The Council rejected the municipal system, the primary reason for that was to assure that no City funds were to be placed at risk. Staff took that policy decision very seriously in their negotiations with the two companies and established that as a principle they would follow. He assured there was no direct risk to any City funds should either of the Lw;rle companies receive the franchise and subsequently fail. There were no city moneys at risk in any event. Established in the agreement was a security fund of $1 million The security fund was triggered at the closin , i.e., at the signing of the agreement the security fund came into being and the compan i es were required to post most of the $1 million -- about $650,000. It was a combination of cash and letters of credit. The security fund protected the City in the event that either one of the_ applicants, whichever one was successful, failed to complete the provisions set forth In the agreement. It also included a provision to protect the city in the event the franchisee failed to secure the appropriate financing, Once the franchisee agreed to the binding agreement and was required to obtain appropriate financing, if they failed to obtair; that financing, there Nay; a penalty immediately: assessed against that security fund of $450,000 which was payable to the City. That was put in the agreement in order to protect the city. There were normally two steps taken historically, which were noted from other companies that had,' either failed err met financial difficulty after receiving the franchise from a governing body. Historically what, happened was 6353 10/1/85 the franchisee came back to the govnrninq hody3 educated the City Council and requested, that the franchise be renegotiated so the conditions of the franchise were less onerous and the company could stay in business and continue to operate at some level of profit. That had occurred to a number of jurisdictions across the country. Failing that, if renegotiating did not ccer nr if the renegotiated agreement was "-a isu unsuccessful and the company could not make the operation work, then it was not uncommon for the jurisdiction to see the company attempt to sell the system. They expected both of those occurrences; either negotiation or sale would be the normal course of events should either of the companies fail. Once again, there was no direct risk to any City funds if either of the companies, were to be in either of those positions. There ;:as some risk to the City of course, which would mean they would have to start the process all over again, depending upon where they were in the process, if the company had already done its construction work and for some reason had failed, it would be a different situation than if they were in the preliminary stages compared to being there later on. In any event, the risk to the City would be that they had to start over. There would be some costs involved in beginning the process over, doing the franchise process again, going back out to the market to see what was available for cable franchise; the security fund would come into play and -ea portion of that $1 million depending upon where they were,In the process, would be forfeited and the City would collect that because the company failed to meet its obligations. There were other risks to the City in regard to the delay they might cause. It vas quite possible that a company could be into its construction stage, streets could be opened up, a partial system could be built up on their power poles, and it was quite possible litigation could result as a result of a company failing and going out of business. The point he wanted to make in summary was that there was no danger whatsoever for the City's General Fund or ary funds of the City and they were well protected with the security fund to assure the successful applicant would complete the work designated in the franchise acid in lieu of that work forfeit a portion of the security fund to the City. Mayor Levy said his understanding ryas .that neither of the applicants had seen the comparison until presented this evening and suspected the applicants might have questions themselves or differences as far as the financial comparisons were concerned. Couneilmember Renzel asked in terms of the limited partnership investment and the venture capital investment, what was the typical rate of return that would be expected on that investment and how did it relate to what the City would expect their citizens to be charged for their services. Mr. Britton replied the typical rate of return was varied and calculated in a number of different ways. If the City chose internal rate of return, which was used by City Cable Partners, the 20 percent plus range would be the rate of return that the limited partners would be looking for. The return was made up of three components: 1) trx benefits; 2) cash flow on an annual basis; and 3) any appreciation realized through a refinancing or resyndication of that system. Regarding venture capital, the way he interpreted it, City Cable Partners had discussions with two venture capitalists, Varian and T.A. Associates and in this particular situation, those venture capitalists were not acting in the mode that was thought of as traditional Silicon Valley Venturi Capitalist. They were acting more as *syndicators" where what they wou l d. do was either through a private placement with some clients who they had already identified, instead of haying a lot of limited partners, they might identify from:. two to five who each took a major portion of the limited partnership interest or should they deem it appropriate, they might do a private placement offering and have 35 investors in that. So the venture capitalists in this particular instance, were bein used a little differently than one might, think of As a classical venture capital..situtation, Councilmember Renzel asked when the- investors lo;ked for a particular rate of return how was it reflected in the management of the system. Mr. Britton responded it was reflected more in the initial negdtiat ons. They would make a judgment with their investment bankers that here was the kind_ of arrangement or dealthat would sell in the marketplace at this time: here was the tax write-offratio theyhad to have: here was the payback- period: here 6354 10/1/85 were the particular c l Buses they had to have in order for this to be a marketable arrangement;. and, hopefully they could live with what was provided for in the_franchise agreement. In respect to the management on a day-to-day basis, it `did not differ from any other arrangement; their interest was to maximize the return to the equity investors. Councilmember Renzel wondered if some of those projections turned out to be off the mark, and there was certainly a 30 percent contingency for financing if needed, and if for some reasonthe penetration rate was projected to be too high or the number of subscribers or some changes of revenue expectations were there any fixed obligations to the limited partners and what was the mechanism by which the limited partners yet their money out, once they bought in. Mr. Britton said there was no fixed obligation to the limited partners. They bought in on the speculation that the company was going to make the numbers projected, and if the company did not make them, they were sophisticated investors and those were the breaks. In the case of debt, if it did not work, they had d legal remedy, i.e., their interest had not been paid their debt was not paid, they would foreclose on their collateral. generally, the way the arrangement was made with the limited partner, given he could not be assured of a rate return legally and he could not make a claim against the assets, the limited partners got their money out before anybody else. Councilmeab r Renzel said several of the services proposed under the City Cable Partners indicated they would provide them if it was economic to do so, and asked if that would be determined in light of the promised rate cf return to investors. Mr. Britton said it would be a consideration given their interest and having: 1) their reputation maintained; and 2) an ongoing interest in doing possibly future deals orsystems. It would be in their interest to try to make the numbers they projected and on which the limited partnership interests were sold. Vice Mayor Cobb said he came to the conclusion that either the Cable Co-op was being extremely optimistic in every respect to penetration or the Partners were being extremely conservative in every respect to penetration and that seemed to bear upon the num:,er on the bottom of the second page where it talked about order of magnitude reduction. There was another element that if someone had been optimistic in terms of their costs which meant they were closer to the margin in case there were overruns or unexpected delays, there was yet another cola that said how much the cost of construction and building it could change before they had the same, kind of profit they°could not return debts or services on. He ranted to understand if oee was being too conservative or was one being too optimistic. The fact that this all came out to the same number, he found particularly fascinating, but that incredible difference in penetration and those very large differences in per mile costs, etc. was difficult to resolve in his mind, particularly since they came out to the first decimal point on the bottom line. He asked how close to the edge they were in either direction. . Mr. Britton said he would separate that into three categories: 1) plant and equipment costs; 2) revenue; and 3) operating expenc,s. With respect to plant and equipment costs, it was clear, that City Cable Partners had provided more money for less provision of plant, namely the intgeactive services and the electronics of. the B Cable and fewer miles. On the other hand, and this merited clarification from Cable Co-op, they made elusions to the fact they had a fixed price agreement with Pac Bell and the only way the $ll million number at least would go up was if their more miles turned out to be more than the 465. The only risk they had in cost overruns were ininstallation of the drops and construction of the head -end. With respect to plant and equipment, City Cable Partners had been more conservative, however, Cable Co-op appeared to have "a fixed cost contract arrangement which negated that comparison. Regarding revenue assumptions, in light of all the sources If revenue, they had rejected including what was typically called ancillary revenues from miscellaneous sources, over this critical period though, they; both canoe to the same place. He thought they were both in a reasonable range with respect to penetration and one might argue that Cable Co-op had been particularly conservative in that regard. Regarding revenue per drOnth, Cable Co-op might have been on the optimistic side. 6355 10/1/85 Vice Mayor Cobb said he ran a quick calculation acid at the JO percent penetration the numbers on the bottom line both went to break even point, a point of within a 1/2 percent. It was fascinating how it all came out the same at the bottom line, coming at it from a very different direction. Regarding the numbers on the first page, if those numbers were correct that there was a fixed price, that was fine tut he knew that coming back for various kinds of renegotiations and cost and it, came under different categories in different businesses but it said the same, "I want more money." Mr. Britton said he would like to comment on two categories: 1) aerial plant mile costs; and 2) drop installation costs. With respect to Cable Co-op the 15,400 might be on the low end of what was reasonable to assume and as was said in the staff report, if the number turned out to be what might be less optimistic, 17,000 to 19,000 a mile, they were talking a difference of $600,000 to $1.2 million. He thought they had been less conservative and farther away from what had been recent experiences. With respect to the drcp costs, it was a similar sort of comment, they had estimeed a $40 per drop cost and $50 to $60 was probably more the norm. Mayor Levy asked if it would be reasonable to assume that whoever got the franchise would have the same plant equipment costs. In other words, was there something about one applicant or another that made it likely the costs would differ by the approximately 20 percent in the forecasts. He thought the items discussed in the technical section would make the costs different, namely the interactive capability, the placement of the electronics on the B Cable, and the capital costs for the head -end. All of those things would lead one to believe that Co-op's costs would be higher since they had the head -end expense, which Partners did not, and since they would be providing a somewhat more sophisticated system initially, he was surprised to see that Partners costs were 20 percent higher. He asked if they could expect the reality in costs to come out similarly on the cumulative total revenue and could they assume that they were both likely to come out about the same whether higher or lower than those actual forecasts. Mr. Britton responded no, not if there was the difference in the design of the systems and what they were proposing toput in. Mayor Levy asked if he was assuming that the Co-op would have a higher cost. Mr. Britton said yes, 'f both companies were to hire Pac Bell and say build the system; and they used the same workers, same materials, etc. then theorectically Cable Co-op should come out to cost more because they had done more in terms of system design in the system they planned. Councilmember Klein said Mr. Britton stated one :thing that in his experience was not quite right and that was the returns of ie limited partners as that coming out before anything else, and he thought that was correct except for payments to creditors. Mr. Britton said that was absolutely correct, you pay the creditors and the notion was that before the general partners, promoters, the syndicators, the guys that put together the deal got their money, the limited partners got theirs most. importantly, Bank of America came before the limited partners. Councilmember Klein said he wanted to explore ,two areas. First, there had been talk about the City Cable's raising of funds through limited partnerships and the timing of that and whether or not that was likely to occur or not and he would appreciate comments. As to what the market was fpr limited partnerships, what was the likelihood of the success of such a _.medication. Mr. Britton said he would talk about the factors that came into play, the first one being the uncertainty caused by the Tax Act, the second one being what rere some bad experiences that were at least imp.ar ;; on the marketplace awhile ago with respect to new urban builds and the fact that people were concerned abort those_. There was a time, probably a year or more ago, when the urban bum`s were vrlmino along and investment bankers were reticent to take them to tW markatp r ace and did not think they were sellable, and he d i d not classify Palo Alto as n urban build in the way that investment bankers defined that. The second thing that happened at that same time was the passage of the Cable Act which "instituted' deregulation" as could be seen in 6356 10/1/85 an ihowetlia e n rease in value of cable properties. During the past year there had been a number of limited partnerships offered for cable television properties which were put in the marketplace in spite of the uncertainty of the Tax Act. Looking forward he was in a position to speculate as to what the marketplace would be like, timing -wise, at any given time and secondly, what the impact of the Tax Act would be. There were so many different plans put forth and the uncertainty was so great that it was very -difficult to access. They had opinions from their respective investment bankers and they might want to talk to that. Councilmember Klein said their investment bankers were optimistic. Mr. Sinel said there had been offerings in the last few months, but ,a lot of the notion was that the sort of year-end activity that generally went on in the tax shelter business and as in other businesses, any other kind of tax shelter the limited partnerships for cable television were also included in the, and so obviously people had confidence that, in that market because there had been recent offerings of limited partnership cable. Councilmember Klein asked Mr. Sinel if he knew what cities they were to give as some ideas to how comparable they were to what was before them. Mr. Sinel said he could not live an idea the comparability, "it was a tough question because there were so many different ways to structure the deal and they did not know the specifics of the systems, some might be new build, some might be acquisitions. He guessed American Cable Systems had an offering on the street for some systems in the Illinois area; there was one Prime Cable that did one earlier this year," there was another one in Southwest Cable for funds in Illinois; Jones which was a public fund and little bit non -comparable continued to raise money, Cablevision of Ohio, which was not Cablevision of Long Island, which was for some existing systems, there was activity. Ho could not comment on whether or not they sold every dollar that they anticipated selling. Councilmember Klein said in effect the tax benefits were a form of external subsidy,or external benefit to the industries in that it was not a cost borne by the subscribers to that particular system. He asked if they could assume for the moment that a projected 20 percent internal rate of return to the limited partners, what proportion of that physically would come from the tax benefits. Mr. Sinel said that was very hard to determine and all he could say was it was substantial, often because the tax benefits came up front and when the investment return or the dollars came up front, they had a bigger impact on the rate of return than if they came seven years or ten years down the road. Councilmember Klein asked how the raising of the equity affected the timing of their obligations under the agreement. Mr. Sinel said it did not. The way the agreement would work was they would have a closing, all the papers had to be put together, which would give them a license to go out and raise their equity. The clock started ticking. immediately with respect to their obligation to clear away the design issues that were left to design the system so the City Manager could approve the design and get permits to construct the system. If they had trouble raising their financing, they would begin to lose ground on the timing on the substantiveissues of building the system. There was not a time element put in the agreement, a drop -dead dote that said they must raise the financing by such and such a'date. Arnold & Porter had experience with agreements that had such a time element, which frequently required them if it was a large system and 'the marketplace was. a little mushy, to come back and ask to have the. drop -dead date extended. They would have to go under the assumption that, although there was a risk of perhaps not raising the financing that the risk` should not be one that was reflected in the tieiwg of the construction. There was an enormous amount of work that :oust go on to get ready to construct based on design work, and' permits were needed. There were ways to take care of the agreement, and this agreement did not specifically address it other than if they failed to raise their financing, the amount of liquidated: damages had been determined inside of the agreement itself._ Councilmember Klein said if they did not raise the money, there, was nothing specific in the agreement about it, but they would not Meet their other obligations of the contract. 6 3 5 7 10/1/85 Mr. Steel replied that was right, but if they did not raise their dollars in the negotiating process and since it would be impossible to determine what the actual damages would be to the City, an amount was put in that the parties agreed to as liquidated damages for failure to pursue the obligations under the agreement because financing could flu, oe raised. If they failed to pursue the agreement for some other reason, then the City would have additional remedies. Councilmember Klein asked when the closing would take place. Mr. Sinel said they could reasonably expect closing to take place within 15 to 20 days after that. There was not a lot to be done; there were insurance policies and bonds to put together. The financing plan was already fairly well done, although the financing plans would probably have to be redone to the extent that anything had changed. There was an option of Council that had to be dealt with, essentially paperwork that could move quickly if both the City and the company wished to do that. Senior Assistant City Attorney Anthony Bennetti said the City Council must pass an ordinance, which had its own time sequence as to how long it had to be on the table. The Council adopted an ordinance when the Charter was amended to allow the Council to grant franchises that required a franchise to be granted by ordinance subject to a 30 -day referendum period so they would not wait to close until that referendum period had run, so the 20 days would be added, so it was probably 50 days. Councilmember Klein asked how long it would take to accomplish financing such as the one City Cable proposed with the limited partnerships. Mr. Britton said the timing could vary significantly depending on a couple of factor: 1) what the marketplace was like; and 2) how they proposed or ended up getting a limited partership interest sold. If it was a couple of big investors, it could move a lot faster than if they did a private placement that had a number of investors involved. Me. Sinel said they were talking in terms of months, not years. Councilmember Woolley referred to the bottom of the second page on the chart which concerned :cntingency. She understood 20 percent contingency for the Cable Co-op meant 20 percent of the debt that was being obtained from the Co-op Bank. She wondered what was the norm or rule of thumb for figuring contingency in the cable industry. Mr. Britton said he was not aware of any such rule and suspected it varied on a case -by -c( ;e and company -by -company basis. Councilmember Woolley said she figured it on the basis of the total cost of the system. Mr. Britton said that was probably the appropriate way to measure it as any way. The bank calculated it just as a percentage of the amount they were going to loon. Looking at it in the context of $1.7 million divided by $17 million, she was right. Councilmember Woolley said when Mr. Britton figured interest costs, he figured it on the lease payments too, so should he figure the contingency on $16.4 million. Mr. Britton said no, that contingency was most likely to be utilized for cost overruns in the development of tha plant and equipment and the $16,4 million incorporated a I year period which was mooch longer than the construction period that was planned. Mayor Levy said it was his understanding those dollars of contingency really did not relate specifically to construction but related to the.. total amount of money that „might be required in construction and operation of the system and that the $1.7 million and the $5 million were what weuiO be available to the operators for any purpose if they should require 'it because expenses were higher or revenues were lower or construction costs were higher. 6 3 5 8 10/1/85 lJ ... 9.. said that _;. aL -al s s, �_ _ i'-_ '- � �- !_ _ � i ii iii ttcn 'let's correct, given V ii tiri wording i n l �.� e l tier which h d been included in . the financial plan which- said non -revolving loans for construction and operation; so he thought the contingency runs for that as well. Councilmember Fletcher said there must be a cost of sharing the Viacom facility if Cable City Partners was the operator, and asked if the cost factored into those figures. Mr. Britton said the agreement with Viacom provided there would be payments during the first three years of the system operation which might be $25,000, $50,000, and then $75,000 for the use of the head -end. He clarified the $75,000 continued on an annual basis and was included in the operating costs. Councilmember Sutorius said he was curious to know what the cut-off date for the numbers was that were shown here because they had situations wherechanges had occurred that might have a plus or a minus effect and he wondered if they had the time to analyze the additional materials that had been received and see whether there would be anything significant that would occur to the capital, the expense or the revenue situations that are associated. For exampie, in the case of City Cable, the Atherton line extension submitted data on that but he didn't know if that was woven into the figures there. There had been communications that indicated changes with respect to CAO and educational understandings. In the case of Cable Co-op there had been changes that identified in connection with the head -end charges because of certain new arrangements or understandings involving both Pac Bell and Heritage. Converter costs, which by the wee were shown in the material and he believed were referred to as Pac Bell and believed they were in fact, Heritage. Payment schedules had been adjusted and deferred. This was how close ',the numbers would be and the critical parameters, would they be affected up, down or significantly if these changes and amendments were woven inco this. Councilmember Sutorius said as stated earlier and it was reiterated, there were a series of additional information and revisions received; one they did not have the time to analyze all of them hut in a cursory analysis his judgment at this point was that the differences were not significant as to allow one to focus in on the real differences between the plant. With respect to Cable Co-op, they in fact, corrected a math error which had already been caught and they stated they had based on negotiations with Heritage and several vendors and with respect to Pac Bell, thought they could get lower head -end costs and lower converter costs. He stated they were leasing the converters from Pac Bell, that was, in fact, what was stated in their original proposal. He did not know whether they contemplated now leasing them from Heritage. With respect to City Cable Partners, the adjustment, that he tried to make to the line extension was to assume that they constructed all of the plant in the first two years. He did not run that through to do all of the subtle effects on the cash flow, etc. but thought that the magnitudes were made relatively safe. He understood if the negotiation with Pac Bell was implemented, it was for 465 miles of plant and was a tariffed item and a fixed price iteC He assumed there would be some: equalizing of the underground and aerial costs that were associated here. Councilmember Fenzel asked first of all on Co-op what happended if the Co-op Bank -could not make the loan in 1993 and then similarly with Partners what happened if for any reason whatsoever, limited partnerships were not sydicable during the 1991-93 time frame. Mr. Britton said with respect to refinancing of Cable Co-op, he would make the distinction between the Cable Co-op Bank not being able to put forth what would probably be about 47 mi l l i on or not wanting to put it forth. He , assumed Councilmember Renzel meant that they were not interested in advancing the money in 1997: or perhaps could not. If they could not and the project had good economics, then other alternative sources would be available for the refinancing. Other banks who would be just as interested in making interest as National Co-op Bank could step forward. If they were not interested, then that might preclude that there were economic problems with the system and if that was the case, the bottom line on it was that it would probably require them to go back and ask Pac Sell for some relief on a big lease payment which was due in 1993. The agreement with. Pac 6 3 5 9 10/1/85 Bell appare rtly contemplated as well as the egreement with leritage that should there be severe financial difficulties in any one year, both Pac Bell and Heritage had agreed they would forego or roll over up to 30 percent of what was due them into the next year. There was already some contemplation that would give some leeway in any given year should they have real financial problems. The bottom line was if the money was not available from -National Co-op Bank or any other bank, it was likely that they would have to renegotiate with Pac Bell for that big lease payment. With respect to City Cable Partners, if they could not resyndicate during that time frame, there was no legal payment that was due to those limited partners, the existing limited partners, so there was really nothing that happened other than that somewhere there would probably be some disgruntled 'limited partners. Mayor Levy referred to the lease payments on the second page. Interest costs were connected with the lease payments, but the principal amounts of the lease payments he asked for an idea of what those would ba during that seven year time frame. Mr. Britton said he did not have that number readily available. It would require some computation and he preferred not to try to compute. They could add up the total lease payments during that period, 1985 to 1992, subtract away from it the interest and the difference should be the amount which was in essence principal on the principal portion of the lease and he would do just that. Councilmember Woolley said she was interested in that number because she would like to get a feel for the total dollars that were going to be required versus the total revenues that were projected. Mr. Britton jaid there was another complication to that. Councilmember Woolley said going back to the question of contingency, which sire considered very important, first of all when It said on the ba:. mom 13-ne that it was from 1988 to 1992 did that mean if Cable Co-op had changes In their revenue greater than 15 percent per year or total over the five years. Mr. Britton said it -was the total over five years. Councilmember Woolley sold in other words, if they had 3 percent a year, they would just break even if the difference in the revenue extreme turned out to be 3 percent each of those five years, then that would be just meeting contingency or contingency could just meet that change. Mr. Britton said no. They did it on sort of a cumulative period to eliminate fluctuations in a given year, so they did it in total so it would not be 3 percent per year. Councilmember Woolley said she would rather see that contingency in terms of operating expenses rather than revenue. Mr. Britton said an accurate statement would be to say that a 15 percent redeetion at any given year could result in the problems of paying the interest expense. Mayor Levy said he would like to be clear as to how the applicants viewed the data that was here and their comments on the data that was discussed because if they differed they had not seen the material before this evening and if they took exception to some of the numbers that were provided, this was the time they should be clear on that. He would like the applicants to speak to the data that was before the Council at this time and that should conclude this evenings discussion. Tomorrow he would ask tttr: applicants for their more geleral comments on the financial picture. Assistant Treasurer, Heritage, Phyllis Clark said part of her responsibilities included acquisition analysls, bank financing, and raising of other capital and had been extensively involved in the Dallas Limited Partnership. She ete !, like to talk about the Heritage reason for financing, how the Co-op was currently financed and the reasons for that and would address the question of the current limited partnership market. There were two reasons why the Co-op decided to deal with Pacific Bell; 1) The Council wanted them to work together; and 2) Due to Heritage's expertise, they determined they could not 6360 10/1/85 finance this as a limited partnership3iven their assumptions on the basis of penetration. Heritage had eight limited partnerships existing and were currently raising capital for the ninth, their largest, Dallas. Listening to the cements yesterday and today, there seemed to be quite a bit of concern regarding risk and leverage and the ability to pay off interest payments. etc, in their plan. Basically the lease with Pac Bell was an operating lease and it had equity -like features. They included the construction cap. Normally it was the equity player who took a risk of any constructioe overruns which Pacific Bell would do because they owned the system. If City Partners hired them to build the system and pair them up front, hewas not sure that Pacific Bell, in turn, owned the system and would be willing to fix the cost of construction. Pacific Bell here would own the system and therefore were willing to take any cost differentials. The lease payments were structured so that the payments were minimal iii the first several years and increasing in total large payments in year eight. It was due to the risk of a new build situation in cable in the first several years and the payments were structured to reflect that. There were three ways the cable company could get money if it needed or desired: 1) If the Co-op, so voted, they could speed up the payments of the Co-op equity so it was not on a monthly basis; 2) From the banks; and 3) From deferral of payments\from Pac Bell. Regarding current limited partnership markets, she had a letter from Kidder & Peabody and would like it entered into the record where it specifically stated that in the past year no significant equity money had been raised for new builds through the traditional limited partnership method. The most important thing about the limited partnership market currently was the uncertainty of the tax situation. Heritage and any bank would not get involved in a finance situation that did not have flexibility to it and that was unsound. Mr. Kelley said he would like to underscore the point that the agreement with Pac Bell provided for fixed capital costs on the plan. In terms of the head -end equipment costs figures were submitted showing a reduction of head -end costs, and that was basically also in the agreement with Pacific Bell that they would bear the costs for the modulars and demodulars and certain other head -end equipment. It was also based upon recent experience and quotations that Heritage had gotten based upon their experience in Dallas so he thought they could bring the head -end costs` down slightly. He took exception to the computation of the average revenue pee subscriber per month and he could show a chart on ti's. The computation here had been driven off__ their line for basic subscribers. There had been some confusion about the term basic subscribers" in the two bids. By basic, he meant the second level service as it was used in City Cable Partners proformas in the first year of service. The proposal included a number of additional subscribers who were receiving universal service, FM service and those subscribers were not reflected in those numbers. As a result, the average revenue per subscriber was somewhat lower than what was indicated. In 1992, if they included all of their subscribers, the average subscriber per, the average revenue per subscriber would be $29.19. As noted in the proformas, they had anticipated an agreement with Stanford University which included providing universal service to all of the dormitories. If they excluded the Stanford student in 1992, they would be closer to the figures mentioned here, $33.80. In 1986, if they included all the subscribers, the average revenue per subscriber per month, including the member equity contribution was $22.91, not $33. Even if the Stanford students were included, they were only talking about $29.10 so the issue that was raised before about whether or not the average subscriber revenue per month in the initial years was unrealistically high, was not well taken. The.. figures here, as indicated previously. were from the medium density run that had been submitted by City Cable Partners. In their most recent financial submission, they had shown additional revenues, which were not indicated in this proformka; whereas the revenue base had not increased. If they were to take the sum of the revenues given in line 72 of their model, they would then come up with $62.7. million rather than $58 million that was eluded to. So, in fact, there was about $4 million difference in the total revenues projected as a result of the line extension change.. That would reflect back upon the question of whether the total market size was Comparable. Regarding the drop costs, they had based the estimates given, $40 and $90 --can quotations from a vendor held in very high regard. The drop costs they had estimated reflected the actual operating experience of Heritage and, he asked Rod Thohl to comment on that point. Rod Thohl, Executive Vice PrgsIdent, thought it was important to point nut to the Council that if they looked at the first page of the analysis, the major differences on the capital side were rirectly related to drop expenditures, 6361 10/1/85, almost ;c million of difference in plant miles. Pac Bell obviously could speak to the plant miles issue here this evening. The figures on the drops were not forecasts or estimates; they were actual dollars based on current experience and it was also based on contract bids that were in hand today for Palo Alto. As an example, the Co-op's bid for multiple family dwellire units, MDUs, was forecast at $90 per average unit installed, that included laborand materials. Right now in the Dallas operation .they were doing the same work, and in more difficult buildings, installing the service on a dual cable basis. Again, the average for Heritage was $45, the Co-op's bid was at $90. They had plenty of room in that bid to provide the service within that range. The individual house drops they were quoting $40, the average in the company was $32 and he had individual systems here actually operating for this year within those parameters. Walter Hewlett, City Cable Partners, said he was one of City Cable Partners founders and a member of the Board of Directors. There was a major difference of opinion regarding the numbers called cumulative total revenue projected. They had Ralculated their revenue for the first 7 years based on numbers submitted recently and also based on numbers submitted in August and they came up with the number $46.75 million instead of $48.8 million. It appeared the parson who did the calculation went on into year 8 and added another $13 million in revenue. Year 1 was 1986 and if they took that and cranked it out, they would see there was a major difference in the revenue projected for the two systems. It was consistent with what they had been saying all along which was that the Co-op had been greatly over -estimating the amount of revenue that it was possible to get here. Mr.,Guite said Mr. Britton mentioned his explanation for the low costs for the drops in the case of the Cable Co-op was because they understood that Pac Bell was putting those drops in for them. Is that what you understand or is that what you did understand. Mr. Britton said he did not think he ever made that statement and that was not to his understanding. Re understood tha drops were being installed by Cable Co-op themselves and that Pac Bell specifically was prohibited from doing that. Mr. Guite said he noticed the absence of personnel to maintain any of those drops in the Co-op personnel numbers and thought that oversight was because they had assumed Pac Bell was maintaining the in -the -home drops as well as the distribution plant. City Cable had done a great deal of research in the Bay Area into average revenue per ,subscriber. They felt the way staff and Price Waterhouse calculated that average revenue per subscriber was the correct way and the numbers -- $32 and $27.50 were correct numbers. They' looked into virtually every Bay Area cable system, and found revenues from $20 to $23 per subscriber. They did a sensitivity analysis and found that if the highest revenue per subscriber being achieved in the Bay Area were in fact plugged into the Co-op numbers, they would find aoproximatel,v a $50 million shortfall In their projections. John Dolan, Gemmel Manager, Viacom, said they should take a look at the staff's number presentation; obviously, they had not had a chance to look at this and would like to review it more carefully and have comments tomorrow evening. He would like to respond to the drop costs number, The City of Palo Alto should take a good look at what it cost to put a drop system in and a dual system. ADJOURNMENT The cueeting was adjourned to Wednesday, October 2. 1935 at 7:30 p.m. ATTEST: APPROVED: