Loading...
HomeMy WebLinkAbout1984-06-19 City Council Summary MinutesCITY / COUNCIL MINUTES LIIY of ALTO Regular Meeting Monday, June 18. 1984 Adjourned to Tuesday, June 19, 1984 ITEM Item 02, PUBLIC HEARING: Cable Television Consideration of an Ownership Model and Possible Selection of One or More Proposals for Further Negotiations for a Cable System Serving the Cities of Palo Alto, Menlo Park, Atherton, East Palo Alto and Stanford University PAGE 4 6 7 5 Adjournment: .12:02 a.m, 4 7 0 7 R.. St J .• _ a 1 a i'ieitL 109 0I Monday, JAIne 18, 1984 Tuesday, Mine 19, 1984 The City Council of the City of Palo Alto met on this day in the Council Chambers at City Hall, 250 Hamilton, Avenue, Palo Alto, at 7:30 p.m. PRESENT: Bechtel_, Cobb, Fletcher, Klein, Levy, Renxei, Sutorius, Witherspoon, Woolley CLOSED SESSION RE PERSONNEL o Mayor Klein announced that a Closed Session re personnel was held at 5:30 p.m. in the Personnel Conference room. ITEM #2, PUBLIC HEARING: CABLE TELEVISION - CONSIDERATION OF AN tWNER SH I P FIUUEI AND A CA'LE SYSTEM TO SERVE PALO ALTO., MERU OF SAa rAlTrallir1 _ �rttt f-3) Mayor Klein introduced City Clerk Ann Tanner; City Manager Bill Zaner, Assistant City Manager June Fleming, Senior Assistant City Attorney Anthony Bennetti, Consultants Normal Sinel and Stephanie Phillips of the Washington law firm of Arnold & Porter, Cable Television Manager Jeanne Moulton, and Woody Britton of Price Waterhouse, Certified Public Accountants. Mayor Klein declared the public hearing open and said the hearings were advertised for both Monday and Tuesday evenings. Sid Landes, 714 Wildwood, said he lived in Palo Alto tor 22 years and returned from mainland China two days early to attend the hearing. He believed in the free enterprise on which the nation was built, but did not believe cities belonged in the CATV busi- ness. He was impressed by City Cable Partners' presentation, which gave specific figures, and offered to send him a copy. Residents could be shareholders, the company would get a fair return, and it had credibility. Issues such as CATV should be put to the voters of Menlo Park, Palo Alto and the Stanford communi- ty. David Coward, resided on the Stanford campus, and was a high ener- gy physicist -who used computers extensively at home and at Stanford Linear Accelerator Center where he was employed. He would not lease a cable television line for entertainment ser- vices ---the electronic revolution was happening so fast that he wanted a line to permit electronic data processing, mail, and other futuristic ideas that might be reality In five years. Con- ventional cable television would miss an opportunity for the com- munity to do something unique and far-reaching. Mayor Klein declared the public hearing closed. He suggested the City consultants, Arnold A Porter, and City . Manager. Bill Zaner respond to the questions asked the previous evening, and then pro- vide their reports which would be followed by additional ques- tions. The applicants would be given three minutes each to respond with answers to questions only --not a repetition of the presentation or a synopsis --and limited to c:omments on factual matters they believed were mistaken. Finally, the Council would deliberate and hopefully come to a decision by midnight; other- wise, , he : recommended the item be continued until the following evening City Manager Bill Zaner said Norm Sinel and his. associate would attempt to respond to the questions on which he had information, and he ;could cover the others. Some questions were duplicative. i 1 Dorman sl nel , Arnold & Porter, said the consultants tried to break the questions down into three areas —legal, financial, and struc- tural or technical.. There were a series of legal questions deal- ing with the effect o.f the new legislative deregulation effort on the City's decision -making process to grant a private franchise or a .joint venture. The National. League of Cities, U.S. Conference of Mayors, and the National Cable Television Association (NCTA) entered i n ;o an ayreernent on Memorial Day to establish a series of principles upon which legislation should be based to go through both. the House and Senate.. The effort to translate the pros of the agreement into a: legislative document ran into many difficult points during the past 10 days as both the industry and city rep- resentatives attempted to ensure the legislative drafting reflect- ed the principles on which they agreed. It was a short legisla- tive session, and ,the legislation could be derailed at many points. For example, the telephone tocnpany issues to be resolved in the committee would not be a subject of agreement in advance, and the access issues --the public's right to purchase access time --was not yet resolved. The cable industry and the cities, took different positions on the issue, and the previous day thr united States Supreme Court handed down a decision on Oklahoma's effort to have advertisements dealing with alcohol stripped from the program as they were carried by the television stations. The Supreme Court might have gone further than necessary by concluding that the Cities' ri yhts to deal with programming, at least in that area, were preempted by the Federal Communications Commission (FCC). He understood that the cable industry, as a result of that aeci s i on, might reevaluate . its commitment to the legislative process, so it was possible there would be no 1 egi sl at on before the terra was up. If there was legislation, it would not immedi- ately affect the structure of the system that Palo Alto attempted to put into place. Various aspects of the legislation --its renew- al provisions, its rate regulation provisions or nonregulation provisions --mould apply to Palo Alto and any other new franchise. It was assumed the effective date of the legislation would be when it was passed --before Palo Alto entered into 'a private franchise agreement --or on a date either six months or one year earlier, so the l eyi sl anti on would apply to the Palo Alto franchise. He could detail each of the provi..sions, but suggested that as the City went forward with respect to a franchise negotiation, the Council bear in mind the legislation and the way it was : draf ted. Without the actual wording, it was difficult to know how the legislative drafters would translate the agreement between the cities and the cable industry into legislation, so it was extremely difficult to pinpoint the effect of the legislation on the City's private fran- chise. If the City elected to participate in the ownership of a franchise, the legislation would obviously apply to Palo Alto to the'extent it spoke to federal policy. and the impact of that poli- cy on how CATV did its business and its rights vis-a-vis a city. However, as owner of a .system, depending upon the city's partici- pation, policyemaking and control and to' the extent issues were resolved Ira the federal legislation allowing cable`.operators to come before a Council to seed. modifications in franchises or shift things without Council approval, the Council could ensure the sys- tem operated in a way it believed to be in the public interest. The -Council's capacity to continue regulation, parts ci pati o:n, or structure the cable system in a way to meet its view of the public need, without interference from the .federal government,: Would Clearly be heightened to the extent council :had a participatory role in the ownership of the system. Regarding Pacific Bell, the FCC, and other -regulatory issues, he understood there was. another letter .fromePacific Bell and Commissioner Jones who- wars with -the FCC for four -years. ArriblOA Porter. believed Pacific Bell was:a utility regulated ,hyl„the FCC, the California Publ-.i c . Usti 1 i ti es Cele- Mission (PUC), and a Court consent decree, and offered risks Coun- c 11 would have to assess when deter -0101-0g the freedom with which i t could deal..wi th the company. Parties might try to throw toad - blocks in Pacific bell's ► dy, without any concern about the effect on -Palo Alto, in the telecommunications struggle to parti+ipate, end .provide services. Wth regard to potential antitrust implica- tions, if the City entered into a joint venture with Palo Alto's franchising -activities, the Ninth District Court held it to be im- mune from antitrust challenge, and expressed expansive views con- cerning a community's immunity from antitrust challenges. He an- ticipated that the long running process would continue, and did not believe there were antitrust difficulties with respect to en- tering into a joint venture. The laws were , fa.ctually based, and the implementation of any City action would be carefully reviewed by the City Attorney. Senior Assistant City Attorney Anthony bennetti would respond to the effect of the Jarvis proposed amend- ment on both franchise fees and the potential for City participa tion in a joint venture. Senior Assistant City Attorney Anthony Bennetti said Vice Mayor Levy pointed.out that the Jarvis amendment had ambiguities and suffered from the same ambiguities of the original Proposition 13; but was more tightly drafted in that the City would have fewer op- tions. To the extent it fit within the definition of "a fee for services," "a fee for benefits conferred" or "a fee for regul a- tion," a franchise fee for a.joint venture or a private franchise would require two-thirds approval by the voters. Similarly, if a totally municipally -owned system was chosen, a two-thirds vote would be required to impose fees on subscribers. The amendment was clear that with respect to fees or taxes imposed after August 15, 19a3, a two-thirds voter approval was necessary. With respect to return on the investment, either for joint venture or municipal ownership, the question was unclear. The amendment did not speak to sales or leases, and he could not say whether such would be in- terpreted as fees. He believed it was somewhat tortuous to fit leases and sales into the categories of fees for services or fees for benefits conferred. It was possible that a true lease or true sale would not come within the ambit of the amendment. Likewise, a lease of the public rights -of -way might also not be within the ambit of Jarvis. It was a question of interpretation, and staff did not expect to have the agreements back before the Council pri- or to November, but would try to structure the final agreement to put the City in the best possible position to withstand an attack under the Jarvis amendment. With. regard to the Gann initiative, the City treated Utilities Department transfers to the General Fund as proceeds from taxes. If funds represented a return on the City's investment on the utilities, and although the City had. rio 1 egad determination, the transfers were proceeds of taxes as defined by the Gann initiative wnich treated anything over:, and above the direct cost of providing a service or regulation as a proceed of a tax for `purposes of calculating the revenue limit. uecause the City exercised caution with utilities, he assumed it Would exercise the same caution with respect to any joint venture or municipal 1y -owned CATY. The City fell below, the Gann limit in the current propose) budget by about $3.3 million, and assuming it hit revenues from returns from investment in cable, i t did not ap- pear it would exceed the Gann limit. With respect tce the fran- chise fee, the FCC rules required that franchise fees be used to pruvI de or reimburse the cost of administering cable services, and to the extent .they were a recovery, they did not fall within the Gann deftni ti on of proceeds from taxes because they woul ti not ex- ceed -the cost of .providing the services mayor P.l ei n clarified -that the Gann initiative was passed by. the voters some years ago, and the Jarvis issue -would be on the Novem- ber ballot and many hoped it would be defeated_ . 'With regard to the effect of= Jarvis 4, there was a question concerning the language that fees charged had to be limited to the ; direct costs Of the ,cgovernien'tal entity. i cool ved. -The Council wanted to know if that language would apply to fees. charged to subscri bees if the City of -Palo Alto Was an --owner, _in whole ors. in part, of the sys- tem.--_ If the answer was "yes 1 ' he asked whether' the City was pre -. cluded from faking any profit from the_ system ;since the fee would be -limited- to the -meaning of direct costs. Mr. bennetti said :Once there would have to be an election with a two-thirds approval to impose the fee, presumably the City would propose a fee and tax together, setting a rate of return on the investment made in the system. If the voters were willing to ap- prove a fee, they would, in the same election and in the same measure, approve a tax that would approve the rate of return. The definition included in Jarvis 4 was that, "to- the extent any fee exceeds the cost of providing the service, it was, by definition, a tax." Therefore, if the voters approved the tax, the same two- thirds vote would approve the Fee, Mayor Klein said he understood that to obtain a profit, it could be a separate item an the ballot and labeled a tax. Mr. Bennetti said it could also be presented as a package so that voting "yes" on the fee would mean voting "yes" on the tax, and vice versa, i n ii cat ng if Council desired, that it was not inter- ested in having one without the other, and taking the risk of municipal participation. Mayor Klein asked if Mr. Bennetti believed it would apply to a system in Palo Alto if the City was a minority owner. Mr. Bennetti said it was unclear. The amendment said a fee was a charge by a City, agency, or instrumentality of the City. If the City was a minority participant, the question of whether the joint venture would be.a city instrumentality or agency was open. Mayor Klein asked if that meant another lawsuit. ir. Bennetti said yes, and he did not know whether they could structure a situation where it was said that the cojoint venturer imposed the rates, And the City was a passive partner. It would oe a difficult proposition. Vice Mayor Levy asked for clarification that to the degree a cable system returned funds to the City over and beyond the cost of the service, a two-thirds voter approval would be necessary any time there was a change in rates. Mr. Bennetti said yes. If the City instituted any new fees regardless of the cost of living index, a two-thirds voter approval would be required. The effects of the amendment were drastic, but no different for cable than any other municpat sere - vice. Councilmenber Bechtel was glad Mr, bennettl mentioned thecost of living increase because it affected the City whether it was for swimming pool fees, library overdue charges, etc. The Council took a strong stand the previous December in opposition to the amendment She asked for clarification regarding "fee" and "rates charged to the subscriber." Mr. Bennetti used the terms inter- chanyeably, and she believed they were two separate issues. Col- lection of a franchise fee would require a two-thirds vote, and the rates charged to the subscribers would .also require a two- thirds vote at the time. Mr. Bennetti said the rates charged to the subscribers would be approved by the voters only if the rates were . set by the Council in a municipally owned system or, arguably, by the joint venture with municipal participation. With: a strictly private franchise, peesumably the ; private franchisee could set the rates without voter approval as long as the Council did not regulate ; the rates nor cause the franchisee tobe an agency or instrumentality of the City. The franchise fee would still be subject to voter approval. (.ouncilmember Bechtel said the negotiation process was predicted to be from four to eleven months, and Council would know the rasu l is of Jarvis 4 before it made the final - decision. Mr. Uennetti said that was correct, however, Council decided to target applicants for negotiation, staff would return with an agreement to address the Jarvis question should it pass. Mr. Liner said staff anticipated the Jarvis question would be decided long before the agreement was returned to Council; and with regard to Proposition 4 limitations, while there was a free- board of approximately $3.3 million, the trend was downward. The Council should be aware that the freeboard was beginning to drop although there was no danger of exceeding the appropriation limit for a number of years. Finally, the Constitutional provision with reyard to Proposition 4 provided for a voter exception that could allow the City to exceed the appropriations limit for a number of years. Courci lmember Cobb said if the City was a part owner of the sys- tem, it would gain some control it would not have if deregulatory legislation passed. He asked if that would still apply if the City were in a minority ownership position of five or ten per- cent. Mr, si nel believed it did. :There were two answers to the ques- tion --first, when the legislation was ultimately drafted, the definition of cable operator and the various jurisdictional sec- tions mieht exclude the operation of the Palo Alto system because of a more than insubstantial ownership. After 1 i stens .Eg to the Council and the public, he believed a primary reason for partici- pation would be to help guide the policy direction and development of the system. To the extent the benefits delivered to the cable operators through the negotiations involved their capacity to change their franchise agreement based on economic need and simi- lar issuee without having to go before a City Council, when the Council was the company, as well as the City Council, its control over activities of the system would be that of an owner, so it could continue to shape policy without regard to the legislation. He did not know what constituted a "real" participation by the City, but he believed it gave the Council a better hand to protect the public interest in a situation where the United States and Congress were enamored by deregulation. Regarding whether there was a possibility of obtaining a waiver from the Industrial Devel- opment Bond (JOB) requirements that a project not be more than $10 million, or S2U million if an Urban Development Action Grant (UUAIi) was involved, the answer was no. However, there were op- portunities to structure.arrangements that did not cause tax-free money to be classified as I U;. They were extremely subtle and were not pushed to their limits in Arnold & Porter's model reports, if the Council decided on a joint venture structure, the City should explore every avenue to see whether there was a way to obtain such money without having it classified as an IWB. It was a difficult road, but there night be avenues. mayor Klein asks, for a - defi nl ti on of IUBs and UDAGs . Mr. Si nel said an 108 was a small issue bond ai l owi ng the use of tax-free money by which. a -private --party could gain access to develop a project. -<e There was a $10 million limitation, and Palo Alto's capital project of between $10 or $22 million -was greeter than the 10B -1iMit. If the City had a UDAG in a project and --also wanted to use an IDB, depending on the outcome of the Conference Committee meeting in Washington that ev€n i ng, i t .soul d either sub- -tract .$1t) mi-11ion from the capital cost, Ar- $1,5 if the Committee accepted the figure. If -it was ;15 million, with a UDAG project, :it. could have a $2.5 million project, with $10 million in 1U8. It was a tecnniq'ue -used =by Municipalities to attract devel- opment;, most frequently ,of a real estate type, to provide--lowe cost -monet to, a_ dieve.l oper working in n the .puabl i c interest. it was a difficult area., and 14 terms: of conservative l_anning, Arnold 4 Porter bel i.eved i t -should assume it wss hot using tax.. --free or a lower interest rate than normal when planning out the revenue streams of -the system. 4 6 7 9 6/19/84, wooay uritton, consultant for Price Waterhouse, said one specific question related the analysis that showed a sale at the end of year 15. For each model developed, a sale at the end of the 15th year was presumed in order to put all alternatives on a comparable basis. The termination value was estimated using future projected cash flows from the system from the 15th year on through a pos- sible second franchise period, which value came out at approxi- mately $32 mil 1 ion, or about $1,100 per subscriber at that time. Another question was why the present value of the system benefits to the City were less in the joint venture model than in the pri- vate model. The reason was that the joint venture figure was net of the City's investment, and Under the joint venture model , the City had to invest an estimated $3.6 million. The present value shown was net of that amount, and lower than the private franchise alternative where no investment was required. The next question related to the City's investment under a municipal system, and the risks varied dependent upon, the specific methodology used to im- plement municipal ownership. If implemented with a revenue bond approach, there was no legal risk to the City because the revenue bond woul a be secured only by the revenues from the system, but any problems would carry over to the City's larger credit rating. As a practical matter, the City would have a vested interest in making sure the system operated as projected. mayor Klein asked for clarification that in most situations where a city founu that revenue bonds were not being paid because the revenue source was insufficient, it stepped in to make the neces- sary payments from the beneral Fund in order to maintain its cred- it ratino. Mr. Britton said it depended on the circumstances. Usually a work-out arrangement was put into position which entailed advances from the various city sources to help the system until the bond holders were put back into the position from which they agreed to make the transaction He spoke of a possible need for a series of City advances in a municipal ownership approach when expenses ex- ceeded revenues to help carry it over the initial periods while the system was put into place and as subscriber penetration- built up. The City could anticipate financial risk along those lines, and the models provided up to $5 million for that purpose, with those moneys being repaid over several years. Depending on how the actual operations turned ovt, the City might be at risk for some short-term advances to help fund operating deficits. Regard- ing a buy-out of limited partners, the most prevalent way in which to do so occurred after the system operated for seven or eight years and the tax benefits began t.o_ dry up, and during the cross- over period when there was taxable income. One approach was for general partners to ,refinance the system by telling the -bank the system matured and stabilized, with an inherent value against which they warted to borrow, and with. that money they bought out the l iui ted partners to become full controllers of the system. A second approach was resyndi cats on with new limited partners, when the general partners might be able to pick up..a_substantial piece of ownership. Regarding performance bonds to_:help ensure perform-- ance, the City could, as a general practice, requied a cable oper- ator to post a performance bond as agreed upon under the franchise acgreement or other arrangement, If the City owned the systeme the performance bond could be with a general -cable contractor orea cabl€ company under which a special. arrangement was ,reached. . It was important to recognize that such performance bonds could be di ff icol t to obtai we and required ,that the table company or con tractors post assets generally eggai "to the mount or a high per- centage thereof with .the. provider -of the performance bond. An ap- nroach that worked in other instances was dividing the system into segments so that a.bond" was: posted for each segaent.-on Which con- struction -to:have commenced.- It was not necessary -to have one-big big bond to -cower -the system in -place at any one time. -A final - ques- tion related_ to the financial implications of ownership._-. roe-i, C n referred w n e4•. 1, competition, 2t 2 J Councilmember .iUL.Os'iei.a i i �:i rt: to the L -network iOi p i,�iiii�►C6i 6iUi1, i%ilil .understood that the cost estimates included in the Council packet projected two to ten percent revenue from the business and insti- tution customers, and was the upside potential of the revenue pic- ture in terms of responses to the Request for Proposal (RFP) for the type of subscriber network plus institutional network. Mr. Sinel believed the two to ten percent was a conservative figure. IMr.-Britton clarified that he did not intend to characterize the two to twentypercent as the upside figure. He believed the state, of institutional networks in such services made it difficult to predict the actual revenues. Given the interest in the industry and experiments underway, many believed it would be a major source of revenue in the future. They tried to estimate conservatively, and therefore showed two to ten percent. Councilmember Sutorius confirmed that it was complex to precisely seperate the costs involved, and asked for a ball park figure of the order of magnitude, or a reaction to the impact of the poten- tial guiding a decision as to whether there should be an institu- tional network incorporated into the system if another institu- tional network was in the same service territory with the same potential customer body. Mr. iritton said with regard to accurately separating out the costs, a big part was an exact definition of the institutional network with regard to service to residential subscribers and ser- vice to nonbusiness subscribers who might be on the insitutitonal network. It was difficult at that time to ball park what the num- ber might be, and with more than one competitor offering the ser- vice, it might not necessarily result in a smaller sector for each competitor. There might be synergies in the sense of two systems working together to feed one another, because each concentrated on a different sector of the marketplace, but it was difficult to forecast. Mr. Sinel said when planning the system, from time to time one would look at the competitive environment and ',the marketplace and design specialized pieces of what Might be called an institutional network, or acquired data network, to slowly construct a system by judicious investment based on what might bring a return on the in- vestment. He assumed the cable operator, whether a private com- pany or a joint venture, would also continually assess how best to construct and what -=best to do in the data networti field. - Councilmember Sutorius asked whether planning out would start at the beginning and be i nceepeea Le%; i i Lhe prospectus, financing package, and the reaction of potential financers. Mr. Sinel said the costs would be reflected, but he would be sur- prised if most _conservative banks were interested in the revenue projections on the data network. - Vice Mayor Levy Wanted to be sure he understood>,the answers to the. questions related to Schedule A-2, the analysis of the alternative development .approaches in terms of the projected investment _ and benefits to the City. The -joint venture projected an investment by the City_ of some $3.6 million i n the first two years. There was' then a stream of total. benefits .including -distributions, fran- chi se.fees and the net proceeds. The. present value of such -- pro- ceeds was determined, the value -of the investMent subtracted, and the net present value was the bottoa line -.-the net benefit to the Cl ty. He presumed they did the . same thi fig under -municipal owner- ship., out could not fins -_any 1nv,e:stment. He asked .for 'an 'explan- ati oh 4 6 8 1 6/19/84 - 1 1 Mr. Britton said the reason was tiwui vid. Under the joint venture, there was also d series of short-term advances to be made by the City and its partner to cover working capital . needs during the early period They were.not technically considered as investments since they were repaid over a relatively short period of time, and the models provided for interest to be paid on those advances dur- ing the period. Some of the detailed schedules showed the actual cash investments in and out, with interest provided on them, but were not relevant when computing a rate of return. Vice Mayor Levy referred to the investment by the City as an entry fee into a joint vent!ire and asked if the City investment would be greater if the City went alone in a municipal ownership. Mr. Britton said it was assumed that a municipal ownership would be fully debt financed. Vice Mayor Levy asked why the joint venture could not be fully debt financed. Mr. Britton said traditionally lenders did not do so under conven- t easel . nancine ae drut Lie equity ratios and coverage ratios re- quired under the private financing approach would not provide for i t . .it was a tradition in the financing field of municipal owner- ship And financing. Vice Mayor Levy obtained confirmation frog Mr. Britton that the City might have to finance from its own funds up to $5 million of short-term working capital funding in the municipal ownership op- .ion over time, which was not considered an investment because the i eternal model called for a sati s f victory return on an ongoing bas- is with acceptable_interest. Referring to the net proceeds from the sale of the system, he believed Mr. Britton indicated the fig- ure was based on the subsequent cash flow of the system. Since the sale would occur in year 15 according to the model, he asked if it was the years 15 to 30 that generated the cash flow upon which the sale price was based. Mr. Britton said yes. They presumed the cash flow during the fif- teenth year would continue at a flat level for the next 15 0l us years. Vice Mayor Levy referred to the municipal ownership figurebecause it represented one owner, where the cash flow in the fii:eenth year was $7 million. He asked if it was assumed the $7 mi 1 i on would continue for 15 years. Mr. Britton clarified, that Vice Mayor Levy was rounding. off $6.8 million to $7 million, and that the cash flow would not be quite that high. One took the revenues generated by the eysteM. minus the operating expenses. He assumed in year 15 under that model, they would arrive at a figure of $8 million. The reason the dis- tributions might differ was because of reserves and other items that might have to be funded. . One capitalized the operating in- come of approximately $8.1 million, as shown in one of the de- tailed schedules. Vice Mayor Levy multiplied 58 Mii'-i_..A -,y 15 +_.p rc ret nit's vele million, and factored back to the beginning at a 10 percent dis- count to give $32 million present value in the fifteenth year. Mr. britton said he took the 15 years_ of _cash flows of roughly $8 million, capitalized at an investment rate, and discounted back at the investment rate to the fifteenth year. The fifteenth year number was $32 million, which was discounted at 10 percent. Vice Mayor Levy understood that was how the $32 came back to being the current $7.7 million. They were talking about estimates for the years . 1998 to 2013. Mr. nritton: Baia it was interesting to note that when looking at the breakdown of benefits under the municipal ownership alterna- tive between anual cash flow and a big net sales proceeds in fif- teen years time, it was weighted heavily towards the net sales proceeds, which were difficult to predict. Councilmember Cobb followed up on Councilmember Sutorius' question for a qualitative evaluation of the system if ..i t appeared that the I -net was not economic because of severe outside competition. lr. Britton said their numbers indicated the system would still be viable if the I -net was not built. They estimated two to.. ten per- cent of revenue from the I -net system, and without it the system would still be viable. Stephanie Phillips of Arnold & Porter said regarding structure and technical issues, that the first question concerned the City's rights in the event of the sale of the system. It was assumed the franchise agreement would contain provisions requirinj City ap- proval to transfer ownership to ensure that any potential trans- feree had the necessary financial and operational ability to oper- ate the system and assume the obl igati ans under the existing fran- chise agreement, - and would probably contain provisions requiring City approval for additional mortages, liens, or pledges placed on the City. A further question on whether the appl cants would be amenable to allowing the City to assume different interests in a Joint venture model should be addressed to the applicants. A question regarding the trends in rate increases nationally for basic services was asked, and a periodical showed areas of the county where requests for rate increases were filed but offered no exact comparison since they contained no indication of the exact basic service. She said Clearview, Florida, requested and was granted a rate increase from $7.50 to $8.45; in Glen Ellen, Illinois, a rate increase from $6.50 to $8.50 was pending, as was a rate increase from $b .03 to $8.50 in Bowling Green Kentucky. Chatham, Massachusetts requested an increase from $9 to $12, with $10 granted; the Scarsdale, New York existing rate of $9 had a pending request :for an increase to $10.25. In the Cleveland sub- urbs, two increases were pending from $6.50 to $9.50. A question was raised about market surveys available for the type of system Palo Alto wanted and whether the subscribers would pay for the types of services offered on the system in the service' area, There were two components cotponents to the question, the first being -=the basic service penetration levels proposed by the applicants for the first full year of operation after the system was fully con- structed: ranging from approximately 35 percent to 46 percent. Based ort general knowledge of the industry and assumptions user by the applicants,. they found the projected penetration levels to be in the ball park. For the models 'compari ng the private franchise and the imunicipal participation options they used a penetration level of approximately 38 percent for the first full year of opera ations. Arnold a Porter dtd not conduct market surveys, but those conducted oy the applicants showed Subscriber support for the types of systems the applicants offered. A question was raised concerni ne the track records. _of Heritage Coimunicati ons,. and Viacom with respect to management and construction, and Heritage was men- tioned in the October 12. proposal by the Cable Co-op as the con- structor and manager of the subscriber system. Arnold & Porter -talked with local officials in other jurisdictions with approxi- atately the same nuiber of households, who., were generally pleased with tiers tape's performance; 'With respect to Viacom, she believed several assumptions were made that were not necessarily true. 'Viacom was not mentioned in the October 12 proposal ,submitted by i i ty -Came Partners, and' -was. not appropriately before the -Council with respect- to construction and Management of the system. City Cable Partners submitted -updated. information oa stating it' entered linto joint sharing oV operating costs with Viate* for the Sup- scriber system, but. di.d not indicate that Viacom would actually construct or _manage the system. No check was made .on Vi acom's track.,. recor-d in those. areas '1,s they were not in the -proposal. Regarding the trade-offs of fiber optic cable versus coaxial cable, both were acceptable methods of distributing signals and the question of whether fiber optics made coaxial cable obsoles- cent was not an issue, as they were different materials used for different purposes. Fiber optics were useful for moving large chunks of data information at high speeds to designated points, but not so useful for tapping into various points to add to the system or to remove or add a signal to the system at nondesignated points. The use of either was a design issue with various costs and trade-offs. When the system was designed, the owners would make a business decision on the use of fiber optics. Regarding the 550 MHz versus 450 MHz, and whether the applicants' costs and revenue projections were reasonable, the industry was moving in the direction of 550 MHz, Cable was available for it, and ampli- fiers and other equipment were being developed which would be mar- keted and mass produced when firm orders were placed. They should be available within a reasonably short period of time. With re- gard to the revenue/expense projections, the two applicants for privately owned and operated systems, City Cable Partners and Cable Co-op included projections that appeared to be in the ball park and accounted for all categories of expense. The Marsh Media proposal, which did not offer the City a privately owned and oper- ated system but only a joint venture, did not include figures within a reasonable range for the type of system Palo Alto wanted. Pacific Bell had the necessary financial and technical ability but offered a.distribution plant, not a privately owned and operated system. The final issue was in response to a chart by City Cable Partners. Arnold & Por=ter was asked to produce some additional comparative information on the applicants. Many of the issues were complex and required complicated answers not susceptible to being put on a chart. The chart shown by City Cable Partners was not quite fair and contained new information not in their October 12 proposal. It also picked on selected data and did not present other information to give a more complete picture of certain items. Given that, Arnold & Porter attempted to produce charts in the areas covered by the evaluation --services, rates, technical, financial and local commitment, ownership, and structure. They looked at all the factors used in the evaluation, and almost had to rewrite the evaluation to fit complicated issues into tiny box- es, and it was impossible to develop such a complicated chart from the evaluation report in one day. She offered to answer ques- tions. Councilmember Renzel said regarding the 550 MHz, she understood that while it was not currently being marketed because no firm orders were placed, there were no technological barriers to it being produced. Ms. Phillips said that was basically c- erect. She believed there might be some bugs in the equipment that needed to be worked out once the equipment was mass produced, but in the last three years the industry went from 350 MHz to 450 MHz and now 550 MHz, and she expected the march to go on to even higher frequencies. Councilmember Renzel clarified that there were no barriers to.mov- ng forward --it was a matter of productionand working out the en. gineerfrig. Ms. Phillips said that was correct. Mayor Klein asked .what would happen if Council authorized the con- sultant and staff to negotiate with both the ;CoTop and City Cable with regard to either a private franchise ©r some type of mixed ownership. He asked if the consultant would consider the addi- tional information that City Cable presented subsequent to October 12, and was concerned .about how new data would be handled. Ms. Phillips said the process in Palo Alto was backloaded to the negotiations process. It was fair to say there were a number of issues that would, be addressed in negotiations to ensure that all m e by a �� were e e s n t was s minimum requirements adopted the Cit., ,;._rL addressed. I,, „�1 true that in the negotiations process, sonre of the holes in any of the applications would be filled, and it might be that the infor- mation submitted by City Cable would become relevant in the nego- tiations process. Mayor Klein asked if the match up chart could be produced at the end of negotiations with the Co-op and City Cable. Ms. Phillips said the end of the negotiation process would provide proposed draft agreements, and it would be easier to produce a chart at that point. The franchise agreement would have various appendices to deal with how the system would look, construction schedule, possible grants to the the City to assist in experiment- ations with cable technology, emergency use of the system, and many open issues raised throughout the process. Mr. Sinel said if two companies were targeted for negotiations of a private franchise, the negotiation would result in two similar systems with the same franchise agreement and requirements, al- though the nature of the systems might be slightly different. The City Manager could propose an alternative, but the going in ap- proach was to not jockey one company against another and for both companies to negotiate an agreement the Council believed to be in the best interests of the City. Mayor Klein could see a situation where an agreement was prepared, and one applicant might not agree with a certain provision, which could result in trade-offs along those lines so that there could be qualitative differences between the two applications when they returned to the Council. Mr. Sinel said a chart would be easy to prepare in that situa- tion. Councilmember Woolley asked the applicants to respond to whether their penetration estimates were based on a market survey of indi- vidual households in Palo Alto with the suggested costs of the various types of services. Mayor Klein said responses were limited to one minute, and, if a question did not apply to a particular applicant, the time could not be used for another: purpose. Marsh Media representative responded penetration estimates were based on industry experience in the surrounding area. Marsh Media proposed to plan the system with the City, and anticipated that before discussing the finer details of finances, it would jointly conduct another survey. Cable Co-op representative said a telephone market survey was con- ducted by Terrence Associates, and the results were included in the proposal in Appendix B, pages 7 and 8.' The results showed an estimate of 42 to 54 percent penetration, but iii deciding upon final penetration levels, the Co-op relied on the expertise of Heritage. It provided estimates of 33 to 47 percent for the basic penetration figures, and discounted the generally unreliable in- formation received from the market surveys and used information_ from comparablesystems and specific factors having to do with the community, its relationship to local universities, and the predom- inance of home personal computers. City Cable Partners representative said two market research sur- veys were relevant to the proposal --that done by City Cable Part- ners three years ago in the particular service area, and the one by Viacom one year ago in Palo Alto and Menlo- Park. Both indica- ted the 40 to 50 percent penetration range ._wan reasonable. The Viacom study showed some .sp-ecific marketing factors about the up- scale highly educated market and the market was not perfect for traditional services. There was a fairly high potential subscrip- tion, rate to basic services, but less topay services. Great . in- terest was expressed in two-way services which did not exist, and. the challenge would be to -provide services along those lines. 109,84 Pac Tel representative said several dimensions of market research were undertaker including demographic studies of similar communi- ties, results of other cable systems, and penetration rates. Levels from basic to premium services, to pay per view, and will- ingness to pay, were looked at relative to those.se_rvices, and it was on that basis that economic models were constructed in terms of the viability of the total proposal even for areas in which it was not part --such as a systems manager. Mayor Levy clarified that his question the previous evening rela- ted to rates of penetration not rates charged to viewers. He Heard about possible reductions in viewership of cable television, and that changes occurred in the past couple of years which indi- cated that operative trends for the past decade would not apply during the coming decade. He asked what changes during the past couple of years signaled new trends. Ms. Phillips said the publication entitled Marketing New Media indicated trends for basic service penetration. The basic service penetration in San Antonio, Texas for. 1981 was 41 percent; 55 .per- cent in 1982; and 49 percent in 1983. The penetration in Cincinnati, Ohio in 1981 was 29 percent; in 1982 it was 41 per- cent, and in 1983 it was 43 percent. The start up date of the Cincinnati system was September, 1980. Oak Park, Illinois pene- tration rate was 36 percent in 1981 and 1982, and 39 percent in 198:x. Mr. Sinel said the thrust behind the cable deregulation- bill by the industry was its experimentation with what the public Wanted, and whether premium services drove revenues for the system or whether it was a repackaging of basic services. Partially because of the movement into marketing and efforts to deal with a churn of citizens who si caned up and disconnected, it searched for the free- dom through Congress to change programming at will, and figure out how best to market consistent with what the public needed. He believed it was a phase in cable which might be a crossover as to the most economically viable services.. In Palo Alto, a system would be another testing as it started dealing with competition from outside sources --VCR's and various other movie distribution sources to determine to best to market to the public, which was something the City must keep in mind. Councilmember Sutorius understood the caveat of submissions after October 12, 1983 in terms of performance tracking, and any effect late information might have, but did not jbel ieve` ' physical con- struction -was necessari.iy altered because the post -October 12 op- tion was for construction assistance. He asked for a track record comment on the turnkey construction by:A.M. Cable. Ms. Phillips said Arnold & Porter did not check other jurisdic- tions In which.A.M. Cable might have constructed systems. Counci 1 member Witherspoon asked for clarification that where the City was less than 100 percent owner, it would.be a general part- ner. Mr. Si nel said the City primarily wanted to participate in owner- ship to help with policy direction of the system, and would .have to be a general partner since limited partners, by definition, could not participate i n management of. - the company. Vice Mayor Levy said Pacific Bell offered a system which necessi- tated City participation. He asked whether Pacific Bell was pre- pared to offer a full private franchise alternative, either total- ly or with some other private_ entity as the manager if Council. chose notto have City participation. Counciirember Cobb asked all four applicants to respond to the following: Council saw specific models of ownership, i.e., 49 t/199 t percent for the Cable Co-op, but he wanted to know whether the applicants were prepared to negotiate smaller proportions of City joint ownership, such as 10 or 20 percent, or well below the 50 percent level. The representative for Cable Co-op said they would be happy to discuss smaller proportions of ownership, and changes in the stag- s ng of participation. It was not necessary for the City to buy into the system, as initially proposed, although it had definite advantages. He added that it proposed the limited' partnership model because it was considered to be the best way 'to structure yovernence where the Cable Co-op remained the general partner, but it was prepared to discuss that as well. The representative for City Cable Partners said the 50/50 split was pruposed in direct response to the question in the RFP for a 50/50 model. The amount of risk and investment by the .City was subject to negotiation, and the consultant and staff recommenda- tion that such matters be negotiated was wise. It was a detailed process with many factors to be considered, City Cable Partners was eayer to talk about those factors in a negotiation process. Mr. $dolschulte of Pacific Bell said its proposal was unconven- tional in that it proposed to build a system, .with the choice of the system operator open for the Council determination. Pacific bell received many requests from companies to participate as sys- tem operators, and some of those requests were sent to staff. In order for Pacific Bell to move forward, it needed to ascertain the City's desires concerning the terms and conditions under which the system should operate. Thatwas a.completely open matter because Pacific Bell's proposal allowed for a cooperative or joint venture with the City •participating with the systems operator. Pacific dell could not be the system operator, but offered to build the best system. The choice of the operator would be negotiated with the City. Vice Mayor Levy said Council had many decisions to make, and if it decided to not involve the City or act as a conduit from Pacific Bell to the Council and back to the private enterprise sector, he asked whether Pacific Bell could put together a package that would result in the City not being a conduit element. Mr. Bolschulte did not believe Pacific Bell could represent the City's interests regarding the system operator without City involvement. Cooperatives and partnerships were clearly available options, and Pacific Bell could structure a process`,,so that those interested in providing programming and head -end activity could sit down and discuss who might operate the system. Pacific Bell could do much to structure the. negotiations, but the City had to be involved just as i t was in the proposals to build and operate. the system. It was a viable matter, and Pacific Bell was approached by others interested in fulfilling the role outlined. He emphasized the need for City involvement. Mr. Zaner believed it was appropriate that Council ask such ques- tions and obtain information, but pointed out that submissions were made on the minimum requirements in the RFP. It was appro- priate for Council to provide guidelines and boundaries within which staff should negotiate, but it would be more difficult, especially in light of legal action now transpiring, if Council attempted to evaluate the proposals on any basis other than the minimum requirements stated in the RFP, since that was the basis upon which applicants made their proposals and the basis upon which they should be judged against each other. During negotia- tions, it might turn out that one or more applicants could provide an augmented or different system than the one Called for- in the minimum requirements. The subject would be proper for negotia- tions„ and Council might want to give guidance concerning the-; types of matters° on which staff should negotiate, but it should be a part of the negotiations. Councilmember Cobb said many of the Cable Co-op system proponents spoke of the need for quality television is opposed to the sup- ;iosedly nonquality television provided by the commercial networks. Une speaker the previous evening who was not involved in any system said the financial health might depend on providing "non-. quality" programming that was profitable. He asked Cable Co-op if it was prepared to provide the kinds of programs that would make the system commercially healthy even if it did notmeet the loft- ier ideals of "quality programming. The Cable Co-op representative said i t was committed to providing a sound, realistic basis for constructing and operating the sys- tem. It would offer all services traditionally offered on cable television, HBO, Cinemax and WTBS. Its service chart -was con- tained in the proposal, and could be compared with any others. Heritage brought a lot to the entire process, and instilled in the Cable Co-op the notion that for the system to work and achieve the loftier desired ideals, it first had to run a good business. That was the hallmark for its proposal. Mayor Klein said Marsh Media was. overlooked for a response to the earlier question, and he offered an opportunity to respond The Marsh Media representative said its proposal was to give back to the City as much participation and revenue a`s possible. Should it be necessary , for the City to participate less, it was agree- able, and Marsh Media offered what it considered the best deal ever offered to a city. Councilmember Fletcher asked whether Council could cone up with different combinations of joint ventures, and instruct staff to explore joint ventures that were not proposed as combinations, but were involved in the RFP process. Mr. Zaner said if T'ouncil aid not reject all the bids, but directed staff to negotiate for either a private franchise or some form of joint or municipal ownership, it could give staff guide- lines for such negotiations. He made 11 or 12 recommendations in the RFP, and Council might have additional ones. Listening to the Council discussions, he made notes of some universally held Council views, and did .not believe suggesting different combina- tions was improper. Council :might suggest them as guidelines for staff to consider during negotiations. He was concerned that it not enter into an auction, bid, or a negotiating process durfnr the deliberations that would have an affect on other things hap- pening in the cable area. Councilmember Renzel said Mr. Zaner indicated that requests for responses to minimum requirements were made in the RFP with a cut- off date in October, and responses were evaluated on the basis of what arcs turnecr i n during October. She asked about the legal con- straints or functional problems on new data that ` came in later or in the .future, and its weight or ability to be considered. She asked why the October date was critical. Mr. Sinel said the concept of tie process was to be fair to all. A notice was put out that Council was interested in receiving pro- posals, and first wanted proposals for a private system, but was interested in options. For those companies not _ prepared to offer a private system, the .Council would be happy to receive informa- tion submitted On other than a private system for consideration in due course. :Two companies responded " to the RFP with a cut-off date with adequate notice for a private system, and also responded to the options in which Council was interested. Two companies responded by say. ng they would be pleased to deal with thee' op- tions, and those responses were before the Council. The Council corafld, at any time, decide to -Stop the: process 'and allow all the applicants to return with new bids, or it could throw all appl ii ca- ti ons out and start over. The Council could take judicial note that things changed, people got financing in line after being awarded a Iranchl-se or would , arrange, through the way suggested, a backhanded process with a heavy concentration on negotiations. 4 6 8 8 6/19/84 People would fix problems to the Council's satisfaction, and it would have a franchise agreement that required a company to file a new financial plan. Council would not award a franchise before it approved and updated the financial plan. There were many oppor- tunities to ensure the reliability of proposals as they turned into an agreement. In term; of looking at companies to determine whether they qualified for further consideration, whether it be negotiating with two companies or targetting one, in the interest of fairness, it was best to look at companies during the time period when they were asked to give their best shot. For that reason it was important for Council to compare what they were on October 12. With respect to the two private franchise applicants, each posed some risks and provided some benefits. In Arnold &, Porter's view, either could provide an adequate system based on. what they said on October 12, 1983. The new information was essentially not relevant. CUUNCIE tECESSEU FROM 9:30 p.m. TO 9:45 p.m. Councilmember Sutorius said the previous evening he asked for an estimate of the costs of the City processes since the RFP process was started. Currently. the City was still some way away from having.a contract: negotiated, and recovery of those costs depended on the type or model that resulted in a contract. He asked what the costs and cost estimates were, and what the recovery would be for each of ,the three' models , bearing in mind the need for esti- mates and projections. .,Mr. Lamer said the costs for the project, which went back to 1981, were approximately $400,000, including staff and all other costs. Councilmember Sutorius was correct that depending on the type or model chosen, the City was "eligible" for reimbursement. On the one extreme, if Council awarded a franchise to a private corpora- tion, tne RFP provided that all costs incurred in producing the RFP and the negotiating process were reimbursable. On the other extreme, if the City operated a purely municipal system, there would be no reimbursement. For a joint venture middle ground, there would be some estimating and negotiating, with the amount to be reimbursed being the total amount or some lesser amount up to the percentage of City participation. Councilmember Sutorius asked if $400,000 was the cost to date. Mr. Laner said it was the total cost to date from 1981. The reim- bursable cost would be substantially less, and probably somewhere near $300,000, including contract. negotiation Gists, which were yet to be incurred. Mayor Cl ei n said the four applicants, City Cable Partners, Pacific (sell, Marsh Media, and Cable Co-op, would have three minutes each to make comments. The City Cable Partners representative said despite what other applicants said, it was possible to have the level of service it proposed. 1t met Council's minimum requirements, and was a fine system. The system was installed in Mountain View, and was pos- sible in Palo Alto. There were questions about the comparison charts and there would be more. For the record, she looked up page references to ensure Council had the numbers straight in important comparison categories, and provided a copy to the Council, which was on file in the City Clerk's office. There was some '.question about City Cable Partners' agreement "with Viacom, and she clarified their three-part tentative agreement. City Cable Partners would share its substantial computerized customer service function which served the entire Bay area and met a high level of service with ..imse!!1,ate access to customer records. Those functions would be shared on a cost paid for service basis, as it was not a system_ they could duplicate alone. Viacom would oversee the, construction of the system working as it would for itself. ` It would be the turnkey contractor. City Cabe Partners would work, with iii acei to create a regional cable system that would share services between the systems and hopefully mean a higher level of 4 6 8 9 6/19/84 development than either system could provide alone. In all respects, they hoped cost -sharing and cost -saving would provide greater services at a lower cost. There was much discussion about local control, and she believed it provided the most significant level. The local board was in control and managed the system, and no one else from anywhere could veto it. Presumably, if the City was a partner, it would have equal representation on the board and provide local control . City Cable Partners offered a 50/50 part- nership to the City in response to what was requested, but it was willing to negotiate some other number. She complimented the pro- cess, and said the staff and consultant recommendations were rea- sonable. There were fundamental, difficult, and complex issues yet to be resolved, and it was time to discuss resolution, and return to Council with a workable, binding agreement with which the City could live. The Pacific Bell representative said he was pleased to participate in the proceedings. The Jarvis and legislation issues would be passed in their time line, and he believed Pacifid Bell could con- struct the lowest cost; highest capability system. The question was how many options should be available. Regarding the com- plexity of the financing question pointed out by Mr. Britton, and the perceived risk with regard to the I -net, there was no competi- tion or risk for the one proposed for Palo - Alto. Pacific Bell proposed the system only to the City, not to be shared with others. All 112 channels could be available for Palo Alto, and could be reserved if that was the desire expressed throughout negotiations. The question of 80 channels arose because it responded to the RFP, and it was an important point to put at rest.. Regarding business -to -business communication, the system primarily proposed by all bidders was to residents. There could be business applications, and he said throughout California, Pacific Bell was building a fiber optic network to meet the demands of business customers for business communications within their own companies. Companies did not want someone tuning into a channel and seeing their internal corporate information, and such networks were not broadcast systems, but point-to-point systems. The value of the 112 channels would be for broadcast pictures from Stanford to the community and small business administration. Technology was raised as an issue, and Pacific Bell proposed fiber optics because it was its specialty, and perfect as the backbone of the network. It did not propose 550 Metz, because it was not working at present, but it would provide the capability 0 utilize the highest capacity of coaxial available with the fiber "Optic backbone. He questioned the issue raised on the operators of some of tne systems proposed. He did , not know if Viacom or Heritage bore much risk in the process, but it.wonld bear management fees. The issue of penetration was of the essence, and Pacific Bell was serious in its intent to bring that kind of technology into every home, and was committed to 100 percent penetration with a fixed price. It would not just go past a home, nor serve one out of every three, but would enter every home, with 100 percent penetra- tion, within 18 months, not 24 months. In response to the last question about how to put together a complete system, Pacific Bell was prepared to facilitate the creation of -a complete system :and do what it did best --build information transport. systems. Opera- tors approached them and the staff, and there were presentations that evening and the previous one by grcups that could manage the system, and to which Pacific Bell would lease it. Cooperative groups could manage the system. The Council needed to provide a system at the lowest cost and with the greatest capability, and to pick the best mix between the management and the lowest possible.. cost. Good and adequate was not good enough --the .question was to form a road to excellence, which could be done with Pacific Bell's proposal and participation in the negotiations without sacrificing. tne _ time line to get a 100 percent service to all members of the joint Powers Agreement. The Marsh Media r=epr=eseiiteti ve addressed the Council concerns re Jarvis 4. It was Important to remember that Marsh Media intended to give the -City as much participation as possible and as much as 50 percent of the gross profits. With imagination, problems could be worked around, and they could explore mechanisms whereby the City could continue to participate to the maximum extent possible and still receive 50. percent of the profits. Regarding the return models made t,y the consultants, it was unfortunate the model Marsh Media offered was :not represented. a It was a simple calculation. The City's returns would be infinite as it would not invest one cent. An important fartor , was mentioned by a consul tant--Marsh Media did not propose the type of system the City wanted because the City required a dual cable mi r: ;mum plus an -.independent I -Net. Marsh Media had the foresight when preparing the application, to anticipate the.t dual cable systems costing in the vicinity of $4U0-$530 per home passed, would not be viable, and events proved them correct. Many big cities such as Cincinnati, Dallas, and Milwaukee were backing down and retrenching on their commitments. The average costs for homes passed in :those cities was $326. -Group W bid cable systems with a target of $400 per home passed; TCI, now the largest cable operator, had a rule of thumb of $200, which was why they were the biggest. Marsh Media believed the right approach was to offer proven state-of-the-art or 450 MHz cable. Applications proved them correct, with only City Cable Partners offering the -mi ni muii requirement of the RFP. There were no 550 MHz cab.lee yet in service. They would provide fiber optics and video -switches when they became proven technology. An. impor- tant factor, not mentioned in the discussion of the advantages of fiber optics, was its vast capacity. Bell currently manufactred fiber optics cable with as much as 144 strands in ene cable. Even only six video channels per strand would give 900 channels of video capacity, which was what they were talking about, and what was important. Mr. Dolan mentioned that the first three years were the toughest, which was correct. They had to be lived through, which was .why Marsh Media proposed the highest proven state-of-the-art rather than fiber optics, which could be used when the revenues could support it. The I -Wet concern was also addressed by fiber optics, and if they were in competition with the telephone company, they could only compete by having their own fiber optic system to `deliver as much capacity as fiber optic would _yield to each home subscribing tc° cable TV. He reiterated that Marsh -Media --showed judgment and the correct approach to build a proven, viable system at no risk whatsoever to the City. The Cable Co-op representative said a good story had a beginning, middle, and an end, and the process was like a good story.. They began the process one year ago when the City, working with the consultants and members of the community, formulated the basic goals for the cable system. The goals were distilled unto the AFP,- and the middle of the story was how the bidders responded. Over a year ago, the Cable Co-op assembled its team composed of local consumers, people who were interested in cable, and those Who wanted to work with others to bring the finest cable System to the community. They .had a management team, a bank, aid an under- writing company to provide the limited partnership that would fund the system. All elements were put forth i n the proposal the previous fall, and Cable Co-op stoo'd by those elements, which he considered a sound system. They Were now at the end of the pro- cess, and the Council had the evaluations 'from the cansui tents and the staff, and had heard from the community. He' believed the Cable Co-op proposal was the strongest, and he urged --the Council to adopt it. The system design was realistic and innovative, and. hit began with revenue projections on which ' they .could count. The proposal started 'with the experi ehce i n other communi ti es, and responded -to local requirements. e The basic penetration revenues were those €ounad" i n other communities, and it projected between 33 and 47 ..percent. e They were. careful to not include revenue from advanced' service* in' the Asaseline financial projections. Mr. Si.nel said i th was .wise to build cap,abi l i ti es for tine advanced services _into the system, and that was -:done. It was unwise to "count on revenues._. for the f i nAnci al underpi n:ri ng of the - system.,` 1 and not include anything for those services in their financial structure. The City would get a system that met specifications and provided broad based services to the community --entertainment services, community programming, and data services. The Cable Co-op was committed to all those goals, and wanted to work with the Council, members of the staff, and the community, which was possible by its structure as .a cooperative. It would make what- ever deal the Council wanted in terms of the percentage of the system,.. and he believed it could respond adequately and fully to the nature of the City participation --the . rights of the Council, staff, and other members of the community. Cable Co-op's proposal contained one item that no other could match --a role for the con- sumer. It was a cooperative, and the people would live with the system, which Council should remember when making its decision. He again urged support of the Cable Co-op. Mayor Klein asked Mr. Zaner to comment on the staff report and make additional recommendations about how Council should proceed. Mr. Zaner said Council had as much data and information as it could handle, and he presented the report from the Joint Cable working Group (JCWU), which he signed as City Manager and chairman of the group. The report represented the col 1 ecti ve judgment of the` JCWU which was made up of the participating agencies. It recommended the City enter into a joint venture systems and that staff be authorized to enter into negotiations with two of the four applicants; namely, Cable Co-op and City Cable Partners° If Council decided to not enter into a joint venture, the JCWG recommended the City move into a privately owned franchise, the implication being that theJCWG did not believe a purely municipal option would e i n the -'best interests of the Joint Powers Agency (JPA). `Should Council authorizes staff to begin negotiations, it would be appropriate to set guidelines by which such negotiations were to be conducted, _ He referred to page- 8 of the RFP, which listed 11 recommendations, and he recommended that if Council authorized staff to begin negotiations, those 11 objectives form the basis of the instructions for negotiations with the cable com- panies. Mayor Klein said some Councilmembers did not have the RFP with them since it was superseded, The same 11 recommendations were listed on page 8 of the Arnold a Porter report. Mr. Zaner suggested Council might want to consider additional guidelines, and the extent to which participation should be nego- tiated. From -the di scissions among Counci lmembers, he understood they probably -did not want more than a 50 percent involvement, and perhaps some lesser amount. He did not believe there was any magic number involven, and the Council might want to set upper and lower_ limits. Recommendation 3 spoke in broad. terms about com- monity involvement in.local programming and access functions, and Council might want'to be more precise. a He believed the Council considered community participation and community control over the public_ access function to be an important value for` the community, so it might want to include guidelines in the negotiations to ensure community participation and control over the public . access portions. There might be other guidelines the Council-believed.to be important, and if it followed -that course of action, it would be appropriate to include them.` Counci l member . Woolley asked if it was reasonable to request staff to ,negotiate both a joint venture arrangement and a private fran- c hi.se with the same'' company at the same time. Mr. Zaner, saw no legal problem and did not believe it was out of the'_ question. As they moved closer to t4ovember and the Jarvis 4 eme dment, they. wanted'.to be able tOi move IA ei they direction :al. necessary.. As" the negotfations- proceeded-.. much of what they did Would apply either way, snit' i f necessary, atheY could probably sari tch fro: one system to another. 4 6 9 2 6/19/84 Councilmember woolley asked whether it would be easier to start off or make the major thrust with the joint venture or private franchise. Mr. Zaner said from the City's point of view, it would probably be easier to start with the joint venture system. The private fran- chise would probably be easier since there were many models around. The cable companies were used to that system, and it would not be as difficult to put together in the end. Councilmember Woolley believed they had not moved far from two summers ago. They were still balancing the desire as set forth in objective 11 , for "an ownership structure that enhances community participation and maximizes the service and economic benefits of the cable television to the residents of the service area without unacceptable risks to the City." The Council was still trying to find a middle ground. On the . risk side, she was concerned about the accuracy of the cost estimates and there were some differences between the various applicants compared to the models given by the consultants. She was also concerned about market penetration, although she found the applicants' remarks reassuring. There was more competition than two years ago --the dishes fog° direct broad- cast satellite were becoming visible, and there were now VCRs and I -I et. The risk to the City was considerable, and she wanted it minimized as much as possible. MOTION: Councilmember Woolley roved, seconded by Bechtel, to adopt the staff recommendations to: 1. Begin to negotiate a joint venture arrangement starting from the description in Model 1 of the Arnold & Porter report; and 2. Authorize staff to initiate discussions with either the Cable Co-op or City Cable Partners, or both, and report back to the Council at a later date on negotiations. MOTION DIVIDED FOR PURPOSES OF VOTING Councilmember Sutorius said he intended to make a motion that would not have gone so far, but he was ready to start deciding the issue. His focus would have been on the decision -making process and narrowing the scope of the remaining issues by moving that Council not proceed with the full municipal ownership process. The City had n) reason to undertake the financial risks involved in the full municipal process, which were only exceeded by the litigation risks. Since a motion was made, he suggested Council approach guidelines and possible amendments to the motion, because he believed other possibilities in the process were important. He specifically referred to pacific Bell's system capabilities, design, experience and flexibility for further discussions which was an important option to maintain in the entire process. He wanted that included among the considerations as Council discussed the main motion. e Councilmember Bechtel concurred with Councilmember Woolley that in providing a 50/50 arrangement between the public and private, Council could ensure reduction of the amount of risk while ensur- ing full community pareici pat1on, and the kind of system that would be the most useful and acceptable to ,the citizens of the region --not just Palo Alto. She believed such an arrangement would be a good one, and that Council should . not go beyond a 50 percent municipal participation. She supported the motion. Mayor Klein thanked everyone who participated. He believed it was. an important debate or - topic for the community, and complimented the applicants on their presentations and the vigor with which: they stated their posi tione. He congratulated staff and the con- sultants on the depth of t ei r preparation and analysis, and said it was extraordinary to see a almost 200 people attend the Council meeting two ni ehts in a row to discuss an issue of Commu-nity concern. As he read and analyzed the matter, he was anxious to see cable move forward An the community, and was frustrated that-, no matter how quickly they moved, the first home would not be hooked up until the- latter part of 1986 or early 1987, It was a long-time away. He tried to balance two significant goals for the City. One often mentioned the significance of community input into the type of system, participation in its management, and that the community not be beholden to Sacramento or Washington D.C., for control of the system, but that Palo Alto decide its own des- tiny. Another matter uppermost in his mind raas the financial risk of a cable system. He worried about it -a lot since Councilmembers were stewards of the public funds. Because of that, he was unable to support part one of the motion. Cable was not a public util- ity', and was a different model from the City's electrical or gas system, where tnere were 100 percent users. The cable system would do well with 60 percent users and would be profitable. The figures, and marketing studies submitted by the applicants and the questions Councilmernber Woolley asked showed that the ability of the system to make money varied significantly dependent on 'whether it had a 30 percent or 50 percent penetration level. He believed private enterprise should take that type of business risk- -not a municipality. It could be argued, and was stated in some of the financial presentations that the City's risk in a joint venture basis was limited since the City could issue revenue or other types of bonds so the General Fund would not be at risk. A provi- sion could be included in the guidelines for staff to negotiate along such lines and, if part one of the motion were adopted, he would urge such workable language. If the time cane when the revenue bonds were not being paid by the CATV operation, the City Council of Palo Alto would be under tremendous pressure to finance the deficit out of the General Fund. The City's credit rating would be at risk to some degree, together with its reputation throughout the country in financial markets for paying all its obligations. He believed the City would find ways to come up with tne money from other sources, but there were too many demands on its limited resources to take that type of risk. The financial and community participation considerations were significant, and his -concerns about the latter and the design and control of the system were significantly alleviated by the applications of the Cable Co,opi and City Cable Partners, Both, in a pure franchise mode, came up with ways of governance that went far towards alle- viating concerns people had about who managed the system. Both were imaginative and community oriented. The Council could., feel confident that citizens would have significant input into the management of the system through those mechanisms, and would not need to be involved through a joint ventei're to accomplish that goat. He believed the goal could be accomplished without the financial risk of a joint venture, and if. part one of the motion failed,- he would offer an alternative. He suggested Council adept the approach offered by Cable Co-op with regard to an option, He believed Counci i was given the chance for the best of all worlds, and could preserve their alternatives by agreeing to negotiate a system by which there would be . a franchise and an elation to buy into a portion of the system down the line at a fair market value. Much more work was necessary to define what was as fair market value, but the first priority was a straight up and down philo— sophical vote on what path to pursue. Councilmewber Fletcher said when the issue was. discussed two years earlier she was in favor of munlci pal -ownership --of the system.. Her-, concern then was local -control , responsiveness to community demands, and concern about pending federal legislation. The Co-op -group that went . before the Coup -ell -then, with a half dozen peopl e and -little iresourcest :blossomed and proved to have the capabil- i ties, enthus i asm, expertise, talent and eb# 1 i ty to raise-- ..money. It .-raised,, $1UG‘400 +end caisae up with the, most iupressive bid. There was np ;,question # t ro d be the most rasponsi ve to coOmuni ty demands since Et -would be -:the subscri berf owners Of the system. . The governs r!g 'board wouldwoulcr publ icli elected. from ; .the --- sub- scrioe.rs, and it proposed an advisory board to be comprised -of all 4 6 9 4 6/19/84 the different elements in the service area such as the businesses, schools, and other segments that needed representation. She was concerned that East'Palo Alto not be lost in the shuffle, and had not heard much reference to East Palo Alto service and its repre- sentation. She wanted to go with the Cable Co-op, and wanted to see a motion that separated out City Cable Partners so Council had the option of eliminating rine bidder. However, she believed Council should not pass up the possibility of having the Cable Co-op lease the system constructed by Pacific Bell , since it had the highest, technologically capable system which would provide. fiber optic cable with 100 percent penetration to the residential areas within 18 months. They had ample capital and experience, and maintenance was already well in hand. A further feature that attracted her was that it offered a maximum number of channels, but only those needed at particular times would be leased, so there would not be the waste of having channels on board that might not be used. The proposal from Pacific Bell was low by the estimates of the consultant for construction costs and it knew what was needed by way of capital for construction since it was continually involved in it. If there was a possibility for a motion to open the door to a leasing arrangement with Pacific Bell, she preferred to have that opportunity later. Counci l meonber Renzel concurred -with Counci l member Fletcher' s remarks with respect to Cable Co -up. Originally, she also looked to municipal ownership as a way to retain community control in terms of offering citizens what they wanted from cable, and not what a larger organization provided to surrounding communities and other parts of the country and what they produced in a vertical expansion of their ventures. A cooperative cable system offered the kind of community control that allowed citizens —not the eovernnnent--to decide what they wanted on cable and to be respon- sive to their needs and desires. She would make an amendment to delete City Cable Partners from part 2 of the motion when appro- priate. With regard to part 1 of the motion concerning the joint venture arrangement she agreed with Mayor Klein, and while she wanted to see the City have the ability to buy into the system at some point in the future, she wanted to have it initiated as a private system. Sne would support a possible alternative motion if part 1 failed. Vice Mayor Levy said he, too, was delighted to be at that point, and took half credit for originally bringing the item to the Council in 1979 when he and Councilmember Fazzino first proposed discussion of CATV, an item that _ lapsed when first studied in the early 1970s. It took five years to get to that point, but he hoped it would not be much longer before they had hookups in their homes. He also wanted to keep the municipal option open, but when he looked at the numbers before the Council, he was concerned that municipal ownership presented too great a risk for the potential advantages particularly in the existing political environment, Reyardine municipal ownership, he was concerned about the techno- loyleal changes that were often discussed and of which Silicon Valley inhabitants were particularly aware; social changes that would occur during the next 15 to 30 years, including a change in public taste. with future generations possibly,less enamored of television; changes in the way the public used its leisure; and changes i n work habits. A number of legal changes might occur, and during each of the past five years there were changes and threats of legal action. Currently the City was faced with the imposition of Jarvis 4, which would make municipal ownership a high risk and low reward option, An analogy was made by many people to other public utilities the City,- ran satisfactorily, but he agreed with Mayor Klein that the analogy had many problems. The need for CATV was clearly not comparable to the need ford gas, electricity, and water, and the City of Palo Alto was able to run its utilities with a low capital expenditure, relying on outside entities to put out the large capital expenditure. With CATV there would be a significant up front capital expense, and for all those reasons, he believed the risk ` of municipal ownership involving large, up front capital expenditures and distributions with dollar benefits to the City coming many years down the road, was not an acceptable risk to the City at that time. Moving to the joint venture, with either a 50 percent or less ownership, the same uncertainties existed, but with only half the exposure. He said the opportunity to use tax-free financing would be substan- tially curtailed. A second concern was who the partner would be, what would be the relationship, and what would happen if the partner went bankrupt, as had happened with cable television providers. There was the question of what, would happen when the partner wanted to sell, or was acquired „i n either a friendly or unfriendly take over, and what would happen when other parts of the partner's business ran .into problems. Many cable television providers, incluoiny Heritage, Viacom and Pacific Bell had many other buss nessesas well as cable television, which could provide unpleasant carry-overs to the City. The joint venture would introduce other problems with which .he was uncomfortable, and he did. not see the advantage of the joint venture in terms of local control. In many ways, he was satisfied with the controls the City wanted to ensure that service to the community was outstand- ing and would not require ownership involvement; Because of that, his desire was towards the private franchise option, not the joint venture option. He heard some discussion that given happenings in Washington D.C. and Sacramento, it might be wise for the City to maintain a small ownership interest, not for a monetary investment reason, but because the City's opportun 3 ty -for any kind of compen---- sation from CATV or. to exercise any kind of local control right be stripped if the City were not a partial owner. He was willing to listen to arguments from his colleagues concerning that, but as far as the City being a 50 percent, or a major joint' venturer, he believed the business, technical, and social rusks were too severe. Caunci1mernber Bechtel referred to the Arnold & Porter report, and specifically pa es.150 and 151, describing the advantages and oenefits of municipal participation. The City could participate more fully in decisions, could determine utilization of cable capacity, develop a new delivery mechanism for various social ser- vices, implement pilot projects, etc.; ensure that cable services were available to all residents; and finally could be involved in of rest participation in the administration of cable activities. --a direct actor rather than a passive reactor or regulator. More importantly , in the issue related to the pending federal legisla- tion, the City's participation as a joint partner gave the City the agility to remain involved. She referred to the end of the report-, where t" ceneeltaata did not recommend the Council make a final decision on participation, whether joint, municipal, pri- vate, or straight franchise. Arnold & Porter described the'vari- ous stayer. On page 188, they discussed a process for an imple- mentation plan for municipal ownership, with various .phases des- cribed on pages 190 and 191. There would be decision -making points that would be brought back to the City Council, and stages where staff and 'consultants would have worked out the various dif- ficulties related to .financing--tax exemptions, bond possibil- ities, and whether all the various problems could be resolved over a period of time. On page 195, the last paragraph of the main report stressed that a joint participation level of municipal participation would, :at that point, not: constitute a final commit- ment to municipal participation, since there were a number _:;of issues that could pose substa,tial difficulties. Therefore, the development process contemplated interim checkpoints that required City Council approval to proceed furthero It made sense to her that they not rule out the joint participation. It might well be. that, at a later date, they would find they could not resolve the di fficu ti es and would wart to pull back to a much less substan- tial ; participation or to a 100 percent fraicnt se. She believed Council should retain the =:joint participation, and support the motion as worded by Counc i l membe r Woolley. Councilmember Cobb agreed with Councilmember Sutorius that full municipal ownership was out of the question. For the same reasons, he believed a 50/50 shared ownership presented the same set of problems. The risks were too great, and it was clearly an improper role for City government to take. He agreed with Mayor Klein that both the Cable Co-op and City Cable offered the most public participation --especially the Cable Co-op. He was con- cerned that the potential effects of national legislation with regard to deregulation 'could put the City in a position where it had zero control and benefit if it passed in some of its more onerous forms. If he understood the answers to the earlier ques- tions, a minority ownership or joint venture position would pre- serve a position to the City to presumably exempt it from those kinds of onerous features of that legislation. He contended that would be the only reason for the City to have any kind of owner- ship at all --to exempt itself from those kinds of problems that would remove all control and ability to benefit in any way from the system --for example, through franchise fees. Mayor Klein sug- gested that the City negotiate an option to buy in at a later date as was proposed by the Cable Co-op, and he believed it was an excellent idea. Given Mr. Sinel's understanding of the proposed federal legislation, he asked whether the option would be possible if the legislation passed. Mr. Sinel said yes. The only provision dealing with buy -ins was to ensure that in a. situation not involving a major default in a franchise, a city could not take over the assets of a cable com- pany for less than the fair market value. The current agreement between the cable industry and cities was that for failure to renew a franchise, a city could take over the franchise for fair market value and in the event of a material breach of a franchise, the city, if there was nothing else in the franchise agreement, would pay an equitable rate. To the extent that it was negotiated up front, fair market value related buy -ins could have various kickers as to when it would occur and it might involve some par- ticipation on the part of the Council as to the design of a system that it had a right to buy into, which would not run afoul of the current agreement between the industry and the cities. Councilmember Cobb said the answer was encouraging. He intended to make an amendment, and if it failed, he would not support the first part of the motion. According to the schedule presented by staff, Council would not see the results ofthe negotiations until after the fate of Jarvis 4 was known, at whIchet1me more would be known about the federal legislation. There was probably some argument for keeping the minority joint venture option open until the outcomes were known. AMENDMENT: Councilmember Cobb moved, seconded by Sutorius, to amend the first part of the motion to instruct staff to negotiate, in parallel, a minority ownership position and a 100 percent pri- vate franchise. Councilmember Witherspoon supported the amendment. She did not know whether it was necessary because staff would get the idea that Council was interested in different kinds of participations if it was at all interested ..in joint ventures. She preferred to go in with the minority position, but was ambivalent about direct- ing staff to simultaneously do the franchise agreement. She believed it was important for Council to keep its options open for as long as .possible. It was a complex subject and there were a number of factors over which Co4ncil had no control --not the least of which was Jarvis what state and federal legislation would do this year, and what it might do next year. She felt responsi- bility not only to Palo Alto :citizens, but to the other cities and jurisdictions Council represented. There were two overwhelming reasons° to keep ' at least partial ownership in the City's hands -- the problem with the legislation, and the City might eventually want an option to sell bonds. She had a feeling that as a general partfer f. .e City would have 4 better handle on . how well its i eystcm was doing and how well the general partners sharing the system were doing, and there would be fewer surprises. She believed any of the contingencies such as buy-outs or bankruptcies as described by Mayor Klein and Vice Mayor Levy could be handled in contract negotiations, and she expected staff to give Council every opportunity to sell out eventually if that was the desire, or to auy in further if that was the Council's desire. She sup- ported the amendment and the main motion. She urged all Council - members to keep options open as long as possible. Mayor Klein did not support the amendment. He believed it was time for the Council to make some clear decisions and give direc- tions that might result in agreement and commencement of construc- tion in the reasonable future. Pursuing a dual track would only slow things down, and when staff returned, Council would have a repeat of that evening's discussion. Although there were some uncertainties in the future that would be resolved by the time staff returned, his basic concerns regarding financial risk to the City :would not change. If one set of legislative uncertainties was removed by the defeat of Jarvis 4, there were others for the future. If the cable legislation did not pass, there would be concerns about the cable legislation at the next session of Congress. If the legislation passed in some form, there might be amendments next year as technology changed. Technology would cha,riye, and it was time for Council to start "biting the bullet and make some decisions." He believed Council should not go the joint venture route, and if the option was preserv:ed, and it got to the point where it was possible or legislatively necessary for the Council to buy into the system, it could do so, which was cleaner than trying to preserve a joint venture by a dual track negotiation. Councilmernber Suterius said he, Councilmernber Woolley, and Mayor Klein diet not participate in the RFP discussions, and it would be unfair to speculate on why municipal had such a heavy role in the earlier discussions although he acknowledged that conditions changed somewhat since then. He was inclined to be almost 10Q, percent in agreement with Mayor. Klein, but a; ked about the differ- ence oetween the negotiations for an option and that which the amendment suggested. Mayor Klein believed there were similarities, but he was more con- cerned with the philosophical commitment as to which way Council was going. If the City was doing a joint venture, it was still on the line as owner/participants with all of the associated con- cerns. If the City had an option, it simply preserved its alter- natives for some period down the line, which he believed would only be invoked if it looked profitable as opposed to just a _ busi- ness investment decision, and if the legislative climate was such, coupled with what the community perceived as maladministration by the franchise holder, so that the City had to step in through its ownership rights, which he saw as an emergency situation. Philo- sphical ly, the City's posture was different --it would not go its as a co-owner, and would use the option as a mechanism to achieve one of two goals somewhere down ,the line-- emergencycontrol or .finan- cial profitability. Mr. Zaner said doing, the negotiations as indicated by the amend- ment was not a serious problem. At the same time, he tended to agree with the Mayor that it was time for a deli si ve move on the part of the Council' andfor a clear message to the community and the applicants about where the City was headed. He was concerned that if there were too many options open to the City, Council would end up with the same set of discussions . in three or four months. Counoilmewber Sutorius was pleased with the opportunity to "have his cake and eat -it too," and would not support the amendment because he was convinced that Council needed to move ahead. His position was strong with regard 'to the role and responsibility of 4 6 9 8 6/19/84 the City in running its current affairs. There were things to be done, and he believed Council should focus on where it could make its current responsibilities the most effective and efficient. He observed that when there was discussion about the comparison between the electric utility or any other utility the City operated versus cable television, some of the numbers being talked about throughout the process paled in comparison to the numbers the City was involved with in its electric utility. That week, the City gave consideration to potentially participating in a $200 million i nvestrnerit for one -small geothermal plant, and while that would not be the City's entire investments, its . share --if it were the successful bidders in a joint venture --could easily approach the amount of money being discussed with cable. Council must be prepared to do what was necessary in its current responsibilities, and he would not support the amendment or part one of the mein motion. Councilsaenber Renzel concurred with Mayor Klein and Councilmember Sutorius. She believed that having a potential purchase option later adequately protected the real interest the City had in municipal ownership, which was some financial possibilities for the City, or protection against legislative changes that removed its ability to ensure that its citizens got the services they wanted. She would not support the amendment or part one of the main motion. She would support a proposal for an option. Counci lmember Woolley supported the amendment and believed she and Counci member Cobb had the same idea in mind. She suggested not including the private franchise based on the City Manager's comments, and did not imagine its inclusion would materially affect the way staff worked as long as the joint venture arrange- ment was also included. Her first guideline would be to essen- tially limit the City's equity to the amount sufficient to retain City control in the event of future deregulation. She did not have the Arnold & Porten Model 1 in mind, but noted the staff recommendation to "start from the description in Model 1." Vice Mayor Levy thought about keeping Council's options open and believed it would be a mistake to take a minority position in a Joint venture because it would close the City's options in that Council would have made a commitment of funds, joined in one specific operation with a specific joint venturer, and if in the future, the citizens of Palo Alto were better served by some kind of competition to cable television, Council would have already taken a position that locked the City into a participation which result would be an inherent conflict of interest. He believed Mayor Klein cungected a concept which kept the City's options open, and wee a specific option to acquire an ownership interest if necessary. Until that time, he believed the best thing was to stay es the supervisor of an operation and not be specifically involved. Counci linember Bechtel asked that the ame dwent be divided. She believed the minority participation was ore part, and the second was to direct staff to simultaneously negotiate the straight franchise. She would not support the simultaneous negotiation of a straight franchise, but might support a lesser participation as outlined by Counciimember Cobb. By holding out for an option to be negotiated, she believed the costs would be considerably higher for the City. Mayor Klein .did; not see that there were two parts to the amendment and denied the request that it be split. Counci lmember Bechtel opposed : the amendment. Counci lmember Witherspoon understood that i egi sl ation would -most likely be retroactive: and she argued against relying on an option in a franchise agreement where the City could slide back under becoming an owner in time to escape- the effects of any- future legislation. She did not believe there would be time to do that, and did not know how one would move from a franchise agreement to becoming a general partner without extensive negotiations. Mr. sinel said the only consistent position taken by the cable industry was that if a city participated in ownership and took over a system fcr whatever reason, it pay fair market value for the system. Assuming the thrust of the motion was a negotiated fair market value, it was possible that legislation --all of which allowed municipal ownership thus far --would come out with a new twist. The key issue was to ensure that cities did not take over the assets of a system after a franchise expired for nothing and turn around and sell it to a third party for $25 million. There, was a risk that Congress would do something not yet considered, but currently, the fair market value aspect of the motion should protect the City from Congressional action regardless of whether it was retroactive. Counci lmember iii tnerspoon clarified that Mr. Sinel did not see a problem with changing the mode of the relationship in a hurry. Mr. Si nel said not if the change in relationship was based on a cash payment equal to the fair market value of what was being purchased. Mayor Klein said there was no motion on the floor with regard to the option. Councilmember Renzel believed the difference between an option and joint venture was that with a joint venture the City put m_^ -e,; up front not knowing exactly what the risks were, and with an option, the City knew the risks when and if it put its money up. Mr. Lamar clarified that under some joint venture arrangements, it might be that both parties put money up front. It could be nego- tiated so that one party --namely the City —would not put money up. AMENDMENT FAILED by a vote of 3-6, Woolley, Cobb. Witherspoon voting 'aye.' FIRST PART OF MOTION FAILED by a vote of 3-b, Woolley, Bechtel, Witherspoon voting "aye,.g MOTION: Mayor Klein moved, seconded by Cobb, to direct staff to begin negotiations for a private franchise agreement to include among other terms, an option for the City to acquire an interest in the franchise (Cable TV operations) upon terms to be nego- tiated. Vice Mayor Levy pointed out that the motion did not target any .of the respondents to the RFF Mayor Klein said the second part of Counci lmember Wool l ey' s motion addressed that question. Councilmeabers Fletcher and Renzel wanted to ,discuss whether to target one or two respondents, and he wanted to separate the two issues. Councilmember Cobb said the motion did not address what percentage for the option, and asked if that was left to _ staff's discretion. Mayor Klein said yes. He deliberately excluded a specific percen- tage because he foresaw the possibility of trade-offs. An option to acquire 26 percent might; have more favorable terms than an option to acquire 50 percent which might cost more and have to be paid earlier. He did not believe staff should be in a straight Jacket when the negotiations arose. MOTION PASSED unanimously. Mayor Klein said the second part of 'he motion authorized staff to initiate discussions with the Cable Co-op or City Cable. AMENDMENT: Councilmeuber Renzel moved, seconded by Fletcher, to delete City Cable from the second part of the motion and that discussions only be initiated with Cable Co=op, -and that staff. report back to Council at a later date on negotiations. Councilmeinber Renzel said her principal concern with a cable sys- tem was that the City have local control.r It was indicated that deregulation would change the City's abi i i ;:y to have local con- trol, and the Council voted to include a. purchase option which woule give the City a somewhat stronger influence to make the system respond to local desires. The Cable Co-op provided legiti- mate local control by making low-priced shares available to the subscribers. She recalled that the prospective minimum investment for City Cable was $1,000. Those investors were more substantial and'might not necessarily be Palo Alto or.Peninsula residents. It was a share holding, company that would be traded with no guarantee of true local participation in the management and decision -making. Viacom was a large outfit and, while not a part of the RFP before the Council, it was indicated they were -part of the proposal. Viacom operated i n a range of places and was more apt to provide Palo Alto with the same programming it provided to other commun- ities, and not necessarily what Palo Alto wanted. The Cable Co-op provided the most thorough response to the RFP and addressed all the matters requested in it, and would provide true local control. She hesitated. to use the word "democratic"' to describe the cone trol, but as a municipal government, the City was representative, and she believed having the citizens make the decisions would be more responsive. The Cable Co-op offered a good system that would nut require the Council to become involved in programming deci- sions but would allow the citizens to get what they wanted, which Was the Council's main objective. Counci lmember Fletcher understood the motion did not exclude the possibility of an arrangement between the Cable Go -op and Viacom. She wanted to see the Co-op as - the governing board to direct- and set the policies of the system, but arrangements would be neces- sary for a cable operator. Mayor Klein said the Cable Co-op informed the Council that arrangements were made with Heritage. Councilmeruber Fletcher said that was not a part of the proposal the Council was considering. 1 Mayor Klein said it was now a-- part of the proposal. Mr. Zaner understood the amendment would limit staff to negotiate with the Cable Co-op who indicated the name of its operator. He believed Counc i l member Fletcher referred to the issue she raised earlier and wt%lch ran parallel to the one raised by Councilmernber Sutorius concerning the possibility of marrying some of the better features of some applicants with others. He would provide sugges- tions for discussion later. AMENDMENT TO AMENDMENT Counci lmember Fl ettber moved that the discussions with the Cable Co-op explore the possibility of an arrangement with Viacom to operate the system. AMENDMENT TO AMENDMENT DIED for a lack of a second. Vice Mayor Levy asked for clarification regarding; the Cable Co-op application, that all or 90 percent of the equity would come from limited partnerships, and the other half of the financing would come from the bank- for cooperatives. Mr. Sinel said that was essentially correct. It had a bank debt of 10.d/ percent, equity from the limited partnership of 9.42 percent, equity from the general partners (the cooperative itself) of .46 percent, and equity funds from operation of =23 percent, for a total of 20.98 percent. Vice Mayor Levy said 90 percent o.f the equity would be provided by the limited partners, and he asked if there were any assurances that investors would be from California since the limited partners would be brought in by E. F. Hutton and Heritage. Mr. einel said not to his knowledge. He suggested that repre- sentatives from the Cable Co-op and Heritage be asked if their irarketi ne strategy would be to first focus on, California before going elsewhere. The limited partners did not participate at all in the management of a system because it would defeat the concept of their limited liability. Vice Mayor Levy asked who would manage the system. Mr. Sinel said the general partner, Cable Co-op, would manage the system, and it had a relationship with Heritage who, for a fee, would manage the construction and day-to-day operation of the system given whatever structure was. ultimately chosen. The Cable Co-op would essentially be the board of directors and owners of the system, with the limited partners sharing in the tax benefits and profits but, by law, no capacity to share in the management of the system. Vice Mayor Levy said management decisions would be made by the Cable Co-op, but he understood from its RFP that Heritage was the manager, and that until the Cable Co-op bought out the limited partners, it would only set policy objectives. The implementation of the system would be the function of Heritage. Mr. einel said the issue was definition in terms of management implementation and policy -setting. As pointed out by Mr. Liner, the bank was investing $10 or $11 million, and would impose cer- tain requirements on how the system was built, when it would deliver the funds, and what the system would have to show in order to receive bank funds. He understood the system was supposed to operate by having the policy set by the Cable Co-op with Heritage responsible for implementing the policy and creating a plan to implement the policy. Ultimately, on issues of fiscal responsi- bilty, he assumed the banks and Heritage would have veto power over policies set by the Co-op until the. system was working dequately. He deferred to the Cable Co-op representatives if Vice Mayor Levy wanted further information. Vice Mayor Levy asked for confirmation that veto power _would be in force until year 8, when it was intended the Co-op would buy out the limited partners. Mr. Sinel was not sure he understood the buyi ng out of the limited partners as a functioning issue with respect to how the power would be shared betweenHeritage and the Cable Co-op. Councilmember Witherspoon had similar concerns, but was persuaded that Council should concentrate on broad policy issues_ and assume that since the matter Was raised in the discussion and would form part of the minutes, staff would look closely into the question if the motion passed. Vice Mayor Levy said he asked the questions because he was concerned about limiting the Council <` to one developer at that point before they knew more Mayor Klein did not support the amendment, and associated himself with Vice Mayor Levy's questions and Councilmember With.erspoon's comments. The rankings by the consultants on the various cate- gories indicated, using a sports analogy, that the game was not over. Perhaps it was half-time, and the score wa,e close -,-so close it would not help to give it‘- The spirit of American competition in the negotiations would probably result in better arrangements for the community, and it was best for the City to keep. both City Cable and Cable Co-op in the negotations. Councilmember Cobb agreed with Mayor Klein and said he would vote accordingly. 1e said negotiations would illuminate many points in need, and would likely be more productive if both parties were kept in. Councilmember Sutorius said if the Council did not defeat the notion, City Cable would be identified as a backup. It would appear more logical to keep them in the negotiations, so he would vote against thse motion as a practical matter. AMENDMENT FAILED by a vote of 2-7, kenzel and Fletcher voting "aye." Councilmember Sutorius asked the City Manager to suggest the prope. "marriage" language for the second part of the. motion. Mr. 2aner did not want to suggest the wording of the "marriage contract" until Council decided the -company or companies cn which staff should focus. He noted that Pacific Bell offered a unique proposal to build a subscriber net and lease it out, which pro - visa] might be advantageous to either of the two companies with which staff negotiated: He suggested that within the guidelines .Council adopted, it include language to allowi staff to discuss, not negotiate, with Pacific Bell and the companies targetted, the possibility of Pacific Bell working jointly with one.or both com- panies with regard to their proposals. Staff could then return to the Council if such a marriage could be arranged, with a package to enhance the overall system. It would allow staff to talk with Pacific Bell on an official basis while making it clear they were not negotiating the award of a franchise, Councilmember Sutorius believed it would be more satisfactory if Council first acted on item 2, then introduced item 3 to cover what Mr, Zaner discussed to convey the desire more strongly than by incorporation into a set of guidelines. During the RFP discus- sions the previous year, a consultant was pressed for a judgment by a Councilmember, and properly resisted throughout the process. At d late hour, the consultant finally., gave a personal opinion that the reoul ators, years earlier, .should have arranged for a common carrier to cable the country, allowing the cable industry to focus on software and programming, which the user was inter- ested in and affected by. He agreed, and the prospect of having design and construction take advantage of Pacific Bell's expertise in ,7 pertnershi p was -_sufficiently . attractive to become .+: i..: r..t: vii . � riw .v point -of s Staff suggested that item 2 not be amended, and after i t was acted on, he would make a further motion inviting Pacific: Bell to dis- cuss its participation potential or availability. AMENDMENT: Mayor Klein moved, seconded by Levy, to amend 2) of staff recommendations, directingstiff to report back to Council on a regular basis no more than 60 days apart. AMENDMENT PASSED unanimously. SECOND PART OF NOTION AS AMENDED PASSED unanimously. NOTION: Conncils..ber SutoriMs moved, seconded by Cobb to direct staff to discuss with Pacific Bell the possibility- of its proposal being 'applicable .to either or, both of the franchise nego- tiating parties. 4 7 0 3 6/19/84 Councilmember Sutorius did not want the discussions limited to the "successful franchisee," in order to leave the most latitude to both parties. Councilmember Renzel asked how staff envisioned the motion work- ing. Each company in part 2 of the motion submitted, or put together, complete proposals for construction and operation of the system. _ She asked if staff envisioned Pacific Bell issuing a set of criteria on which they- would be available to either applicant, or whether the applicants would have to negotiate . separately with Pacific Bell and return with two different possible financial scenarios with Pacific Bell. Mr. Zaner Gel i eyed Pacific Bell would initially work through and with staff to see whether their services and expertise might be of value to the franchise proponents. If there appeared to be a chance it could work, staff would bring the parties together. Councilmember Renzel asked when t. -he parties would be brought together. Mr. Zaner said they would be brought together before a company was chosen. Councilmember Renzel was assured that whatever Pacific Bell came up with would be available equally to both applicants. Vice Mayor Levy was willing to support the mot'on, but said there was no bias on his part for Pacific Bell or any other proposal before the Council, and he did not want City Cable or the Cable Co-op to feel pressured by his vote. The applicants should do what was in their best judgment, and not feel pressure from the Council. Mayor Klein understood the discussion would be different from the negotiation directed in part 2 of the motion. The intent was to have something positive come from the negotiations. Discussions might work well, but if not, it was all right. Mr. Lefler said that was his understanding. He clarified that Council intended that staff negotiate two first class agreements, without pitting one proponent against the other, or running one to. the advantage of the other. The idea was to return with two of the best agreements possible. If in that process, they could improve on the agreements by marrying in the a perti se and ser- vices of Pacific Bell, so much the better. They wQul d attempt to do so, but it was an option that would come after trying to put together the best agreements possible. Mayor Klein said he could support the motion with that understand- ing. It appeared to be exploratory to see if Council ° could do better for the community, but it remained to be seen. PART 3 OF THE MOTION PASSED unanimously;_ NOTION: Councilmember Bechtel moved, seconded by menu, to adopt guidelines as outlined on page 8 of the Arnold a Porter report, to be used by staff in negotl eti ng as follows: 1 High penetration of subscriber services at the lowest possible cost; 2. Broad diversity of servicesavailable uniformly throughout ; the Service Area, 3. Widespread community i avol veaeut in local programming, access, and related communications servicesby 'residents, governmental departments anti ageaci os. l anti tlti oaa, boss tresses. and others wlthie`the Service Area; NOTION CONTINUED Zt i 4. Creative uses of cable technology to foster participation in local self-government and community activities; 5. Active cooperation between the cable operator and City agencies and departments and instigations with the Service Area, including, in particular, educational, cultural, and other institutions, including Stanford Uni verni ty, Palo Alto Unified 'School District, and Foothill College, that may pro- vide cable programming and services over the system; +b. A technically sound and flexible cable system consistent with the state--of-the-art cable technology; 7. Interconnection of the system to cable systems throughout the region and to external sources of programs and services; coordinated programming and operational relationships with. cable systems within the region; 8. Timely and orderly construction of the system; 9. Efficient and effective oversight and regulatory mechanisms; U An economically viable cable system; and 1. An ownership structure that enhances community participation and maximizes the service and economic benefits of cable tele- vision to the residents of the Service Area without unac- ceptable risks to the City. Counci lmember Bechtel believed item 11 could be deleted since Council discussed an ownership option, and agreed with Mayor Klein to retain it since it was sufficiently general. Counci linember Fletcher asked the record to reflect .that although the system would serve multiple jurisdictions, only one government channel was offered. She understood from the Co-op proposal that it was possible to simultaneously broadcast from Menlo Park and Palo Alto, but she was concerned about possible conflicts between meetings of the Council and the School Board plus the possibility of an important additional community meeting. She did not want such coverage limited, and hoped everyone was aware of possible conflict. Counci l saetaber Cobb said after reading the material, he was sur- prised at how long the negotiation process was expected to take. Given the complexities Council added, they should not complain, but he hoped a product of the negotiation process would be extremely firm schedules for getting the system ia place so the people could get the system for which they waited so long. It was Important to have specificity as to when the syste : would go, up, what the schedule would be, and when people would have the sys- tem. Vice Mayor Levy hoped Menlo Park, Atherton, and East Palo Alto City Councils were grateful for all . the time Palo Alto City Council saved them. Countilmember Sutorius said staff suggested earlier that Council might want to elaborate on item 3. He suggested Council incor- porate into the development process durin the negoti ati ons some recommendations to be formulated along the lines discussed in the materials supplied by Ms. Harrington of the American. Association of University Women n (AAUW) , not with the intent of preempting the Co-op process in terms of their 'porticn . of the appticeMien, but. rather supplementing it. There were,governance philosophies and the potential for some kind of liaison , boerd to :. ensure that Atherton:, Menlo Park; the unincorporated areas and East Palo Alto would have something supplemental, auxiliary and some type of authority with respect to the membership which would not be compe- titive with the board process but cooperative with the company that finally became the vendor. It would not stipulate its design, but rather that the concepts be incorporated into the review process and recommendations. AMENDMENT: Councilmember Sutorius moved, seconded by Woolley, that point 3 include a reference to Cable Television: What It Means For You as a reference %ateriat for oeviioping turtnar r comaiendati errs on the community involvement portion of the fran- chise operations Mayor Klein felt overwhelmed. To the 11 guidelines that took up one page, the suggestion was to add an additional guideline of some 5U pages. Councilmember Sutorius said he wanted to incorporate the study only as reference material for staff to utilize. Mayor Klein did not see why staff needed it. Item 3 spoke to widespread community involvement in local programming, access, and related communications services by residents, governmental depart- ments and agencies, institutions, businesses, and others within the Service Area. They were trying to remain general, which meant language as general as possible. Councilmember Sutorius said staff asked whether there should be elaboration, and members of the public requested a stronger defi- nition of how to ensure a full sense of local participation. He did not intend to discredit the proposals before the Council, but wanted to give some elements of design consideration for staff to incorporate into the full development of the franchise negotia- tions. SUBSTITUTE AMENDMENT: Councilmember Bechtel moved, seconded by Fletcher, to amend point 3 to add language stating that there should be strong community control of public access. Councilmember Bechtel said her substitute amendment was to streng- then the public access portions as a subpart of point 3, not to replace it. As outlined by Mayor Klein, point 3 was sufficiently broad tc' include all parts of the report proposed by Ms. Harrington. Counciloa$Ober Fletcher did not believe either amendment was neces- sary al through she preferred the substitute amendment because the Cable Co-op, by its nature, already incorporated that element. First there were discussions, with the Council making a decision further along the line 9 and if that `'kind of element' were not included, the Council would not offer a franchise. Councilmember Woolley did not .feel the amendments-; were mutually exclusive only that the first was more specific. The three groups that carne up with the recommendations in the report put in .a con- siderable amount of time --one year per organization, and she wanted to see Council back there by recommending them to staff as a reference. All the people involved in the organization deserved that much consideration. . he recommendations were specific, whereas Council deliberately aid not go into such detail at that point. They did not discuss access much, which was the prime focus of all three recommendations. She believed Council should give make an official recommendation that staff use them as a ref- erence. Vice Mayor Levy believed Council was wrong" i n changing the RFP at that point and hour in the evening. It brought . up a new item for which he had not carefully prepared. The RFP was the subject of much discussion throughout the community and the resod t of a great deal of. work, and it formed the = basis for responses from the 4 7 0 G. 6/19/84 franchise applicants. With that in w id, a1chough there was much positive in what was proposed, he believed Council should stay with the RFP because he was comfortable with the proposals sub- mitted by the City Cable and the Cable Co --op. Clearly, both recognized the need for widespread community involvement and com- munity control of the public access areas, and when it came to approving a specific franchise application, it would be a critical element the Council would look at. He was comfortable wt th the RFP as it now stood, but would be uncomfortable if Council tried to make changes on a selective basis at that late hour. Mayor Klein agreed with Vice Mayor Levy and believed it was a mis- take on the part of staff to suggest a change in item 3 at all. It was a major item, and did not denigrate the work done by the citizens. He agreed with most of Zheir findings, but the Council had not focused on those points. Almost all members of the Council believed Council should not decide anything major after midnight, and followed the general policy of setting forth broad guidelines for the staff and expecting them to negotiate terms that Council would find acceptable. When they returned, the Council would focus on such matters as access, and would spend a lot of time on it. If was a mistake to tie staf W hands even slightly without giving the question the study it deserved. Councilmember Sutorius did not want to end the evening on two split votes. With the permission of his second, he withdrew his amendment, and suggested Councilmember Bechtel withdraw hers. AMENDMENT WITHDRAWN BY COUNCILM£MBERS SUTORIUS AND WOOLLEY SUBSTITUTE AMENDMENT WITHDRAWN BY COUNCILM£MBERS BECHTEL AND FLETCHER MOTION PASSED unanimously. AuJUJRNMCRT Council adjourned at i2:U2 a.m. ATTEST APPROVED,ti ty i;,r