HomeMy WebLinkAboutStaff Report 14200
City of Palo Alto (ID # 14200)
Utilities Advisory Commission Staff Report
Meeting Date: 4/6/2022
City of Palo Alto Page 1
Title: Discussion of Status Update and Preliminary Financial Business Models
for Palo Alto Fiber
From: Director of Utilities
Lead Department: Utilities
This item is for discussion and no action is requested. Staff will present a status update on the
Palo Alto Fiber exploration and seeks input from the Utilities Advisory Commission (UAC) on the
preliminary financial business models. The presentation will include business planning process,
advantages and disadvantages of outsourcing core functions, post-deployment staffing for
insource and hybrid (insource /outsource) business models, updated high level cost estimates
and funding requirement.
Business Case
Magellan established the Fiber to the Home (FTTH) business case goals by asking key questions
such as:
• what are the minimum sustainable take rates for success citywide?
• What is the effect of market dynamics?
• What is the optimal fiber route and construction method to reduce cost of deployment?
• What is the ongoing impact of competition?
Magellan provided a high-level analysis of the construction methods and costs for the citywide
fiber backbone as follows:
• Total fiber backbone project:
o 65% underground construction
o 35% aerial construction
o 44 miles of total fiber construction throughout City
o 432-count loose-tube fiber cable for City departments, fiber enterprise and
broadband expansion
o 144-count loose-tube fiber cable for electric, to support reliability, redundancy,
and future grid modernization growth.
Construction sequencing will be determined in the detailed engineering design. Underground
Construction will utilize Directional Drilling for the vast majority of the project.
o 24” to 36” depth unless Palo Alto has a greater depth requirement
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City of Palo Alto Page 2
o 12” separation from other utilities unless Palo Alto has a greater separation
requirement
o Soft and hard surface restoration, erosion control per City standards. The
detailed engineering design will codify all City requirements.
Aerial Construction will be Strand and lash or the installation of fiber in aerial duct:
• Pros: Aerial duct may protect fiber better from squirrels or other environmental damage
• Cons: 1) More difficult to cut into for access along fiber routes; 2) May raise future costs
of expanding the network due to additional labor required to cut the aerial duct for new
access points and it’s more visible on pole lines as it is thicker than strand and lash (One
inch compared to two inches).
Utility pole surveys and analyses are continuing, and replacement costs need to be solidified to
determine additional costs for aerial installations.
Major Construction Cost Drivers
• Total backbone construction between $22M - $26M depending on the final engineering
design.
• Recent labor and materials rates from several qualified construction contractors with
experience in the Bay Area
• Underground directional drill labor – average rates
o 2 2” Duct - $78.85/foot
o 3 2” Duct - $97.59/foot
o 1 4” Duct - $86.35/foot
o 2 4” Duct - $131.41/foot
• Underground labor accounts for 60%-70% of the total project cost
• Total labor accounts for 85% - 90% of the total project cost.
In 2021, City Council and UAC approved Staff and Magellan to pursue an engineering design and
business plan to build out of the City fiber backbone in a manner designed to support citywide
FTTH. In addition, Council and UAC recommended establishing the City-operated Internet
Service Provider (ISP) instead of a Partner ISP due to loss of local control of service quality and
pricing and viability of partnership model.
The Business Case evaluates two City-operated ISP models. The City can provide ISP with either
(1) 100% in-house staffing or (2) hybrid of insource (in-house) and outsourced staffing. Some
broadband functions are core competencies and can be easily managed by the City, while other
functions are new and can be outsourced where the City doesn’t have the expertise in-house.
Subsequently, outsourced functions have the potential to slowly be brought in-house through
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City of Palo Alto Page 3
hiring and as City staff becomes more comfortable with the day-to-day operations of the fiber
network. Magellan has identified specific advantages and disadvantages for each model as
follows:
• 100% Insource
Pros: Total control; quality of service; institutional knowledge
Cons: Higher labor costs; higher learning curve
• Hybrid of Insource and Outsource
Pros: Lower labor costs; flexible start-up and scalability
Cons: Lower service levels; contract risks
Attachments:
• Attachment A: Presentation
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Preliminary Financial Review
Palo Alto Fiber
April 6, 2022
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- 2
AGENDA
•Status update
•Business planning process
•Develop alternatives
•Model costs
•Weigh pros and cons
•Review preliminary financials
•Next steps
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STATUS UPDATE
•Engineering Design –60% Complete
•Business Planning –75% Complete
•Engagement & Outreach –50% Complete
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BUSINESS PLANNING
Planning Area Focus
(Checkmark means complete)
Business Operations
Management
Customer Service
Billing & Finance
Sales & Marketing
Network Operations
Tech Support
Engineering
Regulatory Review •State Agencies: CPUC
•Federal Agencies: FCC, USAC
•Compliance & Reporting Requirements
Governance Models
•Legal Structure
•Board Powers
•Policies, Procurement, Rate Setting and Management Decision
Guidelines
Preliminary Pro Forma Financials
Capital Plan
Staffing Plan
Rate Sheets and Packages
Income Statement
Borrowing Schedules
Final Pro Forma Financials •Update Capital Plan Based on Final Engineering Design
•Update Take Rates and Income Statement Based on Survey Results
•Provide Final Set of Financials with Sensitivity Analysis
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- 5
BUSINESS PLANNING
Determine best mix of
existing resources, new
hires and strategic vendors
for Palo Alto Fiber
Existing
Resources
New
Hires
Strategic
Vendors
Finance &
Accounting
Sales &
Marketing
Tech
Support
General
Management
Operations
Management
Overnight
Customer Service
Billing Field
Services
Network
Design
Customer
Service
Customer
Service Construction
Legal Service Quality
Control
Construction
Management &
Inspections
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- 6
PROS & CONS OF OUTSOURCING
Pros Cons Can the Cons be
Mitigated?
Achieve lower costs due to private
sector overheads and shared staff
among multiple customer
accounts
Risk of lower service levels based
on vendor’s ability to scale and
management of the accounts.
Strong service level agreement
with penalties for non-
performance and incentives for
high performance
Flexible startup operations using
vendors that have the experience,
processes and personnel
No institutional knowledge
building within the organization,
which could lead to a lower overall
customer experience. Finding the
right cultural fit may create friction.
Keep high-touch customer
interactions inhouse. Consider
outsourcing other functions during
the first several years, then bring
inhouse. Ramp down vendor
contracts as insourcing occurs.
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- 7
INSOURCE ORG CHART
Assistant Director
Palo Alto Fiber
Engineering &
Operations Manager
Customer
Service
Supervisors (1)
Field Services
Manager
Sales &
Marketing
Manager
Senior Network Engineers
(2)
Plant Maintenance
Techs (2)
Installation &
Service Techs (3)
NOC Techs
(4)
Customer
Service Reps(3)
Res & Biz
Account
Manager Billing Tech
Revenue &
Accounting Manager
Network Designers
(2)
24 Total FTE at Year 5
Share with existing utilities. Allocate 25% of these costs to
broadband.
Utilize existing CSS, allocate 50% of the costs. Add 3 new
CSRs. Shift overnight calls to 3rd party.
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Share with existing utilities. Allocate 25% of these costs to
broadband.
- 8
OUTSOURCE ORG CHART
Assistant Director
Palo Alto Fiber
Engineering &
Operations Manager
Customer
Service
Supervisors (0)
Field Services
Manager
Sales &
Marketing
Manager
Senior Network Engineers
(1)
Plant Maintenance
Techs (1)
Installation &
Service Techs (2)
Customer
Service Reps(2)
Res & Bus
Account
Manager Billing Tech
Revenue &
Accounting Manager
Network Designers
(1)
NOC Techs
(2)
Outsource to Network OperatorKeep several key positions
internal
Insource, plant O&M, outsource heavy lift and emergency repair functions
17 Total FTE at Year 5
Utilize existing CSS, allocate 50% of the costs. Add 2 new
CSRs. Shift overnight calls to Outsourced Network Operator.
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COMPARING MODELS
Outsourcing key
functions lowers
the City’s overall
cost, due to
lower labor
overhead and
shared resources
from vendors
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-10
PRELIMINARY BUILD SCHEDULE
2023 2024 2025 2026 2027 2028
Year #1 2 3 4 5 6
Miles of Fiber -90 180 270 360 360
Residential Customers Passed 6,501 13,035 19,602 26,201 26,332 26,464
Business Customers Passed 998 2,001 3,009 4,022 4,042 4,062
Residential Customers Connected 0 391 1,959 5,103 7,210 8,468
Business Customers Connected -60 301 783 1,107 1,300
Take Rate –(Residential & Business)0%3%10%19%27%32%
Average Res Connected Per Day -2 6 12 8 4
Average Biz Connected Per Day -0 1 3 2 1
Will change
based on final
take rates and
construction
plan
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-11
FINANCIAL PLAN
Costs Original Estimates 2021 Current Estimates
Fiber Backbone $ 22,277,161 $ 25,618,735
Fiber To The Home/Premise $ 85,972,581 $ 98,868,468
Cost Savings if Built Together $ (4,476,825)$ (8,730,823)
Working Capital Set Aside $ 12,500,000 $ 12,500,000
Total Costs $ 116,272,917 $ 128,256,380
Funding Original Estimates 2021 Current Estimates
Existing Fiber Fund $ 32,500,000 $ 32,500,000
Contribution from Electric to Fiber Backbone $ 10,000,000 $ 10,000,000
Total Available Funding $ 42,500,000 $ 42,500,000
Total New Funding Required $ 73,772,917 $ 85,756,380
Will change
based on take
rates, final
design and rates
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-12
FINANCIAL PLAN
•Interim Financial Plan – Updates
•Updated design provides more accurate quantities and costs
•Inflation due to supply chain issues has raised materials and labor costs
•Additional 20% contingency added to original estimates to compensate
•Construction contingencies are now at 40% on materials and labor
•More inflation experienced on materials than on labor
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FINANCIAL PLAN
•Finalizing the Financial Plan
•To be developed in advance of Council —UAC joint session in August
•Final cost estimates based on completed engineering design
•Projections for materials and labor increases in 2023, 2024, 2025, 2026
•Projections based on key indicators to determine inflation rates
•Adjusted construction contingencies to arrive at final costs
•Potential hedging strategies to abate risks of higher costs
•Take rates and rate schedules (based on survey)
•Pro forma income statement
•Borrowing summary with schedules
•Sensitivity and business risk analysis
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-14
Next Steps
•Finish engineering design
•Finalize capital costs
•Additional customer engagement
•Launch survey
•Collect survey results
•Estimate take rates
•Determine rates
•Finalize financial plan
•Develop governance and regulatory plan
•Joint Council/UAC study session in August 2022
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