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HomeMy WebLinkAbout1999-04-05 City CouncilTO: FROM: C ty HONORABLE CITY "COUNCIL CITY MANAGER City of Palo Alto Manager’s Report DEPARTMENT: UTILITIES 17 DATE: SUBJECT: APRIL 5, 1999 CMR:162:99 PROVISION OF UNIVERSAL HIGH SPEED CONNECTIVITY TO ALL PALO ALTO RESIDENTS AND BUSINESSES The purpose of this report is to provide information to the Council regarding the altematives being presented to the Council for the provision of high speed, advanced telecommunication connectivity for all Palo Alto residents and businesses. The pros and cons for each of three alternatives are summarized, along with the resource needs associated with each. BACKGROUND On May 8, 1995, the City Council, in a bold move to expedite the upgrading of telecommunications facilities in Palo Alto, approved funding for a Telecommunications Study (CMR:240:95). As a result of this study, the City Council adopted the following set of telecommunications objectives: Accelerated deployment of a broad range of advanced broadband telecommunications services to all of the citizens and businesses in Palo Alto. Decreased costs for both conventional and advanced telecommunications services (as compared to the costs for similar services if provided without City involvement). 3.High quality for both conventional and advanced telecommunications services. Enhanced competition among telecommunications service providers and increased telecommunications choices for consumers. 5.Limited or no financial risk exposure to the City. Based on these objectives and a desire to spur development of advanced telecommunications services in Palo Alto, Council directed staff to construct a dark fiber optic ring around Palo Alto (CMR:361:96) with the intent of leasing dark fiber to telecommunications providers. The dark fiber ring was essentially completed in early 1998 (Attachment A) and the City CMR:162:99 Page 1 of 7 currently has leased dark fiber to two telecommunications providers and four businesses. In February 1998, Council approved staff’s recommendation that the quickest method of obtaining advanced telecommunications in Palo Alto was to solicit proposals from entities interested in providing universal service to residences and businesses through the expanded use of the City’s existing assets, including the fiber optic backbone (CMR:458:97). This process was designated as the Universal Telecommunications Service Request for Proposal (UTS-RFP). As work proceeded on the RFP, staff felt that the process could be improved upon if a fiber optic telecommunications network was constructed in a small area as a trial, with the experience and results gained assisting with the development and evaluation of the UTS-RFP. The trial was to be done prior to completion of the UTS-RFP. In July 1998, staff informed Council of this potential improvement to the RFP process (CMR:256:98), designating it the Fiber to the Home (FTTH) trial. After considerable staff time and effort was expended on developing the design and implementation method for constructing and operating a FTTH trial and surveying the community, staff reached the conclusion that the major benefit from doing the trial would be as a precursor to a citywide build out of FTTH by the City. Since a citywide build out would be very expensive and represented what staff believed was a level of risk that was not congruent with the original Council guidelines for City telecommunications efforts, staff recommended to Council that the FTTH trial be abandoned and that Council direct staff to continue with the original conception of a UTS-RFP (CMR:424:98). Council referred the issue to the Utilities Advisory Commission (UAC) and Policy and Services Committee for review and recommendation. At the UAC meeting of January 6, 1999 and the Policy and Services Committee meeting on January 12, 1999, staff presented its concerns regarding the construction of the FTTH trail and why it felt it would be better to focus on obtaining high speed advanced telecommunications connectivity through the UTS-RFP process rather than constructing the FTTH trial. The UAC recommended that staff be directed to proceed with the UTS-RFP and revisit the Fee options for the FTTH trial project by looking at different prices paid by the participants to make the project less costly to the City and reduce the amount of time to recover City funds for construction. (Attachment F) The Policy and Services Committee also recommended that staff be directed to proceed with the UTS-RFP, and that staff formulate a proposal to construct a mid-size FTTH trial, with costs to the City in the $250-$275,000 range,(Attachment B) along with developing a proposal for implementation, selection, and mitigation of risk management factors. DISCUSSION Since the January 1999 meetings, staff has met with an advisory group appointed by the City CMR:162:99 Page 2 of 7 Manager on telecommunications issues, and with representatives of PA Fibernet. In those meetings, additional information was provided regarding the pros and cons of the alternatives presented to the Council. Staff believes it would be helpful to the Council in determining the City’s action to summarize the three alternatives under consideration: Alternative 1 is the staff proposal to proceed with the UTS-RFP, without a FTTH trial, and instead pursue a strategy to facilitate advanced telecommunication connectivity for Palo Alto residents and businesses through solicitation of public-private parmerships with technology experts in the provision of advanced telecommunication services. The City would provide reduced rates for leases of the City’s fiber ring, reduced fees for utility pole attachments, and conduit usage leases. Alternative 2 is to proceed with the FTTH trial, and to do the UTS-RFP after the trial, incorporating information from the trial, and assuming that FTTH will be a required option for the overall solution to the "last mile" problem; this alternative is supported by PA Fibernet. Alternative 3 is to proceed with the UTS-RFP and the FTTH trial on a parallel track; this alternative represents the recommendations of the UAC and Policy and Services Committee. The pros and cons of each alternative are summarized, as well as the resource costs that would be required if the alternative was selected. Alternative 1: Proceed with the UTS-RFP, without a FTTH trial, and pursue a strategy to facilitate advanced telecommunication connectivity for Palo Alto residents and businesses through solicitation of public-private partnerships. This alternative assumes that a City-run FTTH utility will not be pursued. PROS: Enhanced telecommunication services could be provided to the commtmity more quickly by utilizing a variety of technologies Little or no financial risk to the City Would leverage City’s asset in the dark fiber ring, as well as other utility infrastructure and right-of-way, to provide advanced telecommunication services to the community Partner with telecommunication professionals for flexibility and expertise Potential revenue for the City Little impact on existing staff, except during analysis of responses to RFP Not locked into one technology, may choose multiple types of service providers City not at risk for obsolescence Not in competition with private industry City not in the telecommunication business CMR: 162:99 Page 3 of 7 ,CONS: o May end up with only medium high speed, .5 to 1.5 Mb/s, with reduced upstream bandwidth, with limits on use. (Attachment C) May utilize combination fiber and coax/copper knowing that coax/copper will eventuall~ be obsolete and require replacement May not provide option of fiber to the home Private owned and operated system, City will have less control than if it owned system itself Combination systems not easily expandable without facility changes Private owner will be in the business to make money, possible at the expense of service to customers; may not offer choice of services Large variety of proposals could be difficult to evaluate fairly and in a timely manner City may have limited control over network policies and services May reduce the number of other competitors trying to provide service in the community (Attachment D) Required Resources: If this is the Council direction, staff will return with a Budget Amendment Ordinance to fund the following: $40,000 Consultant support during analysis of responses to the UTS-RFP Alternative 2: Proceed with the FTTH trial, and do the UTS-RFP after the trial, incorporating information from the trial, and assuming that FTTH will be a required option for the overall solution to the "last mile"problem. PRO S .’_ o o o Demonstrate 10 Mb/sec and 100 Mb/sec service Demonstrate high speed Intemet access in residential environment as well as for businesses Demonstrate 24-hour per day service (always connected) Cost comparable with lessor technologies ($100-$200 per month) Demonstrate fiber superiority to competing technologies Provide cost/operation information to scale up for citywide buildout Utilizes dark fiber ring to provide advanced telecommunication services to the community Demonstrate market demand for high speed service; could potentially act to build a market when performance of system is demonstrated Potential revenue after construction costs paid off Demonstrate construction techniques in Overhead and Underground areas (large trial only) CONS: ®City has no expertise in "lit fiber" operation or fiber electronics May Put City into telecommunication business, may fall under FCC rules Installation/construction will have to be contracted out Contract for system operation (7/24 operation, repairs, customer calls) CMR:162:99 Page 4 of 7 Contract with single Internet service provider (ISP) for Intemet service (customers will have one choice of ISP) City provides funding for construction: payback period 5-8 years, City funds at risk Delayed issuance of UTS-RFP may delay opportunity for-provision of advanced telecommunication service by private sector FTTH trial only provides limited information for UTS-RFP, since broader range of technology will be considered Not a Core Competency for City Staff City and System Operator will face challenge of providing adequate customer service/performance for intemet access Difficulty in obtaining property for switch site and providing service in existing underground area with no city owned communications conduits (large trial only) Required Resources: If this is the Council direction, staff will return with a Budget Amendment Ordinance to fund the following for a 69-home (medium sized) trial: $125,000/yr w/benefits $25,000 $380,000 Medium ($810,000) Large $20,000 TBD Senior Telecommunications Engineer: Design, Project Management Office equipment and vehicle for Senior Telecommunications Engineer Construction of FTTH trial: $100,000 will be collected from residents at start of construction (medium size trial) Construction of FTTH trial: $220,000 will be collected from resident at start of construction (large size trial) Trial operation: Consultant for design, construction contract, ISP contract, system management contract Market Assessment costs Alternative 3: Proceed with the UTS-RFP and the FTTH trial on a parallel track. PROS: ¯Same as listed for alternatives 1 and 2 °Provides maximum opportunity for a solution to most of the needs of the potential customers without waiting for completion of the FTTH trial CONS: ° ° Same as listed for alternatives 1 and 2 Dilution of staff efforts between two projects running at the same time may affect quality of work and/or cause delays Required Resources: If this is the Council Direction, staff will return with a Budget Amendment Ordinance to fund the following: CMR: 162:99 Page 5 of 7 $40,000 $125,000/yr w/benefits $25,000 $380,000 Medium ($810,000) Large $20,000 TBD Consultant support during RFP Response Analysis Senior Telecommunications Engineer: Design, Project Management Office equipment and vehicle for Senior Telecommunications Engineer Construction of FTTH trial: $100,000 will be collected from residents at start of construction (medium size trial) Construction of FTTH trial: $220,000 will be collected from residents at start of construction (large size trial) Trial operation: Consultant for design, construction contract, ISP contract, system management contract Market Assessment costs POLICY IMPLICATIONS Directing staff to solicit proposals does not have any direct policy implications, but subsequent actions could have significant policy implications, depending upon the Council’s decision as to how to proceed with the results of the UTS-RFP and/or the FTTH trial. In terms of issues related to pricing of the services provided by the FTTH trial, if Council directs staff to proceed with the FTTH trial, staff recommends that Council adopt a policy of 100 percent cost recovery for operations, and recovery of the cost of constructing the system over five years. Proceeding with the FTTH trial, based on its size, could put the City into the telecommunication business and move it closer to having to comply with FCC regulations. It would also expose the City to possible litigation from other private agencies that have attempted to restrict municipalities from expanding into the Telecommunications business. TIME LINE UTS-RFP: The proposed time line is as follows: May 99 Jun 99 Jul 99 Nov 99 Apr 00 Telecommunications Advisory Panel review UAC review Send out Request for Proposal Start review of RFP responses Recommendation to Council FTTH: The detailed time line for a FTTH trial is described in Attachment E. The major milestones are: Jul 99 Sep 99 Jan O0 Market assessment report Recommendation to Council Start construction CMR: 162:99 Page 6 of 7 Jun 00 Jan 01 Start operations Trial results report completed ENVIRONMENTAL REVIEW. A mitigated negative declaration has been prepared finding that the project will not have significant environmental impacts provided that mitigation measures are included in the project. Any project undertaken as a result of the RFP or FTTH trial will be required to adopt the mitigation measures identified in the environmental assessment that was completed prior to the construction of the fiber backbone. ATTACHMENTS Attachment A: Attachment B: Attachment C: Attachment D: Attachment E: Attachment F: PREPARED BY: Palo Alto Fiber Backbone Route Map Mid-size FTTH trial area cost options Technology Alternatives, Speed, & Cost Comparisons Recent Headlines on Internet Access FTTH trial Time Line UAC Minutes of January 6, 1999 Larry Starr, Assistant Director of Utilities Engineering & Operations Emily Harrison, Assistan,.t City Manager DEPARTMENT HEAD: EDWAt~D MRIZEK Director of Utilities CITY MANAGER APPROVAL: FLEMING Manager CMR: 162:99 Page 7 of 7 Municipal Service Center Elwell Ct, Deferred until 1999 STANFORD UNIVERSITY LEGEND ~Underground Singlemode Fiber Cable ~Aerial Singlemode Fiber Cable (~)Fiber Backbone Splice Point ("XY" = splice point name) Scale:p------ a2oo’~ -4 800’ Date: 3/15/99 CPAU TeLecornmunicaLions ~ 250 Hamilton Avenue ~ Pa[o Alto CA 94301 , 650-329-2275 ~ www, cpau.com/teLecom CITY OF PALO ALTO UTILITIES ATTACHMENT "B" MID-SIZE FTTH TRIAL AREA COST OPTIONS Base Price: $342,900 ISP: Single Internet Provider COST COMPARISONS FOR RECOVERY OF CONSTRUCTION COSTS Community Center Area: 69 Customers 56 customers @ 10 MBPS 13 customers @ 100 MBPS Speed Initial Payment Monthly Payment Years to Pay Back 10MBPS $1200 (Base)$35 (Base)14 100MBPS $2400 $70 10MBPS $1200 $50 (+$15)8 100mbps $2400 $85 10MBPS $1200 $65 (+$30)6 100MBPS $2400 $100 10MBPS $1200 $75 (+$40) 100M BPS $2400 $110 ADDITIONAL MONTHLY COSTS SINGLE INTERNET SERVICE PROVIDER ESTIMATED COSTS Speed BaselMonth Additional Megabits per day 10MBPS $50 with daily allotment of 150 Megabits $0.10 100MBPS $100 with daily allotment of 200 Megabits $0.10 6~ ATTACHMENT "D" Coml~any wants to give Palo Alto cable TV, .phone and fiber access Pac Bell slashes monthly price for high-speed Internet service Co-oP slashes cable modem prices. ATTACHMENT "E" FTTH TRIAL COMPLETION TIME ACTIVITY Council Directs Staff to construct a FTTH trial LINE DATE APR 99 Return to Council for Resources Authorization Complete Preliminary Design Start preparation of Market Assessment Complete Market Assessment in target Areas Report Preparation Presentation to UAC Complete EngineeringlConstruction Specifications Recommendation to Council Issue Request for Bids for FTTH Trial Construction Internet Access/System Operation Internet Service Provider Award Contracts Start Construction Start Operation Evaluate Network Performance Preparation of Trial Results Report Trial Results to UAC & Council MAY 99 JUN 99 JUL 99 AUG 99 SEP 99 SEP 99 DEC 99 JAN 00 JUN 00 DEC 00 JAN 01 FEB 0t ATTACHiVIENT "F" a. Fiber-to-the-Home Proposed Trial Vice Chair Sahagian: Is there a presentation? Mr. Mrizek: I have a few introductory comments. I will then ask Larry Starr to make a brief presentation on fiber-to-the-home. First, I would like to ensure that you have in your packets the staff report that we gave to the council on December 14. Also, we have included a memorandum from me revising one of the tables in that CMR, and that memorandum is entitled 8.a. Revised. We also have included the "Fiber-to-the-Home Trial Technical and Budgetary Report" which was prepared by the Palo Alto Fibemet. Those are the document we have put in your packets. Vice Chair Saha~an: One thing I would like to mention on behalf of all of the commissioners is that we have all, both individually and collectively, met with the fiber-to-the-home people to try to gain a better understanding of what was being proposed from their perspective, and what some of the issues were. We have had open discussions and discourse, so I feel that the commission has gained a lot of insight through that. In a desire to try and avoid having dozens of people coming forward to speak, we agreed with some of the key people in the fiber-to-the-home group that they would make a presentation of some reasonable duration, and there will be some individual comments taken, as well. After your presentation, they will be making a brief presentation. Mr. Mrizek: Thank you. A year ago, the Utilities Advisory Commission recommended that the City Council approve staffs proposal to prepare a Reqffest for Proposals to seek an entity that may be interested in surveying some or all of the financialrisk associated with adding the infrastructure necessary to accelerate the availability of affordable, high-speed data transport and Interact access for all of Palo Alto. This universal service RFP would solicit proposals from organizations that may be interested in using the city access at a discount. When I say "city access," this would be our poles, conduit and our fiber optic backbone. This would.be the foundation of a network capable of extending service to all areas of the city in a l:easonable amount of time. When the council approved this RFP process last February, staff stated in the City Manager’s Report that "an altemativ6 would be for the city to assume the financial risk by constructing and operating its own telecommunications network to provide universal service. However, staff believes that the financial risk may be too great to guarantee the success of this approach." Nothing has changed since last year to alter staffs belief. Last February, while preparing the draft RFP and considering potential approaches for the purpose of evaluating proposals, a prime preliminary fiber-to-the-home network design emerged as a potential option. After a thorough review of this concept, a Cit3f. Manager’s Report was submitted to the council on December 14fla, recommending that the fiber-to-the-home trial not be done. The staff report details several reasons for recommending against the trial. I will not go into detail on the staff report, but I want to point out a few items. Vice Chair $ahagian: May I interrupt with a question? Did you say that on December 14, a recommendation was put before the council? MINUTES UAC:010699 Final Page 8 of 65 Mr. Mrizek: Yes, the CMR that you find before you recommending that the trial not be done, and we requested that council concur with the staff recommendation. This was then referred to the UAC. First and foremost, we feel that it is a significant policy issue as to whether the city wants to enter into a telecommunications business with a city-financed, city-constructed and city-operated fiber-to- the-home network. Should the city compete against private enterprise in an industry where the technology is, at best, a moving target and also is not an essential utility service? The primary reason for doing a fiber-to-the-home trial would be to gather information for scaling up the results to a citywide network. The financial risks,.staffmg impacts and long-term operating impacts of doing a trial are significant, and a trial should only be considered as a prelude to building out a city telecommunications system. With deregulation of the electric industry, the Palo Alto electric utility will continue to face increased compe!ition. Currently, the electric utility reserves are fmancially sound as a result of long-term planning and sound business decisions. However, as the UAC knows, we are still collecting the transition cost recovery charge in our rates to deal with standard costs for the Calaveras hydroelectric project. One may surmise that competition will only affect the supply business, and the distribution business will not face this competition. Therefore, we can support projects like fiber-to-the-home. This, however, is not the case. The California Public Utilities Commission recently issued an order instituting rule-making on the commission’s own motion to solicit comments and proposals on distributed generation and competition in eleclric utility distribution service. This rule-making will provide the CPUC the opportunity to consult with .thb legislature, the state administration, and other authorities that have jurisdiction or an interestin electric distribution issues. The reality of this action is that the Palo Alto distribution business must remain competitive. Additional program, s to impact the cost of doing business and its use of existing staffmust be prioritized. Finally, I want to state that staffis committed to the di~.ec~ion of the council guidelines to accelerate the deployment of advanced communications to the citizens and businesses of Palo Alto to enhance competition among telecommunication service providers at limited or no financial exposure to the city. We believe that the RFP process seeking an entity that will work with the city does satisfy these guidelines. I will now turn this over to Larry Start for a brief presentation On the fiber-to-the-home .project. Mr. Starr: I have some overhead projections that will explain what a trial would look like. We did a survey and solicited input from citizens of Palo Alto that would be interested in participating in a trial. We have put together three different areas that could be considered. We have one that was considered small, and we had a medium sized area, and one that was considered a larger size area So in the interest of saving time, we did a very detailed analysis and cost estimate for what we considered to be the medium sized area, which was for 69 residential customers. This area is what we called East and West of Newell. The switch equipment would be located in the substation at Hopkins. That is the extent of the work that has been done on an initial design where we would provide service to all of the customers in what we consider to be the medium sized area. This slide shows the basic configuration of fiber-to-the-home. This is the existing fiber ring, and we MINUTES UAC:010699 Final Page 9 of 65 would need to construct a switch site. From the switch site, we would nm an individual pair of fibers to every customer. So they would go out over the system, and at each place where we would break them out for a customer, we would have this splice device, and then a service dropruns into the home, with a box on the side of the home, where we would make another splice, go through the customer’s wall and on into their computer system. One of the things that is clear to us in a fiber situation like this is that it is very labor-intensive. There is no magic in the electronics. That is fairly straightforward. The prices have come down, and there is no magic in the connection up to the computer. They currently have the Ethernet system to do that. But the heart of the system is out here in the fiber and also in that splice enclosure. Let me show you what that looks like. (He displays a segment of the system) I had our fiber staffput this together for you. We need to run a messenger along the distribution lines, and we lash our fiber cable to it. Everywhere that we would want to break out for a number of customers, we need one of these splice enclosures. This is a typical 144-fiber cable. There are twelve bundles of twelve fibers ~ this cable. You need to make a slack loop so there is enough slack in the fibers to cut them apart, splice them and break out the individual service drop. One thing that is different in the fiber-to-the-home as opposed to a wire system or a coax system is that you cannot tap offthe fibers. So from the switch enclosure, you physically have to run a fiber from that location to everyone’s home. That is why it takes so many fibers -- two fibers for the home. So in this cable, theoretically, 144 fibers could serve 72 customers. Since there are a lot of homes in Palo Alto, it takes a lot of cable and a lot of spli.c~s to serve the customers. You do not get very far away from the switch sites before you run ~3ut’of fi’ber and have to either build another switch site or do some other work with more switches to extend it. There is no tapping offof fiber. It eaunot be used like coax. This would be added out there onto the current distribution system in front along the streets and also on our rear easement in backyards. This slide shows an underground splice, and we have some areas where we would have to make an underground splice. Again, it is the same proposition. You can see that the cane goes in and out. The fibers are all broken out and laid in trays where they can be spliced and tapped, and individual services run. The message I want to give you is that it is labor-intensive. It takes time to do this. The fibers are little. You need good eyesight and good color vision, since they are color coded, and that is the only way you can tell them apart. This slide shows the cost estimate that we did. We took the medium size area, and we took our fiber staff, our engineering staff, our telecommunications manager, our consultant, and our operations staff, and we all sat down and spent a full day working out these costs so that we were comfortable in knowing that for this amount of money, we could construct this facility. Following that, we met with the residents from P.A. Fibemet, and they gave us some good input on better prices for some of the electronics equipment. We agreed that we could get by with two fibers, as opposed to four, as originally proposed. So we have a revised estimate. Our price changed from approximately $443,000 down to $375,600. That is what is in the December 14 CMR. This slide shows what our infrastructure looks like out in the real world. PacBel owns anywhere MINUTES UAC:O 10699 Final Page I0 of 65 from 19 to 22 feet on the bottom of our joint poles. They have a small space above that. There is a small space for communications, and then clearance to our electric secondary. As you notice, some of the distances are zero. Where we are out on the streets, we have power poles in the 45-50-foot range. There is adequate clearance, and that is where we strung our existing fiber ring. When you get into backyard lot lines and backyard facilities, a lot of those poles are 35-40 feet high, and all of a sudden, our communication clearance space goes to zero. So to build out an entire facility, it would require a number of poles to be replaced simply because we do not have clearance. The other alternative is to inlMnge upon the 4-6-foot clearance for the electric secondary area. We, as the owner, can do that, but it also takes a qualified electrical worker to do that, and that means electric .line personnel. You cannot just send .your regular fiber folks out to work in that space, so that is another restriction on its use. This is what it might look like to use our existing underground facilities. The main point here is a primary vault where we have our electric transformers from the vaults. We go to secondary vaults, and frdm there we go to the homes with the electric service. If we were to run fiber there, we would have to try and use existing conduit with electric facilities already in it and hope that you can get your fiber through there, or if we have spare duct, the spare duct can be used. Basically, from the transformer vault out to the home, we typically do not run spare conduit for the electric system. We have spare conduit for the primary in a lot of locations. So to simply say we have the ability to use our own conduit is not quite correct. We can use it if we can get something through it. What we have found in stringing the current fiber ring is that not all conduit is usable. So we would have to either construct new conduit or contemplate pulli.n~, out existing facilities and pulling in the same facilities along with another fiber cable. So’ther~ are some drawbacks. That concludes our presentation. Commissioner Gruen: Larry, do I correctly understand that in the underground case, you would break out all 144 fibers in each of the underground locations? Mr. Starr: If you are nmning a 144-fiber cable through there, you need to take the jacket offthe whole thing. You may only open up one of the 12 inner tubes and break the fibers out of that. Typically, what we would probably do is to cut all twelve, splice the ones that drop.service to the customers, and resplice ’the others. It is too difficult to try and pry them apart and just cut a few. That is what the trays are for. They make it easier to keep track of the spliced fibers. Commissioner Gruen: How is that different from overhead? Mr. Starr: You are down in a vault as opposed to being up on a ladder or in a bucket. But basically, the work is the same. Commissioner Gruen: So in the overhead case, you would also cut the entire 144 fibers, and splige the ones you were not going to use? Mr. Start: No, let’s say we had service at one of our splice points for three homes. We would take the black jacket off the cable, and we would then have the 12 colored bundles in there, as you saw MINUTES UAC:O 10699 Final Page I 1 of 65 in our container (looks like spaghetti). We would take one of those and cut that completely. We would skin back the colored jacket on that one, take six of those, two each to the three homes, and splice on a service drop fiber’ conductor. We would splice back together the remaining six, and they would continue on to another home down the street. Vice Chair Sahagian: How would t~e connection to a home differ fi:om a connection to, say, some of the commercial locations we are looking at and contracting for in terms of complexity? Mr. Mrizek: Currently, we are not connecting the electronics to any business in Palo Alto. ~We are leasing dark fiber off the fiber backbone to a service provider. What that service provider does with dark those fibers, if that company ties in with a commercial customer, it is that service provider’s responsibility to provide the electronics and the connection to that commercial establishment. For a fee, we would break out the dark fiber and run it to the property of the commercial company, still dark fiber, and charge for that service up front. After that, we walk away, and we provide the highway. The service provider does everything else. Vice Chair Sahagian: So basically, all of the agreements we have entered in thus far have strictly been interconnections by somebody else? Mr. Mrizek: Absolutely. Vice Chair Sahagian: I am very sensitive to the co.rfiments that you made about economic viability. I could not help but notice in the Cost Recov~ryAnaiysis that the annual net revenue is a very small percentage of the total system cost, so that it would seem that a relatively small change in the system cost number would dramatically change the annual net revenue. Is that a fair assessment? Mr. Starr: The net revenue does not have anything tq do with the cost of the installation. The net revenue is the money we receive from the monthly payments that the customers make to you, minus whatever costs we have to maintain the system. Vice Chair Sahagian: In your financing assumptions, can you refresh my memory on what your assumptions were of your financing? Mr. Starr: We used the city’s interest rate that they make on their reserve money, which is approximately 6%. Commissioner Dawes: I know that the citizens’ group has a major presentation to make, and I am not sure how we expect to deal with all of the issues that come up, but certainly one of the major items that affects the payback period, which is what is the most troublesome to the management of the utility department and to the commission, is the annual revenue for these test sites, however they are sliced and diced. When I met with the fiber-to-the-home people on Sunday, I voiced my interest in the assumptions underlying the revenue side. I also pointed out that I have been a subscriber to the DSL Service by Pacific Bell, which is a new, higher-speed service, but considerably slower than what is being proposed here. We discussed the monthly costs of this service in comparison to the MINUTES UAC:O 10699 Final Page 12 of 65 fiber to the home. My opinion at this point is that the assumptions underlying the revenue side are ones that should be discussed and thought through very thoroughly, because the payback periods are extremely sensitive to monthly revenue figures, whether $35 or $40 or some other number, but a Pacific Bell service oriented to the home is considerably more expensive for a considerably slower service, so again, I don’t know if we want to talk about staffs disinclination to go forward with this based on the finances and the risks involved, which may turn on assumptions that I feel need to be discussed and looked at very closely. Is this the time to talk about that, or after we hear from the folks present tonight? Vice Chair Saha~an: You have made a very good point about the sensitivity to the payback period. I believe that is going to be part of.the focus of the fiber-to-the-home people’s presentation. I would say, let’s hear their thoughts, and then look at the whole picture in a broad context. Seeing no one wishing to make further comments to be made, we can open the public heating. Michael Eager. President, Palo Alto Fiber Network. 1960 Park Boulevard. Palo Alto: It is a pleasure to be able to speak with you. I appreciate the fact that you were able to hear this on short notice. I also want to thank the city staff for their cooperation. The Palo Alto Fiber Network is a broad-based community group that was formed in August of last year to pursue and support the fiber-to-the-home trial. We would not be here if the city had not had the foresight to start a dark fiber ring. In creating the dark fiber ring, the city set up several policies. These were described in the city manager’s report of 1996, and I will not read all of it, but the city felt that it was an extension of the city’s long- standing policy of providing utilities infi:astru.cthre. Another major point was. accelerated deployment of advanced, broadband telecomrhunicafions to all of the citizens and businesses in Palo Alto. So what we are interested in doing is pursuing this same goal, the same objectives, of bringing fiber to the home for the benefit of all of the citizens. We are here tonight to talk about a trial in two neighbor.hoods delivering fiber to the home. As stated by Mr. Mfizek, we see this as a stepping stone to our long-term goal of having affordable connectivity, high-speed bandw, idth to all of the citizens of Palo Alto. The benefits of fiber to the home are: better communication within the community, better working environments, telecommuting, or a viable work environment for people who are disabled or home-bound; new services -- more services than you can probably imagine (the library to the home has been mentioned). With unparalleled bandwidth, we have unparalleled value. I don’t know that we can imagine all the possible uses that high-speed access will provide. I would like to turn this over .to Ken Poulton who will talk about some of the nitty-gritty details. Ken Poulton, 884 Los Robles Avenue. Palo Alto: I work at I-IP and live in the Barron Parl~ fiber trial area. An important background question is, do homes really use the Intemet? A federal government survey shows that nationally, we have about 30% PC ownership, but in Palo Alto, it is about 80%. The important thing that the federal study showed is that right now, we are at about 80% of the homes with computers that also connect to the Intemet. We can extrapolate that about two-thirds of Palo Alto homes presently, or about 16,000 homes, are connected to the Intemet. That traffic, of course, is growing very rapidly. MINUTES UAC:010699 Final Page 13 of 65 Is fiber optic service a good value? The thing to note is that since this is a technical commission here, we have done this on a logarithmic scale, and we have the other services, the medium bandwidth services are at one megabit per second, and fiber at ten times the speed, and our 100 megabit service at 100 times the speed. The costs are quite comfortable, in terms of monthly cost. I would like to show a little about the parts of the network,.because we need to use these terms. At the bottom, we have Infrastructure, the actual wiring, poles, switching equipment. Then there is Network Operations, the day-to-day operations of running a network. That includes functions of billing and customer support. An important piece of the network, a part that has significant cost, is Intemet access. An Internet access provider.is someone who carries user data between the local network and the Intemet. Services can be local on the local network, or they can be accessed through the Interact anywhere in the world. So where do the construction costs go for such a system? You can see immediately that the labor is reall~ where this goes. Cable is the second part, and most of each of these portions is in nmning the big cables down the street. Only about 20% of system cost is in the connections to individual homes. The total for the full-size trial that is proposed is $753,000, of which 30% is to be paid up front by user installation fees. That dollar figure is a little different from the city manager’s report, and the reason is that in the original December city manager’s report, it had one set of cost figures, and those showed cost recovery for the full-size trial in 40 years. The revision of that report last week reduced the estimate of the construction costs by $74,000, and that brought us to 26 years projected cost recovery. We propose to make two changes to the proposal. The first one was actually suggested in November by city staffwhen we met with them. It is to use a single Intemet access provider who also does the network operations function. This is simply a matter of recognizing a small-scale operation. It does not pay to build your own network center for the city, .so it has both a construction cost impact and, more importantly, it has an operational cost impact which affects cost recovery. So making that change brings us to the 13-year cost recovery that we can get. The other change that we propose making is relatively minor, that is, increasing the user fee from $35 to $40. We believe’that is an acceptable level of increase beyond the original survey that will not significantly reduce participation. We have also left out from thi~ analysis at this point $55,000 of other construction cost reductions that we have identified, however, we can ignore those because of the January revision of the report. The bottom line is if participation increases. We will say a little bit later why we believe participation will increase later, but if we increase participation by 50% over the initial rate, we will reduce the payback period to six, and if you double it, the payback period is four years.’ This slide shows graphically the cost recovery for three different participation rates. It starts out showing the costs that the city has up front, and we achieve a 10-year cost recovery at the current rate of signups. If we have more signups later, it comes back faster. So a significant question that has concerned the city staff.is, who is going to do what in this network enterprise. In particular, city staff MINUTES UAC:010699 Final Page 14 of 65 does not have the expertise at this time. If we look at the long-term vision, the city, of course, is the logical entity to do the fiber infrastructure. They have the experience with that, they own the poles, easements are much easier for them to do, and that is pretty straightforward. Network Operations is something that city could if it wanted to, or it could hire those out to a network operator. The definition of what comes under Netw.ork Operations is variable. Where does the dividing line occur? That is something the city can choose. In the long run, we want to have multiple Internet access providers. This is a function which can and should be competitive. With a city-owned system, it can be competitive. Again, in th~ trial we propose to merge the network operator and Internet access provider functions, just recognizing that a small system cannot do everything. Mr. Eager: Let’s answer some of the difficult questions. Why should the City of Palo Alto be involved in fiber to the home? It is building the roads, just like we build the infrastructure for other services. It is a utility that will take us into the next century. We will be needing the telecom development policies that the city has established. We will be encouraging competition as described in the Federal Telecom Act of 1996. It will provide additional revenue that the City of Palo Alto utilities will need. It has been identified earlier. This will provide a significant source of revenue, and it allows the city to set the policies. It allows the city to encourage competition between providers, it allows fair access, and it promotes high quality service. We believe that the city should own the fiber-to-the-’home system. The benefits were described in the dark fiber proposal of 1996. Diversification of revenue income and minimizing right-of-way disruptions. We have heard a lot about financial risk. The December 14 CMR discussed that in great detail. The city is being asked to provide 70% of the cost, or about, $530,000 for the trial. The residents will be covering the remaining 30%. There has been a concern expressed that, well, they will install it and then quit. No, with a significant investment, the users will continue to use the Service. Cost recovery in ten years -- even with a small number of people in the trial, we believe ten years is a reasonable time frame.. With greater participation, which we believe would happen as soon as the trial commences and is announced, and certainly when it has been demonstrated to be working, we believe that we could have a payback period of 3.6%, which is i~ very competitive return on investment. " There is a concern about stranded costs. We believe that with 70% of the construction cost investment, the city should have, if it chose to, a property that could be sold at a profit. So we believe the financial risks are minimal. We cannot say that they are zero. I believe that expecting zero risk is unrealistic, but we believe that they are very reasonable, especially in light of the benefits. Are there other risks? Yes, there are always other risks. There are competitive technologies. The competition of the DSL service, cable modems, IDSN lines, they are all slower speed services. Fiber to the home is far more upgradable than any old service based upon copper technology, whether it MINIJ’FES UAC:O 10699 Final Page 15 of 65 be cable or twisted pair telephone lines. The fiber-to-the-home charges are very moderate. They are priced to recover in a reasonable amount of time. The other potential is competitive fiber-to-the- home systems. Although we do not know of anyone planning to do this, if companies were to come in and install fiber in a given area, what they will likely do is cherry pick. They will pick the profitable things, the profitable installations, leaving the individual residents with no access and at the same time, make it uneconomic to bring fiber into those areas. So the biggest risk that we see is in missing an opportunity. There was mention made of the RFP process. As we see it, the RFP process is running around asking somebody, "What would you like to build?" What you are going to get is their answer rather than our answer. The dark fiber ring would be much less than 10% of the expense of any fil~er-to- the-home system. We do not believe that businesses are likely to want to share their business plans with the city when the city’s participation would be so small. We also believe that the city would have no control. The citizens would have no control over any system that was built on the basis of What do we want to see fi:om the trial? We want to demonstrate that fiber to the home is a practical project that pays for itself. We want to refine the construction and operational costs. In some areas, we have questions about whether these costs are realistic. We know that the city is very good about estimating costs, and in some areas, we believe that the estimates appear higher than we would expect. We want to see real numbers so that we have a real cost model. We want to work out the operational detail~-arid th~ user support model. The city has expressed concern about how to. handle someone who calls because they do not have the Intemet dial tone that they expect. We believe that the network manager should handle that, and we want the trial to show how that would work..We want to rneasure user satisfaction; we want to measure the participation rate based on real installations, not based on a single flyer in the utility bill or on somebody walking down the street saying, "Hey, Joe, do you want to be involved." The fiber-t0-the-home trial will bring the benefits of high-speed Internet access to the residents, not just to the business community. It will increase the awareness, and it will increase the demand for fiber to the home. Paradoxically, one of the comments that Mr. Mrizek had the other day was that when we start fiber to the home in one area, you are going to get ’a demand in other areas. The answer is yes, you will. I think that is good marketing. It is not a problem. It is an opportunity. The trial will reduce the uncertainties. The city manager’s report is filled with uncertainties. It is filled with unknowns about financing, and it is filled with unknowns about participation. We believe that the trial is the best way to answer those unknowns. We will not answer them by guessing at what the answers are. So these are the phases. The ill’st phase is completed, as the backbone is built. What we want now is the trial. The cost is roughly a half million dollars. We want to measure the user satisfaction, refine cost estimates, and produce recommendations on how to proceed with a citywide roll-out. Then we want to see the next step, which is the citywide roll-out. MINUTES UAC:010699 Final Page 16 of 65 We believe that the fiber to the home is technically feasible, we believe that the cost estimates are realistic, we believe that the revenue is realistic, and we believe that the financial risk is manageable. We believe that serving the citizens of Palo Alto is at least as important as providing fiber to businesses. We believe that city ownership of fiber to the home represents unique benefits in diversification of revenue and control and increasing competition. So what we recommend is that the city approve an amendment to the budget amendment ordinance authorizing funding for the trial, approve collections of 25-35% of the initial cost from the users, with the pricing to recover over ten years, and direct staff to execute the fiber-t0-the-home trial expeditiously, and report back results. What we would like the UAC to do is to entertain a motion recommending that the City of Palo Alto proceed and build the fiber-to-the-home trial. (Shows a slide of a Palo Altan’s view of the world with Palo Alto at the center) Palo Alto is the center of technology in the United States. It is the center of the Intemet. Palo Alto Intemet Exchange carries a significant portion of the traffic on the Intemet. The country looks to Palo Alto for leadership. What we want to do is to continue this technology leadership into the 21st century, and we want to do that with fiber to the home. Thank you. Vice Chair Sahagian: We will now hear from the rest of those people wishing to speak. Andy Poggio, 2708 Gaspar Court. Palo Alto: I would like to talk to you about three things -- (1) Why fiber to the home? (2) My assessment of the design plan that has just been summarized and which I have read about previously; (3) The issues.tliat I see. I know that this organization does not know me, so I will introduce myself. I aria-the director of the package systems group at Sun Microsystems. I began using the Internet in 1978. In those days, you had to be part inventor, part user to actually use it, and have been using E-mail for a number of years before that. I have built networking products that go from 128 kilobits per second ISDN up to multiple gigabit ethemet. So I have some experience in the broad range of technolggy that I have been working with, both as a creator and as a user. So I would like to start with, Why fiber to the home? I believe the Intemet has, in fact, become a fundamental utility. But it is very much in its infancy. We do not all see that yet. I think it feels a little like perhaps electricity felt at the beginning of the century. But I believe the Interact has now become the most valuable information resource in the world. Why is that? For several reasons. One, it is up to date. The time-line on information documents on the Internet is measured in seconds and minutes rather than months and years in the traditional library. It is worldwide. You have equal access to every continent and every source of information on the earth with almost equal ease. And lastly, it is hugely broad. A search on the Internet today on almost any topic you can imagine will, in fact, turn up useful information, and do so very quickly. Palo Alto is a city that very wisely has been willing to invest highly in local libraries despite the fact that, for example, in San Francisco, we have quite a good library, and in Washington, D.C.; an even better one. But that is not good enough for Palo Alto. We want and need local libraries. Distance for libraries is much like bandwidth for the Internet. Using a modem to get connected to the Internet is a little like trying to use the library in Washington, D.C. It is slow, and you use it infrequently. MINUTES UAC:010699 Fina!Page 17 of 65 Medium speed services are more like trying to use the library in San Francisco, a little better, but still inconvenient, and we use it infrequently. High bandwidth access to the Internet is like having local libraries. It is fast, it is quick, and it gets used a lot. It is an extremely worthwhile investment. I also want to remind everybody about the ~esponse to the utility mailing on the interest in fiber to the home. I think that some people were actually disappointed with an 18% response rate. But I want to put this in the context of what these mailings are actually like. I am an engineer, not a marketer, so I talked to some marketing people, and they said that if you have a very targeted mailing list and you are very, very fortaJnate, you get a 3% response rate. That is if you know who you are sending it to and that reasonably, they will be interested. If you just target a geographic area, as we did with the utility mailing on fiber to the home, a one or two percent response rate is a very good response rate. We arguably got ten times better than a very good response rate. This is a huge response rate. It may not have been obvious to everybody, but this is phenomenal, almost unheard of. Lastly, on why fiber to the home, I can tell you that I like living in Palo Alto better than anyother city in the United States. And I would like my kids to feel -that way about Palo Alto, as well. My reasons depend, to a certain extent, on wise decisions that Palo Alto has made in the past. For my kids, it will be the things that we do from now on. Building fiber to the home is one of those things we can do to make Palo Alto an exciting city for future generations. Now I would like to comment briefly on the design.-I went over the entire documents that were put together by Palo Alto-Fibemet that we have just heard about. Good design, using the right standards, Ethemet and IP, the technology ha~ a lengthy lifetime, relatively conservative costs, and, I believe, little risk for the city. The issues that I see are that we only have a limited market window. IfPG&E had come in in the early days of Palo Alto, even with inferior technology at a higher cost, we would not have our own electric utility in Palo Alto. The same thing will happen with Intemet access. We need to move quickly, or the opporttmity is lost. I believe the major issue is that our leadership needs a vision to see that this is an essential utility, the will to move obstacles out of the way, and to move forward quickly on both the fiber-to-the-home trial and a citywide roll-out. Thank you. Todd Carothers. 1143 Borregas Avenue. Sunnwale. CA: Thank you very much. I represent a company in Sunnyvale, California called California Microwave. California Microwave, on August 20, purchased a~ company in Cambridge, UK, called Adaptive Broadband. Adaptive Broadband was a spinoff from Oracle and Olivetti Research Lab in Cambridge, UK, and they developed a wireless technology that I wanted to bring to your attention. That is why I am here today. The first initial release of the system is out now and is currently being field-trialed. It is a 25 megabit per second system, bi-directional wireless that operates in what is called the five gigahertz miniband. What that stands for is the unlicensed national information infrastructure band. This band is set by the the FCC, and there is no cost to use the spectrum. So if you have the equipment, there is no cost to use the frequency. The implication of wireless, the big implication, from sitting here and looking at the reports and talking about some of the costs, is trenching. With the wireless system, you obviously have no trenching involved. The system is similar to cellular systems. It is deployed in MINITI’ES UAC:010699 Final Page 18 of 65 that way. You have towers that have access points around the system itself¯ When you want to set up a subscriber or residence or a small business, you simply put in an antenna. The antenna is 8 x 8" by two inches deep. You can mount it right on the customer’s building, a cable drops down, it is cat five, and they have access to the system¯ That is all there is to it. It is all based on IPO, and that is ATM over in the air. [Note: This.paragraph contained many technical words that were unclear.] With the roll-out and the trenching implication, I really want to point out that when you do anything with any kind of wire-based system, whether it be copper or fiber, you have a step-cost structure where you have to do certain sections at a time, but with wireless, you simply put up another antenna, and you have added that subscriber. The system is already being field-tested by IFC’s regional Bell companies, and IFC’s, of course, are the international exchange carrier. Internationally, it is also being tested, and local exchange carriers that co.mpete with PacBell and those types. [More unclear technical terms] We did do a presentation to staff on December 22, and we proposed to them that we would offer a free trial to the City of Palo Alto of our equipment. We .are willing to find a partner on the services side to make this happen. The specific numbers have not been negotiated, but again, I want to bring forth the idea that it is a free trial on our equipment with no cost whatsoever to the city on the equipment, on the infrastructure. That is what California Microwave does. We manufacture this equipment, we are willing to provide a free trial, and obviously, there is no risk from the point of investing in equipment. To sum up, my whole purpose of being here today is to present this as another alternative, I did not see wireless discussed today, but I think it is very important for the city to take a look at that, as there are some serious concept implications. We would be glad to come back and give a full presentation if you desire. Thank you very much. . Frank R. Robles. 401 Town and Country. Village. Palo Alto: Hello. My name is Frank Robles, and I am the CEO of NanoSpace, Inc., a network solutions company here in Palo Alto. We would like to endorse the fiber-to-the-home trial being presented here today. The fiber-to-the-home report presented today by the Palo Alto FiberNet community group is the culmination of an enormous amount of effort from the community, the city staff, and the private,~ector. Thousands of hours of research and study have been contributed. Palo Alto is truly a special and talented place. As some of you may know, NanoSpace has licensed dark fiber from the city and is delivering broadband connectivity to corporate and residential sectors¯ We were founded four years ago and have been providing Intemet solutions to corporations and individuals¯ Broadband services are an evolutionary step for our company. It has been mentioned that the communications business is a difficult one, particularly if a company wants to begin now. I would agree. But I believe that the city can complete this project and avoid becoming a communications company. We have a great deal of expertise in this area and would like to work with the community and the city. NanoSpace is flexible and can contribute to this project MINUTES UAC:010699 Final Page 19 of 65 at a number of levels. We could be the access provider, as designated in the current report, where we could leverage our existing network here in Palo Alto and decrease costs to the city as well as provide a broader servic~ offering to the residents. We could also help by being the network operator, again leveraging our existing infrastructure. And finally, we could partner with the city and be the engineering resource that terminates the dark fiber, installs the switching equipment required, and lights up and tests the network. We were approached at the beginning of last year by Warren Kallenbach with the simple request to provide service to his neighborhood. The technical details have long been worked out, so let’s deliver that service to the residents of this community. Thank you. Colin Mick, 2130 Hanover Street, Palo Alto: I am here wearing multiple hats. I had not at first thought I was going to talk. I am a 30-year resident of Palo Alto and an ex-neighborhood association organiz.er. I am a home businessperson using an Intemet-enabled business, and I pay a fair price to do it. I am also pretty inextricably involved through my business with much of the technology that is being discussed here, and I am one of the movers behind fast Ethernet and the gigabit Ethemet technologies that are in here, and I am one of those people who develops the standards for that, and the standards for some of the switching material you are talking about here tonight. Then the fifth hat I put on here is that I have about 20 years worth of experience in looking at telecommtmications innovation and following these, going back to the first on-line work with public libraries, telemedicine, teleconferencing, and I have participate~d in most of those experiments. So I am talking from a fairly broad range of experience here, and I was going to start with the comment that when we were working with paper-based systems,’ w~ used to use a good rule of thumb, which was that the use decreased as the square of the distance from the person to the source. The inverse is kind of true when we deal with bandwidth. The more bandwidth you have~ the easier it is to get information and the more likely we are to have use. When I have heard some of the discussion here from the utilities folks, with all due respect, I am reminded of the historic preservation discussions I have been heating here in the council chambers, and I start thinking, did we have these same discussions when we were heating about new-fangled innovations likeroads, sewers, and electricity? The one that is probably the closest to what we are talking about today is actually roads, because the Internet is very much a two-way street, and it is terribly important to understand that. Some of the stuff that I hmie heard here today that really concerns me is the emphasis on labor costs and on material costs. I am here to tell you, as somebody who has been working in this business for 30 years, that this stuff scales, and it scales remarkably. We have not have not gotten a lot of experience yet on scaling the kinds of splicing we are talking about with fiber today, but I have been working with fiber connections for about six or seven years here, and I can tell you that I have seen dramatic reductions in the cost of connectorization of fiber, and I would expect that if we see the kind of scenarios that we see here with dark fiber, we are going to see the same sort of thing with splicing, and this will significantly reduce the labor cost involved, because we all understand that that is one of the big costs in cabling, and let me tell you, the cabling industry understands how to cut costs. The second part is the materials, and they go down, as well. MINUTES UAC:010699 Final Page 20 of 65 I do not see this as being an obstacle over time. The issue is to get some experience now so that we can understand it and we can also evaluate other options, such as wireless, and understand what they mean, particularly in an area like Palo Alto which enjoys an extremely healthy tree cover, which gives some interesting challenges to wireless technology. I see some economic impact, but I do not hear much talk here about what the impact will be on Palo Alto of having a system like this. I see this as being a fairly major economic booster having this kind of bandwidth available from the home. I work from the home, which means I have a minimum impact on the city’s infi’astmcture in the revenue-producing activities that I conduct, but I spend my money here in Palo Alto,.so you ought to think about that, as well. ~Thank you very much. Richard Adler. 425 Seale Avenue, Palo Alto: I have lived at this address for 25 years and am a 27- year resident of Palo Alto. I am a member of Palo Alto Community Networks but not a member of Palo Alto Fibemet, nor a resident of the proposed neighborhoods for the trial, but I do want to speak in support of the trial just very briefly. I also run a business from my home and have been involved with these kinds of technologies for a long time, and I think this is very, very important stuff. I am not a technologist, but there is one technical point that I think ought to be made about the revolutionary importance of fiber, and that is that it is not only high speed, but it is always on. In some ways, I think that is as important as the fact that it is very high speed. You do not have to dial: up and log on. It is always on, and that brings a whole array of services which, through dial~fip gervices, no matter how fast, you just simply earmot do for monitoring and getting on line. So it is equally as important as high speed. I want to make one comment beyond that. Palo Alto is an unusual community and is one of the reasons why a lot of us like to live here. I think we are, extremely fortunate in having a resource in this community that is unusual, maybe unique, and that is the competence and the knowledge and the vision of its residents. One of the things that strikes me, sitting here and listening to the presentation and in listening to the folks from the audience talking about it, is that there is a tremendous reservoir of:knowledge and imagination that this city can tap into and take advantage of. This is not something the city has to do by itself. In a way, what you are really being asked to do is to enable the citizens to do what citizens should be doing, that is,’to improve the quality of their own lives. So there is no question in my mind that fiber is the future. The question is, just when is it going to arrive? And when will Palo Alto get to that future? Sooner, in this case, is terrifically important, so I would say to you, take heart, be a little bit bold, and I think there is a very exciting future ahead for all of us. Thank you. Jay Thorwaldson, 400 Channing Avenue, Palo Alto: Thank you very much. I am Director of Public Affairs at the Palo Alto Medical Foundation, but I am speaking as an individual tonight. I spent many years in these council chambers from the mid-1960s to the late 1970s as a reporter for the Palo Alto Times, taking many notes. I listened much more than I talked. However, I have also been very interested in the general flow of communications among people. MINUTES UAC:010699 Final Page 21 of 65 My interest is not so much in the technology but in what happens when you make the technology available for people to use. In the late 1970s and early 1980s, I was a lecturer in communications at Stanford University, and I predicted as early as 1977 to my classes on the future of commtmications that in the future, most people would get most of their information through, their computers. One of the students asked me, what happens if you want to have a hard copy (although he did not use that term), but what if he wanted to keep a copy of it. I said we will all probably have printers in our homes and go click, click, click and print something out. They looked at me as though I was from Mars or Venus. In early 1983-1984, with Joe Villareal and some others in the community, we created an interagency communications network, the I.C.Network, among the 20 social service agencies in the community using Apple II computers on loan and 300 baud modems. We know what slow communications are. We worked it for a year-and-a-half, then gave up, thinking we were 10 or 15 years ahead of our time technologically. The time is now technologically, and now is the time to create it. Several years ago, I did an article for the San Jose Mercury on the job explosion in the Santa Clara County Silicon Valley. I asked one of the Council people I was getting input from, what do you think the role of the Internet is going to be? He said that the Internet is going to be the absolute basis for commerce in the next century, and I believe that. I also believe that properly fashioned, properly rolled out, it will be the absolute basis for community in the next century, as well, if we build it right. We are at a window of time that I, in the past 35 years when I have been a close observer of and participant in Palo Alto, I have never seen a window as significant as the one we are facing now and in the coming weeks. My final point is that it is my belief and convictior~-that if there is a bigger cost, there is a bigger opportunity. Some of the excellent speakers t~night fiave spoken about the opportunities. There is also a huge danger. One of the things that has made Palo Alto magical is that the Terman boys that created the Stanford Industrial Park, the visionaries, the engineers, the people that came here, Palo Alto has had a magic attraction, a magnetism about it because of the kind of vision and the wherewithal to turn that vision into a practical reality, Which the people here have demonstrated over the many, many decades. At this point, this is that kind of magical moment. If we do not move, other people are moving. Communities like Ashland, Oregon are moving in this area to bring fiber to the entire community. Then we see what happens. This is connections with a TV program on steroids right now as the potential on this, but if we slip fi’om that position, within the next few years, Palo Alto, and you already saw when the staff report was reported in the Mercury and in the Chronicle and some of the radio stations, a lot of attention is being paid to Palo Alto. So if you turn away from this decision possibility, I think there is going to be a very significant loss of some of that aura that Palo Alto has enjoyed. Finally, a friend of mine pointed out that the cost that we are talking about for this fiber trial (I have spent many years on these red seats here, and I think these should historically preserved) is less than the projected cost of the renovation of the council chambers, and yet, think of the difference in the potential for what we could bring to this community or not, whether we put up with the council seats for another ten years or go for this experiment. Thank you. Randall Strickfaden. 3537 Julie Court. Palo Alto: I am a PaIo Alto resident of 20 years in the Barton Park area, and I am also the Manager of Networks and Telecommunications for Hewlett-Packard MINUTES UAC:010699 Final Page 22 of 65 Laboratories in Palo Alto. I have experience similar to Mr. Poggio, both in local, metropolitan and wide-area networking. We have worldwide responsibilities, as well as responsibilities on the other side of the next cubiclE. Many of the things I was going to elaborate on were touched upon by other speakers, so I will just add a couple of brief comments. I have reviewed the proposal as it has been put together by the Palo Alto Fibernet folks, and I find it to be technically sound. I think it is something you can go forward with in confidence fi:om a technical risk perspective. I think that anything the city does in this area should not be entered into lightly. This is a utility that is unlike any of the other utilities that Palo Alto has been involved in previously. The impact of that should be carefully considered and understood, and it will require a significant commitment, because you have to develop a new kind of core competencies. Some of those a.h’eady exist today. You have started down that path with the fiber ring, but there are a lot of others that you have to layer on top of that as you want to go forward with something like this. The reason for Palo Alto to do this, in my opinion, is because the city is in a unique position to add value that some of the commercial providers which cannot or are unwilling to do. That is something that I think Palo Alto can uniquely do where a commercial provider could not be motivated to do something like that. Another point I would make here is that there are significant implications for community. Some of the things we are doing in Palo Alto are about community. This is one of those things that will really challenge the definitiogrf community.- Hopefully, it will enhance it in ways we did not anticipate at all. I think it wbuld be’worthwhile for Palo Alto to explore what the new definition of community means in light of the revolution we are entering into here. We have the benefit of hindsight looking backwards at the telephone revolution and what that has meant for the community. Thirty, forty, fifty years fi:om now, we will look back on this and will probably perceive it as a revolution as great or greater than the.one we entered into with telephones. Having said all of that, it is not in the things you can think about today that show the real value. It is in the serendipitous things you did not anticipate when you started. As a result of that, we have things today, like the World Wide Web, that the people who started the Intemet never anticipated. Look at the change it has made in everything we do in Palo Alto and in the world. So I recommend that we go forward with this. Arthur Keller. 3881 Corina Way. Palo Alto: I very much support the effort here in terms of a fiber- -to-the-home trial, and eventually a citywide roll-out. I am at Stanford University as a senior research scientist in the computer science lab, and I have lived in Palo Alto since 1977, using the Internet. I was part of the ISDN trial at Stanford University starting in 1993, and I also participated in the DSL trial that was rolled out at Stanford in 1998. One of the things that has not been pointed out is the fact that there is a distinction between a Star network and other kinds of networks, if you will, a bus. One of the interesting things is that the fiber-to-the-home network is a Star network which means that each person has his own connection to a central point in their neighborhood, and fi’om there, it is a trunk going to the Internet. That means that there is a greater degree of bandwidth and less interference across the various homes that would exist, for example, on the cable system,ifyou have MINUTES UAC:010699 Final Page 21 of 65 a Cable Co-op kind of system. There is a shared tnmk that everybody accesses. Therefore, as you have more and more people, that tends to get saturated. Similarly, with bandwidth, in terms of the wireless network, that will also get saturated. I cannot tell you how (unclear) wireless network that the gentleman talked about earlier. In particular, I had t.o switch cellular phone providers because with my previous cellular phone provider, I could never get through, because the network was too crowded. One of the things that has not been mentioned is that there is potential for reduction, in the long run, of cost to the city. For example, there have been people who have been thinking about the issues of utility meter reading. If you have fiber eventually going to every home, think about the idea of making connections to the meters and not have to send someone out every month to read the meters and find out how much has been done. Think about the idea of demand pricing for electricity, things of that nature, that can be done on a demand basis, or think about the idea of being able to reduce utility u. sage in the event of a high heat spell in the summer when there is air conditioning overload causing an electricity overload. So there are all kinds of things that are potentially direct benefits for the utility itself besides the broader view here. One of the things that is interesting here is that all of us who live in Palo Alto know that home prices. are a lot higher here than they are in surrounding communities with lesser school systems. The same thing I believe will happen with respect to fiber to the home. The idea that this will be a favored place for Intemet access will eventually have an impact on the home prices in Palo Alto in an additional amount. : The last thing I want to say is that we have an opportunity here for historic vision. I would point out here the Palo Alto Centennial History. There are very interesting stories I recommend to you to read, in particular, on Page 47, the history of using some leftover sewer bond money to build .an electric utility, and how a predecessor of PG&E decided to put.an electric utility in on weekends, putting in poles, so that they could "steal a march in Palo Alto" and have the electric utility. The city workers decided to take their day off and came in and ripped out those poles precisely because they realized the importance of having the city own their own utilities. We have benefitted from that lo these many years because of the vision from the early part of the 20th century in utilities, and we will benefit in the 21st century by the vision that you gentlemen will show here tonight. Bob Moss. 4010 Orme. Palo Alto: I also wear several hats. I happen to be a member of the Palo Alto I am the scribe, and I record minutes of the meetings. I am also on the Board of Directors of Cable Co-op. When it comes to bandwidth, more is better, and you cannot get too much. So I certainly support anything that provides maximum bandwidth both ways to everybody. I do have to brag a bit, however. Cable Co-op is the only entity which is actually providing high- speed communications to residences, and has been for four years. We would be supplying more to more people if we had the financial resources. You may not be aware of it, but we do have some restrictions from our bank rollers as to how much money we can spend each year on capital improvements. But we did appropriate $348,000 last month to put in fiber and fiber nodes in order MINUTES UAC:010699 Final Page 22 of 65 to begin providing high-speed communications to other areas of the city. It is true that on a coax system, after some number of users (and we have not come anywhere Close to that number of users) it will begin to slow down. But that will happen on the Intemet anyway. Let me give you my personal experience this week. A couple of days ago, I tried to access AOL at work using my T-1 line, and it was not as fast as a 14..4 modem. I got thrown off three times. I went home in the evening and tried accessing them using my cable modem, and the same thing happened. So if the Intemet is plugged, or a place you are goir~ to like AOL is plugged, you can have 100 gig and you are not going to get there. So it is nice to i~ve high bandwidth, but it depends upon the rest of the system. In terms of using the fiber, we are completing an engineering study which is a little overdue - we should have it this month - which will give Cable Co-op a better handle on the usability and the practicality of tying our system into the fiber. We were very interested in responding to the RFP for use of the fiber ring that was aborted last year. We still are when it comes back. We think there is an opporttmity there. I also know that we have discussed at the board level providing services to the city. If you are going to go ahead with this trial, you have to have somebody running the system, collecting the bills, and is available 24 hours a day, seven days a week to answer the phone. We can do that. We are doing that now. We would love to work with the city to facilitate the use of the fiber ring for fiber to the home, and tie it into our system where it is appropriate. There are, believe it or not, people in Palo Alto who do not need 10 megabits in both directions. They would be perfectly happy with a halfa megabit or one megabit. We can do that right now on coax, and we would like to work something out which would provide, a range, of services to everyone, and we certainly are interested in the fiber system. Thank you. -’~ Vice Chair Sahagian: Thank you. That concludes the oral communications. Given the length oftirne that Item 8.a. has taken, I would like to entertain a motion to move Items. 6.b. and 6.c. to our next meeting on February 3, since we still have to embark l~pon our discussion. MOTION: Commissioner Gruen: I so move. SECOND: commissioner Dawes: I second the motion. MOTION PASSES: Vice Chair Sahagian: That motion passes ori a vote of 3-0 with chairman Johnston absent. Vice Chair Sahagian: I would now like to have city staffmake any comments they care to make on the presentation tonight. Mr. Mrizek: Thank you, Chairman Sahagian. I want to make a few remarks about the input from the community. I certainly appreciate their being here tonight. I agree totally with the community. We have a very highly talented community in Palo Alto, and I am very happy to be a resident of this community. I agree with the statements that fiber to the home technically is a sound design. We say that in the staff report. The design would work. I do not believe that is the question. MINUTES UAC:O 10699 Final Page 23 of 65 There are a couple of statements I want to correct. First, it was stated that I said in a meeting that if we do one area with an 18% response, I questioned what about another area. The way it was presented tonight was that there is going to be a great demand in other areas. What I implied with the citizens at that meeting was that we have on the chart that the highest percentage of interest was around 18-19% for one area. If we do proceed with the fiber-to-the-home trial for that area, I then stated that we have another area where there may be only 5% interest. That area will have citizens saying, "City Council, you have approved this for one area using electric funds. When am I going to get my service?" The payback for a 5% area of interest is substantially longer and at even higher risk, so I could see this ballooning to other neighborhoods, and the risk would just go up instead of down. Another comment was that the response that we got from the community was something like 18% total. That is not correct. We had roughly a 3-4% response overall. We sent the interest letter to every c.ustomer in town, and we got approximately 1,000 responses, so overall, it was 3-4%, but the highest interest area, as we indicated in the staff report, was 19%. There were some comments indicat’.mg that there are so many thousand homes in Palo Alto or in the .country on the Internet. I cannot dispute that. I do not know, and I don’t believe staff knows, and this is why we believe that if this program moves forward, we really need a thorough marketing study. Yes, there is interest on the Interact, but is there interest in the high-speed Intemet access by every customer who signs on to the Intemet. I believe, you have many customers who would be very happy with just their current service through the telephone. Staff suggests that a marketing study is in order before a decision is made to proceed’ with a systemwide, citywide fiber-to-the-home program. There were comments made that there are other uses for fiber, such as remote meter reading rather than sending out meter readers, as one example. We have been looking at this type of program for many years, and we have had some studies made on it. We find that the cost of the meters is very high and the payback is not worth it. We currently utilize a meter reader in Palo Alto to read three meters - the electric, the gas and the water meters. The cost to do that is extremely low. We do have a pilot program that we will be getting under way with to do a remote meter-reading hookup to a few customers in remote areas where the meter reader may have to go some distance or get into some industrial customer and go through some security gates. In those instances, something like that would be cost-effective. So we are looking at things like that, but I am suggesting that a fiber system is not necessary to do that. Finally, I again want to say that we did start with a dark fiber ring, and we have installed that. We still have a $2 million investment to recover for that, and we want to continue to follow the City Council policy of proceeding with telecommunication services to the community, but at low risk. That is the direction that staff feels we have received from the council, and that is the direction we feel we should pursue. So again, as I said in my opening statement, we need some policy if this is going to change. For that reason, again, we do not agree that a fiber-to-the-home trial is the first step we should be taking. First, a policy decision is needed. Are we going to be in this business? We need a marketing study. Regarding the comments about the cost, there were cost estimates made by MINUTES UAC:010699 Final Page 24 of 65 staff, and we have seen another cost estimate to.night which is lower, still, the payback is substantial. To recover these costs is a lengthy period of time, and there was a cost estimate I saw on the screen of about $24 million to build out the city. This is an estimate without actually doing a make-ready survey of the community. As Larry Starr pointed out, there are a lot of areas where we do not have conduit in underground areas. Ther.e are a lot of areas where we need to replace poles, so I do not know if that build-out is going to cost $24 million or $30 million. That study, staff suggests, is also needed before we embark upon such a major program. As the commission knows, the deregulation of the electric industry really had an impact on the cost of doing business. We must select our programs and keep our costs down. That completes my comments. Vice Chair Sahagian: Before opening this up for commission question and comments, there are a couple of things I want to inquire about. The original purpose of the fiber-to-the-home trial, as I understand it in reading the report to the City Council, was, assuming that the economic and other criteria could be met, that it would be a test that would provide information that would be useful in securir~g a service provider that would ultimately come in and contract for the use of the fiber backbone. Is that a correct interpretation on my part? What was the genesis of the whole fiber-to- the-home trial concept? ~: The fiber-to-the-home trial was to help provide us information in preparing the Request for Proposal that the council gave us direction to prepare last February. We could then put in the RFP certain requirements that we felt might bring benefit to the city to provide a higher speed system. But even with that, as we looked at it, if.w~ put a tight specification out on the street, we would still get alternate bids from other typ~s of organizations saying, well, rather than a fiber to every home in the community, we will do this type of system. We would then have to evaluate every proposal, even though we had tightened up our specifications. That was the main purpose of doing the trial. Vice Chair Sahagian: So the idea initially was to try to identify an area or areas where this system could be designed and actually implemented, data collected, and that would then serveas a foundation upon which, through subcontracting or whatever means, we would eventually be able to develop the fiber ring not to just commercial customers but also to residential customers. ~: Yes, we Would seek a partner to work with us, and we’would provide them with our poles and infrastructure. They would actually build whatever system we would have recommended to the City Council. Vice Chair Sahagian: And it was contemplated, then, that if the economics and the other criteria were correct, the city would embark upon this initial trial, and then use that information to go out in this RFP process. Then whatever vendor was selected, they would take over that part of the system. Is that correct? I am trying to understand it. Mr. Mrizek: That was the original concept. Vice Chair Sahagian: That was the original concept. I am doing this because I think it is important MINUTES UAC:010699 Final Page 25 of 65 for the commission to get the history correct on this. It is hard to look forward and try to make a recommendation and provide policy direction without a very clear understanding of the history of how we have gotten to.where we are. Would it also be correct to say that when you read the report, clearly the biggest concem (and there are a lot of concerns, and we are in the fiber business whether we like it or not) is that we have a $.2 million piece of infrastructure, and we have gone ahead and made that bold step forward. We are in that business, but. the biggest reservation seems to be the economics. If the economics were okay on the trial, the other issues are certainly far less significant than the economic concems. Is that a fair estimate? Mr. Mrizek: Yes, I would say that the.economics are the highest concern of staff, but as we have indicated in the staffreport, there is another concern we have as far as staffing. Our staffis busy on just about every project in town regarding electric, and we cannot spare staff .to develop an infrastructure for even the fiber to the home. We would have to come back to the council with the staffing levels we would need to implement this program. And not only to begin it but to continue it for the 10 or 15 or more years of offering the system to recover our costs. Vice Chair Sahagian: That, again, is assuming that the city gets into that business, does the trial, and then goes on. Mr. Mrizek: That is correct. Vice Chair Sahagian: That all comes back to ecorlohaics. Mr. Mrizek: That we have found to be the main reason and purpose of the trial to be to make a decision as to whether we should be in that business. Vice Chair Sahagian: So part of the information coming out of the trial was for detemaining whether we wanted to go to a third party or maybe be in the business ourselves. The staffing cor~cerns, when you boil it down, all comes down to economics. If you put enough money in there, you get enough staff, and time and money fixes everything. That is very helpful to me and hopefully helpful to my fellow commissioners as well. I will now open this up to their questions. Commissioner Dawes: Let me lay out some areas that occurred to me ks we heard from the staff and from the citizens group. First, I would like to hear more about the existing ring and the economics of that. It seems to me that it was a bold decision, driven in part by what I would term a "build it and they will come" philosophy, as with the California freeway system. Put out the road, and it will fill up. Evidently, that has not happened with the fiber ring, and I really don’t know why. Related to that is the position of business in this trial, although perhaps not in the trial, as that is for a specific neighborhood, but in the longer-term, looking out over the bigger picture, corporate use is an area that would provide important revenues for a full system. Perhaps this is putting the cart before the horse, but we have heard from an employee of Sun and from Hewlett-Packard. I am not aware of who provides their high-speed access now and whether the fiber ring has been marketed to them, and what the role of the company whose president addressed us tonight who has leased some space on the fiber ring. I basically need to get more information on what is working, what is not working, and MINUTES UAC:010699 Final Page 26 of 65 why it is not working as far as the ring is’concemed. The third area of concern is the overall pace of this development. Bob Moss made an interesting comment, and one which I have experienced numerous times myself, which is that I have a high- speed DSL link, and I am not limited by the speed of my service. I am limited by the computers at the other end which either cannot talk because they are filled up, or they talk very, very slowly to me. So even ifI had a fiber ring, it would not make any difference. When I talked with Ken Poulson over the weekend, he said, ."Are you satisfied?" and I said, "I am very satisfied." I am operating my business, such as it is, out of my home, and the service I have is very adequate for that. I am not persuaded that the sense of urgency I have heard from a number of people is as germane as it is felt by them. I think perhaps we can be deliberate about our deliberations and evaluate this and the risk that somebody will "steal a march on Palo Alto" and start planting poles down Middlefield Road and stringing cables is probably not a big risk, in my mind. The fo~trth major area is whether this is a true utility or not. There were some analogies made to Palo Alto’s foresight in doing electrical, water and gas. I agree with that. It was an extremely fortuitous decision, but what was not mentioned was the other part of that, which was to sign up a hydro facility which provided a great amount of very low-cost power which extended on until just a few years ago, and was a source of huge margin for us. But we currently have dial-up networks, we have Cable Co-op, we have DSL networks, and it is not as if a concerned citizen who wanted Internet access does not have it today and have it in a way that is very satisfactory to them. Partially, it is a function of what you pay for. As I mentic;ned earlier, the sensitivity of this analysis to revenues is very considerable. I just need mcgee iiiformation about this magical $40 per month figure that is on the table for the 10 megabyte service. I feel that it certainly is a huge bargain in comparison to any other service that I am aware of, in terms of cost per month and speed of access. When that is looked at, then maybe these payback periods can change enough to make the staff comfortable. So that is a summary of where I am at i~ four major areas of interest. Perhaps staff could address the fiber ring situation and why it is where it is, for openers. Mr. Mrizek: We have with us tonight Mr. Van Hiernke. Mr. Hiemke is our Manager of Telecommunications. He has been instrumental from the beginning in developing the fiber backbone, in the recommendations to the City Council on the direction of telecommunications, and he has been working diligently in the marketing of the fiber backbrne. In the staff report, we do indicate some numbers on the revenues we are collecting at this time on the fiber backbone, approximately $300,000 just for leases which Van has executed. This is revenue for basically the first year. I might point out that he was executing agreements even before the backbone was fully installed. We just completed that not too long ago. He is continuing that process, and we have high hopes of recovering the $1.9 million initial investment. But I must point out that we also have operating and maintenance costs, so for the $300,000 in revenue that we collected in the first year, we do have salaries, we do have the operations and maintenance people that Larry Start has working under him to maintain the fiber that we have installed. In a nutshell, I don’t believe we have really collected anything on the major capital investment of almost $2 million, because the majority of that has gone to O&M, to this date. We did indicate to the council that we estimate we will recover this capital investment in three to five years. I do not know if we will do that, but I still have high hopes MINUTES UAC:010699 Final Page 27 of 65 that the backbone is a sound investment and that we will recover our investment. We believe that this is the direction that the city should be taking, that is, that a dark fiber highway is the way to be in the business, and that the city provides that highway, that ring, which in tum provides opportunities for any service provider to link to any customers in the city. Granted, it is mainly serving only commercial areas at this time, although I know there have been some articles in the paper about hooking up some apartments or.condos which are very close to our di-fiber backbone through NanoSpace, and one of the speakers tonight was from the NanoSpace. Bui to get out into the residential area is that last mile, which is the high cost. That is what we are talking about tonight. Regarding your comments on whether this is a true utility, we talked a lot about the electric utility and that our forefathers had the vision of making this a municipal utility. That is an essential service. Granted there will be those who will say that telecommunications will be an essential service. I question that at this time. Will it be an essential service in the future? Is it a business venture that will pay for itself?. We have heard about other types of technology presented tonight -- microwave was one. There are a lot of companies in this business today, and will the city be able to compete with those other companies in serving residential areas? If there were an adequate payback to serve residential areas, you would see telecommunications corporations coming in here and putting up fiber today. They are not doing that. Ms. Harrison: I think one essential difference might be that as the time that the City of Palo Alto entered into the electric business, we were able to’do so on a monopoly basis. That is not the environment in which we would be inauguratiiag this ~ew utility. It did make a difference. That time to nurture a new utility and to have that monopoly power is not available today. Mr. Ml-izek: I am not sure what I can add to your question on the pace and at what pace should we be at. ’That has to be determined through marketing s~dies as to what is right for this community. Yes, there is a lot of interest in the telecommunication business in Palo Alto, but at what pace should this community be doing this versus private enterprise. Commissioner Dawes: What sort ofpayback period would you be comfortable with if the figures indicated? Mr. Mrizek: We really did not analyze that to any great extent. If you look at a private corporation that is in this business and you ask them, I would venture that they are looking at something far less than ten years, some even less than five years. Some are wanting thei.r money back in one to three years. Commissioner Dawes: What was the fiber ring payback period computed before you went into it? Mr. Hiernke: We said three to five years. Considering the revenue pace we are on right now, we just have to continue adding revenue each year. We are essentially a startup company, and we have added $300,000 in the first year. If you add another $300,000, you have $600,000 during the second year. Add another $300,000 in the year after that, you have $900,000 per year. Continuing adding MINUTES UAC:010699 Final Page 28 of 65 at that pace, we would have a 3-5-year payback. Commissioner Dawes: I was just concemed that in the report, it said that it appeared to be performing under plan. Mr. Mrizek: As Van said, we are in the first year, and we had a lot of startup costs. We had the staffing, operating and maintenance costs, so when you apply the revenues to that, we have not really started recovering our initial capital. Commissioner Dawes: Have we learned anything from that test that would be applicable to the fiber-to-the-home trial? ~: There was a lot of interest from a number of service providers who said yes, they were very interested in the fiber ring. So we built it. I think the interest has diminished. The interest is there, but the signing on the dotted line of an agreement is taking longer than we anticipated for leasing our fiber. Mr. Hiemke: Another thing with dark fiber is that we did notice there is a change that we had to make, mid-stream, in terms of focusing on end users, in addition to service providers. We are now focusing quite heavily on end users, and we are finding that we really need to build the market there before service providers are ready. However, with the residential marketplace, it is quite different. It may be difficult to extrapolate the actions of vcr~ large telecommunication service providers to the consumer behavior of residents. But I thiiak’we did learn a fair amount on the construction end of things that would be applicable for dark fiber installation and maintenance, but a residential infrastructure isquite different. It is quite a bit more dense. The costs have to be very low in order for it to be economically acceptable for residents to take on such a service, so there are quite a few things lett to learn in that area and certainly in the. areas we have not delved into, such as the deployment of electronics within a network. Commissioner Gruen: I have a few questions of some of the folks who spoke to us. We had someone talking to us from NanoSpace. The question I would like to ask there is, you have gone ahead with some fiber usage on your own, independent of fiber to the home, or fiber to the apartment house, if you will, although not fiber to the apartment. What sort ’of things do you envision you would do if we did not have fiber to the home? Mr. Robles: Do you mean if there were no trial, or if the fiber did not exist? Commissioner Gruen: There are many people here who would like to fiber links to their home, although not necessarily to every home. To what extent would you be willing to supply service and fiber links to people’s homes without having a city-sponsored trial? Mr. Robles: Without working with the city, I do not see it as being very cost-effective. Ed is right, to privately fund this thing, the reason we are not doing it is that it would cost 3-6 times as much as it would cost the city to do it because of the rights-of-way and the conduit they have in place. That MINUTES UAC:010699 Final Page 29 of 65 is why no one is running up to the plate to do it, and we have to rely upon the city because the economics make sense today. Commissioner Gruen: Is that because of the charges that the city makes for the right-of-way for the use of its poles? Mr. Robles: Partly, and partly the labor. It is mostly the rights-of-way because of the increase in cost. That is why the fiber needs to be owned by the city. Commissioner Gruen: Let me ask a .similar sort of question of the representative of Califomia Microwave who was telling us about a radio-based network. First, let me ask some technology kinds of questions. How far can you expect to have subscribers from one of your transmitters? What is the effect of the foliage, if any, on your transmission? How many towers would you need to serve how m.any homes? Mr. Carothers: The conservative range is 3 to 5 kilometers, so about a mile to just over three miles from a base station cell site access point to a subscriber unit. The effective data is 25 megabits per second. What was the last question? Commissioner Gruen: One of the complaints I heard about using radio is that there are too many trees in Palo Alto to be able to do this. Mr. Carothers: Wireless is a line-of-sight apiga~atus~ There is no doubt about that. However, our field studies are very favorable in that. We are doing some with different parts of the country with some regional Bells in some areas that have a very dense population of large trees, which is the issue that we are going to look at. So far, things have come back in a positive light, but we are still undergoing tests. A few trees in the line of sight are. not an issue, waving branches, that type of thing. The system is designed from a standpoint to retransmit data or cells, because they are ATM-based cells. Commissioner Gruen: How many cells would you envision it would take to provide coverage for, say, 90% of the residences in Palo Alto? Mr. Carothers: I would have to do a plan on that and work some numbers out on that, and I have not done that to this point. Commissioner Gruen: How would your use of this radio system interact with a fiber optic network? Mr. Carothers: Basically, it would sit right on top of the backbone. In working with ISPs or an Internet access provider such as NanoSpace, we would provide service, we would provide the equipment and basically, we would just sit on top of that backbone, and we have an LC-3 at our site that would connect right into that. Commissioner Gruen: If we did not have fiber to the home, but instead, were looking at radio to the MINUTES UAC:010699 Final Page 30 of 65 home, if you will, what would you need from the city and from the fiber network to be able to do that? Mr. Carothers: From our standpoint, we are the equipment provider, in terms of who goes out and puts the equipment out is something that we do not do, however, we would partner with different organizations, different companies, to do that type of thing.’ So that is something that we would have to take a look at. It depends upon how involved the city wants to be in this process. If there were a formal RFP, for example, we would be discussing this type of opportunity with another entity to help with the servicing and to help us with getting the cell sites up, etc. When we say "cell site," I want to be very clear on that. It is not a traditional tower. It could be a pole, and the city could help us out on that. It could be on top of a downtown building. The antenna for each cell, for each access point, is very small. Plus another PC to control traffic at the cell site and an ATM switch. Commissioner Gruen: How far off the ground does it have to be for this 3-5 kilometer range? Mr. Carothers: It is just a matter of being on a building. I thinldaas to be line-of-sight fi’om the edges of the building, that type of thing. It depends upon the deployment specifically. Commissioner Gruen: Do you think you would have to have a monopoly service in order for it to be useful to have your system? Mr. Carothers: No, not at all. Unlike the costs for.t~.enching, things like that, where you have a step cost when you go in to do a certain area (and }-tlfink that is why they brought up the point of having small, mid-size and large areas for the field trials), with a wireless system, if you set up a station in one part of the town, you could have one person over here and 30 people over here, and this one person is going to be as cost-effective as the 30 over here because of the wireless implications. Commissioner Gruen: Let me ask a.question of Bob Moss. (Bob Moss has lett the meeting.) (Question from the audience, repeated by Commissioner Gruen) Commissioner Gruen: The question is, is the 25 megabits per second shared, or is that the total? Mr. Carothers: We have patent-pending technology on this, and this is the secret of our technology, but basically, it is a one-shared channel that is based on a packet on demand system. It is something that is based on Intemet traffic. In a nutshell, if you take a look at Internet traffic, it is bursting. A chunk of data comes down, and there is a lot of wasted space, a lot of wasted bandwidth. What we do is that we use the same channel. Everyone sha~es a channel. It is not bandwidth on demand. It is packet on demand, and we stuff everyone’s packet into this one channel. Question from the audience: So it would not work with video on demand? Mr. Carothers: It would work with video on demand because of ATM. MINUTES UAC:010699 Final Page 31 of 65 Commissioner Gruen: Let me ask a few questions of staff. We have been talking about an RFP. Suppose there were three or four different vendors who wanted to do different things, and say they had different technologies such as the folks we have been talking to just now. How would the utilities staff feel about having multiple vendors providing service? Mr. Mrizek: That is rather difficult to answer. We would evaluate every proposal based on cost, based on what type of service is being offered, the benefits to the community, etc. We would bring all recommendations back to the UAC and the City Council. Maybe the selection would be made from more than one service provider to work with the city. It is really difficult to respond to that. It is based on the responses we get from the RFP. Mr. Hiernke: IfI can put my marketing hat on, we have fiber in place right now that is available for license right now to a company such as Cable Co-op or to Califomia Microwave and partner so that these t,ypes of services can be deployed either on a citywide basis or on a selected regional basis today with the existing fiber backbone license program that is in place. Commissioner Green: And you mentioned that you would give discounts to some vendors for doing some number of things. What would be the basis for those discounts? Mr. Hiemke: There is a fairly generic provision in the license agreement that allows for determination of a discount that is determined by the City Council. That is determined in proportion to the level of public benefit delivered by the entity ’.that is providing the benefit. That amount has not yet been determined in any specific case.’ -It’is an item for future discussion. Commissioner Gruen: Van mentions the magic words "public benefit." Have you thought in terms o1~ using some of the electric fund public benefit money to pay for some of the public benefits of having Interact access? . Mr. Mrizek: We did ask that question. We did look at A.B.1890 and we did ask our city attorney this question. When you look at A.B. 1890, the public benefits cover four areas, and the area we would be talking about is cost-effective DSM service to promote energy efficiency and energy conservation. But if you look at the pilot program, it does not directly involve energy conservation or efficiency. It is directed at promoting telecommunication, and certain telecommunications media. So after review by our city attorneys and our review of A.B.1890, those funds would not apply to this type of program. Commissioner Green: I have listened to Paul Johnston talk about reducing commuting as an energy- efficiency benefit of being able to do things at home, and I have certainly heard enough speakers today talk about how they wanted to work in our office at home. I am in the office at home department, if you will, and I am one of the people who checked the box about how I liked the service, and I expect so did many of the people who were interested in it. I feel that not using energy to commute is certainly an energy benefit. Let me not fuss about that. I just wondered how far you had gone on that. MINUTES UAC:010699 Final Page 32 of 65 Mr. Mrizek: I agree that is energy-efficient, but we are talking about electric energy. I don’t know if the PUC and the legislators had that in mind when they adopted A.B.1890. The answer is that we cannot use it for compressed natural gas vehicles. Vice Chair Sahagian: I have a couple of questions. Stepping back and trying to look at this in a broader context, let’s put the fiber-to-the-home trial aside for a minute and talk about the overall development of the fiber ring. In order to get full use of that fiber ring, is it reasonable to contemplate that there will be a necessity for developing residential fiber connections, or do you think there is enough potential just in the commercial community to fully subscribe the ring? When the ring was originally proposed, I know we had some payback estimates on your part on the basis of going out and getting providers to go out and get some subscribers, and we would do some subscribing for business development ourselves and work with other companies that would go out and develop business. Was it the intent that the connections would be going to residential as well as commercial users? Mr. Hiemke: There are two parts to that question. The first part is, is there a chance that the fiber backbone will become saturated strictly with commercial traffic. The answer to that is yes. If you think of a given segment on the fiber backbone, we have either 144 or 288 strands of fiber in the given cable along a given segment. A couple of areas have fewer fibers, but for the most part, that is the situation. With dark fiber, a given customer gets a given fiber or number of fibers. Depending upon the customer, we have them licensing anywhere fi’om one up to twelve fibers. Along one path, we currently have 32 out of 144 strands already be~licensed along a given segment. So that would be the closest we are to being "at risk" of sattiratilag the amount of fiber that is available. However, I put the "at risk" in quotation marks, because what we are actually trying to do is to saturate those fibers. We designed the pricing in such a manner that it is a good thing to run out, because it is a sustainable pricing mechanism whereby even in an underground district, if we use the last bit of conduit space that is existing, we do have enough reveoue coming in that we can install new conduit and place new fiber and continue the program as an ongoing concern. Vice Chair Sahagian: So saturation really is not an issue because you can keep expanding the system with revenues from the saturated fill in. So it would be reasonable, then, to say that given where the fiber ring is located, the idea is that ultimately, high-speed Intemet access through the fiber backbone would be developed out for everyone -- commercial, residential. W~ that the thought process that went into the development of the ring to begin with? Mr. Mrizek: The thought process, and basically the direction of the council, was to enhance telecommunications in the community. It was not the thought process that we would reach every citizen in the community with the dark fiber backbone project. It is a beginning to enhance telecommunications in the community. It depends upon how many service providers and how they would use those fibers. That would be their choice. Vice Chair Sahagian: I would like to ask some broad-based questions, as I feel it is really important to get a good, broad-based understanding of this. I have some very specific ideas that I will get to, but I want to get a couple of broader questions. In terms of the commercial subscription structure, MINUTES UAC:010699 Final Page 33 of 65 as far as ~he interconnection and as far as the fees that commercial customers are being charged, how do they compare, on a per-fiber basis, with what was proposed in the trial? From the people who have subscriptions, you have $300,000 per year in revenue coming from somewhere. Mr. Mrizek: The $300,000 we have. coming in is for the lease of the fiber, the highway. We are not hooking up any customer of Palo Alto utilities. As far as providing the electronics and the service to any customer, that is the business that the service provider does. We are not. We are just providing the dark fiber for a lease rate. Vice Chair Sahagian: Do we have any idea what those service providers are charging the customers for comparable service to what is being proposed for this residential tie-up? Mr. Hiernke: I think the real issue is what is called the local loop. It is not so much the issue of the service that is provided when you try to do a comparison, because the fiber-to-the-home trial that was being l~rovided was not the Intemet service, but rather, just that local loop getting from the resident’s home to a point where they could tie into the Intemet service provider and Internet access provider. Similarly, with dark fiber, a given business might want to connect their own two facilities and not need a service provider. We would then be providing a local loop to get from Building One to Building Two, or they may want to get from their building to an Internet service provider or telecommunications cartier or other party. The costs are quite different in terms of what is associated with dark fiber where a customer gets a dedicated strand or strands of fiber all the way from Point A to Point B, versus the case with the fiber-to-the-lao’me trial where it was proposed that there would be dedicated fiber from the home to a local n~ighborliood switch site, and then a shared fiber out of that neighborhood switch site with a very, high capacity link to a point where Internet Service providers could be accessed. Specifically, the costs you would face, if we took for example, a four- mile distance between two buildings, the approximate cost for something like that would be $2,500 per fiber per mile per year. If a given company wants t.o run at a dedicated 100 megabits per second between those two locations, they could install equipment ttiat could utilize a single strand of fiber. So we would take four miles times one fiber times $2,500 per year, and we get a charge of approximately $10,000 per year, or a little under $1,000 per month. With the fiber-to-the-home trial, we had a case where we were looking at $35 or $70 per month charges for a 10 or 100 megabit service. So there is quite.a difference between what was proposed for the fiber-to-the-home trial and what is currently in place for dark fiber. Vice Chair Sahagian: As far as the driving force behind the fiber-to-the-home trial, it was explained that it was originally proposed in order to collect information to help us make a decision as to whether the city should develop, out residential interconnections, if you want to put it in simple terms, or gather information that would be useful in either enticing or evaluating a third-party service provider to come in and develop that business. Is that a correct understanding? Mr. Mrizek: What was originally proposed was for the purpose of assisting staff in developing the RFP to seek a partner in installing telecommunications to the community. That was the initial proposal. MINUTES UAC:010699 Final Page 34 of 65 Vice Chair Sahagian: With the idea that the city would develop some kind of a partnership. Mr. Mrizek: And have somebody else actually put up the funding and their knowledge and know- how, and we would provide the poles and the conduit, whatever assets We have, but we would enter this as a low-risk venture without putting up a substantial amount of money. That was the intent. As we looked at the design, and as we have said before, this is a design concept we know will work. There is no question about that. So the rationale of doing fiber-to-the-home now is, should we be in this business, and should the community be in this business? This is what staffis stating. We can write an RFP and put specifications together and get bids from interested parties without doing the trial. Vice Chalr Sahagian: Let me get to the economics in a moment, as that, to me, is where everything seems to pivot. There are a lot of issues there, but what is the RFP time line that is or was contem, plated? Mr. Mrizek: The RFP time line was that the council gave us approval to proceed with the RFP last February. We said we would return to the TAP and to the UAC and finally, to the council, with a draft RFP by summer before the City Council went on vacation. Then the trial proposal concept came about, and we began looking at that, and that did delay the RFP. Now we are suggesting back that we have now looked at the fiber-to-the-home concept, and we want to proceed with an RFP. Vice Chair Sahagian: Is that activity proceeding at the moment? Mr, Mrizek: The RFP is approximately 90% complete. Vice Chair Sahagian: So it is on a track to move ahead independently. Mr. Mrizek: Well, we do not want to move ahead v~ith an RFP ’until there we get an approval to drop the fiber-to-the-home trial concept. We have made that recommendation in this staffreport, and we want council’s concurrence with staff’s recommendation. With that, we will immediately come back with the draft RFP to the UAC, and eventually back to the City Council. Then we will go out on the street with it. Vice Chair Sahagian: Let’s assume that you went ahead full bore on the RFP process. How long would it take before you would have the packages analyzed and make a recommendation? Mr. Mdzek: We are assuming that the fiber to the home, if council concurs with staff, which would probably be in a February council meeting by the time the Policy and Services minutes return to the council, if they concur with staff, we would probably be back to the UAC and to the other committees within a month with a draft RFP. Then we would bring that forward to the council by mid- to late spring and out on the street. Vice Chair $ahagian: So we are looking at the fall of this year before -- MINUTE S UAC:010699 Final Page 35 of 65 Mr. Ivlrizek: If we get bids in, we would be back to council in late summer with a recommendation. Vice Chair Sahagian: Hypothetically, let’s say that the economics weremade to work, and the trial moved ahead. What would prevent.you from going through an RFP process and at the same time, be collecting information? Why would they necessarily have to be serial? Why wouldn’t those things be possible in parallel? Maybe I am missing something here. Mr. lVlrizek: The purpose of the trial was originally to bring us information to develop the RFP. It is really not a trial. It is a hookup anywhere from 40 to 100+ homes in the community, with a particular design at a particular cost. If we then go out on the street with an RFP and we get Company A who says, we will work with the city and we will install’another type of system, we feel it is a good step for the community to take, the financing is there and the proposal is sound, we would perhaps take that recommendation to the council. Now we have one to two hundred homes hooked up with one technology, and we may even be going back to the council with another technology. It may be a slower speed. We have heard a lot tonight about the speed of the fiber. Will the rest of the community accept that proposal when we have hooked up one to two hundred homes with a different design? I don’t know, but I don’t think so. We have some concerns there that once we offer something, we should offer it to the community. Period. Vice Chair Sahagian: There was a substantial difference in the payback that the fiber-to-the-home group presented and the payback period in the staffr~port to the council. It seemed that there were some differences in assumptions -- single Intdrn~t service provider, obviously the monthly fee, the administration cost. As Commissioner Dawes pointed out, the net revenue stream is relatively modest in a small movement and could incrementally sway the payback dramatically. I would be interested in hearing some comments to help understand where the differences are. Is there a possibility of adopting some of the things that were put forward by the fiber-to-the-home group in terms ofpayback reduction, notwithstanding increasing what the individual users would be charged? That is an obvious one right off the top. There is some set of economics that makes anything work. I didn’t know if the number that was put into the study was a number that had been arrived at after a lot of agonizing, or whether it was one that was just pulled out as being a reasonable figure. Mr. Mrizek: Let me back up a bit on the cost. Late last winter, shbrtly after the council gave its approval to proceed with the RFP, there was a proposal by the Fibemet group that We would like to hook up so many homes. The suggested cost they were willing to pay, based on the cost we used when we surveyed the city, are you interested in a hookup fee of anywhere from $1,200 to $2,400, depending upon the speed of service, and so much per month, $35 and $70 for the different speeds. Those were the numbers we used, based upon very preliminary numbers. The responses we have were based on those monthly fees. When we looked at the cost, we found that the payback was substantially higher if we used those fees. I do not know how many people would be interested in it if we doubled those fees to shorten the payback. As far as the cost estimates where there is a difference in the cost estimates you saw by the Fibernet group versus staff’s cost estimate, our staff in the utilities department, as I already pointed out, went through these estimates, for the construction costs, we feel confident that we could build this system for this cost. MINUTES UAC:O 10699 Final Page 36 of 65 Regarding the question of a single service provider reducing costs, that is true, but we did point out in the staff report the reasons why We did not suggest a single service provider. If we were doing a trial, we would be doing it to collect information as far as a multiple service PrOvider type system, and we even included an editorial from comments on a single service provider versus multiple. So that is why we did not recommend a single service provider. If we did go with a single service provider, our cost would be reduced from the mid-range system of 69 homes where we said $375,000, down to about $342,000. This is still a 13-year recovery for that project. If we look at the large area where our estimate was $768,000, that dropped down to $724,000, which is still an 11-year recovery of our capital cost. Vice Chair Sahagian: The other thing that was very compelling is that it is clear that the payback in the per-residence cost of service changes dramatically with penetration. It seems to me that if you were sitting here trying to come up with an optimal scheme (and I am throwing this out for comment by my.fellow commissioners), going ahead with an RFP to find out what an independent provider would be prepared to do, but at the same time, looking at perhaps working the costs a little bit more and going out with another solicitation, possibly, and saying, based on the level of subscription, here are the various rates that could be charged. It is a little bit like the chicken and the egg. With our utility, everyone is hooked up, and you know that you have a certain amount of power that you are going to put out, and you know you can buy in bulk and it is a commodity and you can get it at a low price. With the interconnecfions to the home, with a small participation, the per-home cost is high. With high participation, the per-home cost can come down dramatically, and all of a sudden, you may have a lot of people wanting to subscribe. Iris an inertia problem, to some extent. At what point does the dam break? At what level? I ha,ce three Intemet connections in my house, and I go crazy with how slow they are. With the right price, I would subscribe in a heartbeat, and I am sure there are a lot of people in that same position. It seems to me that a combination of getting deeper penetration, participation on the part of residences, possibly combined with looking at other ways of getting the cost down might get a more robust participation in an initial trial group, and more importantly, might make being able to offer Intemet access on a citywide basis, albeit through city development of that ring or working with a partner or shunting it to a third party is going to be a lot more of a reality. Once your fiber subscription starts to come up, then you will really start to get your return on your fiber. Mr, Mrizek: Well, I agree on the penetration that you are referring’to, but staff totally agrees that we need a much higher participation rate for this to be financially sound. When we went out with our request last summer, we anticipated that we needed a minimum of 30% participation. After looking at the final cost estimates, it probably would be even a little higher. We came in with the best area, the highest interest area, at 19%. It was pointed out tonight that this was just one mailing of the utility bill, but that really is not correct. We had a mailing in the utility bill, plus ads in the paper, and we went out on our Website. Van attended many meetings with the community, and I attended one with Van. A lot of the people.in the audience tonight, I know are highly interested in this, and I applaud them for going out and talking in their neighborhoods and community to stimulate interest. Even with that, we had a 19% maximum participation rate, which is not cost-effective, and that is what we put in our report. Yes, if there was a much higher interest, maybe the numbers would be different, and the recommendation could be different in the future. But there again, you need a MINUTES UAC:010699 Final Page 37 of 65 marketing survey, no matter whether you are doing a small area or a large area like the entire community. I do not have an answer as to what level of participation is needed to make this a sound investment. Mr. Hiemke: I would like to add one more point to that. The flier that was sent out, if you look closely, did have a range of monthly prices of $10 to $35 for 10 megabit service and twice that for the 100 megabit service. So to some extent, we were testing the sensitivity on the lower end, even though we did have an expectation set that if someone signed up, they should be prepared to pay the $35 amount. That range was set based upon the preliminary cost estimates that we had at the time, with the $35 per month number being set at the revenue level that would be required for a 10-year cost recovery if we had 30% market share. The $10 per month number was the number that would be required if we had 100% market share. That is the origin of the pricing structure that had been set up. That was based on preliminary cost estimates, and we have had more detailed cost estimates since then. Those numbers would likely change at this point by some amount. But the costs were quite s{rnilar. Michael Eager: The cost sensitivity in the flier was not $10 to $35. The cost sensitivity was in two areas. One of them was the installation charge which was $1,200 or $2,400, and the other factor was a completely unknown cost for Internet access. The discussion which happened at the time when Van I-Iiernke was at the meeting on August 12, was that this could be from $25 to $1,000. That was the variability. That was one of the factors that contributed to the response rate. If these numbers had been nailed down to some reasonable level or thdre were some definitive numbers, I believe you would have gotten much more response. "- .’" ~: In the flier I have here, we did indicate $10 to $35 per month, and $20 to $70 is what the flier went out. Vice Chair Sahagian: Personally, I think it is pretty amazing that you got the response that you did with the flier in the utility bill. For those mailings, a lot people just go from the envelope to the circular file. I would venture a guess that probably 60% of the population does not read these things. That is my impression, and I agree, to really get a feel for what kind of participation you would get at the residential level at competitive prices predicated on high participation, you would really have to do a market survey. You would have to do something a little more’than an envelope stuffing kind of exercise. The awareness of the community would have to be raised to be able to understand that this is a real opportunity and that it is really something on which they need to express an opinion. Mr. Mrizek: This is an action item, and we are requesting the commission to make a recommendation. It was referred by the council to the UAC, and the council is expecting a recommendation from the UAC. Vice Chair Sahagian: We are going to need to come to some consensus here in terms of a recommendation. Commissioner Dawes: MINUTES Final Could I ask a couple more questions first? One of the important downside UAC:010699 Page 38 of 65 projections that was mentioned in the report and also by some of the citizens was the potential sale of assets. If this program was a failure, or probably much more logically, if it were a success and a private company undertook a roll-out of the full service, what is staff’s’opinion on the probability of either a sale of assets or some sort of recovery if this program is terminated? Related to that, there was a concern about perhaps having to refund installation money to citizens if the trial was terminated prematurely. Have you given any more thought to that? Mr. Mrizek: Staff really has not looked at whether we would sell assets if this trial were not successful and at what cost we could recover. I would believe there would be a company out there who would possibly be interested in purchasing those assets and services, but we really have not looked into that with this proposal. Commissioner Dawes: Was there any discussion with the citizens group about participation by that group in increasing penetration, actually getting signups ahead of the fact, so that the economics would be improved to a satisfactory level? Mr. ~zek: No, we did not have any such discussions. We went out last August with our fliers, and we had to have a cutoff time and make a determination as to whether a fiber-to-the-home trial could be performed and was economical. We did not want to delay this further, so after a period of several months of collecting the information on who was interested, we felt that we had enough information to make our recommendation to the council. It is always possible to go back and ask again to get more participation, but we thought we gaye the community an adequate amount oftirne. Michael Eager: Mr. Sahagian, could I address the UAC for a moment? I am the president .ofPalo Alto Fibemet, and I think what I am hearing is that staff decided in February a year ago that they did not want to do anything. What we have had is an RFP process which could have gone forward independent of the fiber-to-the-home trial. When the fiber-to-the-home trial came in, this was used as an excuse for delaying the RFP. ,what we have now is that the fiber-to-the-home trial is a block in going ahead with the RFP. We hear many reasons why things won’t work. We do not hear anything from staffwhich says what a reasonable price would be. We do not hear anything which suggests that they have considered the way to make it work. We have heard a lot about how they have considered how it cannot work. We have had some very constructive discussions with the staff which led to our producing a report. We believe that this should liave been the report that staff produced, because the report that staff produced really did not provide the UAC or the community the information to evaluate the fiber-to-the-home trial. So while we appreciate the cooperation of the staff, it took two visits to the City Council to obtain that. So we believe that what we are heating is the staff saying, we do not want to do it. No matter what you say, we do not want to do it. What we are saying, as the residents, is that we believe this is a good idea for the entire community, and what we would like to see is for this to move forward. Mr. Mrizek: I would like to comment on that. First of all, I heard that the staff made a decision last February that we made a decision then that we were not interested in doing the trial. That is absolutely false. We did not make a decision on whether we should proceed with the trial until early October after we had collected all of the data as to who was interested in participating in the trial. MINUTES UAC:010699 Final Page 39 of 65 We looked at all of the cost estimates, and we put all of that together. At that time, I made a recommendation to the city manager that the numbers did not work out, and it was not cost-effective. I recommended that we should not proceed with the trial. Vice Chair Sahagian: I think we hav.e garnered about as much input as we can for one night on this subject. We are all going to have to weigh in and see if we can come to some consensus on what to recommend. It is a tough issue, and as Chair this evening, I will weigh in first on the discussion. When the fiber ring came before the UAC for their recommendation, I was a proponent of developing out that infrastructure. I happen to believe that Palo Alto is probably one of the more progressive places on the planet, and that the Intemet access is certainly a big part of our culture here and the Interact itself. When we approved the ring, it was my view that it would eventually allow not just commercial but also residential establishments to have the ability to tie into the ’Net and at high sp.eed. We have a bit of a dilemma here in that this trial that has been proposed clearly, on the face of it, at least based on the staff report, the economics do not pencil out. When we approved the fiber ring, it was on the basis of something on the order of a three- to five-year payback. In the last quarter of the utility report, I even asked, are we going to start to get separate breakouts in terms of the payback on the fiber ring. You said at that time that the indication was that we would be getting those in. the future. I am very sensitive to the city’s utility providing service to the users, but at the same time, it is a business that generates transfers to the General Fund and is solvent and right-side- up. Where I weigh in on this thing is two-fold. I alnderstand the logic, to some extent, of doing this trial as a precursor to going out and soliciting third-party bids. But I still personally think there might be a way to run those two activities in parallel. I do not see why we cannot prepare an RFP, and at the same time, go back and try to develop a set of economic criteria on which the fiber trial could proceed. I don’t think the economics presented tonight :-- we have seen the city’s report, and we have heard from the Fibernet people and their view of the economics, and I think that clearly, there is more work that needs to be done to look at the economics, come up with a set of economics that makes this a program that the city would be comfortable in embarking upon, and it might even necessitate going back out with a more aggressive outreach program in the two areas that have shown preliminary interest, and try to get the subscription rates bolstered up enough, combined with perhaps adjusting the revenues and looking at other ways to try and reduce cost, and come up with a cost-effective program. Where I would weigh in on this thing is that I would like to-see both of those activities proceed in parallel. I would like to see us move very quickly without further delay to try and get some third-party providers to weigh in, and at the same time, go back, revisit the economics, revisit an outreach program within the two areas that showed an interest, and try to refine the economics in a way that we can meet a reasonable target that would allow a trial to be considered. If that set of economic criteria cannot be achieved at all, then abandon the trial, but I certainly think that it requires more work. That is where I would come out on this. It is not black and white, but take the next step on both fronts and not abandon either one. That is my feeling on it. Commissioner Dawes: MINUTES Final I tend to agree with those statements.I think it is unfortunate that the UAC:010699 Page 40 of 65 ¯ economics have turned out to be the major stumbling block of what is essentially an R&D project when the economics were acknowledged by staff to include a certain cost such as providing for multiple ISPs that were acknowledged to be unnecessary in the trial. Yet, by. including them, it is one of the extra costs that caused the project to be recommended for rejection. As far as viewing this as an R&D project, I think that as the utility group moves into a more competitive environment, there are going to be additional examples of having to take higher risks than the department has been used to taking previously. In my view and in every corporation I have dealt with, there have been monies set aside on an annual budget basis for R&D type trials. Evidently, that is not the case with our utility business. I see Ed shaking his head, so perhaps there is an R&D budget, but it seems to me that if this were viewed as an R&D budget item rather than as a capital expenditure with a required payback, then perhaps we would get a little bit different spin on it and be a lot more tolerant toward creating it as an expense, rather than as a capital expenditure with a ,required payback. Obviously, we do everything in our power to have it be a viable project that pays back, but I think it is less important if it is Viewed as an R&D program. I stated that I agreed with the view that we need to readdress the cost and revenue side of the project, with a view towards getting the expected payback. I would like to see it in under seven or eight years, and we probably cannot improve it more than that, but I think we are getting into the realm of some reasonableness in that regard. I also subscribe to a parallel process to press forward:with the RFP for input from commercial firms, as well as moving forward on the R&D projbet-:’ Commissioner Gruen: I think I am getting to the same conclusions, but I am getting there from a different path. I think it is probably worthwhile to talk some about the two different parameters that I am looking at. One is speed and the other is cost, or,the economics. Let me talk about speed, for a start. To make it a little bit simpler for non-teckies to understand, let me talk about speed only in terms ofmegabits per second. On that parameter, I have available for my residence and my home office a number of different speeds. One is 0.03 megabits per second, another is 0.05 megabits per second, and another is 0.11 megabits per second. I optimize among those, depending upon what I am looking for. I knew I would be here this evening, therefore, I wanted to look at my E-mail during the day. The 0.11 megabits per second is too expensive during the day, so I use the 0.03 megabits per second service instead. My computer was able to produce E-mail in front of me with that line faster than I could read it. I switched from one E-mail to the next, and the next would be there faster thanI could shift focus with my eyes fi’om one part of the screen to another. So I was reading E-mail just fine without benefit of any of the fast speeds that we have been discussing. That goes to the discussion we heard earlier about the 80% ofPalo Altans who claim to have home computers, and maybe three-quarters of those are "connected to the Internet." Well there I was connected to the Internet reading my E-mail, but it is not the same kind of connection as ifI were trying to download large quantities of data or trying to provide a Website for my home business from my home at much lower speeds. For the medium range speeds which we have been talking about, numbers in the range of half a megabit per second to one megabit per second, that is plausible for MINUTES " UAC:010699FinalPage 41 of 65 downloading lots of data. My example of that is the Ken Starr report, not because of the report, but because enough people have seen the paperback and have an idea that a paperback little more than- an inch thick has some amount of information in it. You can download that to your computer in less than a minute on a line at 0.5 megabits or one megabit per second. Mostpeople are not going to read that in anything close to a minute, so you can get a lot of data and then go searching through it, using the computer to help you read it. That is a reasonable sort of thing, and that is something that residents might want to do -- process that much data. When we talk about 10 megabits or 100 megabits per second, we are talking about things which are appropriate for my home office. I pay money for those, and I think it is appropriate for my office, but it is not what most residents need for their home. That is an opinion, but I think it does match the folks that I talk to. What that really means is that I think there are two different markets available. One is the folks who might want to move up from point 0 something megabits per second to the half a megabit or one megab.it per second, and that is what Bob Moss and Cable Co-op are addressing. Then there is another market which operates in the 10 to 100 megabits per second, or would like to. I am part of that. I checked the box, but I don’t know that that is anywhere measured in the 30% or 50% of the Palo Alto population this year. It may be five years from now, or it may be 100 years from now. I keep in mind that when I first started using computer communications at home, I was happy to be using 0.0001 megabits per second. I thought that was a lot better than the speed I had been using before. And it was, but we do move on and we do look for higher speeds, and I am looking for higher speeds, also. So with that in mind, I would like to propose a’ motion. The motion is that we give two sorts of things simultaneously. We go ahead with the RFP, trying to keep it sufficiently general that we can hear from people who are offering different technologies and different services and different speeds, and that city stafftry to pair people up with each other. So if someone has an interesting technology but does not want to be in the service business, and someone else is in the service business but needs some way of facilitating that, the city staff could point them at each other. So we go ahead with the RFP, with the idea of looking for one or more people who would use the dark fiber network to provide service to the residents, and especially to large groups of the residents, which I see to be in that one megabit range. At the same time, we revisit the fiber to the home with 10 to 100 m6gabits per second and look for a set of economics which makes that viable. Again, my personal opinion is that I would be willing to pay not $10 to $35 but $110 to $135 per month for service Which was measured in the 10 to 100 megabit range for my office, which just happens to be in my home. So I would like to see a proposal which would address my office at home and would provide an economically viable thing such that Van would say,.well, that is a way I could sell to start fiber, and would go and recommend it, and management would say, yes, we can make some money on that, but I don’t think we are going to do that at $10 a month. I don’t think we are going to do that even at $35 a month. I would like to see a fiber-to-the-home proposal with costs which make even utility managers happy. That is a two-step proposal. Vice Chair Sahagian: Richard, could you phase that a little more compactly? MINUTES UAC:010699 Final Page 42 of 65 T/M__Q.T.LQ~: Commissioner Green: I move that we recommend that the council ask staffto proceed with the RFP, looking for one or more vendors aimed at providing residential service for many residents, and at the same time, that we ask staff to revisit the fiber to the home, looking for a more economically acceptable proposal, probably at higher prices, with which we could go forward. SECOND: By Commissioner Dawes. MOTION PASSES: Vice Chair Sahagian: That motion passes on a vote of 3-0. Michael Eager: I would like to speak on behalfofPalo Alto Fibemet. We look forward to working with the city and with the. staff on revising the fiber-to-the-home proposal to something that you would find acceptable. Reports of Officials/Liaison~ a. NCPA Commission Report Vice Chair Sahagian: Dick Rosenbaum will provide us with an NCPA Report. Councilman Rosenbaum: In time-honored fashion, you have the report before you. I will be happy to answer any questions. ? Vice Chair Sahagian: It appears that we are mbviiag fi:om management by committee to management by general manager. In a nutshell, is that a fair assessment? Councilman Rosenbaum: In time-honored fashion, you have the report before you. I will be happy to answer any questions. . Councilman Rosenbaurn: There has been a movement back to giving the general manager more authority, rather than having separate business unit boards, because there were no clear lines of authority. ADJOURNMENT: The meeting was adjourned at 11:30 p.m. MINUTES UAC:010699 Final Page 43 of 65