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HomeMy WebLinkAbout1999-07-26 City Council (15)C ty of Pal Alt C ty Manager’s Report STUDY SESSION TO:HONORABLE CITY COUNCIL FROM:CITY MANAGER DEPARTMENT: ADMINSTRATIVE SERVICES DATE: SUBJECT: JULY 26, 1999 CMR:314:99 CABLE CO-OP FRANCHISE RENEWAL AND TRANSFER OF OWNERSHIP PROCESS This is an informational report and no Council action is required. BACKGROUND In 1983, a Joint Exercise of Powers Agreement (JPA) was entered into by the cities of Palo Alto, Menlo Park, East Palo Alto, the town of Atherton, and the counties of Santa Clara and San Mateo for the purpose of obtaining cable service for the residents, businesses and institutions within these jurisdictions. Also, the JPA members granted the City of Palo Alto the authority to administer and coordinate the activities of the franchise and to act on behalf of the JPA. In 1986, a franchise agreement was executed with Cable Communications Cooperative of Palo Alto, Inc., (Cable Co-op). The franchise agreement between the City, representing the JPA, and Cable Co-op expires on March 24, 2001. During the period that begins thirty-six months prior to the expiration of the franchise, Cable Co-op may request the City to commence proceedings to determine whether or not to renew the franchise. On July 20, 1998, Cable Co-op requested the City to commence renewal proceedings, and the Council agreed to begin proceedings with its adoption of a resolution in September 1998. After this request, in late April 1999, Cable Co-op announced that its Board of Directors had approved a letter of intent to sell the cable system to AT&T Broadband and Internet Services (AT&T). Currently, it is not known when the Cable Co-op Board will finalize an agreement with AT&T and vote to approve the CMR: 314:99 Page 1 of 9 sale. According to news reports, the Board is currently scheduled to consider the AT&T offer on August 3. If the Board and shareholders approve the sale to AT&T, City staff would expect to receive Cable Co-op’s formal request (a completed transfer application on Federal Communications Commission Form 394) to transfer the franchise and the ownership of the cable system to AT&T. The franchise agreement stipulates that, prior to any change in ownership of Cable Co-op, the City Council must approve the change. DISCUSSION A transfer of ownership and the renewal of a cable franchise agreement are processes governed by Federal and State law, and by the current franchise agreement. Both processes share a similar objective, to ensure the provision of cable services that meet the programming needs of the majority of the community at a fair price. However, the two processes differ in some of the procedures that must be followed and in the timeframes involved. The renewal process is a lengthy one, and has already been initiated by Cable Co-op even though the franchise agreement will not expire until March 24, 2001. In contrast, the transfer process has a much shorter time line. In addition, the transfer process involves a decision regarding whether or not to exercise the right of first refusal. Both of these processes, including the right of first refusal, are discussed in more detail below. Renewal Process Due to the evolving nature of the cable industry, the franchise renewal process offers an opportunity to do more than shape the local cable system. Because cable now includes the ability to deliver voice and data, as well as video communications, the franchise renewal process provides an opportunity to undertake a community-wide communications planning process. The City will strive to structure a franchise agreement that meets local telecommunications infrastructure and service needs into the future. The franchise renewal process also offers an opportunity for the City to ensure that the cable operator is paying adequate rent (in the form of franchise fees) for the use of the pubic right of way. The cable franchise renewal process involves an examination of the past performance of Cable Co-op, including analyzing how well it has complied with the current franchise agreement; an exploration of future community telecommunication needs and interests; and actual negotiations for a new franchise. Most franchise agreements are reached without the issuance of a formal request for proposals and take approximately 18 to 24 months to complete. If the CMR: 314:99 Page 2 of 9 issuance of a formal request for proposals is necessary, it can add an additional nine months to a year to the renewal process. In order to proceed with the franchise renewal process, the City has retained the services of a cable communications consultant. After conducting a competitive proposal process, in June 1999, the Council awarded a contract to The Buske Group. The Buske Group has assembled a cable communications consulting team that includes respected individuals in the areas of cable television refranchising, cable regulation and policy, engineering, financial analysis, survey research, and public, educational and government (PEG) access management. The City has also contracted with a law firm that specializes in cable communications law. A working group comprised of staff from the City Clerk’s Office, the City Attorney’s Office, and City Manager’s Office, including the Director of Administrative Services and the Director of Utilities, has been established to oversee the efforts of the consulting team. The City is currently in the first stage of the renewal process. The objective of Phase One of the renewal process is to develop a renewal plan and timeline, and to ensure that the process and the applicable laws and regulations are understood by City staff, elected officials, and key members of the community. As a part of this effort, The Buske Group will review current governing documents and franchise agreements from comparable cities. This stage should be completed in the fall of 1999. Phase Two establishes the basis upon which the City will negotiate a franchise renewal or a new agreement. An overall review of the Cable Co-op’s past performance is conducted. This review encompasses a technical audit of the cable system, including an assessment of the physical and electrical plant, and will take several months, beginning in the fall of 1999. The Buske Group’s team of technical experts in this area will assist in this process. Phase Two also includes an evaluation of the past performance of Cable Co-op, including its compliance with the existing franchise and franchise fee provisions; a review of customer service standards and consumer complaints; and a review of current public, educational, and government PEG access resources and services. In addition, future community cable-related needs and interests will be identified, using surveys, focus group workshops, and public hearings. The Buske Group will provide expertise in the of areas of surveying methods and needs assessment. This part of the review will take longer, up to twelve months, but will occur at the same time as the technical review. Phase Three builds upon the information gathered in Phase Two. After the review of past performance and the needs assessment are completed, the City will CMR: 314:99 Page 3 of 9 establish its desired outcomes for the renewal process. Typically, the desired outcomes fall within the following areas: cable system upgrades/rebuild; contributions of television channels, facilities, and equipment for public, educational and government access; an institutional network to link schools, libraries, and government buildings; and franchise fees. Federal law also permits the City to identify requirements for cable system capacity, functionality, and customer service. During this phase the City will identify its franchise renewal outcomes (goals), develop a renewal strategy, and conduct actual renewal negotiations. A model franchise agreement and enabling ordinance would also be drafted. The renewal negotiations can be expected to take several months. Once a new franchise agreement has been negotiated, the City will provide the community with an opportunity to comment on the agreement before it is finally granted. If a renewal agreement cannot be reached through informal negotiations, the City would issue a formal request for proposal. The formal proposal and negotiations process involves set procedures, time schedules, and established criteria for denial of a renewal. The City would utilize the information that has already been gathered (e.g., the assessment of community-wide telecommunication needs and interests) in support of the formal proposal process, should it be initiated. The formal proposal process can take up to one year to complete. The City may deny Cable Co-op’s request for renewal only if one or more of the following applies: ¯substantial noncompliance with the terms of the existing franchise agreement ¯service quality has not been reasonable in light of community needs ¯lack of financial, legal and technical ability to provide the services, facilities and equipment the proposal does not meet the cable-related community needs and interests, taking into consideration the cost of meeting such needs Transfer Process The City’s review of the proposed transfer of the franchise to AT&T will be initiated when Cable Co-op formally requests the City’s approval of a transfer of the franchise and cable system ownership. This is accomplished through the submission of a transfer application on Federal Communications Commission (FCC) Form 394, along with supporting documentation. The documentation should include sufficient detail to enable the City to review and evaluate the transfer and to exercise its reasonable judgment with respect to the transfer. Under FCC rules, the City has 30 days to notify Cable Co-op concerning any questions related to the transfer application and supporting documentation, including questions regarding the accuracy and completeness of the information provided. CMR: 314:99 Page 4 of 9 After ensuring the transfer application is complete, the City would begin its review of the transfer request with a primary focus on ensuring that the transfer benefits the community. The franchise was originally granted to Cable Co-op based upon its unique ability to provide the services desired by JPA members and the City has the discretion to deny the transfer if it poses a risk that the community will not receive what it anticipated when it selected Cable Co-op. The City would inquire into the qualifications of AT&T to ensure that it has the ability to meet the City’s cable service requirements. The City would utilize consulting services provided by The Buske Group to perform a review of Cable Co-op’s transfer application, with specific focus on the technical and financial qualifications of AT&T. The City’s law firm would conduct a legal review of the transfer application. An evaluation would also be conducted to identify any areas of noncompliance with the existing franchise agreement, either in the past or currently. After conducting its review of the transfer request, the City would draft a consent to transfer agreement. As part of this agreement, AT&T would be required to assume all of the terms and conditions, and the responsibilities of the Cable Co-op. For example, AT&T would be responsible for complying with all provisions in the franchise agreement related to PEG access, maintaining the extensive local programming provided by Mid-Peninsula Access Corporation (MPAC). In addition, the City would require AT&T to maintain Cable Co-op’s current service offerings not detailed in the franchise agreement (e.g., cable modem services). The City would also expect AT&T to assume responsibility for any areas of non- compliance with the existing franchise agreement, both known and unknown. Federal law requires the City to determine whether to grant or deny the transfer within 120 days of receipt of a completed transfer application which includes the information required by the City. Under Federal law, if the City does not act within 120 days, the transfer request will be considered approved. The franchise agreement appears to provide 90 days for a review of the transfer application. In addition, under the franchise agreement, within 15 days from receipt of a completed transfer application, the City Manager must submit it to the City Council with a recommendation for action. A public hearing must be scheduled within 30 days of receipt of the transfer application, and the City Council must act within 60 days after the public hearing. Both Federal law and the franchise agreement allow both parties to agree to an extension. During the transfer process, the City will work with Cable Co-op, as necessary, to reconcile any time issues if there is insufficient time to render a decision. Applicable law provides a basis for denial of a transfer request. A franchising authority may deny the transfer request based on the buyer’s unique financial, legal, technical, and character qualifications, and its ability to provide the required CMR: 314:99 Page 5 of 9 cable service. A franchise authority also may deny a transfer request if the buyer owns or controls another cable system in the cable franchise area or if the proposed transfer would eliminate or reduce competition in the delivery of cable service. Right of First Refusal The franchise agreement grants the City the right of first refusal provided the City exercises this option within 90 days after it receives the formal notice of the transfer and the detailed terms and conditions of sale. This provides the City the right to acquire the franchise under the same terms and conditions agreed to by Cable Co-op and AT&T. The City would have to match the agreement between Cable Co-op and AT&T in all respects. In addition, the City would assume the financial and operational risks and responsibilities inherent in providing cable services and managing the cable system. Finally, if the City were to exercise the right of first refusal, it would be doing so on behalf of the City itself and not on behalf of the Joint Powers Agencies. This means the City would pay Cable Co-op the entire monetary consideration, and no contributions from the Joint Powers Agency members would be made. Each Joint Powers Agency member then has 90 days in which to decide whether or not to terminate its participation in the Joint Powers Agreement. RESOURCE IMPACT The City’s franchise revenues totalled $345,000 in calendar year 1998; of this, the City contributed approximately $153,000 to local programming provided by MPAC. The City has entered into an agreement with The Buske Group in the amount of $102,250 for cable consulting services. In addition, the City has contracted with a law firm in the amount of $30,000 for legal support during the transfer and renewal processes. Also, significant staff support is being provided by the Administrative Services Department and the City Attorney’s Office, and it is anticipated that staff will request funding in the future to backfill for a Senior Financial Analyst and a Senior Assistant City Attorney. Should a formal request for proposal become necessary, staff will request Council approval for an additional $15,300 for consultant support services. The total costs for the franchise renewal proceedings will be shared among the members of the JPA. CMR: 314:99 Page 6 of 9 POLICY IMPLICATIONS During the renewal process, the City will utilize community focus groups to evaluate the performance of the cable operator and to ascertain future community related needs and interests. This is consistent with the goals in the Comprehensive Plan regarding the use of advisory boards and ad hoc committees to assist City staff" and the City Council on policy issues (Goal G-1, Policy G-2). A key policy implication inherent in the transfer process involves the transfer of the franchise from a locally controlled company to a large multi-national corporation. However, a loss of local control does not necessarily imply a loss of local programming. As mentioned above, the City would require that AT&T assume all of the terms, conditions, and responsibilities of the current agreement, including all provisions related to public, educational, and government access and programming. Also, although the loss of local control is an important concern for the community, there may be potential benefits to the community in the sale to AT&T, including: immediate access to capital for investment in infrastructure, facilities and other resources; access to strategic alliances which could broaden service offerings; and long-term stability in the provision of cable services. During the transfer process, a policy decision also must be made regarding whether or not the City should exercise the right of first refusal. In prior discussions, the City Council has indicated that it does not wish to acquire Cable Co-op nor to become a cable provider. Most recently, in February 1998, when Cable Co-op asked the City Council to help create a new joint powers authority, the Silicon Valley Communications Authority, the Council vetoed a motion directing staff to conduct a preliminary legal assessment of the viability of the venture. Individual Council members indicated that they preferred the private sector to undertake the risks inherent in a rapidly changing and technologically complex field. TIMELINE The expected timeline for the franchise renewal process is provided in the following table. CMR: 314:99 Page 7 of 9 Phase Phase One Phase Two Phase Three Purpose Development of renewal plan and timeline: Educate City staff, elected officials and community leaders about renewal and cable issues. ¯Review current governing documents. ¯Review franchise agreements in comparable cities. Review Cable Co-op’s past performance and future needs and interests: ¯Technical audit of cable system. ¯Compliance with existing franchise agreement and franchise fee provisions. Review of customer service standards and consumer complaints. Review of current PEG access resources and services. , Identify future community cable-related needs and interests. Identification of renewal goals, development of renewal strategy, and renewal negotiations. Draft model franchise agreement and ordinance. Timing July-September 1999 September 1999- September 2000 September - December 2000 PREPARED BY:Melissa Cavallo, Assistant Director Shannon Gaffney, Senior Financial Analyst REVIEWED BY: Grant Kolling, Senior Assistant City Attorney CMR: 314:99 Page 8 of 9 DEPARTMENT HEAD: of Admini Services CITY MANAGER APPROVAL: ity Manager Mr. Russell Averhart, Director of Administrative Services, City of East Palo Alto Mr. Walter Callahan, Deputy Director, Public Works, San Mateo County Ms. Uma Chokkalingam, Finance Director, City of Menlo Park Ms. Jan Dolan, City Manager, City of Menlo Park Mr. Don Guluzzy, City Manager, Town of Atherton Ms. Monika Hudson, City Manager, City of East Palo Alto Mr. John Maltbie, County Executive, County of San Mateo Ms. Jan Thomson, Stanford University Ms. Salani Wendt, City Clerk, City of East Palo Alto Mr. David Wheaton, Asst. City Manager, City of Menlo Park Mr. Richard Wittenberg, County Executive, County of Santa Clara The Buske Group CMR: 314:99 Page 9 of 9