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HomeMy WebLinkAbout1999-09-13 City Council (15)City of Palo Alto City Manager, s Rep0rt TO:HONORABLE CITY COUNCIL FROM:CITY MANAGER DEPARTMENT: ADMINISTRATIVE SERVICES DATE:SEPTEMBER 13, 1999 CMR: 356:99 SUBJECT:ADDITIONAL INFORMATION ON ISSUES SURROUNDING CABLE CO-OP FRANCHISE RENEWAL AND TRANSFER OF OWNERSHIP PROCESSES This is an informational report and no Council action is required. BACKGROUND On July 26, 1999, at a Council Study Session, staff made a presentation on the Cable Co- op franchise renewal and transfer of ownership processes (CMR:314:99). At this session, Council members asked questions about open video systems, open access, the role of JPA members (Palo Alto, Menlo Park, East Palo Alto, Atherton, San Mateo County, and Santa Clara County, representing Stanford), and the options available to the City Council during the transfer process. In addition, the public raised questions regarding a lobbying ordinance that had been enacted during the original award of the cable franchise. This staff report discusses these questions and issues in greater detail, as well as other items related to the cable franchise. In anticipation of receipt of a request to transfer the cable franchise from Cable Co-op to AT&T Broadband and Internet Services (AT&T), the report discusses the options that will be available to the City during the transfer process. Because the formal transfer request, which will contain the details of the agreement between Cable Co-op and AT&T, has not been received, staff does not have a recommendation regarding the possible options identified later in this report, at this time.Staff will return with a recommendation a~er receipt of the formal request. DISCUSSION Open Video Systems At the July 26, 1999 Council Study Session, questions were asked about the relationship between open video systems and the current cable franchise agreement. CMR: 356:99 Page 1 of 7 Under the federal Telecommunications Act of 1996, Congress created a new regulatory structure, called "open video systems" (OVS), to encourage competition in the delivery of video programming. The OVS framework creates an opportunity for a company to provide cable services without authorization under a cable franchise agreement. To be an OVS provider only requires certification by the Federal Communications Commission. From the perspective of a customer, there is little difference between an OVS provider and a cable company. The services offered by both include traditional video programming, and potentially, more recently offered services such as data and voice transmission. The technologies used to provide the services are the same. However, the different regulatory structures (OVS versus cable) create differences. Under the traditional cable model, a company must have a cable franchise with the local franchising authority. This franchise agreement establishes the length of time of the franchise, sets a franchise fee that the company must pay to the franchise authority, mandates the public, educational, and government (PEG) access that the company must provide, and establishes other requirements such as plant upgrade schedules and universal cable services. The local franchising authority requires these in exchange for the public right of way that the cable company uses to lay its wires to customers’ homes. OVS providers are often referred to as "overbuilders" because they come into a community and lay new wire to customers’ homes, on top of the current cable system. Unlike a cable operator, an OVS provider does not need to have a cable franchise to provide its cable services, and thus avoids the time commitment, the franchise fee, and many other franchise requirements. OVS providers have traditionally focused their services on densely populated, higher income areas in a community, rather than providing service to the entire community, in order to maximize revenue relative to the capital investment of laying new wires. While an OVS provider may operate without the obligation to pay a cable franchise fee, it must negotiate with local communities to use the public right of way for its wires. As a part of that agreement, localities may require OVS providers to pay a five percent fee of gross revenues, or a "franchise-like" fee. In addition, federal law specifically states that OVS providers be subject to the same PEG requirements for every cable franchise area with which its system overlaps does. Frequently, these PEG requirements and the "franchise-like" fee are contained in an OVS Agreement. Finally, federal law permits an OVS provider to use only one-third of its channel capacity itself. It must lease the other two thirds of the channel capacity to other providers, unless there are no other providers, and forego the programming control of those channels. City staff is currently in discussions with an 0VS provider, Residential Communications Network (RCN) Corporation. RCN provides local and long distance phone services, CMR: 356:99 Page 2 of 7 cable, television transmission, and Internet access services in high-density areas between Boston and Washington, D.C. It is also targeting the West Coast, focusing on the corridor between San Jose and San Francisco. RCN has initiated discussions with staff concern the right to place its capital improvements underground and overhead in order to provide phone, video, and Internet services. RCN has indicated that it intends to focus on residential homes served by overhead facilities. (More information is provided in CMR:245:99). While RCN would be an OVS provider in Palo Alto, it does have traditional cable franchise agreements in some communities. Open Access The issue of open access was raised at the July 26, 1999, presentation. has continued to generate national attention and interest. Since that time, it "Open access" concerns high speed, broadband access to the Internet through cable systems by all users, including the owner of the cable system. Access consists of two parts: the "pipeline," or the actual physical connection to the Internet, and the content, or what a customer sees once connected to the Internet. Whether the pipeline and content are bundled or unbundled is what is at stake in the open access discussion. Essentially, the major concern is whether customers accessing the Internet through cable modems should be required to pay the cable company for bundled access and its proprietary content, or whether those services should be unbundled so that a customer pays for use of the company’s pipeline but not for its content. In bundled access, customers could end up paying twice for Internet Service Provider (ISP) services if they don’t like the cable company’s chosen provider and elect to use another ISP. The notion of open access is analogous to the situation in the local telephone market, where customers use the local telephone companies’ pipelines to access any long distance company of their choice. The local telephone company can charge for use of the pipeline, but not for the service provided by the long distance carrier. Contrast this with the current "closed model" of the cable industry, where a customer pays one price for both the pipeline and the content. Open access is one of the most hotly debated issues in the communications industry currently, and participants in the debate include local franchising authorities, the federal courts, the Federal Communications Commission, AT&T, local telephone companies, and ISPs, including America Online, GTE, and MindSpring. Supporting open access are some local franchising authorities, ISPs, and local telephone companies. The argument in support of open access is that without it, AT&T will have a monopoly, since it was already an ISP before acquiring TCI, and has a significant interest in companies which provide Internet access through cable modems. Further, some local franchising authorities are exercising the right to regulate open access. A federal judge has upheld the right of Portland, Oregon, to impose open access as a cable franchise condition. Opposition to open access comes from AT&T, and ISPs in which it owns a significant interest. AT&T argues that competition already exists because customers can CMR: 356:99 Page 3 of 7 choose other methods to access the Internet, that open access will be technically difficult to achieve, and that open access will serve as a disincentive to AT&T in upgrading the local network. The FCC’s position is a little different. Currently, it opposes mandating open access, preferring to let the market determine the outcome. Further, the FCC believes that it, and not local franchising authorities, has the right to mandate open access. Interestingly, another issue raised in the open access debate is whether local franchising authorities or the FCC have the right to regulate this issue. Role of JPA Member Jurisdictions in the Franchise Transfer and Renewal Processes At the July 26, 1999 Council Study Session, questions were raised regarding the role of the JPA memb.er agencies in both the transfer and renewal processes. The timeframe for the review of the transfer request is quite short. Due to the time constraints, the City of Palo Alto,-acting on behalf of the JPA member agencies, will play a significant role in developing the recommendation regarding the transfer request. However, every effort will be made to involve the JPA members. Once staff has had an opportunity to review the transfer request, a meeting of the JPA Working Group will be called to examine the request and discuss Palo Alto’s analysis of it. To encourage broader citizen participation, Palo Alto staff will work with the JPA Working Group members to ensure that the public hearing regarding the transfer request is properly noticed in all of the JPA communities. Involving the JPA members in the refranchise process is simpler because the process is longer. To begin with, JPA members were a part of the committee that selected the cable consultant, The Buske Group. All of JPA communities will be represented on the Needs Assessment Task Force, which is being formed to assist in the identification of future communication needs. Out of this Task Force will grow focus group meetings and public hearings involving all JPA member communities. The JPA Working Group will be kept informed through ongoing meetings with City of Palo Alto staff and the consultant. The first such meeting occurred September 8, 1999. Finally, JPA members will continue to receive copies of staff reports and analyses regarding both the franchise transfer and renewal processes. Lobbying Ordinance During the public comment portion of the July 26, 1999 Council Study Session, it was noted that when Palo Alto first entered into negotiations regarding a cable franchise, it passed a lobbying ordinance. The 1982 ordinance required lobbyists to file with the City Clerk a registration statement, which included their name, names of their employers, and a brief description of the legislation or administrative action that the lobbyists sought to influence. In the ordinance, the Council stated that it was passing the legislation to assure citizens of the impartial and independent judgment of Palo Alto public officials and employees during the cable television franchise process. Such an ordinance, today, most probably would be preempted by similar provisions existing under California law, CMR: 356:99 Page 4 of 7 including the California Government Code, Sections 86100-86118, introduced in 1985 and amended as recently as 1992. Transfer of Ownership Request Options The City Council may consider a number of possible scenarios or options available to it when it receives the formal request to transfer the cable franchise from Cable Co-op to AT&T. Staffhas outlined below the possible options. The options represent increasingly aggressive approaches to the transfer process. As mentioned above, the request to transfer the cable franchise has not been received, and without the details of the request, staff can have no recommendation regarding a preferred mode of action. The action that the City Manager will recommend will hinge on the specifics of the arrangement between Cable Co-op and AT&T. After the City has received the formal request to transfer the franchise, if it fails to act on the transfer request within the time required to render a decision, this would, effectively, be deemed to be an approval of the transfer under federal law. Unconditional Approval of the Transfer: Another option available to the Council will be to approve the transfer request without any conditions. With this option, staff would review the transfer request and make a recommendation to the City Council to approve the transfer as presented. The City Council would then vote to approve the transfer. This option should be exercised if the City Council believes that, with the transfer, the community will receive the same quality and type of services provided by Cable Co-op under the existing franchise. This option is viable only if the City has no concerns regarding the transfer. Approve the Transfer With Conditions: Another option available to the Council will be to approve the transfer, with conditions. The conditions that the Council might impose would depend on the specifics of the deal between AT&T and Cable Co-op. Possible conditions could include requiring AT&T to accept responsibility for any past non- compliance, both known and unknown; requiring AT&T to maintain a local customer service office; or asking AT&T to honor current franchise services which are not detailed in the franchise agreement. The advantage of this approach is that it allows the City to influence the structure and details of the franchise agreement. The disadvantage is that, depending on the conditions imposed by the City, AT&T could refuse to accept them. Exercise the Right of First Refusal: The City could opt to exercise its right of first refusal. This would require the City of Palo Alto to match all aspects of the deal between AT&T and Cable Co-op, including price. In exercising this right, the City would be acting on its own behalf, and not on behalf of the JPA. The City could then own the cable system, and could opt to operate it itself or to sell it to someone else. CMR: 356:99 Page 5 of 7 An advantage of this approach is that it might provide a greater opportunity to maintain local control, especially if the City chose to run the cable system. A disadvantage is the cost, which would far exceed the money in the Budget Stabilization Reserve, and would require debt fmancing. This shifts all the financial risk to the City. The City would then be responsible for running a cable company, an industry in which it has no experience and where the technology is changing rapidly, and with a system which is in need of expensive capital upgrades. Should the City choose to sell the system, it would be responsible for finding a buyer, and if unable to do so, would have to run the system. All of this risk would be assumed on its own behalf, not on behalf of its JPA partners, who would have 90 days to terminate their participation in the franchise if the City exercises this right. Reject the Transfer Request: The City could choose to reject the transfer request. A local franchising authority may reject a transfer.request based upon a buyer’s unique financial, legal, technical, or character qualifications, and its inability to provide the required cable services. An authority may also deny a transfer request if the proposed transfer would eliminate or reduce competition in the delivery of cable service. Acquire Interest in the Franchise System: Another option available to the City Council is to acquire up to a 49 percent interest in the cable system, upon reasonable written notice to the company. The right to require a 49 percent interest is independent of the City’s other rights under the transfer or renewal processes. The City retains the right to a 49 percent option even after an approved transfer of franchise. The provision requires the City to pay fair market value for its portion of the system. Staffprojects that this could cost the City about $34 million, based upon a purchase price of $70 million. (In the 1999-01 Adopted Budget, the General Fund Budget Stabilization Reserve, was projected to be approximately $19 million as of June 30, 1999.) A 49 percent interest in the company would allow the City to appoint up to seven members of the 15 member Board of Directors. Controlling seven seats on the Board would give the City an opportunity to play a more active role in the management of the cable company. However, the ownership of 49 percent of the system could expose the City to financial risk, as it will be a stakeholder, dependent on the success of the company. If Cable Co-op appreciates in value, then the City could receive a good return on its investment. However, if it depreciates in value, then the City has risked its money. Finally, it is possible that the City’s JPA partners would choose to terminate participation in the JPA if the City exercised the 49 percent option, which could affect the long-term financial viability of the system. CMR: 356:99 Page 6 of 7 PREPARED BY: REVIEWED BY: Shannon Gaffney, Senior Financial Analyst Grant Kolling, Senior Assistant City Attorney DEPARTMENT HEAD: Services CITY MANAGER APPROVAL: JUNE FL~MING City Manager!!/ Mr. Russell Averhart, Director of Administrative Services, City of East Palo Alto Mr. Walter Callahan, Deputy Director, Public Works, San Mateo County Ms. Ms. Ms. Mr. Mr. The Uma Chokkalingam, Finance Director, City of Menlo Park Jan Dolan, City Manager, City of Menlo Park Don Guluzzy,.City Manager, Town of Atherton Monika Hudson, City Manager, City of East Palo Alto John Maltbie, County Executive, County of San Mateo Jan Thomson, Stanford University Salani Wen& City Clerk, City of East Palo Alto David Wheaton, Asst. City Manager, City of Menlo Park Richard Wittenberg, County Executive, County of Santa Clara Buske Group CMR: 356:99 Page 7 of 7