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HomeMy WebLinkAboutStaff Report 261-07City of Palo Alto City Manager’s Report TO:HONORABLE CITY COUNCIL 12 FROM: DATE: SUBJECT: CITY MANAGER JUNE 18, 2007 DEPARTMENT: ADMINISTRATIVE SERVICES CMR: 261:07 REQUEST FOR COUNCIL DIRECTION CONCERNING CITYWIDE ULTRA-HIGH-SPEED BROADBAND SYSTEM NEGOTIATIONS RECOMMENDATION Staff is requesting direction from the City Council concerning the Citywide Ultra-High-Speed Broadband systemproject, based upon one of the two options below: 1)Confirm the City’s commitment to proceed with the project given that the City’s financial commitment to the project would be greater than originally anticipated. If Council wants to proceed Council should decide whether to: Pay 180 Connect Network Services, Inc. (180 Connect) $30,000 for the preparation of a business plan. If so, authorize the use of $30,000 in Council Contingency funds for this purpose; or b.Direct 180 Connect Network Services, Inc. to develop a business plan at its own expense; and Authorize the use of $65,000 in Council Contingency funds to hire legal, financial and telecommunications consultants to support the City’s role in the development of the business plan. 2)Terminate negotiations with 180 Connect because the City’s anticipated financial contribution (or financial risk) of 30 to 40 percent of project cost, or an estimated $15 million, is too high. BACKGROUND The City issued an Ultra-High-Speed Broadband system Request for Proposals (RFP) on September 27, 2006. On January 9, 2007, two firms submitted proposals. On January 29, 2007, Mayor Kishimoto requested that Vice Mayor Larry Klein and Council Member Bern Beecham review the proposals and provide feedback to Council. On March 5, 2007, staff provided Council with an analysis of the two proposals and Council directed staff to enter into negotiations with one of the respondents, 180 Connect. The Mayor designated a two-member CMR: 261:07 Page 1 of 4 citizens’ committee to participate in this process in an advisory capacity. Staff committed to return to Council after preliminary discussions were held with 180 Connect with a recommendation on project staffing needs, a list of City assets that could be leveraged as part of the project, and information on business plan preparation costs. The proposal from 180 Connect includes a consortium of firms that would partner with the City to develop a broadband system. The consortium (180 consortium) is comprised of the following firms: 180 Connect, who would be responsible for overall project management, construction, installation and system operations; Packetfront, who would be responsible for designing the system and supporting its operation; and RBC Capital Markets ("RBC"), who would be responsible for identifying funding for the system. DISCUSSION In accordance with Council direction, in March 2007, staff initiated discussions with the 180 consortium. On March 29, 2007, staff submitted a series of questions to 180 Connect in an effort to ascertain the proposed business relationship, agreements that would need to be established and the contribution required from the City (Attachment 1). On April 19, 2007, staff and the citizens’ committee met with the 180 consortium to review its response to these questions (Attachment 2) and to define a plan of action. At this meeting, the 180 consortium indicated that. a business plan must be developed and approved by the parties before proceeding with this project. A business plan would give the 180 consortium and the City the information needed to determine whether or not the project is economically viable and should be pursued. In addition, a business plan would define: 1) the City’s financial contribution to the project; 2) the list of City assets and/or other City services that could be leveraged for the project; 3) the relationship and agreements needed between the parties; 4) the financing plan for the project; and 5) the plan for City ownership of the broadband network. The 180 consortium provided a proposed table of contents for the business plan (Attachment 3). The 180 consortium also requested $30,000 from the City to cover its direct costs in preparing the plan. At the April meeting, 180 Connect introduced a new consortium member, NorthStar Capital Partners. N0rthStar works with RBC to provide financial advisory services, and represented RBC’s interests at the. meeting. The 180 consortium suggested that NorthStar act as the financial coordinator for the project. Its role would be to work with RBC to arrange for funding to construct and operate the system. Staff has requested background information on NorthStar in order to evaluate its knowledge and experience levels. NorthStar presented a high-level financing plan to the City at the April meeting (Attachment 4). As part of its presentation, NorthStar indicated that the City’s financial commitment to the project would need to be greater than originally anticipated. 180 Connect’s RFP response had stated that the 180 consortium could support the project on its own, with a pledge of "limited City assets," and without any capital contribution from the City. This response was consistent with the RFP requirements and with Council’s direction to minimize City risk. NorthStar has since indicated that the City would need to provide a pledge representing 30 to 40 percent of the cost to complete the project or a cash equivalent of around $15 million. This pledge could be in the form of cash, loan guarantees, and/or assets and equipment. CMR: 261:07 Page 2 of 4 Staff also learned that RBC will not be investing directly in the project. It is anticipated that NorthStar and RBC will work together to seek private investors for the project’s financial capital requirements. Since it is probable that funding for the project will come from private investors, the rate of return required could impact the economic viability of the project. With this new information about the City’s financial participation in the project, staff would like to confirm Council’s commitment to this effort. If the Council directs staff to proceed with the development of a business plan, staff recommends obtaining legal, financial and telecommunications experts to assist staff in the following areas: 1)Outside legal experts in the telecommunications industry ($10,000) to advise staff on the relationship and agreements between the parties and any legal or regulatory issues. 2)Financial advisory services ($10,000) to review the various financing instruments that could be used to fund the project and analyze the financial condition of the 180 consortium partners. In particular, staff would like to perform a more in-depth review of the financial condition of 180 Connect. During the RFP evaluation process, staff voiced concerns about 180 Connect’s financial stability. Since 2003, 180 had a series of net. operating losses ranging from $4.7 million to $13.3 million. For the 9 months ending September 30, 2006, the company had a loss of $10 million. During this same time period, the company’s balance sheet carried a deficit of $74 million on assets of $169 million. As a result of these issues, staff believes it is prudent to obtain an independent assessment of 180 Connect’s financial ability to carry out the broadband project. 3)Telecommunications industry and other consultants ($45,000) to provide an independent valuation of the City’s General and/or Utility Fund assets, to review the draft business plan, and to provide back-up support to ASD staff enabling it to manage this effort. In addition to these consulting costs, a significant amount of internal staff time (from Administrative Services and Utilities departments as well as the City Attorney’s Office) would need to be devoted tothe business plan effort at a cost of approximately $75,000. The City’s role in the development of the business plan would be limited to: 1) identifying and analyzing the various types of contributions that could be provided by the City (e.g., cash, pledge of revenue, letters of credit, debt instruments, permit fees, etc.); 2) identifying and valuing City assets; 3) providing information about existing City infrastructure and facilities; 4) examining legal and regulatory issues; and 5) providing general information about Palo Alto. Beyond these responsibilities, the 180 consortium would be responsible, with its engineering, technical, marketing, and broadband delivery expertise, for development of the business plan. RESOURCE IMPACT If Council directs staff to proceed with development of a business plan, staff requests funds of up to $95,000 from the Council’s Contingency to pay for the plan. The preparation of a business plan will also require the devotion of significant staff time, estimated at $75,000. If the business plan recommends that the broadband system should be launched, resources valued at about $15 CMR: 261:07 Page 3 of 4 million would need to be dedicated to the project. Once the broadband network has been constructed, 180 Connect would assume responsibility for all ongoing operating costs. POLICY IMPLICATIONS This report is consistent with Council’s policy and program direction provided at its March 5, 2007 meeting. TIME LINE If Council directs staff to have the 180 consortium undertake the development of a business plan, staff anticipates that it would take a minimum of six months to complete the plan. During this process, staff would return to Council for direction on the level and type of contribution the City is willing to commit to the project. Upon completion of the business plan, staff would return to Council with a recommendation to proceed or to terminate negotiations with 180 Connect for a broadband system. ENVIRONMENTAL REVIEW The actions requested in this report do not constitute a project for the purposes of the California Environmental Quality Act. PREPARED BY: - 2IO Director, Administrative Services DEPARTMENT HEAD APPROVAL: CARL YEAT Director Services CITY MANAGER APPROVAL: HARRISON Assistant City Manager ATTACHMENTS: Attachment 1: March 29, 2007 Letter to 180 Connect Attachment 2: April 10, 2007 Response from 180 Connect Attachment 3: Business Plan Table of Contents Attachment 4: NorthStar Presentation CMR: 261:07 Page 4 of 4 ATTACHMENT 1 city of abtlto Administrative Serviees De~adrne~ March 30, 2007 Mr. Ron Ivie Director of Engineering and Construction 180 Colmect, Inc. 3380 Americana Terrace, Suite 230 Boise, Idaho 83706 Administration 650.329.2692 650.323.1741 ~ax Bud~ 650.329.2260 650.323,1741 fax Information Technology 650.329.2182 650,61Z3109 Real Estate 650.329.2264 650.323,1)41fax Finance 650,329.2264 650.323.1741 fax Accounting 650.329.2264 650323.1741 fax 650.329.2271 650.329.2468 fax J~n.vestrl~e~ts 650.329.2362 650.323.8356 fax Revenue Collections 650.329.2317 650.617.3122 fax ParkingCitations 650.329.2252 As you know, the Palo Alto City Council has directed staff to begin discussions with 180 Connect Network Services Inc. on providing broadband services. As indicated in our report to Council, one of the next steps is to develop a better and broader understanding of your broadband system plan, the financial viability of the endeavor, and our respective contributions to the project. To achieve this, please provide the folloWing: 1)A _description of the source(s) of funding for construction and operation of the system. 2)A comprehensive list of existing City assets or other City services required for the proposed system. 3)An estimate of the amount of financia! contributions required from the City. This is to include, for example, any expected credit enhancements or collateral (e.g., pledges of revenue or assets); issuance of anydebt instruments; cash contributions; letters of credit, etc. 4)Information on the business relationship and associated agreements .that would be established among 180 Connect, PacketFront, and RBC. The City requests a better understanding of what RBC’s role and commitment to this project will be as well RBC’s expected rate of return on any investment In addition, the .City would appreciate information on what investment 180 Connect and PacketFront intend to make in this project. 6)Financial projections showing that the project is economically viable over a 10-year period. At a minimum, please include annual revenue projections by source (years 1 to 10), annual operating and capital costs (years 1 to 10), annual funding costs (years 1 to 10), and annual net income (years 1 to 10). Also provide the key assumptions behind the projections in your financial forecast. Finally, provide information on ¯ ~1,,~,~o~ ~s~,~m~o and +~-o basis for y,~ ~°~÷ ....+~*; ....,,~ estimates. EO. Box 10250 Palo Alto. CA 9430B We would like to set up a meeting with you, PacketFront and RBC during the month of April to review and discuss your response to this request~ We believe this information exchange is necessary to return to Council for direction on what resources it is willing to allocate to this project. In addition, we hope this information will provide the foundation for future negotiations of a public-private partnership. Finally, we want to apprise you of the formation of a Citizens’ Advisory Committee requested by the Mayor. At this time, the Committee is expected to provide advice to staff on the technical components of the Broadband project. We can discuss this further during our April meeting. Sincerely, Jo:Saccio Deputy Director 650/329-2288 ~ONN~T 2 Apfill0,2007 Joseph Saccio Deputy Director Administrative Services 250 Hamilton, Ave Pale Alto, CA 94301 Subject: Pale Alto March 29m Letter Questions & Answers Dear Mr. Saccio, 180 Connect, Inc. mad PacketFront is pleased to have been selected to continue working with the City to develop Citywide FTTH broadband solution. To continue to help provide clarity and answer questions in support of the development and future successful completion of the fiber to the home system for the City, we are responding to the list of questions submitted on March 29th: 1)A description of the source(s) of funding for construction and operation of the system. Response: The prima~..r source of ftmding for both, construction and epem~Jons would be provided by ~3C. REC would pro~dde ot~ermfonN funding during ~he developmen~ ot .he project ~.~p ~-o ~he poim that the svstern exceeded enough mass to support a revenue based opera,ions. 2)A comprehensive list of existing City assets or other City sen, ices required for the proposed system. Response: We believe Nat the development of a business plan e~d a dele~ted review of ali of the Cities options would define a comprehensive list of existing Cig’ assets mad other City sen’ices. DtuJng ~e development of’the brininess plan, common assets wend be ie following: !nfra~mctare.: Conduit, I~mer-dncts, abanda~ed systems, avNtable dark fiber, av~Iable pole a~achment space Facility: City Simcttn’es (Bttilding Space, Builddng Access), City Properties (Snmi! Broadband Cfft~inet Locations) City Services: City Design knoMedge, expediied pemai~ing, C_ity relations (ONer Permitting agencies) 3)An estimate of the amount of financial contributions required from the City. This is to include, for example, any expected credit enhancements or collateral (e.g., pledges of revenue or assets); issuance of nay debt instruments; cash contributions, letters of credit etc. Response: The business plan and detailed review of the Cities options would define ff:e amotmt o£ financial contfbutior_, required by the City. Using Ne knowledge of the Cities staff to define the credit er~hancements, tSe financial cou~ribution is currently ~mknown; however, if reqNred could be define as a letter of credit, cash payment upon completion of completed phases. 3380 Arnericcma Terrac®, Suife 230. geise, ID 8370~ ~.v. ~ 80connect.net 180 CONNECT 4)Information on the business relationship and associated agreements that ~vould be established among 180 Connect, PacketFront, and RBC. The Cily requests a better understanding of what RBC’s role and conmaitment to this project will be as well RBC’s expected rote of return on any investment. In addition, the City would appreciate information on what investment 180 Connect and PacketFront intend to make in this project. Response: The business relationship wo~,dd be between the City ~nd 929(;’ with 180 Connect parb’ to ~e agreement for tb.e developmem of FTTH Citywide system. Packe~JZront and ~Ner vendors iii~e M~Net, Tyco, Cisco m~d oflaers would be vendor agreements With 180 Connect to support tlae comp!etion of the system. Pd3C would ov-m the system and contract wN~ 180 Connect~o operate Ne network, m.m’ket the manage content pro¥iders and agn’eements. 5)Financial projections sho~ving that the project is economically viable over a 10-year period. At a minimum please include aunual reveaaue projections by source (years 1 to 10), annual operating and capital costs (years 1 to 10), annual funding costs (years 1 to 10), and annual net income (years 1 to 10). Also provide the key assumptions behind the projections in your financial forecast. Finally, provide information on 3,our forecasted customers and the basis for your market penetration rate estimates. Respons e: We believe that the business plan would finalize tlae economic tb~cast of the prqiect tb_mugh the knoMedge of the Cites staft~ help define a build-out schedule (4-5 Years) and produce a comprehensive annual revenue projection. Following this letter will be detailed capital and operational budget based on the deployment approach outlined in the correspondence provided to the City, using existing infrastructure, facilities and City "kno~vledge. We also believe that a business plan, a face to face meeting with our team and the City will begin to outline a final approach and provide the information that you need to execute a successful project. Finally, we believe the formation of a citizens’ advisol7 Committee, as requested by the Mayor, will be a positive direction for the City, the 180 Connect consortiums and the community. We have been working with several interested individuals in the community, who have expressed an interest in the project. We believe that these individuals could provide us ~vith valuable information and help insight in tothe development of the project from a community’s perspective. Our team would like to meet with the City’s staff to begin the discussion surround a business plan and discuss options and approach to the project. We are looking forward to the tentative meeting scheduled on the 19~t’ in Palo Alto. Regards, Ron Ivie Director of EnWConstruction 180 Connect, Inc. -Network Services 3380 Americana Terrace, 5uife 230, Boise, iD 83700 v,~,,,,w. 180connea|.nei- ATTACHMENT 3 180 CONNECT ULTRA-HIGH-SPEED BROADBAND SYSTEM BUSINESS PLAN FOR THE CITY OF PALO ALTO Table of Contents Section 1 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 1.10 1.11 EXECUTIVE SUMMARY Background, Goals and Objectives .........................................................1-1 Relationships of Parties ...........................................................................1-2 Palo Alto Overview ................................................................................1-3 Service Providers and Product Offerings ...............................................1-4 Open Fiber Network Design and Functionality .......................................1-5 Network Operating Plan ..........................................................................1-6 Financial Overview ..................................................................................1-7 Legat and Regulatory Issues ..........................................................~ .........1-8 Project Timeline Forecast ........................................................................1-9 Challenges .............................................................................................1-10 Recommendations .................................................................................1 - 11 Section 2 2.1 2.2 2.3 2.4 2.5 NETWORK ARCHITECTURE Background ..............................................................................................2-1 Point to Point Network Topology Overview ...........................................2-2 Primary Network Components ....................: ...........................................2-3 Local Traffic Stays Loca! ??? .................................................................2-4 Self-Provisioning Software Solutions ??? ..............................................2-5 Section 3 3.1 3.2 3.3 3.4 3.5 OPERATIONAL PLAN Background ..............................................................................................3-1 Organizational Structure ..........................................................................3-2 Roles of Each Organization .....................................................................3-3 Staffing Strategy ......................................................................................3-4 Operating Costs Forecast .........................................................................3-5 Section 4 CONSTRUCTION PLAN 4.1 System Deployment Plan .........................................................................4-1 4.2 Construction Timeline..., .....................i ...................................................4-2 6/7/07 Table of Contents Section 5 5.1 5.2 5.3 5.4 5.5 5.6 5.9 5.10 PRODUCT AND SERVICE STRATEGY Background ......., ......................................................................................5-1 Proposed Product Mix ..............................................................................5-2 Qualified Service Providers ......................................................................5-3 Triple/Quadruple Play Bundling ..............................................................5-4 Other Services ..........................................................................................5-5 Sales and Marketing Plan .........................................................................5-6 Branding ...................................................................................................5-9 Wholesale Fees .......................................................................................5-10 Section 6 6.1 6.2 6.3 6.4 CUSTOMER CARE AND SUPPORT PLAN Background ..................................i ........... ................................................6-1 Operational Standards ..............................................................................6-2 Network Management ..............................................................................6-3 Customer Support Strategy ............................ ...........................................6-4 Section 7 7.1 7.2 7.3 7.4 7.6 7.7 7.8 FINANCE Background ..............................................................................................7-1 Sources and Uses of Funds .......................................................................7-2 Capital Requirements ..............................................................................7-3 Public Investment ....................................................................................7-4 Take Rate Forecast ...................................................................................7-6 Operating Expense ..................................................................................7-7 Revenue Forecast ......................................................... ............................7~8 7.9 Pricing .................., ...........................................................7-9 7.10 Financial Forecast ..................................................................................7-10 7.11 Ownership Plan ......................................................................................7-11 7.12 Risk Factors and Sensitivity Analysis ....................................................7-12 Section 8 8.1 8.2 LEGAL AND REGULATORY Legal Opinion ...........................................................................................8-1 Legal Recommendations ..........................................................................8-2 ii 6/7/07 Table of Contents Section 9 PLAN STRENGTHS, WEAKNESSES, OPPORTUNITIES AND RISKS 9.1 Background ..............................................................................................9-1 9.2 Strengths ..................................................................................................9-2 9.3 Opportunities ...........................................................................................9-3 9.4 Weaknesses ..............................................................................................9-4 9.5 Risks ........................................................................................................9-5 Section 10 10.1 10.3 RECOMMENDATIONS Final Business Plan ............................................................10-2 Contractua! Agreement .......................................................! 0-3 Section 11 DEFINITIONS 6/7/07 iii ATTACHMENT 4 -i 0 Z