HomeMy WebLinkAbout1998-0708.SS.MINMINUTES FOR THE STUDY SESSION
ASHLAND CITY COUNCIL
July 8, 1998
CALL TO ORDER
Mayor Shaw called the meeting to order at 12:40 p.m., Civic Center Council Chambers
IN ATTENDANCE
Councilors Laws, Hauck, Hagen, Wheeldon and DeBoer were present. Staff present included: City Administrator
Mike Freeman, Assistant City Administrator Greg Scoles, Administrative Services Director Richard Wanderscheid,
Ashland Police Captain Mel Clements, City Attorney Paul Nolte, Director of Electrical Utilities Pete Lovrovich,
Public Works Director Paula Brown, Director of Finance Jill Turner, and Supervising Accountant Karen Huckins.
ASHLAND FIBER NETWORK
City Administrator Mike Freeman explained that this study session had been called because staff is seeking
direction from Council on how to proceed with the project.
Kevin Harper of R.W. Beck, Inc. presented their latest study as consultant on the project. Harper explained that
they had been asked to evaluate the City's original financial pro-forma objectively, in light of two possible
scenarios. Scenario 1 proceeds from the assumption that the City builds the fiber optic network with connections to
homes and provides cable service. Scenario 2, referred to as the "data transfer/network case", was based on the City
building the fiber optic network, but not providing cable service.
Briefly explained the report's format, which has the scenarios in section one, the changes made since the original
pro forma in section two, a summary of the results in section three, a detailed explanation in appendix one, which
has the assumptions used in preparing the report line-by-line, and a printout of detailed financial pro formas in
appendix two. Suggested that appendix one input assumptions were the place to focus to understand the report.
Noted the first category of major changes that have occurred since the original pro forn~a was presented: that the
time horizon has been extended to ten years, rather than five; that the interest for long term debt is less than
originally projected; that the level of capital expenditures has increased from $4.2 million to $5.0 million largely due
to reallocation of some costs from operating costs to capital expenditures; changes made in staffing for buildout and
operation; and other minor changes in some of the operating cost assumptions.
The second category of major changes relate to cable television portion of the project: all revenue and direct
expenses related to providing cable televison have been taken out in Scenario 2; Scenario 1 has revised cable
penetration projections to 36% percent (from the previous 52%); noted assumption that business cable customers
not be included; included additional revenue for advertising, programming guides, shopping channels as well as
costs for these items; also included additional revenues for pay per view services as historically there is greater
utilization of this service under digital systems compared to analog.
With regard to data transfer, both scenarios assume that the City will not become an ISP, and the original ISP
revenues from the pro forma have been removed. Residential internet service penetration figures have been
lowered, and revenues from data transfer services for businesses have been increased.
Discussed Table 1, located at the end of Section 2 of the report, which summarizes the major input assumptions for
both scenarios, noting differences in total capital expenditures, penetration rates for cable and related services,
assumed rates for cable and internet services, and operational savings for the utility and the City.
Harper also pointed out Table 2, at the end of Section 3, which summarizes the results for each scenario. For
Scenario 1, noted a typographical error in the net income for year 5 in this table, which should be a positive
Ashland Cib, Council Study Session Minutes 07-08-98
$771,764, not a negative as indicated. From a net income perspective, this scenario will be negative during the first
three years and turn positive beginning in the fourth year and continuing through the tenth year. Annual cash flow
will be negative in years two and three, after initial bond proceeds the first year, and become positive for years four
through ten. In terms of cumulative cash flow it is negative through year five, and turns positive on a cumulative
basis in year six. Over ten year period, there is a positive cash flow of about $3.7 million. Bond debt is amortized
over a ten year period, and over that period there would be $15 million in revenue associated with the cable service
and another $13 million associated with data transfer services and savings from operational efficiencies.
For Scenario 2, Table 2 provides the same information, relating to net income which turns positive by year five,
annual cash flow which is negative into year four, cumulative cash flow which turns positive in the ninth year, no
cable revenues, but $13 million in revenue for data transfer and operation efficiency savings.
Director of Finance Jill Turner discussed the reasonableness of the report presented by R.W. Beck. Noted that the
previous bond sale amounts were much lower, but that they were revised to include capital costs to cover
expenditures for digital set boxes and other operating costs. Discussed the section on Scenario 1 in Appendix 1.
Noted that the City would likely not consider going to an outside partner from private enterprise to provide CATV
service unless it were financially advantageous to do so. Noted that report's assumed residential passings is very
reasonable in comparison to the number of electrical accounts, and that it is a reasonable estimate to assume that ¼
to 1/3 of total possible customers will be customers by the end of year two.
Discussed positions and salaries listed under operating expenses. Noted that some current positions will be re-
assigned, and explained that while this doesn't involve creating new positions, it may mean a change in existing
positions and salaries. Also discussed that future salary allocated for the Electric Department should show as
savings in the Ashland Fiber Network Plan.
Turner concluded by noting that her previous suggestions have been incorporated into the Ashland Fiber Network
Plan.
City Administrator Mike Freeman discussed Ashland Fiber Network staff recommendations. Explained the reasons
behind the City's looking at this project. Noted that the Telecommunications Act of 1996 frees utilities to enter the
telecommunications arena; that because of low incremental costs there is a low risk of failure and a strong
competitive position relative to traditional telecommunications carriers; that utilities are perceived as providing more
reliable service at a lower cost; that the trend in the industry is to keep options open by installing as much capacity
as possible when climbing a pole or digging a trench to maximize returns on labor expended; and that with
deregulation, utility revenues will likely decrease, creating pressure to enter new markets.
Freeman stated that the state's strategic plan, titled Oregon Shines H, includes the goals that Oregon become one of
the top ten states for starting and growing a technology company and that more Oregon companies export higher-
valued products. Stated that the Ashland Fiber Network would help existing businesses to meet these goals. Also
discussed Senate Bill 994 which created the Oregon Telecommunications Forum Council with the goal of utilizing
telecommunications to improve the quality of life and economic development in Oregon.
Freeman concluded by outlining the reasoning behind the staffs recommendation of Scenario 1, which includes the
provision of cable television services. This option meets the needs of the utility to begin positioning itself for
deregulation; meets the City's needs to provide higher quality services to the public while reducing costs; provides
infrastructure that would not otherwise crone to Ashland in the near future; provides a valuable long-term economic
development tool; assists local businesses in improving their ability to compete; provides larger organizations with
significant opportunities to utilize new technology to reduce costs, improve services and implement distance
learning concepts; gives City schools access to high-speed data and video service; provides high-speed data
solutions for off-campus students and faculty of SOU; provides an incredible opportunity for the hospital to
improve its already outstanding service to the community; provides high-speed data access for homes, and thus
Ashland City Council Study Session Minutes 07-08-98
2
home businesses; provides for an additional $3.2 million in revenues from cable television services; and provides
residents with a choice in their television programming.
Freeman concluded that it is the staff's preference to utilize a partnership with the private sector to provide cable
television service. And although the Business Plan reflects the City getting into the cable television business, it is
the staff's intention to pursue a private partnership first and foremost before considering going into the business
itself.
Director of Electric Utilities Pete Lovrovich discussed the phasing of the Ashland Fiber Network project, and
presented an updated map showing the location of the fiber ring. Explained that the initial fiber ring is g/a complete
and should be completed within 2~A weeks.
Explained that Phase 1 would allow them to tap into the substation, provide some communications functionality that
would increase the efficiency of Public Works and Utilities programs, and provide some remote outage detection.
This alone would mean savings of about $30,000 per year. Pointed out that the data transfer system design initially
installed will also allow the City to provide cable television service. Noted that the first portion of the fiber ring
installed will go by thirteen large users (the hospital, the City, the University, etc.). Stated that the projected cost for
this initial phase is $750,000, assuming that the City bears all costs, and noted that this is a conservative estimate.
Pointed out that ideally, with the users sharing part of the expense, the City's costs would be only half of this.
Noted that costs to date for the fiber ring have been $471,000, and explained that the first phase will allow high-
speed data services, video, and various high-speed services for the thirteen large users. Stated that projected
revenues for the first phase are $200,000 per year.
Phase 2 will involve the build-out of the distribution system to homes and small businesses. Explained that the
construction costs for both scenarios are identical, but the Scenario I has roughly $1'/2 million in additional
expenses for equipment related to providing cable service. Noted that this initial investment of $1'/2 million would
mean $3.2 million in cash revenues, versus $560,000 without the cable service.
Emphasized that the City is looking at offering service to the thirteen large users on the main ring by the fall of
1998. Data services would become available early next year. Surveys would be conducted to determine those areas
where there was the greatest demand for service, and the entire system should be built out within 1 ~/2 years. Stated
that both scenarios are beneficial, intended to provide greater efficiency and more services to the community. These
services are in line with the Department's strategic plan, and both scenarios are excellent. Suggested looking at a
system that would eventually be valley wide. Also noted that there are major differences in both philosophy and
intent between the City and Falcon/TCl Cable.
In answer to a question from Mayor Shaw, Lovrovich noted he had been in contact with Howard Gan of Falcon/TCl
to explain the bandwidth the City would require for remote meter reading if Falcon were to lease the City's fiber.
Noted concerns that the ring is being installed to provide service to customers in light of coming deregulation, and
stated that there would be no control on the part of the City if the fiber were leased to Falcon. Noted concerns over
the integrity of the system.
Lovrovich confirmed that Gan had indicated to him that Falcon/TCI had retained an attorney, and would pursue
legal action if the City attempted to move into the cable business without a vote of the people. Discussed whether
Falcon seemed opposed to the idea of the City providing data services or just cable television.
In response to questions from the Council, Lovrovich explained that redundancy within the system is very
important. If the City is maintaining the system, it will mean that the City has access for using it to restore service.
This might be a problem if the system were leased to Falcon Cable.
Ashland City Council Study Session Minutes 07-08-98
City Attorney Paul Nolte discussed the issue of whether the City's charter requires a vote of the people to enter the
telecommunications business. Explained that the charter allows the City to provide certain specific utilities (water,
sewer, electricity, and public transportation) and any other public utility must be voted on. Explained that it is his
opinion that cable television and telecommunication applications do not constitute a "public utility".
Stated that there is no commonly accepted definition of"public utility" in cases nationwide, and traditionally, in
Oregon public utilities have been defined in terms of power, light, heat and water. Now, by statute,
telecommunications is specifically excluded from the definition of public utility, and cable television is specifically
defined by Congress as not being a public utility. With this in mind, there is no need for a vote of the people as the
services to be provided are not public utilities. Furthermore, the charter is very broad in its grant of powers to the
Council. Thus, telecommunication services can be provided without further legislation or ordinance.
Confirmed that the State Cable Association had retained a Portland attorney to look into the legality of the charter
issue, and that the local attorney for Falcon/TCl has issued an opinion but has not made this available to the City.
Stated that Council needs to decide whether to continue under the threat of litigation, should a suit be filed. Noted
that cable companies typically litigate to the maximum in order to discourage competition. Explained that a cable
company could seek a preliminary injunction to stop work on the grounds that this project is clearly not a function
for a city to provide and it thus needs to be stopped immediately, but he stated that he did not see much likelihood of
such an injunction of this nature being granted.
Nolte stated that there is legally no downside to sending the matter to a vote of the people, but that there is no legal
need to do so. Emphasized that this is a matter of policy and strictly up to the Council. Mayor Shaw noted that the
amount of money that would be put into a campaign by a large corporation such as TCI would make an election
difficult for a small community of volunteers.
Also explained that the cable television industry will be submitting proposed legislation for the next legislative
session that would preclude cities from going into telecommunications. Noted that existing legislation in several
states prohibits city competition in the industry, and that one such law in Texas was upheld on appeal. Stated that
previous legislation in Oregon has not been retroactive, and cities that with established telecommunications systems
would likely be allowed to continue. Discussed whether this would be subject to referendum, and Nolte stated that
it is his belief that this would be an administrative decision rather than a legislative issue.
City Administrator Mike Freeman asked Council to clarify a general consensus on the direction in which they would
like staff to proceed.
Councilor Hauck stated that he had no problem with following the staff's recommendations.
Councilor DeBoer stated that he would like a list of the members of the committees created to look into the
technical and business issues around the creation of the fiber network, and he would like to be sure that minutes are
kept for these minutes.
Freeman stated that there is no project until the proposal is accepted by Council, and as such the strategic steering
committee and the technical advisory committee have not yet been convened. Lovrovich clarified that the technical
advisory group had met once, minutes were taken and will be provided to Council.
Councilor Laws stated that it was his understanding that the strategic committee would analyze the Business Plan.
Freeman stated that it was his intent to provide the committee with a Business Plan for the scenario preferred by the
Council. Discussion of the intent of Council's original decision concerning acceptance of the Business Plan.
Ashland City Council Study Session Minutes 07-08-98
4
Councilor Laws stated that the City needs to compare what is being proposed here with services to be provided by
Falcon/TC! and US West to have a better understanding of potential competition. Explained that he would like to
see a direct comparison of the technical aspects of the systems that will be available in Ashland.
Councilor Laws continued that he wants to feel comfortable that the City will get the number of customers shown in
the projections. Freeman explained that under public records law, cities must provide all information to the public,
but that the competitors are not bound by this law and this would make obtaining complete information difficult.
Laws suggested that he would also like to know the number of customers that would be necessary for this venture to
break even.
Laws also questioned losing general fund revenue from the utility through deregulation of the electric industry.
Feels that there should be an alternative to allow returning profits to the users through reduced rates rather than
putting profits back into the general fund. Feels that the City is working on too many assumptions, and expressed
concerns over the margin for error.
Mayor Shaw clarified that the two issues for raised by Councilors for the staff to look into are: 1)To provide a
general comparison of the different systems. 2) To provide information on just how much money the City needs to
make to break even, in terms of the lowest possible rates that could be set. Lovrovich noted that an accurate
comparison of systems requires detailed design information on the systems, and general information such as a "750
mhz system" provides no substantive data for comparison of the Falcon/TCI system.
Councilor Wheeldon states that she does not believe there can be any assumptions about a parmership until the City
is at the table with potential partners. The City needs to decide to move forward with the cable portion of the
project before Council discussion can proceed.
Councilor Hagen pointed out that unless some direction is given to the committees on a more concrete project, the
committees may find their work difficult or impossible. Also stated that the ability to lower rates and do away with
profit as discussed by Councilor Laws provides the necessary margin for error in that the City doesn't have to show
a profit for shareholders like a private enterprise.
Director of Finance Jill Turner explained that a financial plan and a rate resolution will be coming back to Council,
and that the revenue bond process will require rates that will be sufficient to meet the debt. This will likely require
rates for the first several years to be at the point the market will allow. Discussed the fact that greater penetration of
the market could give the ability to lower rates.
Councilor DeBoer explained that he had requested the committees be formed as groups of experts to look into the
financial and technological portions of the plan. Asked how quickly services could be provided to a new business
coming into town. Discussion indicated that there could be service this fall if the Council chose to move ahead.
l~ovrovich also noted that creating a committee of experts is difficult as the field is so rapidly changing. DeBoer
emphasized that he would like to see reports from people in the field confirming that the project is sound.
Mayor Shaw suggested that Council give staff some direction on the scenario to be brought back to the second
council meeting in August. This direction will provide some basis for the committees' review. Noted that the
information brought back should include a comparison of technical aspects of the proposal and potential
competitors', and a report from the technical advisory committee. Based on the report of the financial and technical
advisory committees the Council will vote at that time. After discussion, there was a general consensus that Council
would like to see details for Scenario I brought back to the September 1, 1998 meeting.
Councilor Laws requested that the information to be brought back include a financial summary of the necessary ten-
year ending cash reserve.
Ashland City Council Study Session Minutes 07-08-98
TOLMAN CREEK UTILITY OBSTRUCTIONS
Noted memo from Pete Lovrovich concerning utility obstructions at 215 Tolman Creek Road. After area residents
expressed concerns that an electrical cabinet which had been at the site for over ten years was impeding vehicular
visibility, the Department of Electric Utilities redistributed the electrical feed and removed the cabinet to address
visual safety issues.
Discussion of the difficulty in seeing at this entry to the road, noting issues of sight distance, speed and proximity to
traffic. Public Works Director Paula Brown stated that her department will continue to look at this issue. Also
noted that while they do not want to use the bicycle lane as a buffer, they will look into the possibility. Stated that
the street has been re-striped, it has been asked that bushes be cut back, and the bikelanes are being looked at.
FALCON/TCI REBUTTAL CONCERNING ASHLAND FIBER NETWORK
Howard Gan of Falcon Cable noted that Falcon and the cable industry in general are being made out to be the
enemy, and emphasized that they do support the City in this endeavor. Stated that they would like to be able to
share their views in open dialog concerning this project, and they have not been allowed to do so.
Stated that his company has no intention of suing the City, and he denies ever making a statement to the contrary.
Said that he has been informed by the Oregon Cable Association that an outside lawyer has been retained to look
into the issue of whether a vote is necessary.
Questioned why the City would take the risk to build a competing system which will duplicate what Falcon wants to
put in place. Feels that there has been no dialog with the Council despite Falcon's offers of partnership and
attempts to accommodate the City's needs, and that Falcon has not been allowed to participate in any discussion.
City Administrator Mike Freeman stated that he feels it is inaccurate for Falcon to say that the City has not taken its
information into consideration. City has run a full scenario (the Falcon Scenario) that did not meet the City's cash
flow requirements, and that scenario has been submitted to the Council.
Gan noted that revenues from providing internet service in the City's scenarios are excessively optimistic.
Councilor Laws emphasized that the Scenario I being looked at by staff keeps open the possibility for a partnership,
and hoped that the Council will remain neutral, avoid an "us vs. them" attitude, and remain open to the possibilities
which present themselves in the process.
ADJOURNED
The meeting was adjourned at 2:30 p.m.
~ubmitted by Barbara Christensen, City Recorder/Treasurer
Ashland City Council Study Session Minutes 07-08-98