fiber to the home business plan · system had many strategic disadvantages when compared to ftth....

T ELECOMMUNICATIONS B USINESS C ONSULTING S ERVICES FOR P UBLIC P OWER

Fiber to the Home Business Plan Phase I Final Report

For

City of Palo Alto Utilities

Prepared By

Uptown Services, LLC

Neil V. Shaw

5650 Greenwood Plaza Boulevard, Suite 225E Greenwood Village, CO 80111

303-290-9756 [email protected]

April 28, 2003

1007 Elwell Court Palo Alto, CA 94303

CPAU FTTH Business Plan Phase I Final Report Uptown Services, LLC

I. EXECUTIVE SUMMARY................................................................................................... 1

II. BUSINESS CASE UPDATE............................................................................................. 2 A. MODEL CHANGES ............................................................................................................ 2 B. CHANGES IN KEY VARIABLES ......................................................................................... 3 C. BUSINESS CASE IMPACT SUMMARY ................................................................................ 5

III. BUSINESS MODEL (WHOLESALE / RETAIL) ANALYSIS..................................... 6 A. BACKGROUND ................................................................................................................. 6 B. VIDEO SERVICES.............................................................................................................. 6 C. INTERNET SERVICES ........................................................................................................ 7 D. TELEPHONE SERVICES ................................................................................................... 11 E. DETAILED BRANDING DISCUSSION ................................................................................... 12

IV. ARCHITECTURE ANALYSIS ..................................................................................... 15 A. BACKGROUND ............................................................................................................... 15 B. FTTH ALTERNATIVES ................................................................................................... 15 C. HFC VS. FTTH .............................................................................................................. 18

V. UTILITY BROADBAND SCAN.................................................................................... 22 A. INTRODUCTION AND SCOPE........................................................................................... 22 B. EXECUTIVE SUMMARY OF FINDINGS............................................................................. 25 C. INDIVIDUAL MARKET ANALYSIS................................................................................... 34 D. CURRENT AND PROPOSED UTILITY-PROVIDED TELECOMMUNICATIONS SYSTEMS...... 46

April 28, 2003 : Attachment B: Uptown Final Phase 1 Report Page ii of 51


I. Executive Summary The purpose of this report is to provide enough support and analysis to secure UAC approval of the following Uptown Services, LLC (Uptown) recommendations:

1. Pursue the deployment of a FTTH system instead of a hybrid fiber coax (HFC) network

2. Use the single fiber FTTH system as the reference architecture during the business planning process

3. Offer retail video services, retail AND wholesale Internet access services and wholesale access to third party competitive local exchange carriers (CLECs)

This report outlines the analysis upon which these recommendations are based. In addition, this report includes in-depth analysis on other municipal utility broadband deployments and an update on the latest business case model and key assumption values.

Uptown’s architecture recommendation is based on the latest engineering cost studies completed by Peregrine Communications (Peregrine). Peregrine’s new design estimates show that a traditional single fiber FTTH system requires the least amount of capitalization compared to blown fiber and a two-fiber system. While Uptown continues to recommend that CPAU use the single fiber system for business planning purposes, the two-fiber alternative still warrants consideration at the time of final selection (RFP).

Peregrine also completed a sample hybrid fiber coax (HFC) design for the same areas as the sample FTTH designs. Uptown used the cost estimates for HFC to create a business case model scenario that could be compared to FTTH. Upgrade costs were included in both scenarios, but the life cycle costs (maintenance, repair and customer service) were assumed to be higher for HFC. The financial performance of the HFC system was close to FTTH, but the lower cost system had many strategic disadvantages when compared to FTTH. These included the need to construct the cabling system twice (when upgrading to FTTH) the lack of competitive advantage that an HFC system would offer CPAU. For these reasons, Uptown continues to recommend that CPAU pursue the development of FTTH instead of HFC.

Uptown’s business structure recommendations were based on a combination of qualitative and financial reasons. For video, Comcast is not interested in using a CPAU FTTH system and no competitive video supplier would have the brand strength of CPAU. Internet access will be the showcase service on the FTTH system, so CPAU will need to insure that the level of customer service is on par with that of the core utility business. This calls for the type of control that only comes with being a retail provider. However, given the entrenched Internet access market in Palo Alto, it would also make sense to lease capacity to existing ISPs that might want to convert subscribers to the FTTH system. Finally, telephone is an important revenue stream in the FTTH business case. The high fixed costs of the business make it difficult for CPAU to take on; so Uptown recommends that they capacity be leased to one or more qualified CLECs.

Uptown worked with CPAU staff to complete a comprehensive scan of comparable municipal utility broadband efforts. There were a number in interesting findings from this study. No utilities that are planning to deploy broadband systems are considering HFC any longer. FTTH appears to be the system of choice going forward. The penetration projections in the current CPAU business case are in line with actual results of those utilities that have already begun offering services. Finally, retail is the model of choice for video, while wholesale is the norm for telephone services. There is not a dominant model for Internet access services amongst the utilities in the scan.

April 28, 2003 : Attachment B: Uptown Final Phase 1 Report Page 1 of 51


II. Business Case Update Uptown has updated the FTTH business case since the September 2002 report was completed. These modifications and the impact on the FTTH business case are outlined next.

A. Model Changes This section describes the changes that have been made to the actual structure of the business model since September 2002. These changes were either made to add / delete assumptions or to add / delete formulas.

1. Telephone Services Custom Calling and Long Distance services were deleted from the model. Telephone service is now modeled as a single option in the business case. This change was made to eliminate an unneeded level of granularity for telephone services.

2. Premium Cable Services Individual premium channels (HBO, Cinemax, STARZ!, etc) are no longer modeled in the business case. Uptown has replaced the list of premium services with a single service – “Premium as a % of Basic.” This was done to simplify the modeling process and eliminate an unneeded level of granularity for premium services.

3. Home Security Monitoring Home security monitoring was added to the set of services in the business case. This service is not currently included in FTTH business case.

4. Analog Set Top Boxes Analog set top boxes were removed from the business case. Given the deployment of digital set top boxes, it would not make sense to deploy analog set top boxes as well.

5. Direct Marketing Costs Direct marketing costs have been broken out by the type of service sold. The old model had only one budget figure that applied to video, Internet and telephone services alike. The new model allows for different marketing budgets for video, Internet, telephone and security feature sales.

6. Vehicle Maintenance A vehicle maintenance assumption has been added to the business case model. This expense is reflected as a percentage of vehicle capital expenditures and is intended to cover annual vehicle maintenance and replacement every seven to ten years.

7. Network Upgrade Costs An option has been added to show the cost of network upgrades in year seven or ten of the business case. This cost applies to all meters passed by the network in the year of the upgrade.

8. NIU Upgrade Costs An option has also been added to show the cost of upgrading NIUs in the seventh or tenth year of the plan. This cost applies to all NIUs being used by subscribers in the year of the upgrade.



B. Changes in Key Variables Uptown has updated several key assumption values for the FTTH business case since September 2002. This section details the background for the changes made in assumption values for service penetration, network construction and subscriber installation costs.

1. Service Penetration Levels Uptown continues to use the factoring method described on page 14 of the CPAU FTTH Business Case Final Report. However, the firm has changed the percentages applied to each research response. These changes are based on the recent broadband product development experience of Dave Stockton, who joined Uptown in January 2003. Table 1 shows the factoring assumptions used in the original business and those being used going forward.

Table 1 – Service Adoption Factors by Level of Interest

Level of Interest September 2002 April 2003 Very excited 70% 70%

Very interested 50% 30%

Sounds interesting 25% 10%

Only curious 10% 0%

Not sure 2.5% 0%

Not at all interested 0% 0%

As Table 1 shows, the new factoring percentages are much more conservative than those used in the original business case. However, these new assumption values are based on Mr. Stockton’s experience in developing and deploying the latest broadband services for AT&T Broadband. Table 2 contains the research results for video, Internet and telephone services according to level of interest. The new factoring percentages place a much higher level of importance on those responses in the top two responses, so ambivalence is not “rewarded” as much as in the September projections.

Table 2 – Service Adoption Factors by Level of Interest

Level of Interest Internet Video Telephone1 Very excited 45% 28% 40%

Very interested 31% 38% 28%

Sounds interesting 13% 23% 13%

Only curious 3% 6% 9%

Not sure 3% 2% 3%

NOT AT ALL interested 4% 3% 6%

1 Data related to the level of interest in telephone services from the 2002 survey was not collected using a five-point scale. So, these responses were taken from the results of the 2003 survey.



Table 3 shows the difference in service penetration levels between the two factoring methods. The new factoring percentages have a significant impact on the penetration projections for all three services. This is the result of focusing on the top two responses and discounting / eliminating the significance of those responses that reflect less certainty. It should be noted that the original business case projection for telephone was derived from a strict “Yes/No” response in the 2002 survey. The telephone question in the recent resample survey used a five-point response, which allowed for the use of the revised factoring percentages.

Table 3– Service Penetration Levels by Service (Year 5)

Service September 2002 April 2003 % Change Cable Television 38% 27% -29%

Internet Access 51% 34% -33%

Telephone 25% 38% +52%

2. Network Construction Costs Network construction cost assumptions have changed as a result of the updated engineering cost study completed by Peregrine. Peregrine’s 2002 cost study estimated the cost to construct a new FTTH system in Palo Alto to be $1,045 per meter passed. The revised study has produced a lowered estimate of $759 per meter passed, a 27% reduction. The factors leading to this reduction are listed in Table 4.

Table 4 – Key Changes in Engineering Cost Study Assumptions

Assumption September 2002 April 2003 Notes Distribution fiber cost, average per strand foot

$0.045 $0.036 20% reduction based on actual fiber cable quotes.

Trunk fiber cost, average per strand foot

$0.025 $0.015 40% reduction based on actual fiber cable quotes.

Construction cost, average per foot

$4.85 $2.44 50% reduction based on the use of qualified electric construction crews instead of using Palo Alto Utilities staff.

Cost per fusion splice $30.00 $20.00 50% reduction based on recent quotes from splicing contractors.

Per the notes in Table 4, Peregrine has updated some of the key engineering assumptions based on recent work completed for other clients. Given the depressed nature the fiber optic cable and construction industries, many suppliers and contractors are willing to offer extremely competitive bids just to generate a minimum level of production activity.



3. New Subscriber Installation Costs The primary change in the area of incremental subscriber costs has been in the time to install a subscriber. The September 2002 business case included a labor assumption of $300 per new subscriber. This cost covered the time for a technician to run a fiber drop from the service pole to home, mount the NIU and connect it to the inside wiring for video and telephone2. Peregrine has gained a significant level of field experience in the area of FTTH installations since the original FTTH cost study was completed. This has led them to lower this labor assumption to $85 for the Palo Alto business case.

C. Business Case Impact Summary Uptown is currently running the revised business case model with the new assumption values. As could be expected, the capital expenditures have been reduced dramatically. However, given the level of reduction in service penetration, revenues have also been reduced. Table 5 shows the values for key outputs from September 2002 and now.

Table 5 – Business Case Output Comparison Between September 2002 and April 2003

Outcome September 2002 April 2003 % Change Working capital requirement ($M) $3.0 $2.8 -7%

Bond amount ($M) $49.5 $33.4 -33%

Total funding requirement ($M) $52.5 $36.2 -31%

Bond payment ($M) $4.0 $2.7 -33%

Total Revenue – Year 15 ($M) $15.1 $11.4 -25%

Total Expense – Year 15 ($M) $7.0 $5.2 -26%

Operating income – Year 15 ($M) $8.1 $6.2 -23%

Cash flow with debt service – Year 15 ($M) $5.5 $4.1 -25%

Cumulative cash flow – Year 15 ($M) $46.5 $32.3 -31%

Total capital expenditures over 15 years ($M) $59.2 $42.2 -29%

Return on Investment – Year 15 8.5% 8% -6%

Table 5 shows that the model changes have had a major impact on all areas of the business case. It is interesting to note that the April 2003 business case results include the added cost of upgrading the FTTH network and all NIUs in the tenth year of the plan. These upgrades, whose cost has lowered cumulative cash, NPV and ROI, were not included in the September 2002 business case. Removing upgrades from the current version of the business case brings the values of NPV and ROI up to $11.1M and 10% respectively. So, in an “apples to apples” comparison, the current business case produces a higher ROI and requires 31% less in total funding.

2 It was assumed that an extra $100 in labor and materials would be required to run a CAT 5 cable from the NIU into the home or business for Internet subscribers.



III. Business Model (Wholesale / Retail) Analysis The purpose of this section is to provide enough support and analysis for the UAC to approve Uptown’s FTTH business model recommendations.

A. Background Uptown Services, LLC (Uptown) made the following recommendations regarding business models for video, Internet and telephone in the CPAU FTTH Business Case Final Report dated September 12, 2002:

• CPAU should offer retail video services and possibly lease head end services from a local cable television provider like RCN or Stanford University.

• CPAU should offer retail Internet services along with limited wholesale access to qualified third party retail Internet service providers (ISPs).

• CPAU should not offer retail telephone services, but instead lease network capacity to one or more qualified third party retail competitive local exchange carriers (CLECs).

These recommendations must be approved prior to the development of a detailed business plan for FTTH deployment in Palo Alto. The following sections detail the issues related to business model alternatives for video, Internet and telephone.

B. Video Services Uptown recommends that CPAU be the lone provider of retail video services on the FTTH network. This recommendation was based on the following reasons that have not changed since the final report was completed in September 2002.

1. Comcast, the dominant retail video provider in Palo Alto, is not interested in providing retail video services over a CPAU FTTH system.

2. No alternative video providers (Stanford, RCN, Eagle Broadband) have a network presence in Palo Alto that rivals that of Comcast.

3. No alternative video provider would have the retail brand strength of CPAU.

4. Primary research shows that a CPAU branded offering would capture approximately 32% of homes passed by the FTTH system. This would amount to a 47% share of the current subscription video market3.

5. CPAU could still lease head end services from RCN or Stanford in order to eliminate the high costs of a satellite earth station and channel modulation equipment for over 200 channels of video and audio programming.

For these reasons, Uptown continues to recommend a retail strategy for CPAU’s FTTH video offerings.

3 Market share according to primary research completed in 2002, Comcast = 54% and satellite = 14%.



C. Internet Services Uptown recommends that CPAU offer its own retail Internet access service and also consider offering wholesale access to qualified third party retail ISPs. Uptown completed a detailed study to quantify the impacts of pure wholesale and retail strategies as well. Based on the results of this analysis (provided in the following discussion), it was determined that the original recommendation was still appropriate. The following sections compare and contrast wholesale and retail Internet strategies.

1. Wholesale Only Alternative Uptown evaluated the concept of CPAU only providing wholesale access to third party retail ISPs. Under this alternative business model, CPAU would not provide any retail Internet access services. Instead, network capacity would be leased to retail ISPs that would then offer retail services to their own subscribers. Services would be branded according to the respective ISP. The advantages and disadvantages of this strategy are outlined next.

a) Advantages Several advantages of a wholesale only strategy are listed below:

• CPAU would not need to invest in Internet backbone connection facilities.

• CPAU would not need to staff a help desk for Internet access subscribers.

• Existing Internet subscribers of those ISPs leasing capacity from CPAU would not be required to change their email address if they switched to a FTTH based service.

• CPAU would sell services to a relatively small number of ISPs rather than thousands of individual Internet subscribers. This would reduce CPAU’s sales, marketing and billing costs.

• The lack of a CPAU retail Internet offering would increase the chances of more third party ISPs leasing capacity on the FTTH system. The existence of a CPAU Internet service might threaten other ISPs, thus discouraging them to use the FTTH system.

• Opening the FTTH system to several ISPs will increase the level of choice for broadband Internet access services in the Palo Alto market. Comcast does not offer alternative ISPs and SBC is no longer required to provide open access to DSL on their local networks.

As this list shows, there are a number of qualitative benefits to a wholesale only strategy with the two primary themes being; 1.) Cost savings and 2.) Increasing the level of choice for broadband Internet in Palo Alto. Drawbacks of this strategy are discussed next.

b) Disadvantages Disadvantages of the wholesale only approach are listed below:

• CPAU would likely feel the brunt of any subscriber backlash related to poor service quality on the part of retail ISPs.

• CPAU would not have control over the quality of service being delivered by retail ISPs.

• CPAU would not have control over price of the retail services, which might lead to higher prices than if CPAU were the retail provider (assuming CPAU would have a lower profit motive than a regular ISP).



• CPAU’s financial success would depend on the performance of a group of third party ISPs that may or may not be dedicated to acquiring the maximum number of Internet subscribers on the FTTH system.

• CPAU would need to secure agreements with AOL, Earthlink and MSN to be successful. Deals of this nature are difficult to complete, which would put the business case in serious jeopardy if one of these ISPs passed on the opportunity.

Disadvantages to this strategy are primarily related to the lack of control by CPAU and the related exposure to the utility’s financial health and reputation for service.

2. Retail Only Alternative Uptown also evaluated a retail only strategy for Internet access services. Under this approach, CPAU would be the only provider of Internet access services on the FTTH system. The following sections detail the advantages and disadvantages of this strategy.

a) Advantages Several advantages of a retail only strategy are listed below:

• CPAU would have control over all aspects of the Internet access service offering on the FTTH system including; branding, product design, marketing, sales, customer service, service performance and billing.

• Palo Alto citizens would be guaranteed of having at least one high quality Internet access service at a reasonable price.

• This would be the only way for CPAU to leverage its strong brand name while maintaining control over service quality in order to protect it (brand name).

• Internet access offers the greatest margin potential of the three primary services on the FTTH system (video, Internet and telephone). If CPAU were the lone provider, this margin potential would not need to be shared with any third party ISPs.

• CPAU would be in a position to adjust to market conditions that might impact penetration of Internet services. Required modifications might include product design, pricing, promotions, marketing and other key elements that impact subscriber acquisition and retention.

• Primary research has shown that the CPAU brand has the potential to reach an Internet access penetration level of 34% of homes passed. Follow-on market research also showed a significant level of interest from current DSL and cable modem subscribers in the switching to a CPAU branded offering. Based on these two factors, it would appear that changing email addresses might not be as big an impediment to CPAU Internet adoption as originally thought.

While the margin benefits are significant for the retail offering, the primary advantage of this strategy is control. The Internet market is extremely competitive and continues to evolve each year. Given the near saturation of Internet access in Palo Alto (95%), it can be assumed that the market consists of advanced users with higher than average expectations for customer service and quality of service.



b) Disadvantages Disadvantages of the retail only approach are listed below:

• CPAU would be required to provide a number of added functions in support of a retail Internet offering including; help desk, marketing, sales, billing, email and Internet backbone access. These functions add expense to the business case, thus increasing risk if the expected revenues do not materialize.

• CPAU would forgo the opportunity to serve subscribers that do not want to leave their current ISP. Reasons might include; general loyalty, perceived hassle of having to change their email address or being under contract.

• While CPAU would not legally be required to provide wholesale access to the FTTH system, closing the system completely may create a target of opportunity for detractors. Opponents could create the perception that closing the system would not be in the “public interest”, which would not be right given the notion that the system would be built with public moneys. This logic is obviously twisted, but that doesn’t mean it wouldn’t resonate with a segment of the voting public.

The list above highlights the risks associated with closing the FTTH system to third party ISPs. The business case will delineate the financial implications of such a strategy, but the opportunity cost of lost subscribers will be much harder to quantify. In any case the political issues can be overcome with a strong public relations strategy.

3. Financial Analysis Uptown used the same business case model from the September 2002 report to compare the financial performance of the aforementioned Internet strategies. Table 6 contains the key variables and their values used in this analysis.

Using the assumptions listed in Table 6, Uptown ran the business case for each business structure scenario. The results of this analysis are listed in Table 7.

The results of the business case analysis in Table 7 show that the wholesale strategy wins over the 15 life of the plan. However, this outcome is based on the assumption that Internet penetration would higher with a wholesale strategy (see Table 6). Table 8 shows a comparison of the two strategies for the same level of Internet penetration (Year 1 = 20% , Year 5 = 34%).

The results in Table 8 show that the retail strategy edges out wholesale when both produce the same level of penetration. This reflects the higher margin potential of the retail strategy with a price of $40.00 compared to $27.50 for wholesale. Uptown has hypothesized that penetration would be higher with the wholesale strategy. However, absent primary market research to validate this hypothesis, it is possible that the results in Table 8 might be more accurate. This shows just how close the two strategies really are financially.



Table 6 – Key Assumptions for Wholesale Only and Retail Only Scenarios

Assumption Retail Wholesale Notes Internet Penetration

Year 1 20% 25%

Year 5 34% 42%

It was assumed that the level of penetration for a wholesale strategy would be greater given the ease of transition to the FTTH system by subscribers of existing ISPs in Palo Alto.

Monthly Price $40.00 $27.50 Pricing is assumed to be the average of multiple levels of service (i.e. 128 kbps through 10 Mbps).

Inside wiring cost $100.00 $0.00 It was assumed that the retail provider would be responsible for installing any required CAT5 cabling from the NIU to the subscriber’s computer or LAN.

Direct marketing cost per new Internet subscriber

$75.00 $25.00 Wholesale - CPAU would still need to budget some marketing for business-to-business marketing and building awareness of the FTTH system in Palo Alto (not service specific).

Service Reps 5 FTE 4 FTE CPAU would not need a help desk, but the level of staffing cannot be reduced to less than 4 FTEs in order to maintain a minimum level of coverage.

Network Techs 9 FTE 8 FTE It was assumed that the wholesale strategy would reduce the number of trouble calls to be cleared by CPAU technicians.

Table 7 – Business Case Results for Wholesale Only and Retail Only Scenarios

Outcome Retail Wholesale Working capital requirement ($M) $2.8 $2.2

Bond amount ($M) $33.4 $32.9

Total funding requirement ($M) $36.2 $35.1

Total Revenue – Year 15 ($M) $11.4 $10.5

Total Expense – Year 15 ($M) $5.2 $3.8

Operating income – Year 15 ($M) $6.2 $6.7

Cash flow with debt service – Year 15 ($M) $4.1 $4.6

Cumulative cash flow – Year 15 ($M) $32.3 $37.3

Net Present Value – Year 15 ($M) $7.6 $11.1

Return on Investment – Year 15 8% 10%



Table 8 – Business Case Results for Wholesale and Retail Scenarios (same penetration)

Outcome Retail Wholesale Working capital requirement ($M) $2.8 $2.5

Bond amount ($M) $33.4 $32.2









4. Internet Summary Based on the analysis of pure wholesale and retail strategies, Uptown continues to recommend that CPAU offer a retail Internet access service AND seek out third party ISPs to use the FTTH system for their own subscribers. CPAU’s need to control the quality of the retail Internet service is undeniable, but the advantages of allowing other ISPs to use the system are also compelling. This is why Uptown recommends a hybrid strategy. Such an approach would allow CPAU to control the primary offering and leave the door open for other ISPs to convert their existing subscriber base to the FTTH system. It isn’t known whether the major ISPs like AOL, Earthlink and MSN will be interested in using the FTTH system if CPAU has a competing service, but this will be investigated in the business planning phase.

D. Telephone Services Uptown has not changed its original business model recommendation for telephone services. The recommendation continues to be that CPAU lease access on the FTTH system to one or more third party CLECs. CPAU would be responsible for transporting telephone packets from the head end to the subscriber NIU and back. The CLEC would be responsible for all telephone specific switching and support from the NIU into the home or business and from the head end to their switch and beyond. While CPAU would be transporting telephone traffic on the FTTH system, these bits would travel in the same stream as Intranet, Internet and video traffic. This recommendation is based on the following supporting factors:

• Providing local telephone service is a very complex endeavor that requires a great deal of up front investment in legal/regulatory support, equipment, facilities and staffing. The limited scale economies of the Palo Alto market would not likely support such a large up front investment.

• Most FTTH NIUs come with two telephone ports as standard equipment, making the marginal cost of providing telephone service (by leasing access to a third party CLEC) relatively low. Conversely, the opportunity cost of letting those ports go unused would be very high.



• As a transport provider, CPAU should not be required to become a CLEC.

• CPAU would not need to invest in any telephone switching equipment.

• CPAU would not need to establish any interconnection facilities to SBC.

• This is not a new model for providing telephone services over a municipal broadband system. Uptown has discussed this approach with one CLEC that is prepared to locate a switch in Palo Alto and hire staff to support a local telephone operation. This CLEC is already operating a similar system in Murray, Kentucky.

See Section E for a more detailed discussion of the telephone strategy.

E. Detailed Branding Discussion 1. In Support of Retail and Wholesale An important outcome of the business model decisions that Palo Alto faces for its broadband services line of business is the branding strategy that the city will implement. If the above business model recommendations are approved and implemented by the city, then as a retailer and wholesaler of services to the end-user consumer, the city will need to carefully develop and maintain a strong brand identity and image. Naturally, the city has a brand and image identity today as a utility provider of electric and water services. However, there will be three significant implications to the current position of the CPAU brand as it enters the broadband sector:

CPAU will need to establish its competency and positive attributes as a retail broadband services brand. From a marketing perspective, this is very similar to a classic ‘brand extension’ in which the product range is significantly enhanced as the brand takes on a broader range of services. The key determinant of success is that the brand must make this transition in to the new ‘turf’ of broadband and yet maintain the level of expectation and performance that it has established within the context of its core business. As a utility, this will certainly be its legacy as a very reliable, local provider of utility services that households depend upon.

The second implication is that the city will be entering a very competitive sector in which major, national brands dominate the landscape for video, Internet and local phone services. As such, the brand will not be evaluated and defined on its own, but rather against these incumbent brands. This will likely result in some changes to the importance of the attributes on which the CPAU brand is defined today. Everything becomes much more relative and dynamic, as the city now will be compared to ISPs, phone companies, cable operators, and even satellite TV operators.

The third implication is that the city will be establishing wholesale partnerships with one or more telephone and Internet service providers.

• The city has two brand ‘relationships’ with these wholesalers. First, it is the network facility provider over which the partner retail brands’ services operate. This fact will be visible to the consumer of the wholesale services and, given the advanced technology the city will deploy, it is highly probable the partner retailer will want to advertise this fact. The branding implication here is that there needs to be a connection, at some level, between the Palo Alto fiber network and the retail partner brand. This will be accomplished by using a mother brand as outlined below.

• The city, at least for Internet service, will compete with some of its wholesale partners via its direct retail offering. This seems like an odd arrangement, but it is exactly how the wholesale DSL business model has emerged among the ILECs. It has been standard



practice for the last 5 years for ILECs such as Qwest or Verizon to provide wholesale access to DSL retailers such as Covad. From the perspective of the retailer, in this example Covad, they view the network operator (the ILEC) as both wholesale suppliers as well as a retail competitor because all of the ILECs have retailed their own brand of DSL service over the same network they wholesale from. The branding implication here is that there needs to be a separation, at some level, between the Palo Alto fiber network and the retail partner brand. This will be accomplished by the retail partner via their individual retail brands (e.g. AOL).

2. Branding Structure Given the above considerations, the city should put in place a branding structure that can establish the brand qualities and image of the fiber network (directly linked to the city and CPAU) as well as a second level of branding which can accommodate the individual retail partner brands since a wholesale model will be used for at least some of the services. This tiered structure will provide a branding strategy for both the broadband network and the resulting services, whether directly retailed by Palo Alto or wholesaled via a third party. The two levels are:

• A mother brand which represents the fiber network and its unique qualities as a technology and as a community concept that was created and implemented at the local level by an organization known for its dependability and responsiveness; CPAU.

• Product brands, either new or existing, which represent the end user services themselves. Where the city offers these services via wholesale, the product brands will be those of the partner retailer.

3. The Mother Brand CPAU should leverage and ‘suggest’ that the positive brand qualities it has established over the years will carryover into these new lines of business. For this reason, it is imperative that the city tap into the brand equity that CPAU has earned in the utility sector as it enters the broadband sector. This can be accomplished via a mother brand that associates to the local utility. Several utilities that are deploying broadband services are using this mother brand structure. Examples are Provo, who is using iProvo as its mother brand and Tacoma, who is marketing its video and Internet services under the mother brand Click! Network. In Braintree, the broadband initiative is mother branded in a simple manner as BELD Broadband.

4. The Product Brand CPAU will establish its own product line nomenclature and will need to accommodate 3rd party brands within the lines of business it serves via wholesale. Examples of product brands can be found among utilities as well. In Alameda, the utility is using the brand AlamedaNET as its Internet service brand. Braintree is using BELD.net as its Internet product brand and BELD Cable as its video product brand. The resulting brand hierarchy is shown in Figure 1:



Figure 1 – Recommended Brand Hierarchy for CPAU FTTH

Wholesale Brands – Internet and Phone

Identity: Accommodate existing 3rd party brands with or without a secondary association to the mother brand.

Brand Equity: Directly derived from the qualities of the 3rd party brand.

Brand Image: Directly derived from the qualities of the 3rd party brand.

Mother Brand

Identity: An identity yet to be created to define the Palo Alto fiber network. It is the overarching brand that represents the capabilities and benefits of this new technology.

Brand Equity: Generated by the credibility and historical brand qualities of both the city government as well as CPAU.

Brand Image: Dependable, modern. The core focus is customer service and responsiveness.

Retail Brand - Internet

Identity: A product identity that will define the range of new Internet services that are created from the mother brand.

Brand Equity: Directly derived from the mother brand.

Brand Image: Directly derived from the mother brand.

Retail Brand - Video

Identity: A product identity that will define the range of new video services that are created from the mother brand.

Brand Equity: Directly derived from the mother brand.

Brand Image: Directly derived from the mother brand.



IV. Architecture Analysis

A. Background The recommendation in the September 2002 CPAU FTTH Business Case report was to build a FTTH system, but several open issues remained in the minds of the UAC members. The major issues to be resolved prior to developing the FTTH business plan are listed below:

• What is the impact to the business case of deploying two fibers per subscriber instead of one fiber (Wave7 architecture)?

• How are construction costs impacted by the use of blown fiber technology instead of traditional fiber cable?

• What is the true cost of an HFC system? How would the deployment of an HFC system change the economics of a broadband business?

The following tasks were undertaken by Uptown and Peregrine in an effort to answer these questions and provide a single technical direction for the business planning process:

• The September 2002 Wave7 FTTH cost study was updated using the latest fiber costs and construction techniques.

• The original Wave7 FTTH cost study was modified to reflect the use of blown fiber technology instead of traditional fiber cable.

• An engineering cost study was completed for a two fiber per subscriber FTTH system (the original study was completed for a system that called for one fiber per subscriber).

• An engineering cost study for an HFC system was completed.

Uptown has grouped the first three tasks into the category of FTTH Alternatives. This group of issues and the HFC analysis are discussed in the following sections.

B. FTTH Alternatives This section outlines the outcome of Peregrine’s analysis of three FTTH alternatives. Peregrine’s report is provided under separate cover. This report includes all of the detailed assumptions and results for the each design alternative discussed below. The purpose of this section is to relate the results of Peregrine’s cost studies to the FTTH business case.

1. Traditional Fiber Construction Peregrine’s original FTTH cost study (August 2002) was completed for a traditional fiber build-out of a Wave7 Optics system. For the purposes of this analysis, traditional fiber is defined as the prevailing method of constructing fiber networks.

Traditional FTTH designs call for the deployment of large fiber count cables that pass every home and business in a service area. When a subscriber signs up for service, a technician is required to string a fiber drop from the service pole to the subscriber’s building. The subscriber fiber is then spliced (or connected) to the fiber passing the home. This is done by breaking into the sheath of the fiber line passing the home, locating the actual strand serving that subscriber and splicing it to the fiber in the drop cable.



One of the primary challenges associated with designing traditional FTTH system has been the sizing of fiber cables. For example, if a fiber route passes 250 homes and businesses, what penetration (of homes passed) number should used to size the cable for this route? If the answer were 100%, then the cable would need to contain 250 fibers for a one-fiber system and 500 fibers for a two-fiber system. Lowering the penetration projection would save on fiber costs, but new construction would be required if the projection were too low and the cable wasn’t big enough.

With respect to the two traditional fiber designs completed by Peregrine, the single fiber system was an update of the original Wave7 design completed in August 2002. This design was updated to reflect recent reductions in the cost fiber cable and contract labor (see Business Case Update section and Peregrine report for more details). The two-fiber design is identical to the single fiber design in every respect except with double the number of fiber strands and connectors at the drop enclosure and the NIU.

2. Blown Fiber Technique A significant development related to FTTH in the past year has been the introduction of an economical blown fiber solution from Emtelle. Emtelle has been in the flexible conduit and fiber cable business for the past fifteen years. They have developed a technique for fiber construction based on the deployment of flexible conduits that contain multiple “microducts.” Microducts are small tubes that range from 3 to 10 mm in diameter and can hold fiber bundles with counts from 2 to 72.

The concept calls for the deployment of a tube infrastructure passing every home and business for the initial construction. Electronics would also be deployed and connected to the head end over fiber during the initial construction phase. Then, as subscribers signed up for service, CPAU installers would blow a two-fiber bundle from a network node directly to the subscriber’s home or business. A new drop tube would be required from the service pole to the NIU as well.

This approach has several advantages over traditional fiber construction. First, fiber handling is reduced because subscriber fibers are not installed from the active node to the home until a subscriber signs up for service. This means that construction involves plastic tubes instead of thousands of hair thin strands of fiber. Second, fiber splicing is not required at the drop enclosure serving the subscriber because fiber is blown through the drop enclosure directly to the NIU. Finally, the fiber is purchased and installed as the subscribers sign up, which would match capital expenditures closer with revenue.

Blown fiber is a promising development, but there are some drawbacks. First, there are a limited number of FTTH deployments using blown fiber in the U.S. Although there are several trials underway and the early results are promising. Second, the majority of deployments have been international using underground construction. Overhead applications of blown fiber pose challenges that are currently being worked out by Emtelle. Finally, the economic advantages of blown fiber over traditional fiber cable are wholly dependent on the prevailing cost of traditional fiber cable. Fiber pricing has dropped over 50% in the past year alone, making the case for blown fiber much tougher.



3. FTTH Alternative Financial Comparison The capital costs for each FTTH system are shown in Table 9. Network construction cost is defined as the cost to construct a FTTH network that passes every home and business in Palo Alto. This figure includes the following elements:

• Trunk fiber from the head end to each active node

• Node electronics to serve at least 38% of the homes passed

• Distribution facilities passing every home and business

• Splice enclosures on service poles

• All construction labor and overhead

Table 9 – Capital Costs for FTTH Alternatives

Traditional Fiber

One Fiber Two Fiber Blown Fiber

Network $759 $895 $787 Capital Costs New Sub $918 $955 $1,149

Table 9 also shows the capital cost per new subscriber. This amount includes costs for the following components:

• Drop cable from service pole to NIU

• NIU capable of supporting video, data and telephone services (assumed to be identical for one and two fiber systems)

• All connectors

• All installation related labor

As Table 9 shows, the low cost alternative for FTTH is the one-fiber system. Blown fiber comes in a close second in initial construction cost, but the added cost for each new subscriber is over $230. This is due to the increase in time and materials required to blow a two-fiber bundle from the active node to the subscriber NIU. The traditional two-fiber design would add $3.7M in construction cost, but the new subscriber costs are very close. This is in part due to the fact that the NIU and active electronic costs were assumed to be equal for both designs. The additional cost of the two-fiber installation can be attributed to the cost of two additional mechanical connectors. Uptown will continue to work with active Ethernet system suppliers during the business planning phase to secure accurate cost estimates for their equipment at the active node and NIU.

Uptown suggested in its September 2002 report that a blown fiber approach might save money on the construction of the FTTH system. Given that Peregrine’s original cost study suggested a construction cost of $1,045 per meter passed, blown fiber’s cost of $787 trimmed the total cost of construction by over $7M. However, Uptown had no way of knowing that the revised single fiber cost study would produce a cost of construction even less than that of blown fiber. In fact the new single fiber design saves over $7.8M in construction costs over the original engineering estimate ($759 vs. $1,045 per meter passed).



4. FTTH Recommendation The optimal fiber alternative from a pure financial perspective is still the single fiber approach from Wave7. However, there are several other factors that may hold sway in the final FTTH system decision. Some of them are listed next:

• A two-fiber system based on the Ethernet standard is the only interoperable FTTH alternative currently available. Suppliers include World Wide Packets, Harmonic and Telco Systems.

• A two-fiber system offers the capability of delivering 100 Mbps of dedicated full duplex bandwidth from the active node to a subscriber NIU.

• The economics of blown fiber are highly dependent upon the cost of traditional fiber. Traditional fiber costs are at their lowest level in history and will likely not stay this low forever. If and when fiber prices begin to increase, blown fiber may become the method of choice.

While this analysis points to the continued use of Wave7 as the reference system for business case and business planning purposes, it is too soon for CPAU to make any final decisions on their FTTH supplier. This decision should not be made until a formal selection process (RFP) is completed following business plan approval.

C. HFC vs. FTTH Peregrine completed a high level cost study for an HFC system in Palo Alto. The detailed results of this analysis are provided under separate cover. In short, the network construction cost of an HFC system was estimated to be $439 per meter passed and the cost per new subscriber was estimated to be $591. Compared to the costs in Table 9, HFC appears to be a great alternative to FTTH. This may be true from a first cost perspective, but the addition of comparable life cycle costs over the course of a 15 year plan produces a very different outcome.

1. Financial Comparison This section provides an analysis of HFC vs. FTTH. Uptown created an HFC scenario using the same business case model as was used for FTTH. The results of this scenario were then compared to those of the baseline FTTH scenario (traditional single fiber system). Table 10 contains the key variables and their values used in this analysis.



Table 10 – Key Assumptions for HFC and FTTH Scenarios

Assumption HFC FTTH Notes Internet penetration

Year 1 18% 20%

Year 5 30% 34%

Given the advanced capabilities on the FTTH system in the area of Internet access, it was assumed that it would garner a higher penetration of Internet services than HFC.

Internet pricing $40.00 $40.00 It was assumed that the average price for Internet services would be the same for each network.

Construction cost per meter passed

$439 $759 See Peregrine cost study.

Cost per new subscriber

$591 $918 Cost includes materials and labor to install service drop and NIU.

Network upgrade costs per meter passed

$400 $100 It was assumed that the HFC system would need to be upgraded to FTTH by the seventh year. It was also assumed that the FTTH system would require some form of electronics upgrade by the tenth year.

NIU upgrade costs $350 $150 It was assumed that the HFC NIUs would need to be upgraded to FTTH NIUs by the seventh year. It was also assumed that the FTTH NIUs would need some form of upgrade by the tenth year.

Service Reps 7 FTE 5 FTE It was assumed the HFC would have a higher incidence of network trouble, which would call for more service reps to handle the associated call volume.

Network Techs 12 FTE 9 FTE An HFC system will require more outside plant maintenance than a FTTH system. More techs will be required to monitor, maintain and repair amplifiers, connectors and coax cables.

Using the assumptions listed in Table 10, Uptown ran the business case model for each architecture scenario. The results of this analysis are listed in Table 11.

The results in Table 11 could be interpreted any number of different ways, but it is clear that HFC and FTTH are very close in financial performance over a 15 year plan. FTTH still requires $7.6M more in total funding than HFC, but it also generates more revenue and operating income than HFC. Cash flow with debt service is lower for FTTH because of its annual $2.7M bond payment (principal and interest). If cash reserves were used to pay down all debt for each scenario, cash flow with debt service would be $5.7M and $6.8M for HFC and FTTH respectively. Given cash flow’s level of importance in any enterprise, FTTH would definitely rise above HFC from a financial viewpoint.



Table 11 – Business Case Results for HFC and FTTH Scenarios

Outcome HFC FTTH Working capital requirement ($M) $10.6 $2.8

Bond amount ($M) $18.0 $33.4









2. Other Issues to Consider As the preceding financial analysis has shown, FTTH has the edge on HFC from a financial perspective. There are also a number of qualitative factors that make HFC an inferior choice for CPAU’s broadband network strategy. These are listed below:

• HFC has evolved from an all coax broadcast television system that was not expected to support two-way services like telephone and Internet access. While HFC is technically capable of supporting these services today, the systems designed to carry two-way traffic are trouble-prone and far inferior to those of FTTH.

• HFC systems are currently capable of delivering 870 MHz from the head end to the end user. Practically speaking, this is the limit of the technology. Most cable operators are struggling to fit their current mix of services on their existing HFC systems. To make matters worse, future services like ultra-high speed Internet access, VOD and HDTV will drive the bandwidth requirements much higher.

• HFC systems are not as reliable as FTTH. So subscribers will experience more frequent and longer service interruptions on an HFC system. Such an environment would not be good for CPAU’s reputation as a service leader.

• Comcast is planning to upgrade their Palo Alto system to HFC in the near future. If CPAU chose to deploy an HFC system, it would simply be a “me-too” solution. One of the primary challenges facing CPAU in a broadband venture is how to create and maintain competitive advantage. An HFC system would do little to support that objective.

• Assuming an HFC system would need to be upgraded to FTTH within the first 7-10 years of operation, a second wave of construction would be required. Unfortunately, this construction would be taking place up and down residential streets and in back yards throughout Palo Alto. With FTTH, the fiber network (cabling) is installed once and the upgrades would be limited to active nodes and NIUs.



• Per the results of the Utility Broadband Scan, several utilities that have deployed HFC systems are looking at the upgrade path to FTTH to overcome operational difficulties associated with HFC. Cedar Falls Utilities has completed a financial study that projects a $13M savings in operating costs over a 20 year period after upgrading from HFC to FTTH.

3. Recommendation Uptown recommends that CPAU continue the development of a FTTH based broadband strategy. HFC provides an opportunity to save capital expenditures on the front end of the business plan, but the increased operating costs and upgrade requirements make it long-term loser compared to FTTH.



V. Utility Broadband Scan

A. Introduction and Scope 1. Business Plan Assignment Well over 100 municipally owned utilities have entered the telecommunications business by deploying one or more services like cable television, Internet access, and telephone. In fact, this document lists some 346 utilities that have entered or have proposed to enter this sector. The City of Palo Alto is interested in understanding some of the high level marketing, operations, finance, and public policy strategies and tactics employed by their peers in this area (similar in size, technology deployed, and service set). Uptown was assigned to complete a survey of at least five of CPAU’s peers and provide a summary for each. This document presents our findings and conclusions based upon the analysis of 13 markets that were identified and studied in depth. The markets were analyzed through a combination of primary research activity (phone calls to management of the respective operator) as well as secondary research obtained through various published information about the projects.

2. Markets Studied The Palo Alto project team has approached the evaluation of this undertaking with particular attention to its financial feasibility. We believe it is imperative for the city to have a quantified understanding of the financial potential as well as financial requirements in building and operating a broadband network. However, this should not be interpreted as the motivation behind such an undertaking. It is clear from detailed discussions with these utilities that a strong community agenda is the driver. We believe the same should be true for Palo Alto.

While we have paid close attention to the ‘business’ aspect of this undertaking, it is important to recognize that other utilities embarked upon this enterprise with other than profit and revenue diversification motives. Their motivation: To promote economical development by attracting new commercial activity and improving the stability of the existing business base; To provide citizens with better value through more choices and the benefits of price competition; and perhaps more than any other single reason; To improve the level of service being experienced by the citizens. Further elaboration on the mission of these communities is found below under “Public Policy”.

Uptown selected a broad mix of markets to review for this exercise. There are a number of factors to consider and the 12 markets cover the full range of situational criteria so that the results and findings can be interpreted as representative to nearly any market that is considering entering this sector. The market qualities we were looking for and that are represented within the sample of the 13 markets listed below are:

• Urban, suburban, and rural settings

• Size of residential market from 1,800 to 143,000

• Business models that cover both retail and wholesale approaches

• Architecture strategies including HFC and FTTH and a corresponding range of vendors

• Markets that have been offering services for 7 years as well as those in planning mode



Given the need to “cast a wide net” and gather a robust set of findings for Palo Alto to draw from, we selected the following markets, most of which provided invaluable detail via phone interviews.4

• Truckee, California. Operator: Truckee-Donner PUD

• Ephrata, Washington. Operator: Grant County PUD

• Bristol, Virginia. Operator: Bristol Virginia Utilities

• Taunton, Massachusetts. Operator: Taunton Municipal Lighting Plant

• Kutztown, Pennsylvania. Operator: Borough of Kutztown

• Jackson, Tennessee. Operator: Jackson Utility Division

• Alameda, California. Operator: Alameda Power & Telecom

• Tacoma, Washington. Operator: Tacoma Public Utilities

• Cedar Falls, Iowa. Operator: Cedar Falls Utilities

• Braintree, Massachusetts. Operator: Braintree Electric Light Department

• LaGrange, Georgia. Operator: City of LaGrange

• Provo, Utah. Operator: Provo City

3. Business Dimensions Evaluated The learnings and conclusions for Palo Alto as derived from this analysis can be separated into two main objectives. The first is to use this market scan as a separate source of data with which to validate the key assumptions that Palo Alto is using in its business case. These assumptions are primarily the revenue drivers such as price level and anticipated penetration levels, but also cover capital assumptions such as network architecture. The FTTH project team has conducted quantitative market research to obtain market-specific information on the key revenue drivers and has used this data as inputs into the business case. However, there is certainly added value in evaluating the “real-world” results obtained by other utilities that have entered the sector already. Accordingly, one of the key tasks of this analysis is to determine if the Palo Alto business case assumptions are indeed supported by the actual experiences of these other operators. We approached this by focusing on five particularly important business dimensions:

• Pricing: Are Palo Alto’s price level inputs in the business case in line with market price levels established by the utilities we studied?

• Network Architecture: Have the architecture alternatives being considered by Palo Alto been selected by other utilities? Is it working?

• Business Model: Are there clear patterns in the preferred business models being used by other utilities for each line of business?

• Subscriber Results: Are Palo Alto’s penetration inputs in the business case in line with subscriber results achieved by the utilities we studied?

• Public Policy: What community benefits are anticipated and how will they benefit citizens?

4 Manuel Topete provided invaluable support on this portion of the project through his contacts at other municipalities.



The second objective is to obtain tactical information to begin developing a knowledge base for Palo Alto to draw from as it considers its strategic as well as operational alternatives for how it approaches its entry into the broadband industry. Certainly this analysis does not cover every tactical dimension in a business as complex and fast changing as broadband. It does, however, provide high-level insights into the various tactical approaches in how utilities are generating success as new entrants.

Given these objectives, the analysis focused upon the following business dimensions as the most important strategic and tactical insights for Palo Alto to validate its business case against the real world and pick up tactical tidbits along the way:

a) Market Characteristics • Geographic Location. Includes the type of market (e.g. rural or urban center)

• Population

• Homes/Meters

b) Strategic Approach • Business Model. Defined as retail or wholesale for each service.

• Services. Of particular interest is video, local phone, and Internet access. Some operators are deploying AMR through these initiatives as well.

• Public Policy. Describes the rationale presented to the public as to why the utility should enter the broadband sector.

• Financing Vehicle. Identifies the numerous ways these projects are being funded.

• Open Access Position. Does the utility support open access by welcoming all takers onto its network? This is not the same as wholesale in that wholesale can done through ‘selective invitation’ versus full open access.

c) Network Architecture • Architecture. Is the technology hybrid fiber coax (HFC) one of the several versions of

fiber to the home (FTTH) or gigabit Ethernet?

• Construction Timeframe

• Construction Budget

• Spending to Date

• Vendors

d) Operating Results • Deployment Status. Is the operator still in technical trials or have they commercially

launched. If so, when and to how many homes?

• Pricing

• Subscriber Results: Number of paying subscribers (and penetration) by each service.



B. Executive Summary of Findings 1. Pricing

a) Business Case Assumptions As seen in Table One, the pricing inputs being used in the business case are in line with the actual prices of the utilities studied. The findings by each line of business are as follows:

• For analog video services, expanded basic (all analog channels) ranges from $26 to $34 per month across the utilities studied. The average (unweighted) expanded basic price is $31.14. This compares an average price by the incumbent cable operators of approximately $40. Palo Alto is assuming an expanded basic price point of $35 in the business case. Although this is somewhat higher then the utility average, the project team believes it is the right strategy (see the section on discounting below) and is in line with the 10% discount tested in the market research.

• For digital video services, the entry tier package ranges from $37 to $50 per month across the utilities studied. The average (unweighted) digital entry price is $42.83. This compares an average price by the incumbent cable operators of approximately $50. Digital pricing needs to be established by the Palo Alto team, but should again be on the high side of the utility range.

• The premier digital package ranges from $57 to $80 per month across the utilities studied. The average (unweighted) premier digital price is $68.29. This compares an average price by the incumbent cable operators of approximately $80. Again, digital pricing needs to be established by the Palo Alto team, but should again be on the high side of the utility range.

• For Internet service, the full bandwidth service (usually 1Mbps downstream) is very consistently priced at $40, since the utilities studies priced it at either $39 or $40. This compares an average price for cable modem service or DSL of approximately $50. Palo Alto is assuming an Internet price point of $40 in the business case (retail, there may be a separate wholesale price). This is exactly in line with the utilities studied as well as the 10% discount tested in the market research.

• For local telephone service, the price ranges significantly from $11 to $25 per month across the utilities studied. The average (unweighted) phone price is $17. This compares an average price by the incumbent ILECs of approximately $26, depending on the degree to which utilities package calling features into their phone service offering. Palo Alto is assuming a wholesale price point of $12 in the business case, which we expect would result in a retail price of about $20 for Palo Alto residents. This resulting $20 retail price is within the range of the utility average and is in line with the 10% discount tested in the market research.



Table 12 – Summary of Utility Broadband Pricing

Price Range Average Incumbent

Range CPAU Business

Case Analog Expanded

Basic $26 - $34 $31.14 $35 - $40 $35

Entry Tier $37 - $50 $42.83 $45 - $50 TBD

Video

Digital Top Tier $57 - $80 $68.29 $75 - $85 TBD Entry Tier $14 - $26 $18.33 No Tier No Tier Internet Top Tier $39 - $40 $39.66 $50 $40 if retail

strategy Phone $11 - $25 $17 $20 - $26 $12 if wholesale

strategy Bundle Discount 2 markets

reduce HSD by $5 - $7 with video

$5 - $10 discount on HSD with

video

b) Discounting Most municipalities are providing broadband services at significant discounts to incumbent price levels. The average discount for video is 17%, Internet is 21%, and phone is 26%. These results provide ample evidence that almost universally, utilities are heavily relying on significant price discounting as a strategy to obtain initial market share. To what extent this will be a long-term strategy is not clear, as this is still an emerging sector for the utility industry. However, that having been said, the telecommunications industry price levels tend to move in one direction: down. Broadband operators, including utilities, need to be careful not to commoditize the industry through their pricing approaches. The better strategy that is being more widely used by the major cable operators (MSOs) as well as the four major local telephony players (ILECs) is to discount services when offered as a bundle.

By tying discounts to bundles, the operator ensures significant Average Revenue Per User (ARPU) growth by encouraging subscription to multiple services. The more important benefit to this approach is the positive impact to subscriber churn. This is due to the fact that customers who buy more services from a particular brand are less likely to switch to another brand. It is important to note that only two of the utilities studied that have established pricing are using bundling as a pricing strategy. These are Alameda and Cedar Fall who offer a $5-7 discount on Internet if the customer is also subscribing to video service from the utility.

c) Pricing Conclusions There are several important recommendations for Palo Alto to consider based upon the finding of this analysis:

• Move forward with the current business case price levels as they are both within the range of actual market conditions and also are reasonable price levels to achieve the assumed subscriber penetration.



• Establish further pricing detail for digital packages and premium services as part of the business planning exercise.

• Determine if Palo Alto desires to tier its Internet access product. At this time tiering is not assumed. Internet tiers are being offered by one-third of the utilities offering Internet access.

• Determine if Palo Alto will offer price discounting through bundled services packages. This is recommended by Uptown.

• Negotiate and confirm wholesale pricing for Internet and telephone services.Network Architecture

a) Technology Trends A major component of this project is a detailed engineering analysis of the most viable network architecture options available to the city for the provision of broadband services. At the current time, the most viable architectures are HFC and FTTH. There are further technologies emerging that may be capable of distributing broadband services to the mass market, but these architectures are still undergoing significant development and have not achieved scaled deployments.

In addition to the engineering analysis, this comparative utility scan is a second source of input for Palo Alto in making its architecture decision. The utilities we studied span a deployment horizon of seven years, and in fact some have not yet deployed. It is an interesting point of perspective to review the architectures selected by these utilities and to garner any feedback on their experience with that architecture.

The most important finding is that FTTH has been the only architecture selected since 2002 among the utilities we reviewed. Prior to 2002, HFC was the architecture of choice for utilities entering the broadband sector (one exception; Grant County deployed FTTH in 2000). The summary of the architecture selections is presented in Table 13.

Table 13 – Summary of Utility Broadband Network Architecture

Architecture Launched Prior to 2002 Launched/Planned in 2002 HFC • Alameda (2001)

• Tacoma (1998) • Cedar Falls (1995) • Braintree (HSD: 1997,

Video: 2000) • LaGrange (1999)

FTTH • Grant County (2000) • Truckee (not launched) • Bristol (2002) • Taunton (pilot in 2002) • Kutztown (2002) • Provo (pilot in 2002) • Jackson (not launched)



b) Operational Considerations In addition to examining the architecture selections made by these utilities, we were able to gather feedback from several utilities that selected HFC early on and have now had significant operating experience with this technology. For a number of reasons summarized below, some utilities are questioning whether or not they will stay with HFC over the next few years. Here is a synopsis of what we heard from three utilities in particular:

• Tacoma: Deployed HFC in 1998 but is now already looking into FTTH as an alternative architecture.

• Cedar Falls: Deployed HFC in 1995. Network maintenance has been very expensive and they are now contemplating a gradual migration to FTTH. In fact they have recently conducted financial modeling comparing the two architectures and concluded that FTTH would save them over $13 million in life cycle costs (initial capital plus ongoing operating expenses) over a 20 year period.

• Truckee: Although Truckee has not launched, it is interesting to note that they originally selected HFC as their network architecture, but subsequently switched to FTTH upon further consideration.

c) Architecture Conclusions The engineering analysis is intended to be the primary information source for Palo Alto’s business decision on which network architecture it will deploy. As for lessons from the utilities who have contemplated this same decision, the clear feedback is a recommendation for FTTH as a preferred alternative to HFC. The superiority of FTTH stems from these advantages:

• Product attributes and performance

• Abundance of reserve bandwidth

• Lower operating costs

3. Business Model In a similar fashion to the network architecture dimension, the utility review is a secondary source of input for Palo Alto to consider as it makes its business model decisions for the three lines of business (television, Internet, and phone). A full evaluation of the business model considerations and recommended strategy is being conducted as part of this project, but again the lessons and examples of those utilities we reviewed shed additional light on this decision. We are using the term ‘business model’ to generally describe the relationship between the entity owning and operating the network infrastructure (the utility or municipality) and the end user customer.

Given this definition, there are two overall business models to consider:

• Retail: The network operator has a direct relationship with the end user customer in that the network operator also performs all value-added functions to deliver and support the broadband services the customer uses. This would include operating functions such as billing, marketing, and customer care. This is not to say the network operator has to perform these functions (e.g. they could be outsourced to third parties), but rather that the network operator has direct business oversight and responsibility for them.

• Wholesale: The network operator has an indirect relationship with the end user customer in that a third party (separate legal entity) performs some or all of the value-added



functions to deliver and support the broadband services the customer uses. This would include operating functions such as billing, marketing, and customer care.

There are a few practical lessons around the boundaries of what is feasible in selecting the appropriate business model for broadband services. The good news is that there is a great deal of flexibility around the business model options as can be seen from the utilities reviewed. We would summarize these as:

• There can be separate business models being used by the utility for each line of business; in fact, this is almost always the case. Only four of the utilities reviewed are pursuing a ‘pure’ business model; Bristol as retail and Grant County, LaGrange, and Provo as wholesale.

• Wholesale does not mean doing business with every potential retailer of services. Most utilities are taking a partnership approach, which is selective in nature and limits the number of service providers they work with. In this regard, it is not so much an ‘Open Access’ approach but is more accurately described as strategic partnering within a wholesale business model.

• Wholesale has been selected in some markets out of state-level regulatory or legislative necessity. Some states such as Washington have legislative barriers that prevent the utility from directly retailing video services as an example.

a) Business Model Conclusions The business model analysis is intended to be the primary information source for Palo Alto’s business decision on whether or not to pursue retail and/or wholesale for each line of business. When separating out regulatory considerations from the utilities we reviewed, the pattern that emerges is the following:

• A strong preference for the retail model for the video line of business

• A strong preference for the wholesale model for the local phone line of business

• A mixed and fairly equal preference for both the retail and wholesale model for the Internet line of business



Table 14 – Summary of Utility Broadband Business Models

Retail Wholesale Video • Truckee, CA

• Bristol, VA • Kutztown, PA • Jackson, TN • Alameda, CA • Tacoma, WA • Cedar Falls, IA • Braintree, MA

• Grant County PUD • LaGrange, GA • Provo, UT

Internet • Truckee, CA • Bristol, VA • Taunton, MA (dial-up) • Kutztown, PA • Alameda, CA • Cedar Falls, IA • Braintree, MA

• Grant County PUD • Jackson, TN • Tacoma, WA • LaGrange, GA • Provo, UT

Phone • Bristol, VA • Truckee, CA • Grant County PUD • Kutztown, PA • Jackson, TN • Provo, UT

4. Subscriber Results

a) Individual Market Considerations We first want to identify unique consideration regarding a few of the utilities studied so that subscriber penetration results from these markets can be interpreted accurately.

• Grant County: We need to address the unusually low penetration level for video services in Grant County. At 9%, it is well below the utility average, but has been negatively influenced by serious product performance problems. Grant County has been delivering video service through an Internet protocol (IP) architecture, which is leading edge, but not without issues. By starting with very new technology, they have had problems to the point of not been able to offer a reliable, video service of any quality by today’s standards. This has clearly affected their ability to take market share from the incumbents who are certainly not going to switch to less reliable service. Palo Alto is not considering IP video for delivering video services, but rather the traditional and proven method of analog video signals carried over the broadband network.

• Tacoma: We mention Tacoma here because we had previously presented a lower penetration figure for this market. Our original calculations put video penetration at 17% and Internet penetration at 5%. Upon reviewing these calculations and gathering more



specific information from this market, we discovered that the denominator we were using (originally 130,000 homes) was significantly overstated. First, we found that the service area represented by Tacoma Public Utilities extends well beyond the city limits of Tacoma. However, the network rollout only covers the city limits at this time (Tacoma is just now doing construction beyond city limits but these homes have not been launched). In fact, the homes within the city limit number 85,000. Second, we were informed by Tacoma that some 20,000 homes within the city limit are Multiple Dwelling Units (MDUs), which are under contract to other services providers. Although the network passes these MDU units, they are not marketable and thus are excluded from the homes passed. With these adjustments the marketable homes for Tacoma are 65,000 and the corresponding penetration levels have been corrected.

• LaGrange: We present the penetration levels achieved in LaGrange in Table Four as informational, but are not using these metrics to calculate the average penetration metrics we mention as the sanity check for our business case assumptions. The reason for this is that LaGrange is a very unique market in that it does not represent a situation where the utility is offering these services in competition with incumbent operators (either as a retailer or wholesaler). The reason for this is that the City of LaGrange is wholesaling directly to the local cable operator (in this case Charter). Because of this, the penetration levels they have achieved do not represent a measure of success in taking market share from incumbent operators, which is what Palo Alto must do. We feel it is therefore appropriate to remove this as a data point from our analysis.

b) Business Case Assumptions As seen in Table Four, Year 1 and Year 5 penetration inputs being used in the business case are in line with the subscriber results (expressed as penetration levels) the of the utilities studied. The findings by each line of business are as follows:

• For video service, the actual penetration ranges from 9% to 58% across the utilities studied. The average (unweighted) market penetration is 34%. Palo Alto is assuming a Year 5 (which is the year in which peak penetration is achieved) penetration of 34% in the business case. This figure was derived from the quantitative market research study, and a detailed explanation of the calculation can be found there. The initial (Year 1) penetration level is of interest as well in examining the viability of the projected revenue streams, and this seems to be in line with actual market results as well.

• For Internet service, the actual penetration ranges from 11% to 43% across the utilities studied. The average (unweighted) market penetration is 28%. Palo Alto is assuming a Year 5 penetration of 42% in the business case. Although this figure is higher than the current average seem among utilities, it is well supported by the quantitative research that was conducted. We believe that Palo Alto should be on the high range of subscriber results among utilities because the overall adoption level of broadband Internet (currently at 44% of all homes) is very high when compared to national averages as well as the market represented by the utilities that we studied.

• For phone service, the actual penetration ranges from 2% to 13% between the two utilities who are currently offering it. Clearly, local phone is an embryonic line of business for utilities entering the broadband sector. Palo Alto is assuming a Year 5 penetration of 38% in the business case. Again, this is based upon our market research. We do know that major cable operators such as Cox and AT&T Broadband (now



Comcast) have achieved penetration levels in the 30% range, so we believe this is achievable.

Table 15 – Summary of Utility Broadband Subscriber Results

Utility Years Deployed Video Internet Phone Grant County 3 9%5 40% 2%

Kutztown 1 18% 17% 13%

Tacoma 4 34% 11%6 NA

Cedar Falls 7 58% 43% NA

Alameda 2 34% 14% NA

Braintree 5 52% 40% NA

LaGrange ? 76% 14% NA

Year 1: 20% Retail: 20%

Wholesale: 25% 23%

Palo Alto Business Case

Year 5: 34% Retail: 34%

Wholesale: 42% 38%

c) Subscriber Results Conclusions We conclude from the above analysis that the subscriber performance assumptions that have been used in the business case are supported by the findings from actual market performance among these utilities. We further recommend two strategies for improving the likelihood that Palo Alto can achieve these growth targets as quickly as possible:

• Incorporate these subscriber growth objectives into the decision process for the business models. Especially for Internet, Palo Alto may realize the greatest acceleration in broadband Internet growth by pursuing a combination of retail as well as wholesale business models. This would enable a rapid migration of the current dialup subscriber bases of the major narrowband operators to broadband via the Palo Alto network.

• Use bundling as a marketing tactic to accelerate the growth of these services, especially telephony. Uptown is aware of markets that have seen a doubling in the subscriber growth rate of these services when offered in a discounted bundle.

5 As explained above, this comparatively low penetration result is significantly influenced by poor reliability as Grant County launched its video service through IP video.

6 Tacoma’s comparatively low Internet penetration is due, at least in part, to a pure wholesale strategy I which all three ISPs are charging a $100 activation fee. We believe this is a significant barrier to market share growth and is an unusual tactic compared to DSL and cable modem providers who minimize upfront payments to accelerate their market share growth.



5. Public Policy There is a common theme within the public policy definition around the benefits to the community and its citizens – one that is very consistent across markets. These themes are; improve availability of broadband services (especially in rural markets), achieve enhanced economic development through commercial use of broadband services, enhance competition and provide lower prices, and improve the service quality experience for the citizens using these services. The detailed insight into the positive community impact a state-of-the-art broadband network could have, especially if operated by an entity with community interests in mind, would be the following:

• Achieve enhanced economic development through commercial use of broadband services. Jackson and Kutztown believe that their broadband initiatives will result in economic growth for their communities. With the City of Palo Alto suffering a high rate of vacancy in commercial office space (above 20%), it would be rather advantageous to offer FTTH services to attract business tenants, promote economical growth and stabilize Palo Alto’s industrial and commercial base, thereby preventing future migration to other markets that offer these services at better prices and/or quality.

• Enhance competition and provide lower prices. In Braintree, Massachusetts, 82% of voters said they wanted to see cable competition in town. This was the encouragement the city needed to move forward.

• Improve the service quality experience for the citizens using these services. Most of the markets we examined mentioned this objective as central to their mission. Braintree, LaGrange, Cedar Falls, Kutztown, and Tacoma specifically referred to this objective. For example, in LaGrange citizens were clamoring for improved service levels and the city could not ignore their request. The incumbent was purchased and the cable plant re-built. Clearly, the city of LaGrange seized the opportunity by preempting the market trend for improved pricing and quality and enhancing customer demand to reach an astonishing 76% penetration in video services alone.

• Improve availability of broadband services. Historically, not all residences and commercial sites in the City of Palo Alto have had access to DSL or other form of Broadband at competitive rates. This is in fact, and important driver for some utilities to enter the broadband sector. For example, in some rural markets there is no availability of broadband Internet access due to lack of capital investment by MSOs and ILECs.



C. Individual Market Analysis 1. Truckee, CA. Utility/Operator: Truckee-Donner PUD

a) Market Characteristics • Geographic Location: Rural town located 100 miles northeast of Sacramento and 31

miles southeast of Reno.

• Population: 15,000 (Truckee)

• Homes/Meters: 9,000

b) Strategic Approach • Business Model: Retail: Video, HSD (both through partnerships). Wholesale: Phone

• Services: Video, HSD, Phone

• Public Policy: To enhance services and pricing competitiveness. HSD is considered very important.

• Financing Vehicle: Certificates of Participation through an underwriter.

• Open Access Position: No -- Will establish partnership

c) Network Architecture • Architecture: FTTH. Initially selected HFC but switched

• Construction Timeframe: Ten months once they start.

• Construction Budget: $10m in Lease Financing. Believe saved $2m by selecting FTTH vs. HFC

• Spending to Date: None

• Vendors:

d) Operating Results • Deployment Status: PUD Board has approved FTTH deployment

• Pricing: Undetermined

• Subscriber Results: No subscribers

e) Contact Information Allen Harry, Director of Telecom Services. (530) 587-3896



2. Ephrata, WA. Utility/Operator: Grant County PUD

a) Market Characteristics • Geographic Location:


• Population:

b) Strategic Approach • Business Model: Wholesale via 17 ISP's, 2 video, and 2 telco service providers

• Services: Video, HSD, Phone, Home Security, and AMR

• Public Policy:

• Financing Vehicle: Utilities cash reserve.

• Open Access Position: Supports

c) Network Architecture • Architecture: FTTH - AON

• Construction Timeframe: 6 years

• Construction Budget: $120m

• Spending to Date:

• Vendors: Worldwide Packets

d) Operating Results • Deployment Status: Launched in 2000. Available to 9,000 homes.

• Pricing: Varies by service provider

• Subscriber Results: 810 video subs (9% penetration), 3,780 Internet subs (40% penetration), 180 Phone subs (2% penetration).

e) Contact Information Ed Williams, Director of Customer Service. (509) 754-0500



3. Bristol, VA. Utility/Operator: Bristol Virginia Utilities

a) Market Characteristics • Geographic Location: Rural center 118 miles east of Knoxville and 143 miles west of

Roanoke, Virginia.


• Population:

b) Strategic Approach • Business Model: Retail


• Public Policy:

• Financing Vehicle:


c) Network Architecture • Architecture: FTTH - PON

• Construction Timeframe:

• Construction Budget:


• Vendors: Alcatel: STB and Optical Solutions: Businesses

d) Operating Results • Deployment Status: Launched late 2002. Currently barred from offering video due to

Charter injunction.

• Pricing: Require customers to purchase at least $44.95 in services. Expanded basic is $32. Digital packages are $44-$62. HSD is $26-$39 (tiered). Phone is $15.

• Subscriber Results: Unknown

e) Contact Information Mark Lane, Network Engineer. (540) 645-8701



4. Taunton, MA. Utility/Operator: Taunton Municipal Lighting Plant

a) Market Characteristics • Geographic Location:


• Population:

b) Strategic Approach • Business Model: Retailing its narrowband Internet

• Services: Not announced. Providing narrowband Internet today.

• Public Policy:

• Financing Vehicle:

• Open Access Position: Unknown



• Construction Budget: $1.5m for pilot


• Vendors: Wave7 Optics

d) Operating Results • Deployment Status: Pilot


• Subscriber Results: No subscribers

e) Contact Information Rick Velez, Project Manager. (508) 824-5844



5. Kutztown, PA. Utility/Operator: Borough of Kutztown

a) Market Characteristics • Geographic Location: University town 100 miles west of New York


• Population: 5,200 (half of which is the University)

b) Strategic Approach • Business Model: Retail: Video, HSD Wholesale: Phone (Conestoga)

• Services: Video, HSD, Phone, and AMR

• Public Policy: No vote required as expenditure limit before referendum was not exceeded

• Financing Vehicle: Taxable bonds

• Open Access Position: Support but have not opened access

c) Network Architecture • Architecture: FTTH – PON. Built their own headend.

• Construction Timeframe: Completed in seven months

• Construction Budget: $4.6m

• Spending to Date: $4.4m

• Vendors: Optical Solutions and Atlantic Engineering

d) Operating Results • Deployment Status: Launched in August 2002

• Pricing: Expanded basic is $28. Top package is $57. HSD is $14-$40 (upstream tiering - all are 1Mbs down). Phone is $11.

• Subscriber Results: 329 video subs (18% penetration), 300 Internet subs (17% penetration), 241 Phone subs (13% penetration).

e) Miscellaneous CATV Incumbent (Service Electric) engaged in a war price dropping prices in town and raising it in surrounding areas. That has kept video penetration below expectations. Another unexpected hurdle: Cell phones are the service of choice among university population. f) Contact Information James Vettiaino, Manager. (610) 683-6131



6. Jackson, TN. Utility/Operator: Jackson Utility Division

a) Market Characteristics • Geographic Location: Urban center 80 miles northeast. Strong industrial base


• Population: 61,648

b) Strategic Approach • Business Model: Retail: Video. Wholesale: HSD and Phone


• Public Policy: To promote economical growth.

• Financing Vehicle: Revenue Bonds, City provided GEO backing.

• Open Access Position: Supports (Open for ISPs. Planning on retailing video)

c) Network Architecture • Architecture: FTTH

• Construction Timeframe: 10 years

• Construction Budget: $52 million ($36m for cable signal processing facility and transport)


• Vendors: Wave7

d) Operating Results • Deployment Status: Launched in August 2002


• Subscriber Results: No subscribers. Projected penetrations are Video: 40%; Internet: 25%; Phone: 25%

e) Contact Information Mr. Kim Kersey, Jackson Energy Authority. (731) 422-7257



7. Alameda, CA. Utility/Operator: Alameda Power & Telecom

a) Market Characteristics • Geographic Location: 15 mi East of San Francisco (driving distance) and 32 mi from

Palo Alto.


• Population: 74,259.


• Services: Video, HSD

• Public Policy: Their mission statement summarizes their public policy: “We guarantee the highest-value electric and telecommunications service.” To enhance quality of service at competitive prices.

• Financing Vehicle: Taxable Bonds and partnering with Vectren, who had a buyout clause. Ironically, Alameda has taken over Vectren’s interest in the system.

• Open Access Position: Closed

c) Network Architecture • Architecture: HFC

• Construction Timeframe: Construction began January 2001 with expected completion end of 2002.

• Construction Budget:


• Vendors: Various

d) Operating Results • Deployment Status: Launched in July 2001. Available to 14,763 homes.

• Pricing: Expanded basic is $33. Digital packages are $45-$75. HSD is $40 -- $33 if HSD/Video bundle.

• Subscriber Results: 4,948 video subs (34% penetration), 2,000 Internet subs (14% penetration).

e) Contact Information (510) 748-3905



8. Tacoma, WA. Utility/Operator: Tacoma Public Utilities (TPU)

a) Market Characteristics • Geographic Location: Urban center just south of Seattle in the lower Puget Sound.

Service currently available within the city limits but starting construction to greater Tacoma.

• Meters: 143,000 residential meters. There are 85, 000 meters inside city limits (of which 65,000 are passed) and 65,000 outside the city limits.

• Population: 195,000 in Tacoma proper.

b) Strategic Approach • Business Model: Retail: Video. Wholesale: HSD via 3 ISPs

• Services: Video and HSD (Click Network). Will deploy AMR

• Public Policy: Provide citizens with the product, quality and competitive pricing they want. Decision was made to build the network after a study for deregulation was made (totally unrelated) and it was discovered that the citizens of Tacoma wanted a high quality TV and fast Internet access.

• Financing Vehicle: Utilities cash reserve.

• Open Access Position: No. Partnering with 3 ISPs.

c) Network Architecture • Architecture: HFC. Looking into FTTH.

• Construction Timeframe: Construction in Tacoma is complete (670 miles). Expanding to other cities served by TPU

• Construction Budget: $96million

• Spending to Date: $96million

• Vendors: WorldGate, Optic Fusion, Motorola and Nortel

d) Operating Results • Deployment Status: Launched video in March 1999 and Internet in December 1999.

• Pricing: Expanded basic is $26. Digital packages are $37-$66. HSD is $30 per month for 1Mbps service with a $100 activation charge.

• Subscriber Results: 22,000 video subs (34% penetration), 7,200 Internet subs (11% penetration). Tacoma’s comparatively low Internet penetration is due, at least in part, to a pure wholesale strategy I which all three ISPs are charging a $100 activation fee. We believe this is a significant barrier to market share growth and is an unusual tactic compared to DSL and cable modem providers who minimize upfront payments to accelerate their market share growth.

e) Contact Information Diane Lachell, Government and Community Relations Manager (253) 502-8200 email: [email protected]


mailto:[email protected]


9. Cedar Falls, IA. Utility/Operator: Cedar Falls Utilities

a) Market Characteristics • Geographic Location: Suburban area of west Waterloo. In the northeast quadrant of Iowa



b) Strategic Approach • Business Model: Retail (Some ISP wholesale to other communities)


• Public Policy: Non-profit. Goal is to create competition to enhance quality of service and lower prices. Prices are 20% lower compared to surrounding communities.

• Financing Vehicle: GOP Bond of $2 million and a Plain loan from Electric Utilities of $6 million. Four years into the project, a CATV-backed bond was issued for $3.5-4 million.

• Open Access Position: Closed. There are at least three other ISPs (including Mediacom Communications with high-speed Internet) so don’t feel political pressure.

c) Network Architecture • Architecture: HFC (750 MHz)

• Construction Timeframe: Began in 1994, first customer signed up in February 1995.

• Construction Budget: $7 million

• Spending to Date: $11 million spent due to larger than projected take rate and shorter than expected HFC life cycle (technology replacement too frequent)

• Vendors: Zenith STB’s

d) Operating Results • Deployment Status: Launched in 1995. Available to 13,000 homes.

• Pricing: Expanded basic is $32. Digital packages are $42-$67. HSD is $40 -- $35 if HSD/Video bundle.


e) Miscellaneous • Maintaining the HFC plant has been a greater expense than anticipated. Bandwidth

doubles every 18 to 24 months and HFC can’t cope with it without significant modifications and addition.

• Their recommendation is not to build an HFC network but to build a FTTH network. They are contemplating slowly migrating to fiber optic some time soon.

f) Contact Information Dave Martin, (319) 266-1761



10. Braintree, MA. Utility/Operator: Braintree Electric Light Department

a) Market Characteristics • Geographic Location: Suburban center 10 miles south of Boston





• Public Policy: Lower rates and better service. A November 1999 non-binding referendum ballot received 82% support for a utility-offered CATV service.

• Financing Vehicle: $3.5 million bond.

• Open Access Position: Closed


• Construction Timeframe: Deployment is 95% complete.

• Construction Budget: $2.8 million for the fist stage (HFC); $3.5 million for CATV and extending services citywide.


• Vendors:

d) Operating Results • Deployment Status: Launched Internet in 1997 and video in 2000. Available to 9,000

homes.

• Pricing: Expanded basic is $34. Digital packages are $39-$71. HSD is $39.


e) Contact Information (781) 348-2353



11. LaGrange, GA. Utility/Operator: City of LaGrange

a) Market Characteristics • Geographic Location: Rural center 60 miles southwest of Atlanta



b) Strategic Approach • Business Model: Wholesale. Leases fiber network and headend to Charter, who kept the

video end of the business and owns the franchise.

• Services: Video, HSD is free via WebTV application. Also offer FTTX for business and industrial customers, both lit and dark.

• Public Policy: To enhance service quality (former service levels were poor). Notably, there was no competition.

• Financing Vehicle: Municipal bonds through a development agency. No referendum needed.

• Open Access Position: Support, but they have not had any takers.


• Construction Timeframe: 1999

• Construction Budget: $10 million

• Spending to Date: $10 million

• Vendors: Various

d) Operating Results • Deployment Status: Launched. Available to 10,500 homes.

• Pricing: HSD is free (WebTV format) to every video subscriber

• Subscriber Results: 8,000 video subs (76% penetration), 1,500 Internet subs (14% penetration). The Internet penetration number does not include their “subscriber” to free WebTV, which is provided with video subscription. This is clearly having a dampening effect on their mainstream Internet service growth.

e) Contact Information Joe Maltese, Director. (706) 883-2010



12. Provo, UT. Utility/Operator: Provo City

a) Market Characteristics • Geographic Location: 47 mi South of Salt Lake City.



b) Strategic Approach • Business Model: Wholesale


• Public Policy: To provide for the citizens of Provo a full range of choices, competition and open and equal access to necessary telecommunications services and applications. To ensure continued economic expansion in the high-tech sector that requires broadband services, and to ensure that existing businesses have services that will allow them to be competitive.

• Financing Vehicle: Cash reserves




• Construction Budget: Estimated at $40m.

• Spending to Date: $3.5m spent to date.

• Vendors: Worldwide Packets

d) Operating Results • Deployment Status: Pilot active in the Grandview area.

• Pricing: Expanded basic is $33. Digital packages are $50-$80. HSD is $15-$40 (tiered). Phone is $25.

• Subscriber Results: No subscribers. Pilot participants receive service free for first 3 months.

e) Contact Information Paul Venturella, Phone: (801) 852-7900



D. Current and Proposed Utility-Provided Telecommunications Systems

5. California 1. Alabama 1. Alameda 1. Fairhope 2. Anaheim 2. Florence 3. Burbank 3. Foley 4. Colton 4. Hartsell Utilities 5. Commerce 5. Lincoln 6. Imperial 6. Opp Cablevision 7. Los Angeles (Leases dark fiber) 7. Riviera Utilities 8. Modesto 8. Scottsboro Electric Power Board 9. Palo Alto 9. Sylacauga Utilities Board 10. Pasadena 2. Alaska 11. San Bruno 1. Angoon 12. Santa Rosa 2. Chetornak 13. Shasta 3. Kake 14. Truckee-Donner 4. Ketchikan

6. Colorado 5. Kiana 1. Brighton 6. Kotlik 2. Center 7. Metlakatla.net 3. Copper Mountain 8. Tnakee 4. Fort Collins 9. White Mountain 5. La Junta 3. Arizona 6. Longmont 1. Gila Resources

7. Connecticut 2. Satt River 1. Groton Utilities 3. Tohono O’odham

4. Tucson 8. Delaware 5. Wellton Mohawk Irrigation and

Drainage 1. Dover Electric Department

4. Arkansas 1. Conway Corp. 2. Lockesburg 3. North Little Rock 4. Paragould Light & Water 5. White Mountain



11. Illinois 9. Florida 1. Batavia 1. Fort Pierce Utilities Authority 2. Chicago 2. Gainesville GRUCom 3. Evanston 3. Homestead 4. Geneva 4. Key West 5. Madison 5. Kissimmee Utility Authority 6. Rantoul 6. Lakeland 7. Rochelle Municipal Utilities 7. Leesburg 8. Rock Falls 8. Newberry 9. Springfield 9. New Smyrna Beach Utilities

Commission 10. St. Charles 10. Ocala Electric Utility

12. Indiana 11. Tallahassee 1. Anderson 12. Thomasville 2. Richmond Power and Light 13. Valparaiso 3. Rising Sun 14. Vero Beach

13. Iowa 10. Georgia 1. Akron 1. Acworth 2. Algona 2. Cairo 3. Alta 3. Calhoun 4. Bancroft 4. Camilla 5. Bellevue Municipal Cable TV 5. Cartersville 6. Carroll 6. Covington 7. Cedar Falls Utilities 7. Doerun 8. Coon Rapids Municipal Utilities 8. Elburton 9. Danbury 9. Fairburn Utilities 10. Dayton Cable TV 10. Forsyth 11. Denison 11. Fort Valley Utility Commission 12. Grundy Center Municipal Light &

Power 12. La Grange 13. Marietta Fibernet 13. Harlan Municipal Utilities 14. Monroe Utilities Network 14. Hartley 15. Moultrie 15. Hawarden Integrated Technology,

Energy & Communication 16. Newnan Utilities 17. Quitman 16. Hull 18. Sandersville 17. Independence Light & Power

Telecommunications 19. Thomasville Water & Light Dept. 20. Tifton 18. Indianola

19. Lake View 20. Laurens Municipal Communications

Utility 21. Lenox



15. Kentucky 22. Manilla 1. Barbourville 23. Manning 2. Bardstown Cable TV 24. Mapleton 3. Belvue 25. Mount Pleasant 4. Bowling Green 26. Muscatine Power & Water 5. Frankfort Electric & Water Plant

Board 27. New London 28. Orange City Communications

6. Glasgow 29. Osage Municipal Utilities 7. Hopkinsville Energy-Net 30. Paulina 8. Insight Communications 31. Primghar 9. Monticello Net Power 32. Rock Rapids 10. Murray Electric 33. Sac City 11. Owensboro Municipal Utilities 34. Sanborn Electric &

Telecommunications Board 12. Paducah 13. Taylor Mill 35. Sibley 14. Williamstown Cable TV 36. Spencer Municipal Utilities

37. Storm Lake 16. Louisiana 38. The Community Agency 1. Lafayette 39. Tipton 2. Minden 40. Traer Municipal Utilities 3. Natchitoches 41. Wall Lake 4. Terrebonne 42. Waterloo

17. Maryland 43. Waverly Light & Power 1. Easton Utilities Commission 44. Webster City

45. Westwood 18. Massachusetts 46. Woodbine 1. Belmont

2. Berkshire County 14. Kansas 3. Braintree Electric Light Department 1. Altamont Cable System 4. Chicopee 2. Americus 5. Concord 3. Baxter Springs 6. Holyoke 4. Cawker City 7. Littleton 5. Columbus 8. Middleborough 6. Courtland 9. North Attleborough NAISP.net 7. Hugoton 10. Shrewsbury Community

Cablevision 8. Kingman 9. Marion

11. Taunton Municipal Lighting Plant 10. Pawnee Rock 12. Wellesley 11. Sabehta Municipal Light

Department 13. Westfield Gas & Electric Dept. 12. Waverly



22. Missouri 19. Michigan 1. Carthage esarthage.com 1. Coldwater Board of Public Utilities 2. Centralia 2. Crystal Falls 3. Chillicothe 3. Hillsdale 4. Columbus 4. Holland 5. Gallatin 5. Lowell Cable TV 6. Kahoka 6. Negaunee Electric Department 7. Kirkwood 7. Norway CATV System 8. Macon 8. Sturgis 9. Newburg Cable TV System 9. Wyandotte Dept. of Municipal

Services 10. Nixa 11. Odessa 20. Minnesota 12. Sikeston 1. Alexandria Board of Public Works 13. Springfield City Utilities 2. Bagley 14. Unionville Cable 3. Benson

4. Buffalo 23. Nebraska 5. Chaska Electric Dept. 1. Butler 6. Coleraine 2. Central City 7. Cross Lake 3. Crete 8. Detroit Lakes LakesNet 4. Lincoln 9. East Grand Forks 5. Omaha Public Power District 10. Fosston

24. Nevada 11. Garden Valley Telephone Co. 1. Churchill County 12. Jackson Municipal Cable TV

System 25. New Hampshire 13. Lakefield Public Utilities 1. Keene 14. Marble 2. New Hampton 15. Moorhead

26. North Carolina 16. Taconite 1. Fayetteville 17. Westbrook Municipal Light &

Power 2. Gastonia 3. Laurinburg 18. Windom 4. Monroe

21. Mississippi 5. Morgantown Public Antenna

System 1. Canton

6. Pineville 7. Shelby



32. South Carolina 27. Ohio 1. Gaffney 1. Archbold 2. Georgetown 2. Butler County 3. Greenwood 3. Brunswick 4. Orangeburg 4. Bryan Municipal Utilities 5. Rock Hill 5. Celina

6. Cuyahoga Falls 33. South Dakota 7. Hamilton 1. Beresford Municipal

Telephone/Cablevision 8. Lebanon 9. Medina 2. Brookings Swiftel Communications 10. Niles 3. Heartland 11. Orville

34. Tennessee 12. Sycamore Telephone Co. 1. Clarksville 13. Wadsworth Electric &

Communications Dept. 2. Cookeville 3. Germantown

28. Oklahoma 4. Jackson 1. Duncan 5. Jellico 2. Pryor 6. Memphis 3. Stillwater Power 7. Nashville

29. Oregon 8. Paris 1. Ashland 35. Texas 2. Cascade Lakes 1. Brownsville 3. Central Lincoln 2. Bryan 4. Columbia River People’s Utility

District 3. College Station 4. Denton 5. Emerald People’s Utility District 5. Floresville Electric Light & Power

System 6. Eugene 7. Lexington 6. Garland 8. Springfield 7. Georgetown

30. Pennsylvania 8. Greenville GEUS 9. Lower Colorado River 1. New Wilmington Borough Cable

TV 10. Lubbock 2. Pitcairn Power/Community Cable 11. Schulenburg 3. Schuylkill Haven 12. Seymour

31. Rhode Island 36. Utah 1. Pascoag Fire District 1. Levan

2. Murray 3. Provo 4. Spanish Fork 5. St. George




37. Vermont 1. Burlington

38. Virginia 1. Bedford 2. Blacksburg 3. Bristol Virginia Utilities 4. Harrisonburg 5. Leesburg 6. Lynchburg 7. Manassas 8. Martinsville

39. Washington 1. Clark 2. Douglas 3. North Bonneville 4. Pacific County Public Utility

District No. 2 5. Richland 6. Snohomish 7. Sumas 8. Tacoma Click! Network

40. West Virginia 1. Phillipi Communications System

41. Wisconsin 1. Oconto Falls Water & Light

Commission 2. Reedsburg Utility Commission 3. Sun Prairie Water & Light

Commission 4. Richland Center 5. Two Rivers Water & Light

Commission 6. Marshfield 7. Waupun 8. Plymouth 9. Kaukauna 10. Oconomowoc 11. Columbus 12. Brodhead 13. DeForest 14. River Falls 15. Stoughton 16. Jefferson 17. Gresham 18. Hustisford 19. Manitowoc Public Utilities 20. Menasha Utilities 21. Oconto Falls 22. Shawano Municipal Utilities 23. Two Creeks

42. Wyoming 1. Bailvoil 2. Lusk

fiber to the home business plan · system had many strategic disadvantages when compared to ftth....

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