uac approved minutes - palo alto,...

UAC Minutes Special Meeting FTTH 3/17/04 – Approved 4/7/04 of 5555

UAC APPROVED MINUTES SPECIAL MEETING ON FIBER TO THE HOME MARCH 17, 2004 Rosenbaum: Good evening. This is a special meeting of the Utilities Advisory Commission. (Voices overheard from the Council Conference Room) We are working on this problem, there is a meeting next door. Good I think we have solved that problem. So to repeat this is a special meeting of the Utility Advisory Commission of March 17 for the purpose of discussing the Fiber to the Home Business Plan Phase II. Lets have a roll call. John if you would start by announcing your name. John Ulrich, Elizabeth Dahlen, Dick Rosenbaum, George Bechtel. Our fifth member Dexter Dawes will be with us approximately 8:30, he is flying in. Let me take this occasion to introduce and congratulate John Melton who will be our fifth member of the Utility Advisory Commission. John, welcome.

Oral Communication Rosenbaum: Our next item is Oral Communication. Is there anybody here who would like to address us on any subject other than Fiber to the Home? Seeing none, we will move on to the main item which is Fiber to the Home Business Plan Phase II of the Final Report.

Fiber to the Home Business Plan Beecham: If I could, I’ve called to have someone come out to correct the audio. It may be a few minutes till someone can arrive. Rosenbaum: Can we continue or is the interference too great? Alright then I think we better take a short break until we resolve this problem. (5 Minute Break) Rosenbaum: Good evening once again. We are now on Item III the Fiber to the Home Business Plan Phase II Final Report. Let me make a few preliminary comments. If you are interested in speaking to us we would appreciate it if you would fill out one of these forms and give us your name and address. We also have the final report available for sale and Dee Zichowic who is sitting in the back corner here will be happy to sell anyone who is interested in having their own copy of this report, a copy. Now we have set aside tomorrow if necessary to continue this meeting and what I propose we do is first we will hear from the staff


and our consultant. Then I would like to set aside a brief period perhaps no more than half hour if there are commission questions of staff and the consultant. This is particularly important to do tonight because our consultant cannot be with us in person tomorrow night but will be available by telephone. So if there are questions I would like to take care of that first. If there are further questions from the commission we will put that aside until we have heard from the public. At the end of the public testimony we will decide whether we think we can finish tonight or continue the meeting for further commission discussion till tomorrow night. So we will play it by ear and see how it goes. John do you want to take over? Ulrich: Yes. I have a presentation Mr. Chairman that will be shown. I hope everybody will be able to see it. It will take a little time. It is broken up into couple of parts so that we have the opportunity for a presentation of our Risk Management. Also the Business Plan from Neil Shaw and some concluding remarks that I’ll make and for those of you that have been following Fiber to the Home for several years, a number of the items here will be redundant but I think it is important because of the complexity and high profile as the project has had that I would like to start at the beginning. And feel free to ask members of the staff some questions. I do have one thing I would like to ask though. First is that you mentioned that we have the documents that can be purchased. We placed two of the Business Plans out on the table with a note that said that they are for review and people are welcome to look at them. One has been moved away from the table and the person that has it could return it so that it can be used by people here at the meeting and then if you would like to have a copy you can see Dee Zichowic at the back who will arrange to get a copy. But it looks like a binder like this and appreciate if that is returned to the back of the room. I would like to just kind of start with a little bit of history. I think most people know that Palo Alto is one of - in fact it is the only city in California - that owns and has basically full service utilities to all its residence and business. They include electric, gas, water, wastewater and a fiber utility. Much of what we are talking about this evening is looking at the foresight of our founders and translating that into whether we should take another giant step and look forward to going into a business in Palo Alto owned by the City and focusing on a business that we believe will be in the interest of our residents and businesses. We started back in 1900 in the electric business and you can imagine the first people that walked around the City of Palo Alto asking its residents ‘would you like to have electric service’ and many people would not even vision what all the things you could use electricity for back then and of course today it is indispensable and cannot be replaced easily. I think we are in the sense on a similar threshold in Palo Alto and the purpose of this meeting is to review the combination of all the analysis that we have done and have this as the beginning of


a forum for residence and businesses to let us know what they think of the business plan. Then ultimately to decide whether we should continue with it and form the business that will be outlined this evening. We believe that we can repeat the success of our founders by building a system for the future. Initial services will pay for the construction of a Fiber to the Home System and have a City-wide fiber that is not limited to phone, Internet and video that can be expanded over time. We still don’t have a real good understanding, nor do we expect to for sometime, about the magnitude of the benefits that they can be obtained by using the fiber system. But we believe that we are recommending a system that will allow us to expand and do many significant additional services in the future. Those could be things such as direct link to fire and police services to a communication from your home, home security, electric system monitoring, automatic meter reading, time of use utility rates etcetera. You will find though, that the business plan does not suggest that there is big money to be made or that’s the business that we can use to sustain the fiber plan but that this is what we see as items that can be developed in the future. We believe we have taken a very conservative approach in recommending the next steps. Our recommendation will be at the end of our report that the Council designate Fiber to the Home as one of their top council priorities. We believe strongly that this is going to take a lot of time, energy and effort on the part of staff and there are many competing priorities that are very high and of strong interest of the residents of Palo Alto. We want to make sure that fiber reaches that priority status and if not, get to the point where we can move on to something else. We would like council’s approval to continue to use our electric enterprise fund to expand the final phase project analysis and that is outlined in the plan. Council would recommend a public process for ascertaining and assuring the community’s interest, either in the form of a public vote or community meetings. Additional information is required so that the public is fully aware of and has all the understandings of the benefits and the risks of going into this business. Following is an outline of what we are going to do this evening. I’ll give you a little bit of an overview in summary of fiber progress to date. Uptown Services (the consultant Neil Shaw) will talk about the business plan highlights. Our organization will make a risk management presentation so that we can show an independent review of what we have done. Karl Van Orsdol is with us this evening to go through with that. We will have a discussion, further recommendations from the utility and of course questions and answers and public input. I’ll say this is the beginning of the public input process. What is Fiber to the Home? There are all kinds of visions for it but briefly, this is a glass fiber that goes all the way to a dwelling or business and would have the


ability to provide a very high speed data transfer rates - faster than DSL or cable. It contains virtually limitless capacity for information flow with a very long life span which won’t become quickly outdated, offers high reliability and data security, can accommodate evolving technologies and add-ons and offers ability to provide future services not yet thought of as I mentioned a little bit earlier. You will hear about fiber to the home, hybrid and present systems. There are very few fiber systems in the United States that have a glass fiber all the way to people’s premises. Other systems, the ones that are currently in place in Palo Alto are hybrids of glass fiber. I have been in Palo Alto for just under five years and I think I have been involved in, and the staff, for at least that period of time plus the amount of time in developing our very successful dark fiber system which is in place. We believe that there is a strong community interest in the system, there is potential for your utility to provide an additional city-wide utility service, determine if it is cost-effective to build out, that it has potential of improved telecommunication services and choices and of course synergy with other utility services and systems. We have had a trial that’s going on which has been used to evaluate construction techniques, test system reliability, test new services for phone and video, determine customer expectations and measure customer satisfaction. While the trial area is quite small we have learned significant things from both from the customer service standpoint, construction techniques and the ability to provide customers expectation and value for the money spent. Lessons that have been learned from the trial are that the staff can install, maintain and operate the fiber equipment, the fiber system can reliably deliver phone, video and Internet. ISP or Internet services are easily contracted and delivered. Networks are self diagnosing and easily maintained as long as we know what we are doing. Equipment can be modular and interchangeable. Customers expect help on their side of the connection. We will emphasize this and make sure that it is clear that we understand this business. While we have not been in a competitive environment exactly like this, we clearly know how to provide our customer service and understand construction and maintenance of infrastructure. There’s a number of accomplishments to date and next steps. I will not go through all of this except we are very good at making these kinds of charts and it works well for all of us to be on the same page and work very close together. You can see Council approved funding for the trial as far back as November of 2000. We conducted customer surveys, we presented various drafts of our plans and kept moving along towards the point where we are now. Next steps include obtaining additional public comment, move towards the recommendation to the City Council and finally to the decision whether to move ahead and go ahead with the project.


The business case looked at the economic factors. We did a scientific survey of residents, current technology and cost options, known customer needs services and pricing options, trial technical and customer service experience, customer input from other municipal telecom, extensive consultant industry experience, detail perform analysis of economics and risks and economics of delivery of the three major services, video, phone and Internet. The business plan looking at what it would take for a City-wide roll out, refinement of key assumptions in the business case, marketing strategies, product and service strategy, staffing and operation procedures and firm financial strategy. We have had the report on the Internet for two weeks. As a public organization anyone can drill down and look at the details of all of these. Uptown Services has provided the business plan summary. I will turn it over to Neil for discussion. It will take him a second to hook on the computer. That is one second through the fiber connection. Shaw: Thank you John. I am Neil Shaw and I am a partner with Uptown Services. We have been working with Palo Alto now for a long time and it seems like it has been 8 months since we were last here - but it can’t be that long. So what I want to talk about tonight is just quickly to go through the plan outline, talk about where we have come from the last time we talked and then talk about some details in the plan, but mainly focus on the financials. If we want to dig down as John said, into the details of the marketing strategies, service delivery issues and organizational issues. I think that is best done on your own with the full copy of the report. What we want to talk about tonight is just an overview of the highlights. So in terms of what we presented July 9th of last year compared to where we are today, we have made good progress. We wrapped up the marketing strategy, the legal regulatory piece came a long way and the monthly operating budget was about half way done, we completed that, wrapped up the partnering strategy completed the service delivery processes with Palo Alto Utilities staff as well as the organizational structure. The financing was a big piece that was left to be done. So just a quick overview of the services that we have in mind for the plan. On the video side we are looking at expanded basic which will be the main flagship product alone of four tiers of digital video. Included in that would be options for high definition television, pay per view or video on demand as also all the premium channels. On the Internet side we look at five tiers of symmetrical service. The tiers run from 256K through ten megabit Internet tiers. These will all be symmetrical service as opposed to asymmetrical on your cable modem and


ADSL. And the nice thing of fiber to the home is we would be able to offer unlimited intranet bandwidth in the Palo Alto system because that is virtually free if you engineer the network correctly and the tiers would only apply when you go out to the internet backbone. So the local applications that could be enabled by unlimited local bandwidth are pretty compelling. Telephone side we recommended that Palo Alto bring on a competitive local exchange carrier as a partner who would lease wholesale access on the fiber to the home system and sell either under the Palo Alto Co brands or brands on their own. So on the penetration side we are looking at little bit different penetrating assumptions than we have in business case. The reason we have difference, especially on telephone it is lower, video slightly lower, Internet is about the same, is that when you go into a business planning mode you start with a very detailed monthly budget and you build from the ground up. So this is bottoms up plan , it is not a top down strategy like the business case. So when we look at marketing budgets it is type of called on, it is type of return rates, the walk in traffic in the payment centers, everything like that we start to work both ends against the middle. These are the results we came up with based on how this thing would actually roll out. The number of direct mail pieces you would be putting out, the word and advertising you will be doing. That type of a thing so we feel very comfortable with these penetration recommendations or results. In terms of pricing we will not get into details. The details are in the plan. On the video side that state that the basic offering would be $35.00 up to your high level packages which will be close to $80.00. On the Internet side, of course these packages were developed nearly a year ago so these are going to be changed obviously but anywhere from $29.95 to $149.95. The business plan called the first 3 tiers consumer residential and the last two tiers as small business or business when in fact a residential customer could buy any one of the 5 as could a business. On the telephone side, there is a wholesale model and this is obviously going to depend on who you’ve actually partnered with. But the wholesale model would call for $8 per line as the wholesale fee and a projected sharing of a profit in a $5 range. From the expense and capital assumptions you obviously can’t sell services unless you do a lot of marketing and promotion (unless you are the only game in town). So we put into the marketing business plan, a significant amount of direct marketing awareness advertising that roll up to a budget in near or in excess of $350,000 a year. Okay. That is in addition to the pull that you would get from promotional discounts that are built into the plan. So for example if you have the rate card as Dave talked about last year, the rate card would be $34.95 for expanded basic, $29.95 for 256K symmetrical Internet. These discounts would apply over and above those rate cards as promotional offers in the first five years


and then we’ve got a 5% discount built in for the rest of the plan. So this is a significant revenue hit that we forecasted based on the competitive environment. As far as capital expenditures these numbers are based on engineering studies that were done specifically for Palo Alto. These engineering studies are about a year old. I can tell you what we have seen in other markets that these numbers have come down. Risk assessment, risk analysis we will talk about what happens if the numbers go up. But I can tell you based on our experience that the per house passed cost of $759 would probably be lower; $825 per subscriber is going to be at least 20 % lower. Everything that we have done (and is reflected in recent business plans that we completed with other clients) is that we didn’t say that if 33% take each service that we will only deploy network interface units in of 33% of the homes. What we are going to do is to deploy network interface to 33 times 1.8 as the number of homes. The 50% increase is because not every one is going to take all three services. You are going to have inefficiencies so at the end of the plan we’ve got network face units deployed to nearly 60% of the homes passed even though our highest penetration rate is 33%. We also have got network upgrades built in to the plan in the year 10 for both network equipment and network interface units. So all this builds up to a capital budget of $42.3 million over 20 years and that includes $5.4 million in upgrades in the 10th year. In terms of financing we made a lot of strides with ASD in working through the financial assumptions and putting a real fine pencil on this. What we are looking at is a 17 year amortization with principal payments starting in the 4th year. So think of this as a 20 year loan process. The first three years will be interest only with 6% interest rate, although we have seen lower, we haven’t seen anything higher than that yet. But you don’t know when these bonds are going to be issued. What we are looking at is $34.8 total bond issue including the bond reserve and issuance cost. Short term debt, which is the debt you need to cover your working capital, includes a 5 year amortization schedule with payment starting in the 6th year. By the end of the 10th year our short term is paid off and that debit is taken on by us. Right now the assumption is that the utilities department will take that issue identified at a 4.7% rate, which is the current portfolio rate. Interest will be earned and compounded over the first five years. So it just doesn’t sit there interest free and that would require $8.6 million through early in the 4th year where we will see it turns cash flow positive. And finally cash reserves you can see the conservative nature of this plan and that the cash reserves earn 3% interest and 3% interest on bond reserves. So if you can imagine we are borrowing $34.8 million in the first year and that’s going to sit in the bank and earn 3 % but we are paying 6 % interest on it. So we are taking a little bit of a hit there but again that is the part of the conservative nature of this plan.


So now what I would like to do is switch to the first chart which shows what is commonly referred to as EBITDA or Earnings Before Interest Taxes Depreciation and amortization. Back in the heydays of Sand Hill Road when money was falling from heaven it was really based on what’s your BDITDA. How fast is your EBITDA positive and what kind of multiples I can get on that in the 5th, 6th and 7th year. So in the case of this plan EBITDA goes positive in the third year. We include a year zero which is basically your start up year, where there is no revenue. There is a little bit of expense but you really don’t start spending a lot of money and bringing on customers until month seven which is in year one,. So in the third year our EBITDA goes positive at $3.4 million dollars. And then the next thing would be look at earnings before taxes. We added depreciation and interest, which is the interest on your debt service. So now we are taking bigger hits because we are starting to depreciate (which is a non cash item) but it still hits the books and it impacts your accounted earnings. Our earnings before taxes go positive in to the 4th year and that stays positive throughout the plan. So what we are looking at is a very healthy business. The next item would be cash flow. So when we look at cash flow we take our operating income, our operating cash flow and then we start to take away capital spending and financing costs. Now this is where we get into how much cash needs to come in to the business to fund our operating losses and in this case we have positive cash flow in the year 6 just barely $130,000. We have a little bit of a dip in the 10th year that is to pay for the $5.4 million in upgrades but by the end of the plan year 20, we are generating nearly $5 million in the cash flow for the City. So we’ll look at sensitivity related to this in a minute. Now the last item. We have this measure that we call net cash. Because it is difficult to really identify a break-even for this case when you got financing of tens of millions of dollars going into the project, you got money flowing all around so basically what we mean is that net cash is defined as total current assets ( everything except my equipment, my capital fund) minus my total debt. So the top line is basically my cumulative cash flow which is basically all of my current assets. That bottoms at around $30 million range because you remember we borrow all that money in the first year (taking it out at 6 % so we do not take a chance that the interest rate is going to go up). So we draw down on that fund over time and we bring it down to $4.3 million. That is a function of cash on hand requirements as well as my bond reserve requirements. Then we grow cash balances but we have a little blip and then we grow and then we come down again in year 10 because of our upgrades. Cash grows up over the 20 year period to almost $54 million. Now the yellow line is my net cash because my pink line on the bottom represents my total debt. My total debt bottoms out between my short-term and my long-term debt, it bottoms out around $40-some million and then it comes up and in over 20 years it is completely paid off and my net cash goes


positive in the 14th year at a value of $6 million. So what that says is after 14 years if you want to exit the business, if you need to upgrade your plant, you are not upside down. It is not like you buy a Lexus and you say “I can’t afford this car payment I need to turn it in after two years” At that point you will be $10,000 upside down. This is going to be in the black in terms of the net asset value in the 14th year. And this doesn’t even include the value of your subscribers which in today’s day and age are going for $4000 per sub even as an over-builder. So the next thing we can look at is sensitivity analysis and basically what we did was we took a look at (and Karl is going to talk about this) what is the most sensitive variables in a business case and how those impact us and how bad they can get before we getting into trouble in the business case. And in this case we are looking at Internet price sensitivity. This is cash flow. Remember our cash flow went positive in the 6th year. Now what happens if we do a 10%, 20% and 30% discount on all of our Internet pricing. So we took the 256K from $30 to $27. We took the $40 from $40 to $36. This is the impact. If we have a 10% discount on all our Internet pricing we move our pay out, our cash flow positive year out by 2 years. So this says that Internet pricing is very sensitive because Internet is very high margin product and this is something you want to keep very close tabs on. But the rates that developed in business plan for Internet were already developed based on a 10 % discount to incumbent pricing. So when we look at service penetration sensitivity as it impacts cash flow, if we can get 10% more penetration we can go cash flow positive two years earlier. So we can bring that back to year 4 so that is a little bit of good news that is not completely out of the question if we get 10% more penetration. If we get 10% less penetration again we move it out 2 years and if you drop your penetration as much as 20% that’s a problem you need to do something, hopefully before the 9th year rolls around. So, and finally, the last sensitivity analysis for cash flow would be the bond rate. The bond rate right now is run at 6%. If the bond rate were to go up to 8% you would be moving your cash flow positive period out 2 years. So you can see that within a nominal variation the plan still stays intact. There is another chart I want to look at. This shows an overall year 20 view of your total current asset, which is basically your cumulative cash number. It says if penetration for my overall services say were 10%, at the end of the plan, I would be in the Hoel $48 million dollars. So you hope that more than 10% of the public signs up for this thing. If it is 20% the system basically breaks even over 20 years. If it is 30% which is close to what our plan is you are in the $51 million surplus range. With an additional 10% penetration, you nearly double your cash in the bank. So you can kind of see how this works. Basically what this says is the more people that sign up, the more they as citizens will benefit and this is really the point of this slide.


One of the things that I run into all the time, is that when we get into meetings like this, we have lot of people that have a lot of input and some of the input is constructive, some of the input is not. The thing that is probably the most difficult, is these negative, supposedly “objective think tank reports” like the Beacon Hill Report or something about Progress of Freedom Foundation or something like that. Well who really funds these think tanks are the people who don’t want these projects to happen and you look at the list of the people who fund the Professors at University of Denver. They work for the Bill Daniel’s Cable Pioneer School of Business in Denver, they’re Comcast, the Verizon the SBC, the Cox and so on. So you need to consider the source. And when you look at their claims the truth always prevails and this will hopefully head off some of these at the pass. With respect to the Tacoma system, it has been claimed that the cost ballooned to a $100 million for their broadband business. Well in fact, the truth is that they spent $60 million on their own internal data network to connect their dams, their power plants, their substations and everything else across the vast network that they use to serve many tens of thousands of customers. And only after that, did they seek $35 million to make coax extensions to build a hybrid fiber coax network to reach consumers and small businesses. Regarding Kutztown, PA,. they built a fiber to the home system. It is claimed that they missed their projection completely wide of the mark and actually they were within 95% of their projected numbers after their first year. I would say that is pretty good. Finally Paragould, Arkansas these are couple of examples of this information that floats around. The claim in one of these reports was that cable system auditor reported a net loss of nearly $1 million for the fiscal year 2001. The truth was that the loss was $263,000 and that included depreciation and amortization, both non-cash items and what it failed to mention was that Paragould offered then and continues to offer the lowest price cable services in the state of Arkansas. Their stated of goal is not to make a profit. Their stated of goal is to serve the community with low cost communications. Other efforts in municipal broadband exist. When Palo Alto started, I think they were by themselves, definitely not now. Dalton, Georgia launched fiber to the home in July of last year and they have currently have 33% penetration on video, 23% on Internet and 31% on phone of the homes passed and they compete with Charter. Bristol, Virginia is another Charter competitor. They launched fiber to the home in late 2002 had to battle tooth and nail to get there but are seeing 27% on video, 14% on Internet and 20% on phone. Marie, Kentucky, not a fiber to the home veteran but a hybrid fiber coax veteran nonetheless stellar results of 53% penetration for video, 40% on Internet and 30% on phone. And finally I just talked to Harland , Iowa and they have 82% penetration on video, 23% on Internet and 36% on telephone. I am not saying that Palo Alto is going to get 82% penetration of video. You don’t have that many video subscribers in the whole community, so we are not saying that. We are saying that the plans calls for 28%


penetration of video, 33% on Internet and I think that there are some people using Internet here, maybe more that Harland in Iowa, and 29% on telephone. So if you look at the results across the United States east to west, I think we are in the ball park. Other fiber to the home projects; Lompoc, California has made an announcement that they are going to go forward, Truckee Donner is going forward, Crawford, Indiana, Salso Oklahoma, Jackson Tennessee, Provo, folks in Washington, Reedsburg and 17 other cities in Utah. There is another item that gets thrown around quite a bit. It suggests that Palo Alto will have to go on bended knees to HBO, you would have to go hat in hand to ESPN, but that you are never going to be able to get the prices that all these other big cable companies get and you’re going to be priced out of market. So we did a little research. Comcast has 21 million subscribers. They are definitely the gorilla here. But Palo Alto, as part of the national cable Co-op would have 14 million subscribers under their belt. So how can Palo Alto with 14 million subscribers behind them be any less advantaged than Time Warner at 11 million Plus and Charter with less than 6½ and so on. You get my point. This is a complete fallacy and it is wrong to suggest that Palo Alto through the Co-op would be significantly disadvantaged against Comcast. I am not saying that they are going to get Comcast rates but to say that it is going to be material difference is just not the case, especially given where they stand. Last but not the least I want to address wireless. We address wireless in the business plan not to the level of detail that some had hoped. But let’s just review. Where does wireless fit with Fiber to the Home. Fixed wireless is basically wireless application that requires line of sight. They typically use 2 frequencies. in the giga-hertz range and above. You have macro and micro cell transmitters to homes and businesses where they have fixed antenna that is really required for a fixed line of sight. This is not needed for fiber to the home. This is what fiber to the home is for. To apply fixed wireless to a fiber to the home arrangement will be a waste and counter productive. Fiber to the home can do everything that fixed wireless can do, except 10 times better. Now portable wireless is very complementary to fiber to the home. Portable would be well. I got my PDA, I got a wireless card in it. I am going to walk around, I am going to sit somewhere and work. That’s not really mobile but it is more portable. So this is like Wi-Fi hot spots of community access points where you could allow for authenticated access to the fiber network via wireless needs. So this would be good for pedestrian speeds and stationary work spaces. It is not something where you are going to say ”fiber to the home user you are zipping down 101 at 80 miles an hour and put your PDA out of the window and get your email”. It is not going to work that way. But it would be very compatible with fiber to the home with some strategic


applications and at some locations. You can give Starbucks a run for their money or even partner with them. In terms of mobile wireless this will be nice but there are a lot of issues. Mobility really requires license spectrum that has non-line of sights properties. Something to 2 gig or below they can penetrate buildings that doesn’t have multi path problems. But the spectrum is being used or it is not available for the Palo Alto only footprint. The spectrum is typically auctioned off in BTA’s or very, very large blocks and it costs billion of dollars nationally. And the mobile broadband strategy is going to be driven by few players, Cingular bought AT&T and at the end of the day there is probably going to be two or three guys all the airways for mobile broadband. They will eventually converge but not for a while. Finally lets talk about the wireless graveyard. Mobile broadband. I remember in 1999 when Ricochet Metrocom came out, studies were talking about mobile broadband being billions or trillions of dollars. The billions to Ricochet were lost by the investors, me included. I am just a little bitter, and they sold all of their assets at auction for $8 million and that was a truck load of modems literally, a company bought them and they tried to do it again and it didn’t work. Fixed wireless, Sprint broadband spent a lot of money on license spectrum which is the way to go if you are going to do wireless, to offer fixed wireless services. Look at their website, they have not offered services in at least a year because they are not happy with the technology, they are not happy with the things they are seeing that are coming out and we can go down the list. Pacific Bell, Bell Atlantic spent millions on wireless cable licenses because they thought they are going to turn on the world of wireless cable TV, it didn’t work. Local multipoint distribution service 38 giga hertz point to point high speed wireless of fiber alternative in metro areas, Teletin and Winstar bad and worse, satellite, we all know what happened to Iridium, and Teledesic, Bill Gates and Craig McCaw are couple of other billionaires I don’t know exactly who is doing what. But they had this promise of putting up a 60 satellite constellation in providing broadband to cell phones. Well I guess they can’t do it now. Now they have to do stationary points and after a while fixed wireless system is really a wired system in the home at some point and I would challenge anyone that wants to push Wi-Fi to show me a revenue generating Wi-Fi operation that has a long-term potential. That is summary of the business plan and I will turn it back over to John. Ulrich: Thank you Neil. I would like to move into the other side of the discussion and that is look at the Risk Management. Everything that we do has a risk side of it and we have asked Karl Van Orsdol who is our risk manager in Administrative Services Department to go through and give an assessment from his point of view and Karl welcome and thanks.


Van Orsdol: Thank you John and good evening. As John mentioned we were asked by the Utilities in ASD to do an independent risk assessment of the Fiber to the Home Project. And what I am going to present to you tonight will be a very brief summary of those findings. And just a point of note that this risk assessment should not be considered as a substitute for a very careful and evaluative reading of the report that Neil and other staff members have done. What I am going to present to you is a very brief sort of summary of our results. The first aspect is our responsibility was to really look at stress testing of the numerous variables that Neil has included in his report on the Business Plan and to assess which variables were most important in impacting the bottom line. In our discussion we think of the bottom line as really the net cash after financing. That is ensuring that the project has sufficient funds after meeting its operating, financing, debt servicing and capital costs to fully repay the bond to have cash left over. Our assessment of this project was based on the various models that Uptown Services and staff in the utilities have completed. We did not go and build our own financial model. In this analysis we focused on the key risks on the cost side and the revenue side that would impact net revenue after financing costs. On the cost side we identified 5 variables and on the revenue sides we identified 2 primary variables that influenced the outcome. The first variable, the most important variable on the cost side, is the bond rate. Now the base case scenario that Neil presented assumes a 6% interest rate. However, if bond rates were to increase perhaps to 8%, perhaps due to a change of economic situation, then the net cash available to the project after all the financing cost were met would be reduced by $16 million dollars or approximately 29% of the total pre cash available at the end of the year 20. It would take bond interest rates to go up to 12.34% for the project to be just at the break even cost and have no cash after financing cost. Now if a bond for the fiber to the home was tied perhaps say to the Utility, we would expect that a bond rate would be in the range of 5 to 6%. If the bond was based solely on perhaps anticipated revenues from fiber to the home project,, we would expect an expected bond rate of 8% or greater. But in either case the bond rate will not significantly impact whether the project is a profit project or not. All the factors in the model stay the same. We found 3 main cost factors that significantly influenced the financial outcome of the project. The first is customer service. Now clearly in this module the customer service is going to be key to the success of the project. The current model calls for 7 customer service reps and so on as we looked at what would happen if it was perhaps 50% more customer service reps. This addition would result only a $7 million dollar decline in cash after financing in the year 20. Of the 2 hardware costs our sensitivity now also show that perhaps 25% increase in


network hardware cost would result in a 24% or $13 million dollar decline in cash in year 20. On the control box side , a 25% increase in cost might lead to about a $6 million dollar decline in cost but these hardware cost have declined in recent years so the numbers that are in the base case are most likely the highest numbers. In fact I think in the last year control box, cost has declined by about 20% and these costs were also known prior to the implementation of the project. So they are not risks in the sense that once the investment is made we will not know the outcome. We will certainly know these cost prior to going into the project. On the revenue side, my analysis is showed that the residential Internet and cable services and their penetration were the key factors in profitability. For example if residential area Internet penetration declines by 5% over what was in Neil’s model we would have a $13 million dollar decline in net cash or about 24% of total in cash at the end of the project. It would require a decline down to 19% of Internet penetration for the project to not to have sufficient cash to meet its bond requirements. Almost a 50% drop over that is what is predicted. Secondly on the cable side, a 5% decline in penetration would lead to about 20% decline in cash after financing at the end of the project. The break even number is 21%. So again almost a 50% decline over what is predicted in the Uptown models would be required for the project to not to have sufficient bonding to meet the bond interest payment as well as capital and operating costs. And then finally the technology risk. I think our review has shown that the competitive technology risk to this project appear manageable. Wireless and satellite technologies do not, are not poised to match the versatility that a fiber network could have. Both in terms of its band width, in terms of data security as well as in a constellation of services that can be provided over a fiber network including TV, Internet, security fire protection as well as a variety of utility services to enhance the customer use of electric and gas utility and to manage their costs. So that is a very brief summary of what we have done and I am certainly open to any questions and I will hand the floor back to John. Ulrich: Thank you Karl. I am going to move into the summary and recommendation phase. Always the question that keeps coming back is why embark on the next Fiber Phase. We have spent a lot of money. We have done a lot of studies and you can see a lot of summary of the work that has been done thus far. We have an experienced staff, we had a very successful trial, we have learned how to construct and manage and provide customer service and, while the trial included a very small number of people, we think it can be increased to include the entire city based on this plan and do well. Fiber is a long-term and reliable technology. It is not going to get leap frogged. We are in the position since we know how to install infrastructure and maintain it. The fiber will have a long life and as new customers want service or changes it, we will be available to


provide that service in short notice off of the backbone and the fiber system that would be constructed throughout the City. Fiber is supported by the strategic plan. Everything we do in the utility focuses around that and fiber fits very well within that plan. The fiber business case and business plan suggest, as you heard tonight, potential for business success. We find through the extensive surveys and studies that citizens feedback has been positive. People in Palo Alto know where to find us and to communicate well with us and I think we understand what kind of services would be expected of us. Vision of an expansive future for fiber in Palo Alto focused on services for customers not just for today but what can be forthcoming in the future. Is the City capable of providing competitive services? I have outlined before and as you know, I am extremely strong proponent for the value that utilities has provided to the residents. The community can look back as far as 1896. Again we are the only city in California that offers full service utilities. We have experience in providing all these utility services. We are about, I believe, the only city that has 24 X 7 not only emergency response in utilities but we can provide even minimal customer service in your home whatever you need it, whatever time of the day you would like to have it. We only work for the 65,000 residents and businesses in Palo Alto. We don’t have a complex marketing plan that that looks at outside the city. We have been successful and competitive. Those of you that have seen me and our staff during the energy crisis I think know what that is. We have a very strong tradition of customer driven programs and services again we are accountable to the community not outside stockholders. Interesting factoid is that utility revenues provide ongoing support to central city programs and services. Did a little math and over the last hundred years we have made and provided to the City $310 million beyond the cost of providing service and running the business. This is a bit hard to see but let me, many people say now why would we need fiber? I am really happy with what I currently have. If you currently happy with what you have I don’t think in the short run fiber is going to be something that would provide you something else that you need. But as soon as you have it your want goes to a need. If you just look at the typical DSL service , we assume you have that now that’s basic speed. If you had cable modem it might be twice that. If you are using your Wi-Fi down at Starbucks this is probably about half of what you get on DSL. These are round numbers. But with the system that we are talking about this evening and based on the cost and the services once you have it at your house you will a hundred times capability of what you would have had if you had DSL. Most of us will not need a hundred times. That is really a beyond the needs of many people. But once it is in, you will have the ability and if you have a business in town or you have a need for it you will be able to get that kind of service. Projected in to the future; DSL may be three times what it is now and cable modem ten times and Wi-Fi one and a half times and you got all this. And this sounds quite, it got a lot of zeros, ten thousand. So you got tremendous


unlimited basic capability with fiber to the home. It is whether we are willing as a community to put up the money and have the utility provide that kind of service. It fits within the utility strategic plan, customer satisfaction, investing in utility infrastructure, providing superior financial performance and again the unique advantage of a municipal owned and controlled service, hand delivered products in a competitive market. What citizens think about us doing it? Well the purpose of having an open communication as we are having this evening and as many community focus groups or neighborhood meetings we expect to communicate the benefits and the risks so that at the appropriate time you would be able to vote on it and to let the city council know how strong your interest is in providing this service. It was brought to the council as far back as 1997. We did extensive surveys and suggests 50 to 70% of citizens support the utility running a broadband service with truly value reliability more than anything else. Always on and speed are both important. High reliability equals low volume of customer service calls and complaints and we believe that participants trust us to provide this excellent service. Participants want to continue the service that is on trial. Our vision for fiber in the future is to sell services to pay for the construction and maintenance of the fiber system and let fiber to the home expand our abilities and the City’s service offerings far in to the future. Is there a fiber market in Palo Alto? We have the surveys that indicate that and it shows similar results 50 to 75% interest. We believe that our results have been discounted for overstatement. And discounts result in the statistics used in the business case by 30 to 36%. The point is that I think we have done our homework. I am continually asked is it is legal for us to get into the fiber business? I am not attorney and I won’t purport to do that but we have had very extensive legal review including attorneys in Washington, D.C. that work for APPA and have been doing this for other communities. Other cities are doing it such as in Alameda, other cities are in the process of pursuing construction financing and an appropriate legal path for Palo Alto would be developed if the next phase of Fiber to the Home is approved. Some aspect of this may require citizens approval. I think the point here is we are not going to chart a path or make a recommendation, nor would the City Attorney or the City Manager recommend something that was not legal for us to do when we get to that point. Can we operate it? I mentioned that this is an area that we have already demonstrated strong success in doing. We believe we are going to have extra additional expertise and will have those individuals here as needed. Are the construction estimates correct? They were made by experienced Telecom engineers, they are based on our design standards, based on the neighborhoods that


it would be build to. It has actually been supported now by the Provo actual bids and supported by the Lompoc and the Truckee Donner estimates that are very similar. It is also supported by informal discussions with other providers. As you can see though from our recommendation, one area to reduce risk is to expend the money to do a more formal design and eliminate that as a concern if it falls within the price that we are willing to pay. Potential risks. You will probably hear many of them this evening and you have heard some already. Competitor price discounts, actual cost of construction, how construction is paid for, participation levels turn out to be less than we expect and the venture ultimately fails. If you take the worst case scenario some of those were addressed in Karl’s Risk Management presentation. Our report talks about most of those, but not all of them. It puts a financial risk of failure into another report. We took a competitor’s price discounts, and price cuts over twenty years that will make cost recovering based on the three services difficult, but will save the community money in the long run. Short term competitive discounts are planned for in the Business Plan and I think are realistic. Will exact cost be known? When we prepare estimates and get bids the cost of construction will be known. If it is too high bids can be rejected. The project would not be started if the cost is too high. We are not asking for ‘let’s just rush out and do it.’ We have a recommendation on how to do this methodically and reduce of the risk before we are actually out there spending lots of money. Who will pay the cost of construction? Well everyone knows ultimately customers pay for everything that we do. The plan pays off the construction loan through the user fees. All operating expenses are paid through user fees. The project is expected to be self supporting. We have heard some of the details of how that would be done. Who pays if the venture doesn’t work? I think this is important for everybody to know. It depends on the financing. If you look at the Truckee Donner, it is based on broadband revenues only. In that case the project itself is the only risk. As you could see from Karl’s report and from Neil when you do project financing, the cost of the financing increases because the people loaning the money are taking the full risk of the business. If it’s financed by the electric utility then the ratepayers may have about 2% rate increase for fifteen years or about 70 cents per customer per month if the project fails. Now the assumption here is there is a salvage value and which is realized when the customers are sold but ultimately we are looking at this is the worst case. In the case of Palo Alto, the business and larger electric customers would have a considerably higher amount of cost involved. Again we are not going to recommend going forward without full disclosure of this and everybody understands where that potential risk might be.


We are also not making a recommendation that there would be any financing or any risk to the General Fund. Are participation rate estimates are accurate? Studies from the other communities that are moving ahead showed similar projections. Alameda has run broadband now for 3 years and has had excellent customer satisfaction and their actual deployment shows better results of 40 to 50%. How can we reduce our risk? Check out the financing options like Truckee. I think we need more work in that area to sort out the various options. Chart a path to minimize legal risk. We suggest in our report that’s about $70,000 expenditure. Evaluate our current business plan systems and specification upgrades that is probably a $70,000 cost, establish a partner and contract relationships. We have always been looking for partners that would be willing to work with us. We have envisioned an open access system. We have recommended the services in the business plan for other partners to come along and utilize our fiber system. Develop construction specs as I mentioned earlier and get bids. This is $200,000, of course the money will be spent at the beginning so it wouldn’t have to be spent later on. But if we give a firmer cost estimate for actually doing the constructions we will have a better idea of how much money you need to borrow. What does the community get for taking the risk? This is all going to be in the eyes of the beholder. But at least a $15 million flow back to Palo Alto per year for broadband services. Local Palo Alto service will return some of that to the City. A local control over the quality and cost of service, a locally owned infrastructure to carry the broadband services of the future and of course an additional asset to draw business and people and provide those kind of services within Palo Alto. Our next step - The staff requests the UAC to recommend that the council designate Fiber to the Home a top council priority in consideration with all the other things that are of high priority within the City. As I pointed earlier, this is going to take an effort by many members of the staff beyond just the utility organization to work on this. Have council approve electric funds expended for the next phase of project analysis similar to what has been done for earlier phases. Council to recommend public process for assessing community interest whether that is including a public vote, community meetings and other broad communication objectives. On the other side, we mentioned that if the council does not want to proceed with the Fiber then direct staff to develop termination protocols for the Fiber Trial. That is my last slide and I appreciate you bearing with me to go through that report. I want to make sure in summation, we spent a lot of money and want to


make sure we gave you a thorough answer to the questions that you have. We are available for Q and A and then on to the comments from the public. Rosenbaum: Thank you John, Neil and Karl. That was an outstanding presentation. I would like to welcome Dexter Dawes our fifth commissioner who is now with us. Couple of things I don’t believe we have a copy of the slides from Neil. Could those be made available to us? And once again I would ask any members of the public who would like to address us to please fill out one of these forms which are available at the front and just give them to John. Dexter what I had suggested at the beginning was that we would hear the staff report which just concluded and then perhaps for a short period maybe half an hour entertain questions from Commissioners to staff and particularly to Neil. Neil will not be with us in person tomorrow although he will be available by telephone. Then we will hear from the public and depending on the time we will either decide whether the commission should discuss the item tonight or continue the meeting till tomorrow night. So I think we are now at the phase where if Commissioners have questions for staff this is the opportunity. John. Melton: I would like to ask Karl on his sensitivity analysis. You tested the sensitivity of the penetration rates of both Internet and cable and sort of came to a break even point or zero cash point if each of those rates fell. At what point would they reach a zero cash? It seems to me that there is some likelihood that those penetration rates might move in tandems. I wonder if you did a dual test that said how much can those two rates fall to reach a zero cash point. Van Orsdol: We did one but I think Neil has actually more up to date one. Let me… Shaw: That was a sensitivity that I flashed up there. Basically we took the penetration down for all services. The triple play we took them down 10% then we took them down 20 and then 30 and if there is another question then I can flag it and we will go to that. Rosenbaum: John do you have any other questions or you are waiting for this one? Alright. Do we have other questions? George. Bechtel: As you suggested I am just going to ask questions of Neil because Karl and rest of the guys we’ll have on tap later on. But Neil, you have changed, you talked about changing the penetration rates compared to what we talked about 9 months ago last summer. Were those new penetration rates included in the financial summary that we have in our book today? Shaw: Yes.


Bechtel: Okay. Another thing I thought was quite interesting was your talk about Tacoma. That it was a successful system and I guess that I had also read where they would have spent sixty five million dollars anyway for a network to collect data from utilities. I find that surprising because at no time has John come to us and asked us to spend that kind of money in connecting our systems. So it seems sixty five million dollars for communication network is sort of high. But if that were the case that would certainly justify what we are doing, maybe they have a much larger network than I think about. Do you have any more information on Tacoma? Shaw: Karl has a lot. Van Orsdol: Actually yes. I spent several hours talking to Tacoma over the last week about some of these specific issues and several reasons why they spent sixty five million to do this. First is that they have four hydro generating plants. Secondly they have a population of 195,000. Third they have an area covering approximately 60 square miles and they have their own scheduling operation. So they serve the same function that NCPA does for us in the electricity side. So they needed much higher levels of communications to operate the SCADA system to integrate all this. They also wanted to move into the wholesale energy trading business and that required higher levels of band width and they wanted to optimize their hydro resources. So those are the reasons why they wanted to initially go forward with the utility side that was about $60 million dollars. There was also a couple of other issues. They stated that there is some development when they were going through this in 1997. There was a new development going on in Tacoma and because of the physical irregularities as to where this development was going it was hard to get, impossible to get any kind of band width service from the incumbent providers. In fact some were having difficult times in getting telephone service. So the utility decided that in addition to building up this service that they needed for their own internal communication and to link the universities in those city, they needed to expand the service out to the public in order to meet these other service areas of the community. Bechtel: Good. Thank you Karl. That was helpful. Maybe one more question of Neil and that has to do with the content and the ownership and so on. You were saying that we would probably have access to it. But what do you think of the possibilities of companies like Comcast buying Disney and controlling the content? As I remember in the write-up , it is not very clear where the FCC or the Telecommunications Act, I can’t remember maybe it is a Cable TV Act of early 90’s said ‘No’ you cannot get have a monopoly on a content you have to make it accessible. Do you think that as we look forward we are going to have the availability of content even if content is owned by cable providers?


Shaw: Well. Time Warner is a good example of that. They own a lot of content and there is still a lot of independent content owners out there. I would think that it is difficult to say. I don’t see how Comcast could buy up Disney and then shut off everyone in the cable loop. That is 14 million subscribers. They would have to do the same thing as Time Warner and I think they find themselves in front of a senate subcommittee very quickly. So but to be honest I couldn’t say what the future is going to hold for ESPN rates, whether Comcast owns Disney or not. But there is definitely a ground swell of anger and resentment towards some that is going past the cable TV providers who are now pointing the fingers at the programmers and both the providers and programmers are on Capitol Hill a lot more than they would like to be of late. But I don’t have a good answer for you Commissioner Bechtel. Bechtel: But I think that’s at least a more positive answer then I might expect. Thank you. Rosenbaum: Neil do you have the answer for Commissioner Melton. Shaw: Yes. I do. This chart reflects the net cash not only in the 20th year but over the entire plan period and this blue line represents the base case of penetration which was the 28% video, 33% Internet and 29% phone. Basically what we did was we went in and dropped those three rates by 10% each and that takes us from a net cash value of $53.8 million down to a net cash value of $41 million. So we are looking at a drop of around $17 million dollars. And then we come down to 20% we drop another $40 million We still come down to a net cash value in 20 years to $20 million. So it is a precipitous drop from $53 million but it is not a disastrous case nonetheless. Heitzman: Neil would you mind showing the bar graph that you had that does the penetration in the 20th year. To me it is clear. The last one that you showed. Shaw: Okay. Basically this reflects if all the services were at the same penetration rate. If you had 30% penetration on all three services your cash balance at the end of the plan will be $51 million. If you penetrated 20% of homes, your cash balance will be $2.7 million and so if you only had 10% it would be $48 million in the Hoel. So this is a little bit different take on things. This is a 33% drop from 30% to 20%. So that is the answer. I don’t know if it answered your question. Melton: Yes. Shaw: Okay.


Rosenbaum: Do we have further questions? Elizabeth. Dahlen: Neil actually on the last chart that you showed. Is it correct that with the triple play option that the base case goes cash positive in the year 14? Is that what I saw in that last chart? Shaw: It wouldn’t go cash positive. It would break even in year 14. It goes cash positive in the 6th year with debt service, EBITDA goes positive sooner than that. So it depends on the measure you are looking at. So EBITDA goes positive in the 3rd year you put in depreciation it goes out to the 4th year. From a cash flow perspective in the 6th year. Dahlen: I guess I am referring back to the chart that showed the three triple play numbers. Shaw: Okay. Dahlen: Right before the last question. While you look for that let me just ask a couple of other questions. What is the penetration of Cable TV today in Palo Alto? We have in some of the reports it does mention that satellite has about 15% penetration. What is the cable TV penetration? Heitzman: Okay. Do you have the number handy? Shaw: Somewhere between 46 and 50%. Heitzman: I think if you count the satellite it is around 74% as I recall. That information was available in the business case report where we had roughly thousand respondents then we added up projected across the community. I believe 74% was a total of everything cable and satellite. Dahlen: Of the Internet users in Palo Alto what percentage of Internet users are paying for today? I am really referring to the residential market for high speed Internet access that is greater than 2 mega bitts per second. What is the penetration of that? Shaw: The only one that would be available would be Comcast if they have delivered three meg here, do you have the research there? Heitzman: I don’t have it handy. We do have the numbers I will have to go back. I can give them to you tomorrow night. I have to go back and pull them out of the original report. It would, as Neil said it would, have to be the Cable modem users


percent, I don’t remember exactly the total for broadband would be about 50% for Palo Alto. I can give you the exact numbers tomorrow night I just have to pull them out of the report. Dahlen: That would be great. What is the speed limit of DSL today? Shaw: Depends on how far you are from the central office. When I DSL from my house, I’d be getting 300K possibly. Dahlen: In Palo Alto? Bechtel: I can give you an answer. Every time I’ve checked here with PacBell it’s over 1 meg. Audience member speaking, (cannot hear clearly) Ulrich: Excuse me, if you are going to make a comment, you are going to have to come up and speak into the microphone because every word that is uttered here is transcribed and we would like to record it. Shaw: I think that the answer is here. Distance dependent the maximum currently on a DSL is 6 meg I believe downstream and not that much upstream. Cable Modem’s Comcast is going on a national program to build 3 meg down and much less up. Dahlen: I want to thank the member of the audience for the additional information. I have a question with regards to the staff, the hires that are mentioned in the plan, particularly when it comes to sales and marketing. There is a good amount of the plan devoted to the need for sales and marketing and a fair amount of money would be put into that effort, but I could not find which individuals are going to be hired in this area. what is the projection? I mean who is going to be taking care of sales and marketing and how come we don’t have individuals mentioned for that role. Heitzman: Neil in his plan does lay out a table of types of skills and employees that would be hired. If we were to move forward, there would be an assessment as to what skill sets we need and so forth, who would be hired in each position, whether we hire from outside to bring in talent that we don’t have or whether there is existing talent in the city for some of those positions and so on. So that would be an implementation issue as to who you get for what position and what skill sets they have and where they come from. There is a Product Manager, there’s a General Manger, there’s a Technical Manager in there. I believe the is a lot of technical staff so forth so, and there is an issue of combining with existing staff so


you utilize existing staff where possible to support this. There is an intermingling of existing staff and new staff to comprise this system and there is also the possibility that you would contract for some of the service and not all of them would be hires. There are hires in the plan but that does not mean you’re having to hire all those people, some of those people could be contracted services as well Dahlen: It just seems from the plan that there is a very important role in terms of operating this business, in getting it off the ground. When I look at the hires in exhibit 27 I don’t see a Sales Manager or… Heitzman: Is there a Product Manager there - I believe there is? Dahlen: Well and I guess I would assume that a Product Manager is going to be really busy tracking three different business areas. Heitzman: That is basically for developing product and establishing marketing plans and so forth. Ulrich: I think it’s important to get the estimated cost into the plan. I would agree with you that we are far from determining the exact positions and how we would do it, but all of those would be very critical. I could not over emphasize customer service and product development because the whole plan hinges on a market penetration and selling the product in a very competitive environment. Dahlen: I agree, that does seem to be a critical role, I just was surprised to not see somebody under that, in that table. I just have a final question with regards to the section of the report that deals with alternative technologies and mitigation of risk. Given that cable is one of the, or perhaps the prime competitor in this sector, I thought that, it seemed that the report did not give a tremendous amount of input and information with regards to the technical potential of Internet over cable. The same would hold true for DSL. I see that a lot of input was made with regards to wireless but I wondered if you have any feedback on that and why that wasn’t mentioned more in the report? Shaw: The assumption is that the cable TV infrastructures in Palo Alto has recently been upgraded. Wall Street believed in the Cable Companies and their current upgrades, based on their current plans, to deliver Cable Modem services and the current generation of Cable Modem Services. To go much beyond that , the Cable plant is going to require much smaller node sizes, it’s going to require much more investment in fiber beyond what Comcast is going to be willing to deploy in Palo Alto. So on the cable side, they are struggling just to come up to meet the 3 megabit limit that everyone else has had for many months. On the


telephone side it’s a little different. SBC has had project Pronto in place for the past three years to get DSL fiber connectivity to the home to reduce that DSL loop limit. Then again, DSL and its higher bandwidth incarnations like VDSL and things like that just can’t compete with the capabilities of a 100 megabit intranet with Fiber to the Home. It is noted that we didn’t have to spend as much time talking about the incumbents as we needed to, we’ll do more of that next time. The assumption was that on an investment perspective that they wouldn’t be able to afford to invest what it would take to compete with an all Fiber infrastructure. Rosenbaum: Elizabeth, I might interject with respect to your first question about video penetration, the one hard number we have is that Cable Co-op in its last years of operation had 47% penetration, numbers that come after that are based on survey results. Dexter? Dawes: Thank you Mister Chairman. I might also point out that Cable Co-op covered more that Palo Alto so we may have a chicken, a scrambled egg problem here in terms of other cities involved. Rosenbaum: No, I think that the 47% referred to just Palo Alto customers. Dawes: Okay, Thank you. I have a couple of questions. I had told the staff that I would have to be late today and I may have missed some things that I will ask about and, if so, I apologize and just go on. In this analysis I can’t find where our existing fiber ring is, I mean we have a business with revenue and cash flow which varies year by year. It had about eight hundred thousand dollars positive cash flow last year. It’s a pretty good start to expand and its also been pointed in various reports that these communication systems are important for inter, intra-city utilization which is what it was built for. But has also built up a nice business besides that. Is this in fact included in these financial projections that we have. Heitzman: I think I can answer that. The place where that would come into play would be the construction issue. The engineers that came out to Palo Alto to examine the field and so forth did look at our Dark Fiber infrastructure and would consider where it could be used in the build out of the Fiber to the Home. Now there is a limited application to where that backbone can be used in the Fiber to the Home build out, in that in some places it is utilized for other services and some places we want to leave some room for it. They did consider it’s existence in their design criteria and design estimates. Dawes: I understand, that’s on the design side. But I’m talking about on the financial side. Is it assumed that this business will carry over and we will have the revenues from the business that currently buy Dark Fiber from us and is it swept up into this financial analysis?


Heitzman: No, its not swept up into this analysis. Dawes: Is it assumed that will just die and go away? Heitzman: I believe that service will still be used many of the current customers because it’s a different level of service than FTTH would be. They have their own particular needs and they want to establish their system independent of this system. So in many cases it’s not going to be affected. Some of the lower tiers of it would be affected. Dawes: But what I’m getting at is this in fact perhaps a financial contingency, positive contingency that’s not included in this analysis? Heitzman: Yeah, I believe that’s correct. Neil will correct me if necessary, but my review of the model is that the business part of this revenue stream is very much underestimated, it’s very minimally estimated in the business plan. So there is some potential there that isn’t rolled into it. Dawes: For many of these meetings I have made a point of the business uses and particularly because there is a potential that business could pay additional monies through their rates and because businesses contribute over 70 percent of our electric revenues, they would pay a vastly disproportionate measure of the under funding that would come by virtue of lower penetration. I have encouraged staff and Neil to include provisions, options, enhancements that would make this attractive to small and medium size businesses. I think that my assumption is that T1 lines are five, six, seven, eight hundred dollars a month. I don’t know what the cost is, but it’s pretty big bucks in comparison to FTTH business rates. This can be a very positive thing for local businesses. The objections to having the possibility of higher rates would be tempered greatly. So has this offering been tailored to these kinds of people? Heitzman: The is two tiers on the Internet service are business tiers. We have recently done a business survey so we are aware what business, 86 respondents, I believe a hundred at this point, respondents) type of service they are getting currently. These two tiers are very much in the mix based compared to what they are getting at a very attractive price. So the tiers that we have showed here are not necessarily the limit of what we can do. We can certainly add other tiers and so forth to attract businesses. We have recently have gotten some information from survey work on businesses and believe that the tiers are right. They would be very attractive. The responses of the businesses when asked whether the city should provide these services was very positive when they felt they would get a discount. What you would expect from a business, right?


Dawes: Thank you, I appreciate that and I urge you to continue to develop those benefits for businesses. Next question deals with the financing side which is still pretty murky in my mind. To my recollection, Truckee Donner used, in effect, commercial financing sources. It was mentioned that they did not encumber electric revenues to do that. If in fact we go down that path, not use tax exempt bonds, not make it a part of the electric infrastructure, it changes the cash flows. It changes the expense side of our situation and hence the curves that Neil drew for full payment of the indebtedness and the time the system turns cash positive. Is it the intent as we learn more about our potential for financing that this would be plowed in? How do you plan to address that? Ulrich: Yeah, this is one of points that I addressed during the presentation because Truckee Donner is one that tells us they have explored and they feel that they are going to be able to finance it without revenues from any other source except from the sale of services on the Internet. Dawes: So that’s not a done deal, it sounds like. Ulrich: Well no, nothing’s done till we see it. But it’s an option that apparently they have been able to do. In addition, Alameda, is going out for refinancing as they have a business that is already making money. They are able to get financing without depending on revenues from their electric or any other business. Dawes: They had a healthy down payment from their diffusing their portfolio which we don’t currently have. Ulrich: Karl will mention that a little bit more, because that was addressed in the risk assessment. Dawes: Fine, I’m sorry I missed that part. Ulrich: It’s alright, we like to say it again. Van Orsdol: If you will turn to slide 16, I addressed that specifically in terms of bond rates. If Palo Alto were to issue a bond tied to the utility we would expect the interest rate to be in the 5 to 6% range. And our conversations with bond council would be if we decided to have the bond based solely on the prospective revenues of the Fiber to the Home project, we would probably expect an interest rate around 8%. And if we had an 8% interest rate that would decrease the twenty year, year twenty cash, free cash at the end of the project by sixteen million dollars or about 29%.


Dawes: Thanks. Rosenbaum: I have some questions or perhaps comments for Neil on some of the numbers in the business plan. If we look at page 11 of 85, do you have a copy Neil? I’m looking at exhibit two, labeled incumbent broadband Internet offerings. The data in that table is outdated, to the degree that it figures into financial projections I think it really ought to be corrected. So do you have the table in front of you? Shaw: Exhibit one? Rosenbaum: Exhibit two. I have it on the bottom of page eleven. Shaw: Okay. Rosenbaum: Where you say Comcast up to one and a half megabits, they now are at least advertising in this area that they are offering three megabits, but more importantly with SBC, they have pretty much abandoned the basic tier and their standard plus tier is now available for $30 a month with an annual contract which is something you acknowledge on page fourteen in a brief comment. Shaw: Uh hum. Rosenbaum: SBC has also introduced a new tier that provides three megabits and they are charging $45 a month for that, I assume they did that to compete with Comcast which charges $43 for their three megabits. So I think it would be helpful before this goes further to have that table corrected. If we go to page fourteen. That’s in the first paragraph that is where you mention that in terms of bundling that SBC offers the 29.95 a month service and its always available with a one year contract. If we look at page 24, exhibits nine and ten. I found it hard to correlate those two exhibits. You define what you mean by low, medium and high tiers in exhibit nine, but then in exhibit ten you introduce something called ultra high which isn’t well defined, and I’m not sure what you were thinking of for what’s called medium DSL because I think you had yet another chart in one of you view foils that you showed us tonight, I think that you were showing that 2, 4 and 6 megabits per second would all be priced at $39.95. Shaw: No, it must have been a typo it should have been that 2 would be $39.95 and 4 would be $59.95 and 6 would be $99.95.


Rosenbaum: No, I’m talking about the proposed rates for the city, not the SBC rates. These are city rates that are proposed city rates here. I’m looking at the CPAU column. Shaw: These rates are what, if the presentation did not reflect these rates, I apologize, but these are correct. Basically the low would be 256, the medium would be 2 , the high would be 4, the low business would be 6 and the high business would be 10. Rosenbaum. And the Ultra High? Shaw: I don’t know, that’s 4 I guess. Rosenbaum: Presumably that’s your 100 megabit intranet, that’s what I made the assumption, is that correct? Shaw: No, all of them would have 100 megabit intranet. I mean the issue here is that we had a few too many cooks in the kitchen on these charts. Some people didn’t want tier names, some people didn’t want rate speeds, so it’s like lets call it high, low, medium, lets call it ultra high blah blah blah. So basically what we are looking at here is five tiers, the top two tiers would be assumed going towards business, and the lower three tiers would be going towards residence. In reality in a market like this you are going to have some businesses take the low tiers. So in recent studies we have done away with the low, the 256 tier and we have gone 2, 4, 6 and 10, starting at $39.95 and we’ve talked about to address the rate issue, SBC is doing a promotion, $29.95 for an annual contract and the fine print says that your rate’s going to go up to $59.95 or whatever or what have you, in the thirteenth month. Now it’s yet to be seen if they are going to do that, if they do that, they are going to have some problems. But we do build in, as I mentioned promotional discounts over the first five years, of up to 20% and then ongoing 5% operate card forever. So I’m sorry commissioner Rosenbaum that exhibits nine and ten are confusing. Rosenbaum: I’m just suggesting that they be clarified before this report goes further. With respect to SBC, nobody knows, they do say that they will, if you want to sign up for an additional annual contract at the end of the first the annual contract you will get the annual contract rate which is currently $30. Then one final comment. On page forty-two. The third paragraph under “B” you make a calculation of dollars per megabit, per second and once again it ought to state that Comcast provides three rather than one and a half megabits. Shaw: What page is that on?


Rosenbaum: That is page forty two, “B” the third paragraph. Shaw: Okay. Topete: Thank you commissioner Rosenbaum, if I may make some clarification. Rosenbaum: Yeah, why don’t you identify yourself. Topete: I’m sorry, Manuel Topete, Projects Coordinator for Telecommunications. I did some research, thirty-six hours old at this time and this is basically what Pacific Bell is offering and SBC. For 384 kilo bits down and 128 up, $29.95, one year commitment. Now they have a special offer right now, if I sign with them tomorrow, I can get 1.5 down and 128 up that would normally go for $49.95 at $29.95 for a year, but the clarification is there, after a year I would have to go to $49.95. Now they are also advertising 3 megabit tier with a 128 up and they are offering this in limited areas. It needs a little bit of research on the technology since the limitations are physical for this type of service. It has to do with the usage of proxy servers and compression software, proprietary compression software. So the 3 megabits are not for dynamic down loads but rather for cache or data that has been cache in proxy that surrogate servers in the network. So in essence what they are offering really is 1.5 down and 128 up at $49.95. Rosenbaum: You don’t believe that when they say at the time you sign up for twelve months, you can get the twelve month rate? Topete: I did ask about that and the clarification was it is to attract new customers, if you are a new customer you will get it, if you are just with us after one year, your rate will goes to $49.95. That is something I have experience with. DSL, with wireless and with cable modem and now again with DSL, it’s always the same thing. Rosenbaum: Thank you. Alright, it’s now nine o’clock, we’ve got, I think we’ve got fifteen speakers. Colleagues would you like to take a short break, and then listen to the public? Why don’t we do that. I would anticipate that the commission would finish its discussion tomorrow night rather than try to do it after listening to the public tonight. Why don’t we plan that we will after hearing from the public we will continue the meeting to tomorrow night? Karl? Von Orsdol: I’m sorry to interrupt, I just want to fully answer the question Mr. Melton asked earlier, I didn’t have the numbers at my finger tip, it was a 33% drop in both Cable and Internet subscribers would lead to a zero cash after financing. Rosenbaum: Alright, let’s take a short break.


Break Rosenbaum: I would like to continue with the meeting please, would everybody please take your seats. Alright we will now hear from members of the public. I apologize for being as late as we are. I had not anticipated that the first part of the meeting would take this long. Indeed our first speaker has had to go home, that was Andrew Johnson the Vice President of Communications for Comcast but he has left us with some written comments which we have in front of us. As you come up to the microphone it would be very helpful if you would clearly identify yourself, every thing we do is recorded and the minutes and all the names and information depend on what come through the microphone. So we are going to start with Gary Lindgren and Jerry Schwart will be our second speaker. And I would encourage everyone to be as brief as possible. Jerry Scharff: I’m Jerry Scharff and I live on Laguna Way in Palo Alto. I wanted to support commissioner Dawes in his desire to have business directed services and I have some experience in this area. Very often it’s not about equipment. The idea of reliability; these people or business many times have tremendous investments in what they do, to make this a critical service requires that the Utility have a mentality and some people who really are focused on what business wants to do. Business can pay a lot of money, as you said they are at high risk as well. I think that with the proper service structure it can easily be a significant money maker for the city and I would like to encourage that. Rosenbaum: Thank you, Gary are we now ready? Gary Lindgren: Gary Lindgren of 585 Lincoln in Palo Alto. I have a couple of comments on the Business Plan. First, I suggest adding a few comments on the design concept for the phone and Internet service. Really in the plan it just says how well people are going to be served. What is the design concept? Is there going to be just one fiber that goes by each home and you pick off some service, or is each home going to have an individual fiber that goes back to a central office. I’m not sure and it doesn’t say at all in the business plan. I’m not looking for design of course, but just to get some idea, some comfort level as what the thoughts are. I’m sure Fiber to the Home phone service really shouldn’t be compared directly with SBC’s phone service, you know across the street they have this huge building there, I’m not sure were talking about phone operation that ‘s similar to that. And a very important question, is there going to be a 911 service and what happens in the event of a power failure? I think those are important issues that need to be addressed.


Then let’s see, Dick, you already addressed exhibit 2, I’ve got a table that has a lot more information here. This information comes off of a website DSL reports and this is up to date information. These are all ISP’s that serve the Palo Alto Area and as it was mentioned, SBC is offering some special deals right now and a lot of these ISP’s really have SBC backbone service except for Convent. I personally have the one Sonic.net and they have the service, the special offer for 6 megabit down and 608 up. I signed up for that for at a special rate for one year at $44.95. If you test it, at least for what I have right now with past week, it’s maybe about half that. It’s from 1.5 megabit to 6, so you know they gave me what they promised. That gives you a little bit of an idea of what real stuff is right now. Then, let’s see, then for alternative technologies on page 28, suggest, you discuss 4 G Wireless Technology as envisioned Flarion Technologies. That’s something that there’s going to be, Verizon is going to be doing something on the east coast, I think the Washington area, a demonstration program and that might be good to add some comments there. Then exhibit 24, page 63. That suggests that the per user revenue will increase with time, I think that competition is going to be pretty strong and its going to be hard to increase rates if that is what’s implied there with that table. A very minor thing, the last thing, the paragraph on network operations center talks about, it says a Windows NT. That’s been obsolete for several years, change that to Windows XP Pro. Rosenbaum: Thank you very much. Ulrich: Mr. Lindgren, could you leave your documents so we can put it with the record if you don’t mind. Thank you. Rosenbaum: Wayne Martin to be followed by Bob Evans. Wayne Martin: Wayne Martin 3687 Bryant. I dropped off some handouts for you folks to look at. These came out of the historical file at the library, the first one is the new rates schedule for Pacific Telephone for 1948, you will notice that a single line is $3.75, today a single line change is $10.00 and change, well it’s almost $11.00 or a 400 percent increase, in 1950 when mom toddled me off to the store, I took a quarter and I got a loaf of bread, today I take twelve to fourteen quarters and I get a loaf of bread, many of you remember a gallon of gasoline was about $0.08 in those days, now it’s about 20 times higher. A telephone line in America is one hell-of-a-deal and people who have grown up under the aegis of the American phone system have the best phone system in the world, the idea that they are going to start moving away from it because someone say’s that they can save them a dollar or two with a no name telephone company is not likely. I encourage you to think long and hard about that as you go forward.


Second page is a picture from 1951 where Pac Bell puts 120 down in a day to help Palo Alto wire its town. I don’t know, I mean in 1948 and 1951 south Palo Alto as I understand was not part of Palo Alto proper, so I don’t even know who wired it for electricity, but Pac Bell was here to wire it for phones. The last picture is an example of a man, a guy named Fisher using a car phone in 1948, the phone company has always been at the forefront of innovation, I remember California in 1950 and 1951 with Broderick Crawford in Highway Patrol, but it seems that people were using car phones long before that time. I think that the business plan has a number of errors and omissions, I think that there is far too much boiler plate and not nearly enough substance, at least in the document on the website. An example, Comcast channel lineups don’t match the website. I found what I think I found what I think is about a hundred more channels on the Comcast website than what I saw on the plan. The business plan claims there is not much ethnic programming, yet you can find channels for Palo Alto that include Italian, Russian, Chinese and Hispanic programming on the video and most of that in digital radio channels. Terms of alternative technologies, SBC has now added a bundle with satellite Ecostar in early March that doesn’t show up in the Business Plan as a competition and also the French hardware developer Alcatel is now touting video delivered through DSL. And to answer the question about DSL speeds, a company I know of two years ago had their DSL product running at 12 Kilo or Megabits downstream. Another point. An issue about being owner operators, I checked that with the city attorney, and according to her, the Utility is simply another face of the municipal corporation known as Palo Alto. I asked if the assets of the Utility were sold would the proceeds be distributed to residents as in the case of Cable Co-op? The answer was no. So I don’t think we are owner operators, what we are, our only actual link to the municipal corporation is our ability to vote for city council members. The issue of the telephones, I was as an army officer was in the DMZ, just south of the DMZ in Korea as a company commander of a cable line unit that had high reliability, high availability as its missions. So I always look to these issues when someone talks to me about telephone companies. When I saw the name E-Tel I had never heard of them for the potential partner for the city’s telephone operation so I looked them up on a website. It seems that there is a mention of them in a Kentucky PUC posting in 2002 as having a 600 line user base in Monroe, Kentucky. I couldn’t find out any other information about them other than they did have some additional business with Southern Bell and so they presumably have a larger user base now. Doesn’t seem to me though that that organization is going to be able to compete at the name level and the branding level of SBC. POTS over fiber has been hawked by a number of people as being a higher quality, reality is that because it’s linked to the power grid at the NID level as well as the head-end level, it will never have higher stability than the power


level. Most of the current battery lives right now are 8 hours of standby-by when the grid goes off, two hours of talk time. So, if you start looking at the outages you will find that as soon as you use your phone or any other part of the unit for any period of time during a power outage you will loose your phone. Voice over IP which is another way people envision using this, is a double whammy because not only does the NID need power, but also does the PC and any other information applications that actually would be accessing the net doing telephony. Another issue that is very important to me is a disaster management plan, I have seen no evidence of it in terms of backup generators, fuels and personnel. It seems to me that since we live on a couple of fault zones I think that people have heard of the Hayward Fault and the San Andreas Fault that we have some reason to believe that disaster management is something that should be on our agenda. 911 service is a problem, I suspect over time that 911 through fiber issues will be worked out but as I understand it at best you are going to get a connect to a 911 but the kinds of features that are built into class five switches such as the ability to determine the location of a phone simply by it off hook by calling 911 won’t be available anytime soon. I couldn’t tell from the business plan if this partner would be a registered CLEC under the auspices of the California PUC or not. I saw some lists for services that generally are built into the class five switches and from doing my research there about 30 or 40 of these I saw 6 or 8 in the business plan and so business that might be interested using some of these switch features are currently have, no provisions have been made. I couldn’t get any sense out of the business plan how SBC or Comcast would respond to the targeting of their business such as 29%. I can’t believe they are going to roll over and play dead. Yet they just seem to see this year after year increase in business without any response. Point of order is that from looking at various websites the Fiber to the Home website claims that somewhere around 300 thousand, 200 to 300 thousand homes have been passed to date. FCC website seems to think it’s 500 thousand and the number of people who are actually connected to this service seems to be 130 to 180 thousand people in the United States. As another point of order the FCC claims that there are 109 million homes, 180 million access lines and 140 million cell phones. So you can see that this technology has not really taken off. Back to the disaster issue, if you look at the electric grid outages in the eastern United States large sections of the county are routinely without power for 30 days. Ice storms and hurricanes rip up the power grid pretty badly, this means that people will not be able to depend on this technology till some other form of power comes along and while it may not be necessarily important to Palo Alto at the moment it is important to the fact the technology is not going to grow at any great rate until this powering issue has been taken care of. And another point of order about the system rebuilds, the class five switches that were installed around 1980 are beginning to end their lifetime. Class five switches are fairly expensive it is


the backbone of the switching network, and so if in fact that 20 years is level of extent for those switches it seems to me that whatever we use, collectors, d-slams whatever the particular technology is probably not going to have the level or lifetime of a class five switch and people are going to have start asking when is this stuff going to have to be replaced and where are those replacement numbers going to appear in the business plan. Thank you. Rosenbaum: Bob Evans, followed by Jeff Hoel Evans: Bob Evans, Galen Avenue. I also own and operate together with my partner the Fiber Internet Center of Palo Alto in town. I will get back to the inaccuracies of where the $2 million dollars is going to go that you are generating now from the Dark Fiber after I bring up the fact that this plan is really, really full of a lot of great generalities as these people have pointed out and its missing details. These guys here that just spoke also just mentioned that its missing details, it’s missing a lot of them. We have a hundred year plan to put the lines in the ground, this doesn’t talk about any additional cost to move the fiber, to keep the fiber going as we do things. And how are you going to move that into the ground after you hang another wire on all the poles, so that’s a big detail that’s not in this plan. I mean, I bring this up because I have a pole in my backyard that has termites in it and they want to replace it. My wife said, get them to put in the ground, so we called, we also talked to the neighbors, the neighbors were also willing to put up money. How much to put the pole in the ground? Four phone calls later my wife comes back, the guy told me to just forget it, it’s going to cost millions to put that pole in the ground. If it’s going to take us 100 years to put the poles in the ground and we start with north Palo Alto first, this plan does not address any sort of roll out for how we go hooking up the fiber and which house go first and which direction and how long that’s going to take. If it takes 20 years then the numbers in this plan aren’t good because they pretty much look like and they appear to be based on the fact that we can quickly wire up all the homes. Well if that’s true, then my experience in business using Dark Fiber, sad to say, I was really, really misdirected myself when I started the company to begin with. Across the street from an office that they sit in on a daily basis we have a customer that wanted fiber and we had to go to all kinds of free space optics because it was going to cost $20,000 to pull a fiber optic cable in front of one of the buildings to the building adjacent to them. This is the utility building that there is a fiber splice point in front of. The average price I have seen, in fact the lowest price I have ever gotten a quote after I pay my $500 for the engineering study is, first I don’t know if all of us will have to submit a dollar amount for an engineering study to go underneath our roses or how ever we are going to pull this thing in, but I pay $500 right now for a study to see if a business can be connected and the lowest price I have ever seen when the fiber runs down the street and in front of the


building is about $10,000. So if we can do that for $10,000 I really challenge the economics of being able to roll this out everywhere when we are supposed to be pulling down the infrastructure that we going to hang this on and putting it in the ground at the same time. So this has a lot of generalities, that’s just one big gross oversight that I see here. The other thing that I would like to point out is most of these towns that we listed up there with the exception of a few, were all lacking infrastructure. Tahoe Donner wouldn’t want to be putting this stuff in if they could get some decent phone service up there to begin with. So they are looking for the citizens to go ahead and put it in. Here we have gentleman who gave us a nice list of all the ISP’s in town and told us that he could get, not the quoted 6 megabits, but 3 megabits, I’m going to go sign up for Sonic Net at my house because that sounds really good for the price that he’s paying. These competitive things, when I first watched this Fiber to the Home begin and I saw it taking shape if we go back to what was claimed we were going to do and how we were going to build an infrastructure and get other ISP’s and other companies to want to go ahead and participate in providing the services. Like two of the guys have already pointed out, , the 911 service alone When the city’s got this problem when we are already paying people that we are liable for after an employee or someone hurts them to be able to say, don’t make us liable. This doesn’t have any insurance in it at all for the mom or the father at home who tried to use the 911 service over the fiber and because of some smurf attack or some sink attack or denial of service attack from some university student somewhere with a full DS3 they couldn’t get their voice over IP to work for their 911 service to for the ambulance. I’m sure that the insurance company the way it’s underwritten the power company, I don’t know how that works actually, you know people in this town have a lot of money for lawyers who can make sure that their mom or their dad is worth at least a million bucks because that phone call didn’t get answered because of that fiber service. I hate to bring this stuff up because there is really one side of me that really wants this service. And that’s the other part that’s the citizen at home who would love to see broadband access and everybody shooting video around to their relatives, but quite honestly I don’t see an investor underwriting this. I see I’m underwriting it with my property. And I’m going on the hook for the 40 million dollars. On the other hand that you build an infrastructure that somebody does know how to provide services with and I will tell you right now that Comcast did a heck of a lot better job than Cable Co-op and they still are today. I’m also the guy who founded ISP channel and I used to have people in town and professors at Stanford call me up and demand a cable modem when I only had 20 cable modems and that


went on for years. I would get those phone calls and I had to un-list my phone numbers so there is a true pent up demand for high speed access in town. But it’s missing the detail, lots of details. I probably have, I could go on for an hour with all the details that are missing here, it’s just too easy. I will go out of business when you want to go ahead and provide a business $99 for 6 megabits or 10 megabits, who wants to argue about a megabit when I can tell you my average customer that’s on the Dark Fiber that I lease from the City today uses maybe two, maybe one, and that’s a business with 50 employees. And I will tell you something else about them, they are very demanding, and with the number of technical people that you have listed in this you’re not going to be able to do it. Right now I have customers who expect me to go to upstream providers away from me. I don’t know if you know what that means. But somebody on the Internet who owns a big part of a network, part of AT&T or MCI’s backbone decides that they are going to block port 135. So my customer on the Fiber that we lease that we provide service to expects me to find out who the engineer is that I’m going to talk to three states away so that his packets can still make it back and forth from India along that route and you are not going to do it with the number of technical people you plan on hiring. Not if you plan on running the mail servers and being responsible for everything that goes through the network including the firewalls and other things that are going to protect people from denial of service attacks and sink attacks. I really think that the city was heading in the right direction before this and that was when the city was looking at going ahead and getting other companies, several large companies for example, as I mentioned to Blake actually in my office, eighteen months ago when I started the company that what we should do is, the City should go ahead and encourage more of this Dark Fiber service. It’s making good money with it. There is no doubt about it. If you want to change that over to this kind of a plan, then you really, really have to think about a lot more and consider a lot more. Because building a Dark Fiber ring that the city runs in the level that say layer two, and then get a whole bunch of people to want to come on it, people, business or whatever and provide services and compete with each other. That’s the best way to do it. This is a little monopolistic and puts us in the position where we are going to go ahead and compete with two satellite providers and a cable company. When you really could be building something to encourage more business to provide services in town too. So the 2 million dollars that you are getting now, a large part of that will evaporate because I pay thousands of dollars a month, now we get the bills monthly instead of annually, my wife used to hate it every month of that year when I would got the bill and I would have to come up with thirty grand or something like that for what I pay for Dark Fiber services as we were growing. Now we pay even more.


I’m also helping and then subsidizing one of the Fiber to the Home projects in Palo Alto that is sitting out there on Driscoll Court and trying to keep it alive and the City has made concessions as they can tell you, the fiber to that place costs money. The expenses are really high for that person to figure out they couldn’t afford the run all the way from the PAIX out to that place. So we took some technology, cut down on the number strands that they were using and also shorted up their run and ran it from our place for them to help them subsidize that. So that project would easily become a customer of the City’s too as that little business goes out of business. So I think you had a lot of little things starting up in the city that you are going to see evaporate from the Dark Fiber. Like I said one part of me, as somebody who lives in the town, I really want something like this. The other part of me says, nah, let a private enterprise do it because I don’t want to go on the hook for it if the people that we have running this can’t pay attention to the details. Why don’t we see if some VC’s, have some VC’s look over this plan and give us a study back on what they think about this. There is so many in town, you could probably find several of them would do it for free for you. Thank you. Rosenbaum: Thank you Mr. Evans. Jeff Hoel to be followed by Sanford Forte. Jeff Hoel: Hi, I have only a couple of remarks. Rosenbaum: Jeff please identify yourself. Jeff Hoel: I’m sorry, Jeff Hoel 731 Colorado Avenue. And I just wanted to say I am an avid supporter of the city wide municipal Fiber to the Home Utility for Palo Alto. And I think that’s what you ought to recommend to city council. I should also mention that I don’t agree with all aspects of the current plan and I sent you lots of detailed information saying where I don’t agree. I am hoping that maybe tonight or tomorrow night you can get into some of that stuff. If you want to know the kind of Fiber to the Home system I think would be just great, I think that’s the kind that is going into Provo right now. For example each home has a 100 megabits per second and I know that the current plan the business plan phase two that we are reviewing now does call for 100 megabits per second but in fact in previous city documents the so-called representative system couldn’t go that fast and I think that probably needs to be acknowledged. I would like to see no shared fibers, each home gets it’s own fiber, no sense in doing party line stuff, individual fibers in a fiber optic cable are cheap enough. I would like to see the kinds of components used in the system be standard spaced and interoperable and that’s another characteristic that the representative system does not have. I think all services should be provided using Internet protocol and that includes TV. In the business case that was written some time ago, the document said that nobody has proved it works. Well, now Provo has proved that


it works well, costs less than the old way of doing it and it’s much easier to contemplate having multiple video service providers, if we ever want to do that in the future. I do like the concept of open access where you can have a number of retail service providers competing with each other to provide service. What the city does, is provide the bit moving service at the wholesale level. In the current plan that’s contemplated for phone. At least they are intending to get one retail service provider perhaps not multiple, but not for TV and possibly not for Internet, depending what they can find for service providers. The biggest problem philosophically I had with the whole document this time is all of the pricing seems to be based on what the market will bear. And I think it’s great to find out what the market will bear, just so you know what it is. But for the rest of Palo Alto’s utilities, they are priced at what the service costs plus a little bit for the general fund. That is a philosophical approach I think at least deserves some discussion. A while ago when the business plan was being contemplated, the prediction was that this would be the last document we would have to write and now the current plan say’s there is going to be a phase three. I hope that UAC will ask council to be given oversight responsibility for this Phase Three. Because my impression up till now was that after approving this current round you’d be done. Alright the $200,000 for making very detailed design for the kind of system we want, I would like to hear a little bit more about what kind of system it is, whether it’s going to be the kind like Provo has or not before spending the $200,000.00 to design every last detail of it. As far as legal concerns I think it’s too bad that we haven’t had more input from city attorneys up until now so we don’t really understand what the legal options are, particularly with respect to whether some of the services if operated at the wholesale level will not require the referendum to approve the board that reviews the TV content and stuff like that. If it cost another $70,000 to get input on those legal options then I guess we better get it. I think that’s all I have to say. Rosenbaum: Thank you Jeff. Sanford Forte Sanford Forte: Sanford Forte, 280 College Avenue, Palo Alto. The incumbent communications service providers, that is the Comcasts, the SBC’s of the world have failed our public’s interest. Palo Alto citizens deserve better, they deserve a municipal broadband network with local control. That being said, the proposed FTTH business case does not yet meet the standard for maximizing potential depth, full spectrum of choice or long term fiscal sustainability of municipal communications services here in Palo Alto. By choosing to leverage citizens communicative assets through an information utility, our municipality assumes a


special responsibility to perform the business diligence that accomplishes the following goals. One, project realistic forward risk and realistic down side risk. Two, suggest public private funding scenarios. Three, reveal local opportunity costs. Four, model management and strategic architectures that reflect the complexity of the communications sector today and moving forward. Five, model service choices that fit the customer, not the other way around. Six, provide ubiquitous communications infrastructure that serves all citizens in static and mobile environments. Seven, model unique community synergies that create embedded substantial competitive barriers to entry and maximum flexibility. Unfortunately the business diligence falls short in all of these areas. My recommendations; that UAC pass the business plan onto City Council and that Council appoint an un-funded working group to complete the following: One, perform a market diligence or complete the market diligence that better reflects the risks and opportunities of today’s communications sector and going forward. Two, pursue alternate means to fund the project. Three, ensure that personnel who understand the social and business development dynamic of communications networks are in place at CPAU before deployment takes place. Four, model a plan for a hybrid that is fiber and wireless infrastructure instead of the proposed single solution fiber infrastructure. Five, model a scaleable built to demand infrastructure deployment instead of the current build it and they will come scenario. Finally Six, ensure that local key constituencies participate in modeling how their participation in the network contributes to its optimal use and benefits and model those findings into the strategy. The above goals will maximize intra-community communications creating significant revenue, innovation and social multiplier effects. This can be done profitably if the will and vision are there. If the above goals cannot be met in the working group, I recommend the project be held back from community vote until they are. Be assured that current and future developments in communications services and the consumers who buy those services will not favor poorly diversified communications infrastructure or less then optimal consumer choice. That way is failure or little better than we have today. I just want to say I’m in sympathy also with some of the remarks that Bob Evans made. There are some infrastructure details going forward that have been omitted from the plan. I was going to mention those, Bob did it for me. I would also like to say that there is, it seems to me that there is a special bias against wireless technologies in this plan. I think we are foolish to consider less than an organic build out. The build it and we will come scenario that has been proposed by the plan I think is really too much. There are things happening in the technology sector, let me just mention just one of them. I’m not going to, because other people want to speak, I could go on for an hour or two myself. Let’s take a look at


Store and Forward, the storage and communication technology sectors are converging rapidly. Within the next two or three years you and I are going to be able to buy multi terabyte drives, Hitachi has something like a 400 gigabyte drive the size of a quarter available today. Now what does this mean? This means that when things like 3G Networks, and by the way, let me back up for a second. 3G Networks in the plan were pilloried, people were saying that they weren’t working, well Dokomo the Japanese company and part owner AT&T just today said that their subscriptions to 3G technology has doubled in the last four months. We are talking about a technology that is only in terms of its public prominence is only about two years old. Project forward ten years. Back to Store and Forward, you and I ten years hence or eight or nine years hence are out in the community with our portable device and streaming to that portable device is a movie that we are interested in or a newspaper that we are interested in or whatever, you and I go home and we turn that portable device on and we have a television set or stereo system that’s wirelessly enabled that allows us to stream at one giga bit or more per second all the information that’s on that portable device to our entertainment device. I would submit that because the major telecommunication providers do not and don’t intend to and probably never will deploy fiber, if they do it will be thirty or forty years out before we see it universally, companies like Intel and other wireless providers and so on and content companies are looking for way to go around us because they understand that people want convenience. So what we are talking about is how people use networks, we are not talking about how fast they are, the fast, the speed has nothing to do with what people what. People want convenience, they want it now, they want it where they are. That is all I’ll say and I thank you very much for your indulgence. You have done very hard work on all of this. Rosenbaum: Thank you Mr. Forte. Bob Moss to be followed by Bob Harrington. Bob Moss: Thank you Chairman Rosenbaum. Bob Moss. I’m going to begin by trying to address some of the questions that have been raised by both commissioners and the public. Penetration rate that Comcast has currently in Palo Alto is between 35 and 36%. Their penetration rate for cable modems has dropped from 13% to that Cable Co-op had when we sold the system to about 3%. This demonstrates very clearly that in Palo Alto a little incompetence goes a long way. When it comes to incompetence AT&T and Comcast are unparalleled. You asked questions about being able to buy content and we are worried about Comcast’s not selling content if they were to buy Disney. That’s not going to happen, that merger will not be allowed by either the FCC or Congress unless there are very strong requirements that the content be made available freely and at maybe even a lesser cost to other organizations.


As to the cost comparisons between Comcast and the rest of the cable industry, as you may know we used to buy programming from AT&T, originally TCI. In order to try to hamper our financials, TCI cut us off and made us go to the National Cable Co-op for programming. The difference in cost for programming was on the order of $100,000 or $200,000 a year total. It was almost unnoticeable. There is a discussion about the cost of undergrounding, figure between five and $600,000 a year for undergrounding, that’s what we used to pay. So that is built into your normal costs of doing business. In terms of what sells the service, it’s not the 10% or 20% cut in price, in Palo Alto what sells- it is performance. None of the competing services, none of them, have the capability of matching the high speed two way bandwidth that Fiber to the Home offers. That table you saw earlier where they talked about as high as 6 meg downstream and the highest upstream is only 640 K. That sucks. Comcast limits your upstream speed to only 128 or if they feel generous 256 K. So when I want to upload a bunch a pictures of our grandchildren to our kids, I have to sit there and watch, even though I have a cable modem, for as long as ten or twelve minutes, if I had a decent system I could do it in 30 seconds. That’s what people are going to go for. I don’t think you realize how many people use those digital cameras and trade pictures all over the world. I was getting pictures from my son and daughter-in-law of their trip to India last week. All over the Internet. That’s what people want, that’s what sells the service. Now let me talk a little bit about the business plan and some of the problems with it. First of all, it grossly understates the capabilities of VOIP. Cable systems that have been selling VOIP, Cox in particular, have found that their take rate within two or three years ranges from 15 to 40%. In terms of the 911 problem that’s well known in the industry and a number of companies that are in the business of making the equipment are working very hard to solve that, it’s just a matter of a year of two. They are being kind of closed mouth for competitive reasons about what they are doing and how they are doing it. But I have no doubt that you are going to be able to have 911 service on a VOIP line exactly the same as you are going to have on the telephone lines today. By the time our Fiber to the Home system is deployed. There was talk about having a Dark Fiber system put in and letting competitive business lease the system and provide service. That will never provide Fiber to the Home. There is no organization anywhere in the United States that is providing Fiber to the Home to significant, except municipal services, no commercial organization, no cable company, no telephone company is providing Fiber to the Home to existing neighborhoods. They are doing it all to green fields, to new homes, new developments. They are not going in and doing it to large


numbers of private homes, so the only way we are ever going to get that is if we do it ourselves. It’s going to make a tremendous advantage competitively for doing business in Palo Alto. I remember when Cable Co-op first started putting in cable modems. We didn’t have it deployed yet, but they had it deployed in Fremont and we had a guy call up who was moving into the Bay Area and wanted to know if we had it. We said no. Well I understand that Fremont is going to be turning it on in a few weeks so I’m going to be moving to Fremont because I have to have that kind of service. Let’s talk about penetration rates. Penetration rate for cable modems for data service would be approximately 40% in 3 to 4 years after turn on. Why do I say that? Because we had 13% penetration, after about 3 years and we were charging $99 a month and we made no effort to promote the service, in fact we liked to discourage people. Because we were doing over 100% coax system and nobody in the world knew what the capacity of a coax data service was. We were afraid to roll it out too fast. So we intentionally priced it high and moved it out slowly, we never did find out what the capacity level was by the way. In terms of the video broadcast what we should be looking at is giving the people what they want. What we want locally not what somebody in Philadelphia wants to shove down our throats and when we bundle service we should bundle it according to people here want to see it. We shouldn’t be emulating Comcast, the last thing we want to do is offer Comcast light. I’ll give you one example, Comcast owns the Golf Channel, so we have the Golf Channel here. Cable Co-op previewed the Golf Channel, we asked people, “Do you folks want the Golf Channel?” and the answer was ‘hell no’. So we didn’t carry it, but Comcast carries it because they own it. We have the opportunity to tell people that this is your system, this your interest, what do you want? And then give it to them. We have a utility system that delivers, a utility system that knows how to provide quality service and that’s important to the people here. I’ll tell you a short story, we had big storm a few years ago, the electric power was out, the Mayor of Menlo Park’s power was out for four days. The longest anybody in Palo Alto had their power out was four hours. That’s the way our utility system works. I could also tell you about the service level that Cable Co-op gave, the average outage time was one hour and forty five minutes, and that was over 10 years. The longest outage we ever had was 26 hours, the longest outage. So when people come down here and say that Comcast does a better job than Cable Co-op, they are full of it. That is not the way the system works, we know how things really do work. I would like to see you go forward with this now. Not do an awful lot of studies, not have lot of discussion, not have a lot of community meetings. Move out. Approve it. Let’s get it done. If Cable Co-op had been able


to borrow $25 million dollars we would have had Fiber to the Home in this city three years ago. Lets talk about the cost estimates. We had a cost estimate of what it would take to build fiber to 100 home nodes for the entire franchise area, Menlo Park, Atherton, East Palo Alto, Palo Alto. $25.3 million, that’s all it would have cost. Now let me talk about financing. The financing system you should use is very simple, you take 10% of our existing assets, those bonds that we have, 10% of them. Take that money build the system with it, with a commitment to repay that after 10 years, no later than 10 years. You don’t have to pay the 6% interest, you don’t have to worry about floating bonds, the money is sitting there, why do we need to have the money continuing to earn $2 to 3 million a quarter and just sitting there, we should put that money to work. Finally, how are we going to convince people that this is a good thing? It’s real simple, let them go and sit in the homes of the people that already have Fiber to the Home, you very soon learn you can’t be too rich, you can’t be too thin and you can’t have too much bandwidth. Rosenbaum: Thank you Bob. Bob Harrington to be followed by Mike Eager. Bob Harrington: I’m Bob Harrington and I’m in fiber trial neighborhood and so I’m here to testify that it works really well. It works so well that I was delighted to participate on the Fiber to the Home Advisory Team that’s been working with the consultants, the utility and the staff and everyone for about two and a half years now. Really there is a huge amount of detail in the plan before all of us, and finally it’s out in public forum now so that we are beginning to be able to discuss it. The big challenge ahead is pretty clearly - to take this very significant and sophisticated plan and communicate it accurately and fairly to our citizens. So I would encourage us to move that along because until we get it out in public debate the citizens aren’t really going to be able to figure out where the bodies are buried and kind of clear away all of the smoke. The one thing that came clear to me as I got the chance to dig into every little detail and then come up the other side with it and feel comfortable with most of the things in the plan, is that it really comes down to a community decision. Unlike other communities and I’m not an advocate of build it and they will come, I am an advocate of getting out early and discussing with the community opportunity that we all have. We can choose as a community to make this a tremendous success. Neil had a slide that showed essentially that it pays for itself at a 20% penetration. That pays the bills, you got zero cash, but it still paid all the bills. For every 1% addition to the penetration in the 20th year in the cash account is about $5 million. So the community is pretty soon going to realize that what they are looking at is a


$400 million opportunity over a twenty year period if 100% of the take rate was going to our home owned utility instead of shipping the money out of town. Now we pay a lot of taxes here, we have sales taxes, we have property taxes and we pay the bills that go to the County, goes to the State, goes to the Feds. Just some of it comes back. But when we buy our services from our municipal utility it stays in town, and that I think will become pretty clear to our public as we get an opportunity to communicate with them over the next six months I hope that it then goes to a vote so we can see how they really feel at the ballot box and if we are right and it gets a tremendous positive response then we know we have a winner on our hands. Rosenbaum: Thank you Bob. Mike Eager? Mike Eager: Hi, I’m Mike Eager, 1960 Park Blvd. Let me first off say I want to acknowledge the hard work that the utility department has put into this over many years. I have participated at many meetings and boy it’s been hard work. Regarding Uptown’s in-depth analysis, especially where they refute the Looney tunes, I appreciate that. The UAC has spent many hours on oversight, so I think it all should be acknowledged. I’m one of those concerned citizens or interested citizens that John Ulrich mentioned who showed up before the City Council seven years ago. I think his chart shows exactly what the benefits are of fiber infrastructure. Outstanding bandwidth, high reliability, you know, you name it, it’s much better than any of the other technologies. It was when we first started talking about seven years ago and it is now and, as far as I can see, it will be for the foreseeable future. I think that the city, I want to encourage you move this forward to the City Council, I want to encourage you to give them the opportunity to discuss this. I want to talk about a couple of the areas that we have been talking about tonight. One of them is the risks of this. I see some of the risks in the services provided and in the market penetration. Those are very closely tied together. The City has a Dark Fiber infrastructure, has Dark Fiber which has been profitable for some years now and that is predicated on not providing services, just provides the infrastructure, just a way for a company to lease the fiber and provide the service to another customer. The Fiber Internet people are doing that. I think that’s the model that you should adopt for the Fiber to the Home project. I think the City should do the infrastructure, I think that they could do it very well, I think that’s where their expertise lies. What they don’t have is expertise in is in being a service provider, they don’t have expertise in being a video programming or being an ISP. I think these are some of the areas that we have talked about tonight, you talk about whether it’s 256K to the Internet or 2 megabit to the


Internet. Let an ISP take that on as their issue, let them market that service, let then differentiate their products. Palo Alto is home to the Palo Alto Internet Exchange. We have some 140 or so people, companies there, many of them ISP’s. These people can be connected and can provide services over a city-wide Fiber to the Home infrastructure. You get your choice of an ISP with these services, the other ISP with the other services. The system that we are looking at here in the business plan is a monopoly system, one provider, one set of services. The idea that the City will select exactly what ISP services are provided and that’s it. I don’t think it’s an appropriate thing for the City to do. It’s a poor. It’s a high risk that the City will guess right, it’s something that ISP’s are experienced with and we have many that are. Let me say one more thing. I believe the product that we have described here is a me too product. It looks like, I believe that Bob Moss mentioned it as Cable, Comcast light or Cable Co-op re-visited. 10% price cut is not a compelling case. A compelling case would be strong product differentiation. Let me describe to you what I think a good product would be. First of all, 10 megabits to the Internet, not 10 megabits down the street or 100 megabits down the street and get to the bottleneck of 256 K. Let’s give them 10 megabits to the Internet. Let’s have a couple of hundred channels not a 100 channels. Let’s do it a las carte. Let’s let people select what package they want. Let’s not say you get the silver bundle or you get the gold bundle, let’s let people choose. Let’s have dozens of music channels, let’s have dozens of international channels, let’s have literally hundreds of domestic channels, let’s do it for a price that’s reasonable. This isn’t blue sky, there is a company in Sacramento that is doing this. 6000 customers on fiber, 260 channels, 10 megabits to the Internet, $50 for the Internet charge. 160 channel package is $43 bucks. So if you want this to be a successful business plan, let’s not do a me too copy of Comcast with a 10 percent price cut. Let’s do a killer system that is well within our means and will actually provide benefits to the community. Thanks Rosenbaum: Thank you Mr. Eager. Andy Poggio to be followed by David Harris. Poggio: Hi, I’m Andy Poggio, 2708 Gas Park Court. Since you have had a lot of speakers and heard a lot of things. I’m also an avid supporter of Fiber to the Home in Palo Alto. First point I would like to make is that the Internet is in its infancy, I was using it 25 years ago, and I still think it’s in its infancy. I think if we looked out 10 years from now and looked at the 10 most popular applications of the Internet in that time frame, half or less of them are in common use right now, I won’t try to predict what they are. We see email and web right now, there will be more things


like that. They may just be starting to be used right now and they may not have been invented yet. But there will be more reason to use the Internet than we have now and that will grow I think for a very long time. The second point I want to make is that people that work in the networking industry, and I have from time to time, have a very simple saying, and that saying is, “don’t bet against more bandwidth” it always fails if you bet against more bandwidth. Some years ago IBM was pushing a technology a networking technology called Token Ring. IBM was a huge influence on the computer industry. An upstart called Xerox, that was invented here in Palo Alto at Xerox PARC, was pushing something called Ethernet. No one uses Token Ring today, the only advantage Ethernet had, and it had many disadvantages, but the only advantage it had was that it was faster, it offered more bandwidth. Now it just completely dominates. I think that will also be true for fiber technology to the home, that over time it will completely dominate and the people who recognized that earlier will benefit earlier. Finally, I’m sure that there are number of possible suppliers, the Comcast’s or the SBC’s that could, over time, supply Palo Alto with higher bandwidth to our homes. I also believe that the results, that the bandwidth will be lower, the quality will be lower, the cost will higher and we will see that much, much later. So I want to encourage Palo Alto to move forward and get Fiber to the Home just as soon as we can. Thank you. Rosenbaum: Thank you Mr. Poggio. David Harris to be followed by Art Kraemer. Harris: I am David Harris 455 Margarita. The first comment is the obvious one. That jobs these days are being put at places that are reached by fiber optic. Friedman in the New York Times talk about fiber optic cables that came out of the dot com bubble made it possible for India to have jobs. If we do not have a quick way of getting access to the data and doing work with it, we will be cut out from that foreign employment and that form of business that the community needs. I’d like to touch on a couple of slightly tangential, or perhaps creative aspect here. I don’t think we have touched on the main line of discussion. One is that public benefit is not in the accounting system. We are looking at it as a business for the electric utilities. But as a citizen, if you can give me benefits, I want to vote and have this thing provided to the community. Among the possible benefits are trip reduction by telecommuting. Those poles that have gotten more and more cable are getting lots of wires, kind of looks like the old pictures from the early days of telephone phase before the switching system. Well this capacity that carries all the


information on the fiber allows the possibility of removing those other wires. That’s reliability and safety from wind storm for telephone poles. Undergrounding. To make a distinction between fiber optic, which is very easy to put underground, is not particularly harmed by water and the electric systems that are in these vault boxes. This stuff apparently is having problems because it is high power high voltage electricity and hard to underground. And another community benefit besides nice looking poles is real estate values are likely to rise if we are among the few communities that have this early. There is also a possibility of lower rates, we heard that in Consumer Reports March 2000 Page 32 that where there is a choice of cable companies the general accounting office report found cable rates are about 15% lower than a non competitive markets. So just by undergoing a project like this which offers cable services we provide a benefit to the citizens. There is an opportunity I think here that requires some work but I think it is worth thinking about it. I searched on the word billing, I am looking at the billing system discussion and in Neil’s report. It said there was basically some incompatibilities between the existing billing systems for utilities and the operation of this system. We have a particular opportunity here because all our services are provided and billing could be done even at a micro integrating level. To elaborate the obvious easy thing of a single bill is easier to pay then multiple bills. But if we can get a system that does capture the information of about who received a service from whom or what bits were transferred and be able to do billing for other companies or for start up companies, we can charge for that service. But we are unusual in having complete control of the billing thing and be providing service to that same area. It would obviously require some software work to be able to access the information., The problems he points out would have to be solved. But the potential of that is perhaps great enough that some start up company might do it using this as a test bed and give you a copy of the results for free or something of that sort. Also, by having the billing system able to create incentives for people to offer services, it may be a way of allowing things like Wi-Fi nodes to be put up in somebody’s home because they happen to live near a road where somebody would use it or things of that nature. Basically some thought on the billing system where that could be used creatively to generate additional revenues I think would be in order. Regarding content in the role of independent media marketing. Back in 1972 I came down to Stanford and took a film making course. I now could do in an afternoon. What would have been a whole quarter project in terms of film


making, I do it on my desktop machine at home. The capacity to create content is been rising and it will get obviously still more powerful and the number of hours that people can watch stuff will not increase so the relative availability of content versus consumption will change and I think we may see social benefits from that kind of increase in production. And finally I was looking at the penetration sensitivity and also the slide concerning people who know how to use the Internet are rising. Bob gave some figures on the cable modem rates and more recent rates as a society and the economy. As people learn how to use these tools they are able to put them to work more effective. It becomes more essential to have those tools and we can expect that the penetration rates will rise over what they are now because people will be more aware of how to put these things to work. Thank you. Rosenbaum: Thank you Mr. Harris. Art Kramer. Kramer: I am Art Kramer. I live on Forest Avenue in Palo Alto. I’d like to support some of the inputs that came from some of the last few people. One of the things that happens in this business, is the fact that if you are going to provide this service, we are always at risk that comes as this guy is going to buy somebody or somebody is going to buy to keep the network from us. If you set up the dark fiber situation, and you sell to everybody, then you might get some repetitive service because somebody that comes and uses our fiber could compete with Comcast. So I would like to see a business plan that is says let’s put in the dark fiber, let’s establish some prices for leasing to anybody ISPs, telephone companies, cable providers. I think the last person said we could provide the billing service for all these people. If we do that, we take advantage of what we do well in Palo Alto, and that is maintain the plant. We are not good at maintaining the content. That way we will get out of it we will reduce our risk. I think we need to have a business plan that is based on how much can we lease the fiber to so many people rather than how much we can sell video to a particular customer. Thank you. Rosenbaum: Thank you Mr. Kramer. Hilda Weisberg to be followed by Peter Allen. Weisberg: Thank you. Thanks for still being awake and being able to hear us even though it has been a long evening. I want to request that you grant John Ulrich’s first three requests to move fiber to the home project forward and I hope that would be as quickly as possible. There has been many wonderful supportive ideas that have come forward tonight and I am sure there will be in the future. This is a program I think will need to


continue to have lots of flexibility to be able to respond to good ideas and break through technology over time rather than to tie their hands to any particular thing. I am very excited about the possibilities that this offers to us as a community and hope that it becomes a model. I am fortunate that I have been part of the trial and I am very happy to continue to talk to others about the benefits that I have seen and to knock on doors and to encourage people to take and share this risk with us. When we were children in elementary school we did this little experiment about picking up somebody in a chair and you know no one of us or two of us could possibly pick up that fellow classmate in their chair. But a few of us together could lift that chair very easily with our little fingers.. I see the risks that have been put before us today, though we don’t know exactly what they will be. I think these people have given their very best in looking in to the crystal ball. Since the time they were looking and time has moved on, I think those risks look very acceptable to me. I hope that they will as well to other friends that I have in the community. I hope there will be enough of us that we will make this a project that something that we are proud to have supported and that will be a model now and in the future. I am very grateful for the kind of service that the utilities has been able to provide us and for the work you as a Commission have been able to do for us over the years to respond to the emergencies and challenges and opportunities and I trust you and will support you in the future. Thank you very much, Rosenbaum: Thank you Mrs. Weisberg. Peter Allen. Allen: Good Evening. I am Peter Allen. I live on Hopkins Avenue in the Community Center. I think Hilda neglected to mention that she is also a trial participant. Okay. I have been involved with this for about 6 years, more than 6 years and I think our utilities staff has done a fabulous job in putting this together so far. The plan you have in front of you many people say it is not detailed enough but it is not the final roll out. There is a lot of more work ahead of us. But the right diligence has been done in terms of presenting a plan that sits there. You look at it and you go “there is twice the margins in this business”. What we are proposing will be situated in the electric business right now. We are protecting the revenue models that we have in town here now. I think it is a great idea. Some of my own business came to me with this. I am like who would stand by against it. I have been part of 4 companies in this town that have leased fiber from the city. To give you an idea that I know how to lease fiber from the city, I know how to operate a network like this, I know how to scale it, I know how to maintain it.


I was a Director at Napster as well, so I know an awful a lot about content and legality of certain things. We are not going to be in the content creation business here. What we basically going to be doing is operating a network and offering services as a middleman. Alright, so let me go on a little further here. I am a beneficiary of the 7th utility here in town. Most of the people in this town have six line items on the utility bill. I have seven. The 7th one says telecom. I think this is the right entity for this. I would discourage you from going out to the venture community to try to find partners to do this. Why? Well I am pretty tired from doing it every day right now in the current start up I am in. I am really what you could call up start up junky. I have done about 10 start ups. Three of them have gone public, three of them have been bought and four of them have failed including Napster. But my real point in saying that is that VCs is the wrong entity for this. They are the most expensive money in the world outside of the mafia. And they want a return on their money in 3 to 5 years. Here is the municipal utility we have everything in place to make this succeed. We have recovery rates of 20 or more years, we have access to municipal bonds, the cheapest money in the world other than getting it from my own parents. We have a mentality here that serves the public, we have lots of people in trucks, we have operated a network on exactly the same scale necessary to do this. We have operated it for 100 years instead of those being just in electric distribution network. It is just the right place to do this. It is the right crucible to make this successful. I am also the one who is irresponsible for negotiating the current rates that trial members participated in. Participants pay $85 a month. They get 5 megabits per second both directions. I would also like to mention one of the companies that I helped lease fiber with here in Palo Alto was Lucent. I worked at the Bell Laboratories here under Brian Reed’s direction who helped build the Palo Alto Internet Exchange here in town which is responsible for about 20 percent of our country’s traffic passing through Palo Alto every day. That is phenomenal facility that we have within literally a stone throw of this building. What I learned really, when I was at Lucent, was that the future is fiber and wireless. And the way you differentiate between those two worlds is if it doesn’t move wire it. The last time I checked my house hasn’t moved. But another thing the people are saying is this is a bill that may come due in the future. I walked my neighborhood. I covered half of the 600 homes in my neighborhood and of the 600 homes in my neighborhood 4 or 5 years ago. I forgot the exact dates. One fifth of them, 125 homes put down a $500 check to be part of the trial. That is not a bill that they would come, that’s pay for it and you then you build it. And to my amazement the utility returned our $500 in the end. They wanted to bear the risk


of this. They actually loved this concept now. They owned it, they built it, they operated. If they understand it and you have a business plan in front of you that shows you that this is going to keep money in this town, and provide services for this town on a scale essentially what the electric utility has done for 100 years and that economic model is in danger right on. Okay so to continue on why was $85 a month for the trial participants. How was that figure negotiated? Why do we arrive at that? Well. It’s what we knew the utility, it’s a revenue buoyant business. They are not losing money on it right now okay. So what we negotiated was both a combination of what the market would bear and what it actually cost. I understand both sides of this equation and we worked well with the utilities to come up with those rates. It isn’t damn hard to do it and I think they have done a good job so far in their research. This has been incredibly reliable network. It has been phenomenal. My children, my daughter who is actually asleep over there right now, enormously benefit from this and you wouldn’t imagine how many kids come to our house because we have a faster connection. Children are learning from this. They are more facile with the Internet than I will ever be probably. Yet also understand that the phone company will come out against us. They will say you don’t want to do this. And understand, the rest is really fear, certainty and doubt that they wish to plant in your minds. When you really come down to study it, Pacific Bell, now as we see, offered an extra digital phone line to every single home in the trails. 70 phones were provisioned for the trial and normally to provision 70 phone lines you would have to roll 70 trucks. PacBell had to roll one truck to provision the lines to our municipal services yard. One truck to provision 70 phone lines. It was cheaper for them to start this business than to provide it. Then over the summer there was an electric storm that shut out, that cut out about half of the phone lines in my neighborhood and low and behold some of those homes were serviced by fiber. You pick up the phone to connect to your fiber -guess what - the same company providing your telephone line over fiber or copper your copper line is dead, your fiber line never had a blip. It was less expensive for PacBell to maintain that network as well. So when they come before you, out of great public interest at some point in the future, to say don’t do this, it is a terrible business, you don’t want to do this, think why they are coming up with a sudden civic concern and think about the lessons we learned from the trial. It was cheaper for them to build it, operate it and maintain it. By not owning their own network but by delivering it over our fibers. So in conclusion through all my experience I would just like to say I think we should build this 7th utility for the whole town. I think it would be a great economic boom. Thank you. Rosenbaum: Thank you Mr. Allen. Arthur Keller to be followed by Ken Poulton.


Keller: There have been people who suggest that we should have businesses build this. Well I have been hearing people talk about creating fiber to the home for quite a number of years and so far nobody has build fiber to my home. I know it was mentioned by some of the colleagues here there is a notion that we talk to VCs. VCs want 10 times return on their investment in 3 to 5 years. And that would be great if we can get that. But this is not what this business takes. My assumption is that the City of Palo Alto Utilities would be happy with a 10 to 15 year payback on paying off the investment and beyond that a 10% return on investment. A 10% return on the investment would be pretty good for the City. So the consideration is what kind of return does a municipal utility or government require. It is not the kind of returns that VC would handle and this is not the kind of numbers that they would understand. Sometime ago, not too long ago, there was a proposal that we shop Palo Alto. I was just standing this about noon on California Avenue and on that little concrete sign that is on the center of California Ave. abutting El Camino somebody put this thing on top that said shop Palo Alto.. Well that is the opportunity we have to do right now. The profits from the several phone lines I have in my house are going to somewhere in Texas, the same community that brought us those blackouts. And I am paying for Comcast. I receive Comcast bills. Since Comcast took over Cable Co-op that is, that are one third or more higher than it was when Cable Co-op was here. So what we are seeing is profits escaping our city going somewhere else. And I’d much rather have those profits go to support the services that go to me as a 25 year resident of the city. So there is certainly a need to enhance revenue to the city. We are trying to figure out how to do that. This is one way of investing in the future. Investing in revenue for the City. One of the comments that was made is about dark fiber versus light fiber. We have a streets network that connects the various houses together. People can bicycle, people can walk, people can drive. I wouldn’t expect there to be a separate streets network for people who drive GM cars and a separate streets network for people who drive Toyotas, sort of that. People can ride bicycle, and drive cars and to some extent drive trucks down our streets network. So therefore the idea is if you provide light fiber it is a conduit. You can put lots of things across it. You can put across it phone, you can put across it Internet, you can put across it video, cable, cable TV, you can put across it radio, you can put across things we don’t know about now. Because as once it was referred to me bits is bits and things are becoming more digital and so by creating this fiber that goes to everybody’s house, that people can put whatever services they want on them.


That there will be an opportunity for bringing new wholesale providers to the City that can provide services that we don’t know what they are yet. There could be future opportunities of being able to sell things through this network that we don’t know about which would bring additional revenue opportunities simply by doing this. Now people have thought about what the opportunities are for fiber and we know some of the things we can use it now. Think about how long ago was the time that Alexander Graham Bell decided that copper wire could be used for transmitting telephone lines. If you think about when Alexander Graham Bell decided to invent the telephone he wasn’t inventing the telephone so that I could talk to somebody across the world making a phone call on it. He created the telephone so that towns without symphonies could hear music transmitted over the telephone from towns that had could afford symphony orchestras. So we have seen things being created and being used for much more dramatic differences than what they were originally created for and the ability of having a switching network in between allowed for one person talk to another instead of hearing essentially a cable broadcast of symphonies as was originally created. And I would suspect and I truly believe that when we build this and I am waiting for it to be built. I haven’t seen anybody come along and say hey I am about to write a check for 40 million dollars. I am going to build it. I don’t see any community members coming around. I mean after all this thing has been discussed for several years. If someone really wanted to come and say Yes I am the XYZ company and I want to wire the whole town with fiber where are they? Anybody want to raise your hands telling that I want to wire the town with fiber. I don’t see anybody doing that. So it is only going to happen if you guys do it and I think that it is not a matter of if you built it we will come. It is a matter of if you don’t build it nobody will. And this is a kind of thing that will be the future, we were on ground zero of creating Internet and we need to be making Palo Alto the place where the future is invented of what can be done with high speed Internet. Because otherwise we will see what is going on in Korea, where 50 and 100 megabits Internet is being put in, in Tokyo, other places around the world and we will see whether we will still competitive in Silicon Valley when that happens. Rosenbaum: Thank you Mr. Keller. Ken Poulton that will be our last speaker. Poulton: Guess I better make it good. Ken Poulton Los Robles Ave. in Palo Alto. I wanted to talk a little about the build on demand idea and in essence that is what the dark fiber system is. It’s just the backbone and really to get your connection to


your house it’s build on demand down probably several streets. And someone else just told you just how expensive that is. 10, 20 thousand dollars to make a relatively short connection. So that is on the order of 10 or 20 times more expensive per connection than building out a whole system is for the per house connections. So it is the only economic way building all at once. Building it all at once is the only economic way to bring connections to everybody. Fiber to the Home is going to be a huge benefit to Palo Alto. It is going to bring new levels of services. Of existing kind of services that we know and it is going to allow us to bring new kind of services. It is going to bring revenues to the city in the long run. It is going to be our 7th utility. It is going to be the logical thing to have along with our existing utilities. There is one thing that has been overlooked in the current business plan and that is the principle of encouraging competition where you can and only building monopoly where that’s the only economic way to do things. For television, currently there are technical reasons why that pretty much economically has to be a one choice system. For telephone, apparently the regulatory reasons is why that has to be the pace. But for Internet service, that is definitely not the case. This is a case where we really have an opportunity to open the system to multiple ISPs. Let multiple ISPs, possibly including the city, provide different kinds of service plan, different kinds of options for people and have different kinds of pricing that will benefit everybody better. To summarize five surveys and a trial have said will come so let’s build it. Rosenbaum: Thank you Mr. Poulton. Indeed thank you everybody who has spoken to us and everyone in attendance. What I would like is a formal motion from somebody to continue this meeting till tomorrow night. Dawes: I so move Mr. Chairman. Bechtel: Second. Rosenbaum: We have a motion and a second to continue this meeting to 7 o’clock tomorrow night. Thank you Neil for being with us and staff and we will see you all tomorrow night. Ulrich: Thank you.

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