Telecomm Policy Committee 1995/12/21 TELECOMMUNICATIONS POLICY ADVISORY qT' f
MINUTES
DECEMBER 21, 1995 FEIN L 11 os 1 , SS
The agenda having been posted on Friday, December 15, 1995, the f ,0 1 s liddiild :meetin of the
Telecommunications Policy Advisory Committee (Committee) was called to ord'e'r by` ilitOrlson Paul McMillan
at 4:15 p.m., on Thursday, December 21, 1995, in the Gordon Hoyt Conference Center, 201 S. Anaheim Blvd.,
Anaheim, California.
Committee Members Present: Chairperson P. McMillan, T. Daly, P. Boydstun, B. Whorton, J. Mayer,
W. Wiseman, D. Stanton, F. Feldhaus.
Committee Member(s) Absent: None
Staff Present: E. Aghjayan, M. Bell, L. Moses, V. Tiwari, K. Thalman,
G. Anghel, P. Grimes, S. Frazier, E. Goode, C. Alario,
R. Howell.
Guests Present: Renney Senn, SpectraNet
Floyd Farano, Farano & Kieviet
Brian Renner, ICG Access
1. PUBLIC COMMENTS
B. Renner, ICG Access Services, thanked the City for the opportunity to make a proposal for the
telecommunications project and added that ICG looks forward to any opportunities in the future to do
business with the City. F. Farano, representing ICS, asked to comment on item number three of the
agenda prior to any action on that item and it was agreed that F. Farano would comment when agenda item
three came up. The Public Comments portion of the meeting was then closed.
2. APPROVAL OF MINUTES OF NOVEMBER 16, 1995
The minutes of November 16, 1995 were approved 6 -0. 2 ABSENT. (J. Mayer and T. Daly arrived
after the approval of the minutes.)
3. RFP STATUS AND RECOMMENDATIONS
Staff Proposal: Staff updated the Committee on developments concerning the telecommunications request
for proposal (RFP). At the last Committee meeting staff was directed to report to the Committee within
60 days, staffs evaluation of the finalists' actions to cure financial deficiencies in their respective
proposals. SpectraNet and ICG Access provided a revised proposal and ICS had not.
SNI's most recent proposal includes private financing, rather than public financing. Nortel's revenue
shortfall guarantees for the private financing would remain in effect, with no change in the revenue sharing
with the City from what was originally proposed. The revised proposal also increases payment by SNI of
the costs of the due diligence process which is expected to be quite substantial. The City will have the
option to purchase the system in the future with the date and terms to be negotiated. SNI will obtain any
required regulatory authorizations from the California Public Utilities Commission (CPUC) and the Federal
Communications Commission (FCC).
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ICG's revised proposal suggests ICG lease 80 of the 96 fibers on the City of Anaheim's backbone system
for 25 years. There would be a one -time payment of $100,000, upon signing the lease, with guaranteed
payments based on on -line revenues of five percent in subsequent years (estimated at $883,000 in year 10).
Staff believes this could be an alternative proposal, but it does not meet the potential that exists with SNI's
proposal. Staff recommended discontinuing negotiations with ICS and ICG at this point in order to focus
on the due diligence process with SNI. SNI's revised financial plan meets the requirements needed to
proceed with due diligence.
The due diligence process will include developing a Memorandum of Understanding, establishing
ownership /regulatory structure, conducting feasibility studies, completing detailed market surveys and
analysis, system design, system costing /schedules, operational costing, and developing the financial
structure. Additionally, SNI will obtain a certificate of public necessity and convenience for local dial tone
and interconnection to Pacific Bell. SNI will make a CPUC and FCC tariff filing and meet the
requirements of the California Environmental Quality Act
Issues Addressed: A question arose about what the additional payments from system revenues will be that
are proposed to be established in an operating and management contract. Staff replied that the City would
expect to share any gross revenues with SNI that are above and beyond the five percent guaranteed
annually that will be paid to the City after the completion of the system and at the time that it begins
producing revenues.
The Board asked why the California Environmental Quality Act would need to be addressed with this
project and staff said that any large project requires compliance with the California Environmental Quality
Act and SNI will ensure compliance with its requirements.
A concern was expressed about the effects of current legislation on the ability of SNI to meet CPUC and
FCC requirements. Recent right -of -way issues and broadcast satellite systems are currently being worked
out in Washington, D.C. and the bill is expected to be submitted to the House, Senate, and President
before the new year. The current developing legislation does not appear that it would negatively impact
the proposed contractual agreement with SNI and the City of Anaheim.
F. Farano, representing ICS, advised the Committee and staff that a new partner recently joined its team,
Bechtel Corporation. ICS disagreed with staff's November 16, 1995, conclusions of its evaluation of ICS's
proposal. Until the November 16 staff report, ICS felt that staff had communicated ICS was equally
capable of constructing and managing the fiber optics network. ICS felt that the differences communicated
in the November 16 and December 21 staff reports are unrealistic and do not reflect the true differences
in ICS and SNI's proposal. F. Farano stated that ICS feels the grading of the technical abilities where the
SNI /Nortel proposal was shown to be far superior to the ICS /AT &T /Bechtel proposal was inaccurate. F.
Farano stated that previous reports showed ICS /AT &T's net contribution to the City was $43.2 million
over a period of years. During the same period of time, SNI's contribution was $114.1 million. He
expressed a possible reason for this difference could have been that SNI's figures were predicated upon
a higher rate schedule to the user than ICS' computation. As of October 1, SNI had not submitted a rate
structure, where ICS had. ICS feels that the costs of construction and operation are so similar that it is
hard to understand how there can be almost three times the amount of difference in revenue produced for
the City's benefit with the SNI proposal. F. Farano felt that it was possible the revenue to the residential
units in phase II might have been included in SNI's proposal. He said that this was not included in ICS'
proposal, however, it did include the cost of construction of these units. This computation, he felt, then
includes the costs but not the revenues which damages the comparison to SNI. F. Farano said ICS did not
submit residential revenue units because ICS' market study did not include the residential, thus it had no
basis from which to project the residential revenue. He stated that either of these exceptions could account
for all or part of the differences in comparison. F. Farano stated that ICS has asked for an explanation
for these differences in how the figures were determined, but he said that ICS has not received an answer.
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ICS feels there are serious enough questions about the comparisons on the grading report that it warrants
additional review. F. Farano said that ICS /Bechtel /AT &T and Bank of America all expressed an interest
in the project and were willing to seriously discuss the question of guarantees with the City after a
feasibility study and due diligence is done. ICS feels that the financial guarantee will be provided and it
is willing to pay for the cost of due diligence. ICS feels that the City should pursue due diligence with
both proposers.
Staff responded that both companies submitted good proposals with the exception of the finance issue.
Evaluations by a panel of 24 internal and external representatives, including a Bechtel Corporation
representative, produced the rating comparisons of the two proposers. The ratings did not reflect staff's
own opinion that one proposer rated higher than the other, but reflect the entire panel's opinion of how
well each proposal met the needs of the City of Anaheim. The results of the panel ratings were definitive
and staff presented its recommendations to protect the City from revenue deficiencies. There are
insufficient staff resources to pursue due diligence with two proposers in negotiations. The due diligence
process will be extremely time consuming with even just one proposer. In order for a proposer to gain
credibility with financiers, it is necessary for the City to select a sole proposer to pursue due diligence.
Staff explained that the feasibility study will refine the assumptions made to date regarding market
penetration, cost of construction, rate schedules, potential competitive reaction, and the foundation and
basis for providing the financing. Staff recommends that the feasibility study begin as soon as the
Committee and City Council approval to proceed is obtained and the selection of the firm for the feasibility
study be a collaborative effort between the City and SNI.
A concern was expressed by a Committee member that it might be premature to assume SNI will be able
to provide the necessary financing and possibly if the review of the two proposers was reopened, then ICS
might be able to provide the financial guarantee•at this time. Staff replied that the O'Brien report stated
a private financial path would provide the necessary guarantee to the City and that SNI provided sufficient
information at this stage to pursue the financial guarantees in the due diligence process. It is possible that
during due diligence, there will be sufficient positive data shown that would entice a financial institution
to step forward with public financing and provide a credit guarantee, which together with Nortel's
guarantee and a public financing approach, might allow the City to proceed with the project without risk,
without the CPUC involvement requirements, and at a tremendous savings to the City in lower interest paid
on bonds. This would happen only if it is deemed that public financing is better, not because there is not
private financing available.
A motion was made to approve staff's recommendation as stated in the staff report dated December 21,
1995. MOTION CARRIED 8 -0. NONE ABSENT.
4. OPEN QUESTIONS AND DISCUSSION
There was no further discussion.
5. AGENDA ITEMS FOR NEXT MEETING
Staff will brief the Committee on the progress of negotiations with SNI at the next Committee meeting,
as well as continue a joint education process on how the fiber optics systems have been used throughout
the country and the proposed system's full capabilities for the City of Anaheim.
6. ITEMS BY SECRETARY
None.
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7. ITEMS BY COMMITTEE MEMBERS
J. Mayer asked that a timeline be provided to the Committee that is a collaborate effort between staff and
SNI.
D. Stanton inquired what the timeline was referring to in the formation of an advisory Committee in
January. Staff felt that the current Committee needs to stay in place until the finalization of the agreement
because of the tremendous knowledge level the Committee has gained throughout the process. The
Committee may consider at some point having a group of citizens involved in an effort to determine what
types of uses and priorities the citizens would benefit from in the building and expansion of the fiber optic
system.
P. McMillan commended E. Aghjayan and staff for their aggressive negotiations and tremendous amount
of time given to the entire telecommunications process.
8. ADJOURNMENT
A motion to adjourn was made at 5:20 p.m. MOTION CARRIED 8 -0. NONE ABSENT.
Respectfully submitted
CI A
Edward K. A yan
Secretary, Telecommunications Policy Advisory Committee
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