A PUBLIC HEARING TO RECEIVE INPUT FROM THE COMMUNITY REGARDING ITS CABLE-RELATED NEEDS AND INTERESTS, TO ESTABLISH A DATE FOR SUBMISSION OF WRITTEN COMMENTS ON THE “CITY OF SAN JOSE, CALIFORNIA REPORT ON CABLE-RELATED NEEDS AND INTERESTS AND OPERATOR PAST PERFORMANCE” AND “CITY OF SAN JOSE, CALIFORNIA REQUEST FOR RENEWAL PROPOSAL (RFRP) FOR CABLE TELEVISION FRANCHISE;” AND TO DIRECT STAFF TO PROCEED WITH PREPARATION OF FINAL REPORTS.

RECOMMENDATION

It is recommended that the City Council:

(a) 1. Conduct a Public Hearing to receive public and Council input on the future cable-related needs and interests of the community.

2. Accept draft reports entitled:

(a) City of San José, California Report on Cable-Related Needs and Interests and Operator Past Performance, and

(b) City of San José, California Request for Renewal Proposal for a Cable Television Franchise, including a draft franchise and model cable ordinance as attachments

3. Establish a deadline of July 13, 2001 for submission of written comments on these draft reports and the attachments.

4. Direct staff to seek additional information from AT&T on these draft reports, where appropriate, in order to make a final recommendation to Council on these reports.

5. Direct staff to review comments received on the draft reports, conduct any necessary further investigations to be able to respond to those comments, or to complete the ascertainment and return in August with final documents needed to close the ascertainment and to request renewal proposals for a cable television franchise to be presented to Council by October 19^th, 2001.

DOCUMENT SUMMARY

The draft documents attached to this memorandum are designed to meet requirements set out in federal law that govern the cable franchise renewal process. Staff suggests that in reviewing the documents, particular attention be paid to the “Draft Report on Cable-Related Needs and Interests and Operator Past Performance.” This document contains an 8-page executive summary that may be particularly helpful in providing Council with historical information on the community outreach performed to date, as well as the cable operator’s performance under the existing cable franchise. Please note that the “Actions Requested” in Section A of the Executive Summary are not being presented to Council for action at this time. These actions will be brought back to the City Council for approval in August when the documents are finalized. The attached documents are:

1. Draft Report on Cable-Related Needs and Interests and Operator Past Performance – The Executive Summary of this draft report summarizes the needs and interests that have been identified so far through extensive community outreach, focus groups, phone surveys, and other research. This report also summarizes problems identified in Heritage’s operation of the cable system during the existing franchise term.

2. Draft Request for Renewal Proposal for Cable Television Franchise (RFRP) – The draft RFRP, which is based on the Cable-Related Needs and Interests Report, outlines the specific requirements the cable provider would be expected to meet in order to renew the cable franchise for a new term. The RFRP will ask the operator to submit a proposal for renewal to satisfy these requirements. These provisions include requirements for cable system design, for PEG access, for an institutional network and for system construction and extension, as well as conditions related to right of way use and enforcement.

3. Draft Model Franchise – This attachment to the draft RFRP is designed to help the cable company understand and respond to those franchise provisions that staff would recommend that the Council require in any franchise grant to the cable operator. In the RFRP, the cable operator is required to explain any concerns it has with the proposed franchise and propose alternative language for consideration that addresses those concerns.

4. Draft Cable Ordinance – The attached draft Cable Ordinance is intended to establish a regulatory structure that staff would recommend for adoption by the Council. The draft Cable Ordinance sets out the City requirements that any cable provider is required to meet. Requirements in the Cable Ordinance are limited to those requirements that the City may impose unilaterally upon a cable provider under the City’s existing powers, such as the City’s police powers. As the operator’s activities would be subject to the ordinance, the operator is required to identify any conditions it would not comply with, and propose alternatives.

BACKGROUND

Heritage Cablevision of California, Inc, provides cable service in the City of San José. Heritage claims to hold the franchise originally issued to Gill Industries, Inc. in 1985. There is an ongoing dispute as to whether the original Gill Franchise has been unlawfully transferred. The City never formally approved a transfer of the franchise from Gill to Heritage. Heritage then came under the control of TCI of California, Inc.; and later TCI’s parent company merged with AT&T, thus placing current control of the franchise with AT&T. None of these transactions involving the franchise were ever approved by City. Heritage now does business as AT&T Broadband. The TCI/AT&T transaction was never approved by the City. In 1998, TCI of California notified the City that it desired to have the Gill franchise renewed. Following procedures prescribed by federal law, and set out in the federal Cable Act, the City has been considering this request. The Cable Act establishes a number of requirements for a formal cable franchise renewal. Among these, it requires that the City ascertain the future, cable-related needs and interests of the community, and perform an evaluation of the past performance of the cable operator.

To assist in this effort, the City contracted with Miller & Van Eaton (MVE), a nationally recognized law firm specializing in federal telecommunications law. MVE has extensive experience assisting municipalities with cable franchise renewals and other telecommunications-related matters. The MVE contract includes the services of two subcontractors: 1) The Buske Group, specializing in the community ascertainment process as prescribed by the Cable Act; and, 2) Columbia Telecommunications Corporation, engineering specialists with expertise in cable system design.

In September of 1999, the City Council held a public hearing and directed staff to pursue nine goals and objectives for a renewed cable franchise. In summary, these goals were to: 1) ensure a “state of the art” system; 2) reflect the community’s interest in, and commitment to, technology; 3) ensure responsive service; 4) ensure the cable system can be a means to stronger neighborhoods and a greater sense of community; 5) ensure residents and businesses benefit from access to the modern infrastructure of the rebuilt cable system; 6) provide an Institutional Network (I-Net) to allow community institutions to communicate more effectively; 7) ensure that a new franchise is strong and enforceable, with flexibility to respond to changing communications needs; 8) ensure that the public is compensated appropriately for use of the public right of way and, 9) resolve any outstanding non-compliance issues.

In March of this year, the City Council directed staff to develop a report identifying the results of the City’s ascertainment of the City’s cable-related needs and interests and review of Heritage’s past performance and to develop a Request For Proposals for a renewed franchise. The Council directed that staff return to the City Council with draft versions of these documents to receive further input.

ANALYSIS

In April, 1999, The Buske Group, working with City staff, initiated a series of focus groups involving representatives of various segments of the community. Between April and September, 12 focus groups were held with 142 people representing the following segments within the community:

The focus group attendees were affiliated with 98 community organizations and institutions. In addition to participating in the focus groups, each attendee was asked to fill out a “Community Cable Needs & Interests and Local Programming” questionnaire. A total of 108 questionnaires were returned. The data resulting from the Buske Group research was used to develop (and is described in) the “Draft Report on Cable-Related Needs and Interests and Operator Past Performance.” In addition, The Buske Group evaluated the public access facility and services provided by Heritage under its franchise with the City. This work identified significant shortcomings in the cable provider’s existing operations.

To further ensure broad involvement from the education community, the Mayor’s Office, working with city staff, invited the School Superintendents and technology officers from every school district within San José to meet and discuss their technology needs. This meeting resulted in agreement by the attendees that the creation of a fiber optic Institutional Network (I-Net) linking their facilities within the city would enhance their use of technology to meet educational objectives and should be pursued.

Columbia Telecommunications Corporation (“CTC”) conducted a technical review of the cable system, and worked with the schools, the City and the Buske Group to identify needs and interests with respect to overall system design and institutional network design.

Evolving from the efforts described above, staff and The Buske Group began meeting in February, 2000, with a broad-based community group. This Board of Conveners has continued to meet and is now in the process of establishing a non-profit organization that would manage public and educational access when a new cable franchise is approved.

Based on all of the work above, Columbia Telecommunications Corporation (CTC) and the Buske Group prepared reports identifying needs and interests and describing how these needs and interests could be met. Staff reviewed these recommendations, and based on its own experience and review, developed a draft report on needs and interests and a model for satisfying certain of those needs and interests, consistent with the Cable Act. The staff also reviewed the operator’s past performance based on work performed by the consultants. In the draft, several deficiencies in performance are identified for public comment.

Status of Negotiations

While federal cable law prescribes a formal process for cable franchise renewals, the law also expressly provides that a city and cable operator may try to reach an agreement on a franchise renewal through an informal process, outside of that formally prescribed process. Accordingly, the City and AT&T have been meeting for over a year and a half in attempts to reach agreement on the terms of a renewal franchise.

Since October, 1999 when the negotiations opened, staff has held more than 25 negotiating sessions with Heritage. The negotiations have been difficult and long, often resulting in little progress. We have not been able to achieve results that would meet the City Council’s stated objectives nor the community’s needs and interests as demonstrated by the attached reports.

Between August and December of last year, the discussions shifted to the company’s demand that the City allow it to rebuild the old PacBell Video Services cable system. In resolving this side issue, the City was able to impose an obligation on Heritage to: 1) expand its planned rebuild beyond the PacBell area to include most of the City; and, 2) improve the technical design of the planned cable system. However, these discussions further delayed negotiations on a franchise renewal. A Settlement Agreement resolving the side issues was approved by the City Council in December, 2000.

The franchise negotiations resumed in January with four meetings. In late February, two meetings were scheduled, but the day before the first meeting, AT&T notified the City that it was unwilling to make any substantive changes in its position, and suggested that their objective in any further meetings would be to discuss ways in which the City could reduce its position. Upon due consideration of AT&T's new posture, the City concluded that there was probably no reason to continue negotiating, and the February meetings were cancelled. The City did agree to meet again, and a meeting was held on March 19^th with little progress. Members of the City's negotiation team met with AT&T representatives in April, in response to AT&T's request for further information regarding certain of the City's equipment and facilities requests. The City and AT&T met again for negotiations on May 9^th, but again little progress was made. The last scheduled meeting, a conference call in late May, did not occur because AT&T’s representatives neglected to calendar it. There have been no formal negotiation discussions since then.

Significant differences remain between the City and the company. They are:

1. Funding — As described below, the level of support AT&T has offered is not sufficient to meet the needs and interests that have been so far identified by the community for a new cable system.

2. Terms and conditions — AT&T has insisted on terms and conditions that the City finds unacceptable.

3. Technology — Under AT&T’s proposal, cable subscribers are not protected from a repeat of the existing situation, in which subscriber service is limited by aging and outdated technologies because the company has chosen not to upgrade equipment.

4. Enforceability — AT&T has insisted on terms that would weaken the City’s ability to enforce the franchise.

Financial Analysis

While completion of the community ascertainment will continue through August, the consultants and City staff have identified between $37 million and $41 million in capital costs that would be necessary to provide PEG and I-Net facilities and equipment over a ten year franchise term. This figure does not include any operating costs. Under the formal process, the City is capping its request for PEG capital funds for studio facilities and equipment, and I-Net funds for construction of the network and equipment required to activate that network at approximately $1.63 per subscriber, plus a $2.25 million up-front payment. Heritage has offered $1.14 per subscriber. The amount offered by Heritage falls significantly short of the capital costs that will be incurred to meet the identified cable-related needs in this City.

To ensure that the City’s requested support for I-Net and PEG Access is reasonable, we have performed an analysis of projected revenues for the cable operator. Industry-wide projections by Paul Kagan Associates, a nationally recognized telecommunications business analyst, were used. Applying Kagan’s industry projections to the Heritage system in San José, staff projected growth in subscribers and growth in cable rates. This analysis reveals that AT&T will derive gross revenues of approximately $1.75 billion over the next ten years. Based on these projections, it appears to staff that it is reasonable to require the company to assume the obligations reflected in the attached documents.

Under the formal and informal processes, the City has been negotiating for construction of PEG facilities and advanced infrastructure that would enable the City, other governmental agencies and the schools to provide more services, more effectively to the public; that would reduce some existing communications costs; and that would provide all citizens with the opportunity to produce and disseminate information electronically to others in the community.

Under both the informal settlements and formal RFRP, there are costs that we have not required the operator to bear. In our informal proposals, we have requested funds below the amount requested in the RFRP both to speed settlement, and because we had hoped that the operator would agree to arrangements that would permit the funding to be used for both operating and capital expenses. We consider that to be a more cost-effective approach. But, it would have required the City to make up any difference in required costs (or obtain additional funds from other sources, such as other I-Net users).

In the formal process, a slightly different approach is being taken. Operators generally take the position that requiring payment of operating funds to the City above and beyond the franchise fee violates the Cable Act. In the RFRP, we have accordingly proposed a cap on direct dollar payments and indicated those payments are for capital costs. While we believe the operator may have a legal obligation to satisfy all needs and interests (including operating costs requirements) this is likely to be an issue of dispute.

So, the City Council should assume that there will be additional costs that will need to be borne. During a new 10-year franchise term, the Budget Office projects that franchise fees paid to the City will increase over current revenues levels by $24.3 million. It would be a matter of Council policy to determine how much, if any, of this additional revenue might be used to close the gap between the cable company’s support for PEG and I-Net, and the funding necessary to meet the needs and interests of the community.

Next Steps

With approval of the recommendations in this report, staff will accept additional written comments on the attached draft documents and on the future cable-related needs and interests of the community through July 13^th. In particular, AT&T will be given an opportunity to respond to the needs assessment, provide any data it has on needs and interests, and respond to the criticisms of its past performance, if it contends the draft evaluation is inaccurate. Input received at the June 19, 2001, City Council meeting and any written comments received will be used to create final documents that will be brought back to the City Council for approval in August. At that point, the Council will be asked to close the ascertainment formally; adopt the statement of needs and interests and direct the issuance of the RFRP. The Council will also formally adopt findings regarding AT&T’s past performance. The deadline for receipt of a new franchise proposal will be 60-days after the City Council approves the final documents. Staff will then return with recommendations for the conduct of the remainder of the formal process, which will require coordination of the proposed submittal

PUBLIC OUTREACH

In addition to the extensive outreach noted in this memorandum, advertisements noticing this public hearing were placed in the Mercury News and community and ethnic newspapers throughout San José.

COORDINATION

This report was coordinated with the Budget Office, the City Attorney’s Office, and Information Technology.

Tom Manheim

Public Outreach Manager