CLICK! NETWORK DRAFT PROPOSAL
•
In the early 1990s, Tacoma Power needed a
telecommunications network for its electrical system
•
Monitoring and control, real-time data, shorter power
outages, connect to homes with smart meters
•
No high-speed data services available
•
TCI only cable provider – no competition, high rates,
high demand for cable at that time
•
Business plan: build own infrastructure, offer cable
and Internet service
•
Launched Click! Network in 1997
HOW THE NETWORK OPERATES
3 Cable TV Head End NW Hub NE Hub Downtown North Hub Downtown South Hub SW Hub SE Hub Internet Internet Large Business Large BusinessGOALS
1998 Now
Electrical system data, substations connected,
faster restoration
Smart meter program
Competition in market
Lower rates
Better service
Financial self-support Wholesale broadband
Open-access network
GROWTH TREND – 1998 TO 2010
5 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Cable TV 690 10,654 16,841 19,834 21,483 22,742 23,342 23,625 24,327 24,553 24,507 24,737 24,002 ISP 0 0 1,256 2,986 6,310 9,525 12,763 14,420 15,955 16,862 17,141 17,519 17,659 Homes Passed 63,333 64,620 69,300 73,610 80,854 87,142 97,515 108,099 109,300 110,330 0 5,000 10,000 15,000 20,000 25,000 30,000Cable TV & ISP Customer Counts
Cable TV ISP
Strategic Planning
Market share
22.6%
“I recommend the aggressive plan…It is obvious that bundling
is needed to succeed in the market because Comcast is
thriving while Click! has been stagnating….Further, I am
recommending that Click! resell the voice and cellular
products.”
-
Douglas Dawson, President
Plan A
•
Launch Click! branded Internet and telephone service
•
Offer bundled package/great savings for customers
•
Convenience of one bill, one call, one payment
•
Creates operational efficiencies for Click!
•
Promotes economic viability of enterprise
Plan B
•
At the direction of the Public Utility Board, to collaborate with
ISPs to devise and execute a plan that addresses Click!’s
financial deficit
•
ISPs offered to grow 6,000 Internet customers between Aug. 1,
2012 and July 31, 2016
•
In exchange, ISPs sought a non-compete from Click! during the
growth period and locked in wholesale rates
STRATEGIC PLANNING 2010
GROWTH TREND – 1998 TO 2016
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Cable TV 690 10,654 16,841 19,834 21,483 22,742 23,342 23,625 24,327 24,553 24,507 24,737 24,002 22,983 22,449 20,619 19,506 19,196 18,578 0 5,000 10,000 15,000 20,000 25,000 30,000Cable TV & ISP Customer Counts
Cable TV ISP Strategic Planning Market share 31.3% 16.6% 4.7% 22.1% 22.6% 16.0%
TODAY’S CHALLENGES
9
Escalating programming costs
• Retransmission consent license fees doubling, double-digit increases in
network programming costs
Declining cable TV customers (industry-wide)
• Cord cutters and cord-nevers
• Growth in competition from wired providers, satellite providers,
over-the-top service providers
Current business model “Plan B” doesn’t work
• Click! invests in the capital and manages the system, ISP and MSAs
enjoy the markup
• ISPs are Rainier Connect, Advanced Stream and Net Venture
• MSAs provide point-to-point services, local loops and last mile, and include Integra, tw Telecom,
Century Link, Optic Fusion, Rainier Connect, Spectrum and Noel Communications
TODAY’S CHALLENGES
Higher operating costs
•
Lack of scale
•
Lack of negotiating power
•
High personnel costs
•
Deep diversification of labor – union work rules
Changes in Power’s smart meter strategy
•
Wireless technology wins
•
Change in cost allocation to shift costs based on utilization
of the network
Evaporation of rate differential with competition
•
Need to recover cost
FINANCIAL TREND – CLICK!
11
$ in millions 2009/10 2011/12 2013/14 2015/16 (Budget) (Budget) 2015
Revenue $46.2 $49.1 $53.5 $59.5 $29.8 Click! O&M ($43.1) ($44.7) ($46.2) ($51.8) ($25.9)
Cash flow after O&M $3.1 $4.4 $7.3 $7.7 $3.9
A&R and capital ($22.9) ($5.6) ($3.5) ($5.2) ($2.6)
Cash flow after
A&R and capital ($19.8) ($1.2) $3.8 $2.5 $1.3
Debt service ($3.9) ($3.9) ($3.9) ($3.9) ($2.0)
FINANCIAL TREND - OVERALL
$ in millions 2009/10 2011/12 2013/14 2015/16
(Budget) (Budget) 2015
Revenue $46.2 $49.1 $53.5 $59.5 $29.8 O&M ($57.6) ($58.3) ($60.0) ($67.0) ($33.5)
Cash flow after O&M ($11.4) ($9.2) ($6.5) ($7.5) ($3.8)
A&R and capital ($25.8) ($7.4) ($5.4) ($7.6) ($3.8)
Cash flow after
A&R and capital ($37.2) ($16.6) ($11.9) ($15.1) ($7.6)
Debt service ($3.9) ($3.9) ($3.9) ($3.9) ($2.0)
DEFICIENCIES: WHAT ARE CUSTOMERS
MISSING OUT ON?
13
•
One bill for cable, internet and phone
•
Lower rates – cost structure and economy-of-scale
negotiating power
•
Top technology – DVR, TV Everywhere
•
More programming
STRATEGIC PLANNING - 2013
Problem: Click! cannot meet its stated goals
with the current business model “Plan B”
•
Cannot improve products and services to
customers
•
Brought in experts to address deficiencies and
develop strategies
•
Addressing business viability, eliminating financial
losses are critical drivers
ALTERNATIVES EVALUATED
15
1. Current operating model
2. Go fully retail – compete with ISPs
3. Cut labor costs
4. Go fully retail – buy out ISPs
5. Offer wholesale broadband only
6. Shut down Click!
7. Sell
GOAL AND NPV COMPARISONS
Electric System Support
Smart
Meters Competition Market Discipline Rate Service Better
Financial Self-Support Wholesale Broadband Open Access Network 10-year NPV in millions Current model ($59.6) Compete with ISPs ($48.7)
Cut labor costs ($22.4 to
$41.5)
Buy out ISPs ($22.5)
Wholesale only ($9.6)
Shut down $16.4
Sell $36.4
Lease to 3rd
SHUT DOWN CLICK!
17
Pros
Cons
• Eliminate Power ratepayer
subsidy (F)
• Retain network ownership and
use (O)
• Eliminates market competition (C) • Potential rise in price for Cable TV,
Internet and phone services (C)
• Displaces ISPs and MSAs (O) • Loss of employment for Click!
employees (O)
O = Operational C = Customer F = Financial
Discontinue all commercial operations
10-year NPV = $16.4 million
SELL
Pros
Cons
• Maintain effective market
competition (O)
• Provision of new products &
services and bundled packages (C)
• Opportunity for continued
employment for Click! employees (O)
• Proceeds from sale (F)
• Eliminate Power ratepayer
subsidy (F)
O = Operational C = Customer
• Relinquish ownership of
non-utility portion of network (O)
• Network, and product and
service improvements at the discretion of new operator (C)
• May not include employment
opportunities for Click! employees (O)
• In-house support/maintenance
of Power’s fiber (O)
Sell network and customers to third party
10-year NPV = $36.4 million
LEASE NETWORK TO A THIRD PARTY
19
Pros
Cons
• Maintain open access network (O)
• Maintain effective market competition (C) • Grandfather existing services & rates (C) • Provision of new products & services and
bundled packages (C)
• Continuation of low-income programs (C)
• Opportunity for continued employment for Click!
employees (O)
• Generate positive cash flows from rent (F) • Capital investments to upkeep network (O,C,F) • Support/maintenance for Power’s fiber (O) • Eliminate Power ratepayer subsidy (F)
• Retain network ownership and use (O)
• Status would change from
network/owner operator to network owner/lessor (O) • Click! Network, as a brand,
would dissolve (O)
• Continuation of employment for
Click! employees (O)
O = Operational C = Customer F = Financial
Cable customers would move to a third party
10-year NPV = $78.2 million
“I see two reasonable alternatives for the business. Either lease
the whole network to one party, or continue to operate the
business but cut staff.
Leasing returns the highest amount of cash to the bottom line
and under a lease scenario even most of the cost for Power to
maintain using the network would be covered. But it looks like
continuing to operate, even with staff cuts will result in an
ongoing subsidy to Click! and the company will need to get
comfortable with the permanent subsidy.”
-
Douglas Dawson, President
RECOMMENDATION: PRIVATE/PUBLIC
PARTNERSHIP
21
Why enter into a lease-like arrangement?
•
Satisfies customer, operational and financial goals
•
Maintains city ownership and oversight – important for
operation of electric system
•
Assured continuity for customers
•
Continued investment in network
•
Improved long-term value
•
Best opportunity for cost recovery, while maintaining
“The telecommunications industry is evolving rapidly with resultant increasing
competition for incumbent suppliers. In addition to the industry structural changes, Click! has a number of competitive disadvantages (inability to bundle services, programming costs, overhead costs, labor costs, lack of scale).
Click! has been, and is, experiencing a steady loss of customers and resultant financial deterioration due to industry structural changes. It appears that Click!
cannot overcome the industry structural changes and its competitive disadvantages
As a result of the industry changes and the competitive disadvantages, Power has been subsidizing Click! and the subsidies will likely grow over time.”
Recommendation
“Sell, lease, or close Click! as soon as reasonably possible, and within one year at the latest.”
- Dave Vondle, Sage Consulting LLC
PUBLIC/PRIVATE PARTNERSHIP
FEASIBILITY
23
Exploring feasibility options
•
Theoretical recommendation not enough
•
Wanted to understand if arrangement is implementable
•
Conducted due diligence to bring a concrete plan for
policymakers to consider and react
Wave Broadband approached Tacoma Power
about buying or leasing network
•
Able to discuss options, determine possibilities
•
Jointly developed draft letter of intent that outlines
potential public/private partnership – with policymaker
approval
PUBLIC/PRIVATE PARTNERSHIP OPTIONS
Can TPU enter into a lease-like agreement?
• Yes, it’s not only the most financially sound option, it is legal • Contract terms would include cancellation clause
• Performance measures built into contract for consumer and city protection
Why not issue an RFP?
• Competitive bid not required
• Unique transition, few suitable partners
Why not Google, Comcast, other company?
• Google not interested in this market
• Comcast would eliminate valuable market competition • Few companies could meet goals
City has ability to establish performance standards
through the partnership agreement and the franchise
WHY WAVE BROADBAND?
25
• Local, independent company: Headquartered in Kirkland, WA, operations along I-5 corridor
• Solid customer service: 24/7 Call Center and Network Operations Center • Excellent suite of products and services: Largest gigabit provider in
Washington state, gigabit service offered since 2008 • Competitive, value-oriented pricing
• Experienced management: Operating telecommunications companies is
their core business
• Financial strength: Raised over $1.2 billion in capital over the past two years
• Operational-scale economies: Three-state operation, 200,000 households; 400,000 plus subscribers
• Leadership role: National Cable Telecommunications Cooperative and American Cable Association to influence technology and regulations
WAVE’S PROPOSAL
•
Long-term operation of the commercial
telecommunications network (active plant and dark
fibers)
• 40 years with one option to renew for 10 years, IRU (Indefeasible Right of Use)
Agreement, APA (Asset Purchase Agreement), other controlling agreements
•
Improved products and services
• Commitment to roll out gigabit service to condos, apartments and commercial
complexes, limited to improvements made to the physical plant, cash value for unmet capital commitment
•
Provisioning, support and maintenance of TPU’s active
fiber infrastructure
• Fiber network, legacy Gateway meters
•
Avoids $6 million of the $9.5 million annual loss
WAVE’S PROPOSAL - FINANCIAL
27
Annual* 40 Years*
Lease payments $2.0 million $80 million
Capital payments $1.5 million $60 million
Avoided losses $6 million $240 million
Total Value $9.5 million $380 million
HOW PROPOSAL BENEFITS CONSUMERS
•
Consumers still have choice of service
providers
•
Access to better products and services
• More channels and more On Demand • Better TV Everywhere
• TiVo DVR and multi-room solution
• Faster Internet speeds (plan for deployment of Gigabit Internet
service)
•
Competitive, fair pricing
• Grandfathering of services and
• Rate increases capped at 5% each year for 2 years • Low-income program for cable and Internet
HOW PROPOSAL BENEFITS THE CITY
29
•
Open Access Network
• Choice of ISPs
• Choice of telecommunications companies • Net neutrality principles
•
True market-driven competition
• Competitive pricing • Value for consumers
•
Advances economic development initiatives
• State-of-the-art network
• Regionally interconnected networks
• Better for resellers
• Better for local businesses
HOW PROPOSAL BENEFITS THE CITY
•
Support and maintenance of the INET
• Will assume Click!’s INET obligations
•
Local presence
• Local stores
• Local employment
•
Maintain or improve tax base
• Franchise fee • PEG fee
• B&O tax
• Sales and use tax • Property tax
ISP IMPACTS
31
Click!/ISP current status
• Click and ISPs are collaborating, meeting (modest) customer growth
targets
• ISPs requesting new, long term contracts with non-compete clause, no
rate adjustments
• Contract negotiations almost completed
• Some concern by Click! about entering new long term contracts at this
time
Implications of public/private partnership on ISPs
• Will continue to be an open-access network
• ISP contracts (term, pricing) will be honored by new network lessor • New network lessor will compete with ISPs
• ISPs have committed not to oppose public/private partnership
TAKING CARE OF EMPLOYEES
Wave expects to hire 81 people, have
committed to interviewing Click! employees
TPU offering severance pay if no offer of
employment by TPU or Wave
Data request received from union – keeping
them in the loop
PROPOSED FOLLOW-UP ACTIVITIES
33
Click! proposal presented to PUB or PUB/Council March 31
Discussions with Council members Within 14 days
Union meetings Within 7 days
Community Town Hall meetings April 9 & 15
Employee transition discussions Within 60 days Council and PUB deliberations
Other community meetings (Community Council, business districts, etc.)
PROPOSED FOLLOW-UP ACTIVITIES
PUB approves Wave non-binding LOI Approx. 60 days post
Council approves Wave non-binding LOI Approx. 60 days post
Negotiation of definitive agreements with Wave Within 60-120 days post PUB approves Wave agreements Approx. 120 days post
Council approves Wave agreements Approx. 120 days post
Wave and TPU work to satisfy “closing conditions” 120-180 days post
Transaction closes Approx. 180 days post
APPENDICES
35
Pros and cons of alternatives 1 through 5
1.
Current operating model
2.
Go fully retail – compete with ISPs
3.
Cut labor costs
4.
Go fully retail – buy out ISPs
CURRENT OPERATING MODEL
Pros
Cons
• Maintain open access network (O) • Maintain effective market
competition (C)
• Provision of new products and
services (C)
• Continuation of low-income
programs (C)
• Continued employment for Click!
employees (O)
• Support/maintenance for Power’s
fiber (O)
• Retain network ownership and use
• Today’s challenges still at play (O,F,C) • Continued capital investments in the
network (F)
• Continued subsidization by Power
ratepayers (F)
O = Operational C = Customer F = Financial
Reliance on ISPs for revenue generation
10-year NPV = ($59.6 million)
GO FULLY RETAIL – COMPETE WITH ISPs
37
Pros
Cons
• Maintain open access network (O)
• Maintain effective market competition
(C)
• Provision of new products & services
and bundled packages (C)
• Continuation of low-income programs
(C)
• Continued employment for Click!
employees (O)
• Retain network ownership and use (O)
• Today’s challenges still at play
(O,F,C)
• Continued capital investments in the
network (F)
• Disrupt ISPs business model (O)
O = Operational C = Customer F = Financial
Offer cable and Internet, compete with ISPs
10-year NPV = ($48.7 million)
CUT LABOR COSTS
Pros
Cons
• Maintain open access network (O) • Maintain effective market
competition (C)
• Provision of new products &
services (C)
• Continuation of low-income
programs (C)
• Continued employment for most
Click! employees (O)
• Retain network ownership
and use (O)
• Today’s challenges still at play
(O,F,C)
• Potential reduction in service
levels (C)
• Continued capital investments in
the network (F) • Continued subsidization by Power ratepayers (F) O = Operational C = Customer F = Financial
Reduce staffing levels by 11 to 22
GO FULLY RETAIL – BUY ISPs
39
Pros
Cons
• Maintain open access network (O) • Maintain effective market
competition (C)
• Provision of new products &
services (C)
• Continuation of low-income
programs (C)
• Continued employment for most
Click! employees (O)
• Retain network ownership
and use (O)
• Today’s challenges still at play
(O,F,C)
• Continued capital investments
in the network (F)
• Incur cost of purchasing ISPs (F) • Continued subsidization by
Power ratepayers (F)
O = Operational C = Customer F = Financial
Offer cable and Internet, buy out ISPs
10-year NPV = ($22.5 million)
OFFER WHOLESALE BROADBAND ONLY
Pros
Cons
• Maintain open access network
(O)
• Maintain effective market
competition for broadband (C)
• Provision of new products &
services (C)
• Continued employment for some
Click! employees (O)
• Retain network ownership and
use (O)
O = Operational
• Growth limited by growth in
wholesaler business (O,F)
• Continued capital investments in
the network (F)
• Majority of operation and
maintenance costs absorbed by Click! (F)
• Limited return on investment at
the 60/40 revenue split ratio (F)
• Continued subsidization by Power
ratepayers (F)
Cable customers move to third party, charge per customer
10-year NPV = ($9.6 million)
