February 24, 2004

SUBJECT: Award of Contract to Assist the City in the Negotiation and Renewal of City's Cable Television Franchise Agreement and Budget Modification No. 27

REPORT IN BRIEF

Approval is requested for the award of a contract to Municipal Services Associates, Inc., to assist the City in the negotiation and renewal of the City’s cable television franchise agreement.  Approval is also requested for Budget Modification No. 27 to provide funding for this special project.

BACKGROUND

The franchise agreement with Comcast (previously AT&T Broadband/TCI Cablevision of California) expires on December 13, 2005.  Comcast notified the City on January 16, 2003, of its intent to “reach a mutually satisfactory agreement through informal negotiations” to extend the franchise agreement for an additional five years.  Federal law requires an elaborate franchise renewal process that gives the City an opportunity to ascertain the community’s needs and to make demands of the cable operator as a condition of renewal.  However, Comcast has a contractual right to extend the franchise agreement without going through this process unless it is in material breach of the agreement.

The City conducted a Periodic Review of the cable franchise in calendar year 2000 that was completed in March 2001.  There is one significant finding that remains outstanding from the 2000 Periodic Review: the underpayment of franchise fees.  The Periodic Review found that AT&T underpaid franchise fees from 1996 through 1998 in the sum of $108,465.  The two reasons for the underpayment are the definition of “gross revenues” per the franchise agreement and the pooling of advertising revenues.  Comcast (then AT&T Broadband) maintains that it “properly calculates revenue estimates for payment of franchise fees” and that “pooling of advertising revenues is appropriate and conforms to industry practice.”

The City considers this underpayment of franchise fees to be a material breach of the franchise agreement and subsequently notified Comcast on December 4, 2003, that it is not entitled to exercise the five-year option to extend.  As a result, the City defaults to the formal renewal process established by the Cable Acts of 1984 and 1992.  The formal process includes four basic steps:

1. Determine what the community will need in the future for cable services;
2. Evaluate the past performance of the incumbent cable operator;
3. Evaluate the incumbent cable operator’s proposal for a new franchise, and the cable operator’s financial, technical and legal qualifications to satisfy its proposal; and
4. Decide whether or not to renew the existing cable franchise agreement and, if so, on what terms and conditions.

It was undetermined during the City’s capital project budget process in 2003 whether the City would informally or formally negotiate the franchise renewal process with Comcast; therefore, a special project was not submitted for consideration at that time.   As a result of the City entering into the formal renewal process, funding is now required for assistance in that process.

EXISTING POLICY

Cable Franchise Agreement (12/14/90 – 12/13/2005)
City Charter Article XVI, Sections 1600-1608

Federal Communications Commission Rules and Regulations

Cable Acts of 1984 and 1992

Telecommunications Act of 1996

Community Participation Sub-Element, Goal 7.2B, Community Involvement – Achieve a community in which citizens and businesses are actively involved in shaping the quality of life and participate in local community and government activities.

DISCUSSION

Due to the complexity of cable operations, staff is recommending that the City contract with an independent expert to assist with the formal franchise renewal process.  Staff further recommends that the City selects Municipal Services Associates, Inc. (MSA) as this independent expert.

MSA conducted the 2000 Periodic Review of the City’s cable franchise.  MSA was selected for this Review through a Request for Proposals process that was distributed to an extensive consultant list provided by Public Technology, Inc. (PTI) and the National Association of Telecommunications Officers and Advisors (NATOA).  An evaluation team composed of staff representing the Departments of Finance and Information Technology developed a consistent set of criteria for evaluation and selected five proposals for further consideration.  After extensive reference checking, staff selected the proposal submitted by MSA.

The team of experts who conducted the 2000 Periodic Review collectively had over 20 years of telecommunications-related experience working with a variety of counties and municipalities across the country.  The team performed similar work in the states of California, Illinois, Virginia, Wisconsin, Ohio and Minnesota.  The lead experts were:

• Mr. Stuart Chapman, President of MSA (Performance Review);
• Mr. Louis Karrison, CPA, Partner, Crowe, Chizek & Company LLP (Financial Review); and
• Mr. Jonathan Kramer, President, Kramer Firm, Inc. (Technical Review).

References for these individuals were positive and complimentary.  A number of individuals described Mr. Chapman, Mr. Karrison and Mr. Kramer as “some of the very best”.  These same individuals will comprise the expert team who will assist the City with the renewal of the cable franchise agreement.

MSA conducted the 2000 Periodic Review in a thorough and professional manner.  The resulting report identified numerous technical, performance and financial discrepancies in AT&T Broadband’s (now Comcast’s) cable operations.  As a result of conducting the comprehensive Periodic Review, MSA expert team members have gained an intimate knowledge of the complexities of the City’s cable franchise agreement and its relationship with Comcast (previously AT&T Broadband).  The team members know first-hand the issues in cable television that are high priority for the City and will address these issues during the cable franchise renewal process.

MSA’s proposal for the cable franchise renewal includes significant efforts for needs assessment and evaluation, a critical element in that it provides an opportunity for cable subscribers, citizens, schools, City staff, City government officials and community leaders to participate in determining the community needs and interests for cable services.  The proposal also includes a survey of cable subscribers (28,356 basic subscribers in 2002) and non-subscribers during the assessment process with a focus on Internet access and related telecommunications services as an outcome of the 1996 Telecommunications Act.

MSA proposes to examine Comcast’s performance with an emphasis on records and system review, including the City’s franchise ordinance and support documents, such as complaints received, previous performance reviews and any notices of violation.  This review will lead to recommendations which will strengthen the City’s position in protecting its rights in the new franchise ordinance and agreement and allow for improved customer service protection for subscribers.

The review will also provide the City with a detailed overview of the cable system and plant.  The technical evaluation will examine the physical integrity of the cable reception and transmission equipment and determine whether the system installation is in compliance with local electrical and safety codes.

A financial analysis will be conducted which will probe Comcast’s financial records to determine if the City is receiving its proper share of franchise fees for 2003.  This analysis is important and can determine if there is a need for a more inclusive definition of franchise fees and a more complete breakdown of fee sources in the new franchise agreement.

The proposal also includes working closely with City staff and the Office of the City Attorney in the research and preparation of the franchise ordinance and franchise agreement documents as well as negotiations with Comcast.

The formal renewal process is estimated to take from 21-24 months.  MSA can begin work immediately upon award of contract.

FISCAL IMPACT

The total project costs are $85,590.  It is recommended that this project be funded from the General Fund’s Non-Recurring Events Reserve.  Any funding that is received as a result of the underpayment of franchise fees from the 2000 Periodic Review will be applied back to the Non-Recurring Events Reserve.

BUDGET MODIFICATION NO. 27 FISCAL YEAR 2003/2004
	Current	Increase (Decrease)	Revised
General Fund
Expenditures:
New Special Project – Cable TV Franchise Negotiation	$0	$85,590	$85,590
Reserves:
Non-Recurring Events	$749,025	($85,590)	$663,435

PUBLIC CONTACT

Public contact was made through posting of the Council agenda on the City’s official notice bulletin board, posting of the agenda and Report on the City’s web page, and the availability of the Report in the Sunnyvale Public Library and the City Clerk’s Office.

ALTERNATIVES

1. Approve Budget Modification No. 27 as described in this Report.

2. Award a contract to Municipal Services Associates, Inc., in the amount not-to-exceed $85,590.

3. Do not approve the Budget Modification No. 27 and direct staff to prepare a revised Budget Modification.

4. Do not award a contract to Municipal Services Associates, Inc. 

RECOMMENDATION

Staff recommends Alternatives No. 1 and No. 2.

Prepared by:

Marilyn Crane
Manager, Information Technology Services

Reviewed by:

Mary J. Bradley
Director, Finance

Reviewed by:

Shawn Hernandez
Director, Information Technology

Approved by:

Amy Chan
Acting City Manager

Attachments

1. Draft Professional Services Agreement (pdf format)