Date: Wed, 3 Sep 1997 16:55:00 -0700
Subject: Fiber Backbone Status, Etc.
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From: Van_HIEMKE@city.palo-alto.ca.us (Van HIEMKE)
To: pa-comnet@smart1.svi.org (INTERNET)
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X-Hpdesk-Subject: Fiber Backbone Status, Etc.
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Dear pa-comnet Members,
Although I keep up with the online pa-comnet discussions, time
constraints prohibit me from participating directly in each
discussion. Recently, several questions have been posed to me
both directly and indirectly. I will attempt to address those
issues in this email message. Since many of the issues were
addressed in the Telecommunications Strategy Study, I thought it
would be constructive to begin with a summary of the findings of
that study. In this email, I also describe the status of the
fiber backbone project and touch on possible future directions.
SUMMARY OF THE TELECOMMUNICATIONS STRATEGY STUDY FINDINGS
In this summary, I attempt to synthesize nearly 400 pages worth
of Telecommunications Strategy Study reports into about 5 pages.
Clearly, I can't cover everything, but I have tried to highlight
the most relevant insights. For those interested in more detail,
most of the information from the Telecommunications Strategy Study
reports is available on the City's web site at "www.city.palo-alto.
ca.us/palo/city/utilities". The reports can be downloaded as Word
Perfect documents from within the City Manager's Reports (CMRs) in
the "Attachments" section of the CMRs. The spreadsheets and some
maps are not available on the web site due to web formatting
problems, but copies could be made available upon request. Keith
Cooley, Michael Silverton, and other pa-comnet members may have
hardcopies of the reports from one or more of the phases of the
study.
In May 1995, the City initiated the five-phase Telecommunications
Strategy Study to determine the best City strategy for acceler-
ating the pace at which high-quality, low-cost advanced telecom-
munications services are delivered throughout Palo Alto while
limiting any negative impacts on Palo Alto's physical environment.
The Telecommunications Advisory Panel (TAP) was formed to provide
feedback to staff during the course of the study. The TAP
members included two City Council Members (Joe Huber and Ron
Andersen), one Utilities Advisory Commissioner (Paul Johnston),
and four community representatives with telecommunications
expertise (Keith Cooley, Jan Thomson, Ron Skeleton, Bob
Stillerman).
During the course of the study, alternatives were evaluated based
on the extent to which they would achieve the City's primary
telecommunications objectives in entering the telecommunications
business, which were determined to be as follows:
* Accelerated deployment of a broad range of advanced broadband
telecommunications services to all of the citizens and
businesses in Palo Alto.
* Decreased costs for both conventional and advanced telecommuni-
cations services (as compared to the costs for similar services
if provided without City involvement).
* High quality for both conventional and advanced telecommuni-
cations services.
* Enhanced competition among telecommunications service providers
and increased telecommunications choices for consumers (who are
currently limited to monopoly service providers for telephone
and cable television service).
* Limited or no financial risk exposure to the City.
The results from Phases 1-3 were presented to the City Council in
February 1996. They included a situation analysis, a market
analysis, and a preliminary strategy screening analysis. The
screening analysis narrowed the City's options down to the
following two classes of strategies:
1. Lease Existing Infrastructure (such as poles and conduits)
2. Develop a Network and Lease Access (ranging from dark fiber
to wholesale circuits)
As a part of the screening analysis, it was determined that
strategies under which the City would develop a network and
directly provide retail telecommunications services would require
too much new expertise and would place too much capital at risk
and were removed from further consideration. Doing nothing,
however, was also determined to be unacceptable because it would
not fully utilize existing Utility assets and would leave the City
in a completely reactive mode.
In August 1996, the Phase 4 analysis results were presented to
Council. Phase 4 involved a detailed analysis of several
variations on the two remaining classes of strategies. The
analysis involved both qualitative and quantitative evaluations
of a variety of network development options, with different
network architectures considered for commercial and residential
applications. The qualitative evaluation also considered the
service capabilities and limitations of each option and various
partnering and financing options.
For high demand commercial applications, the two options were:
1.) a dark fiber backbone, or 2.) a "competitive access
provider network" consisting of a SONET-based fiber network
over which point-to-point circuits could be configured. ("Dark
fibers" are simply bare fibers without any light transmitters,
receivers, or electronics installed by the City; the telecom-
munications service providers and/or end users would be
responsible for such devices. The SONET, or synchronous
optical network, standard is emerging as a dominant standard
for such telecommunications network backbones.)
For residential and small business applications, the four
options were: 1.) a hybrid fiber-coax (HFC) network, 2.) a
fiber-to-the-curb network, 3.) a switched digital video network,
and 4.) both active and passive fiber-to-the-home networks. Of
these options, HFC was the lowest cost option and was capable of
providing most services that would be of interest for the
foreseeable future. For the sake of keeping the quantitative
evaluation manageable, only the HFC network option was quanti-
tatively evaluated for the residential and small business market.
Had the HFC network option been more economically viable (i.e.,
less risky), the other options would have been given further
consideration.
The qualitative evaluation also included a brief evaluation of a
number of potential partners, including Cable Co-op, Pacific Bell,
Metropolitan Fiber Systems, an independent telecommunications
network developer / operator (e.g., Spectranet), and others. The
potential financing mechanisms that were considered included City
financing (Utility funds, the General Fund, revenue bonds, or
general obligation bonds), partner financing, or service provider
financing. Financing via an assessment district had been
considered in Phase 3, but was viewed as unlikely due to the
unprecedented nature of a City-wide assessment district.
(Assessment districts are typically formed to finance local
projects of benefit to the surrounding region. The projects
are financed by those who benefit from the project, such as the
businesses located near a new parking structure.)
The quantitative evaluation involved a detailed examination of
the network options which were structured as a series of buildout
decisions:
1. Should the City:
a. Lease existing poles and conduits, or
b. Install a fiber ring (with at least enough fiber for the
high demand market)?
2. (If the City installs a fiber ring) For high demand business
customers, should the City:
a. Lease dark fibers on the ring, or
b. Develop a "competitive access provider network", by
adding SONET hubs and additional fiber, and provide
wholesale circuits?
3. (If the City installs a fiber ring) For residential and small
business customers, should the City:
a. Add fibers to the fiber ring, extend fiber into neighbor-
hoods, and lease fiber on both the ring and extensions to
Cable Co-op (or Cable Co-op's successor),
b. Add fibers to the fiber ring, extend fiber into neighbor-
hoods, extend coaxial cable to end user premises, add the
necessary electronics for a hybrid fiber-coax network, and
lease bandwidth (i.e., channels) to service providers, or
c. Not add fibers to the fiber ring for the residential and
small business market?
4. (If the City only leases poles and conduits) Should the City
impose a universal service requirement on parties that lease
poles and conduits?
a. No
b. Yes
All of the eight possible combinations of the answers to the above
questions were incorporated into a series of eight strategies that
were analyzed in detail. The eight strategies, with the answers
to these questions identified in parentheses, and their estimated
capital costs, ongoing costs, estimated new staff requirements,
and 10 year net present value (NPV) of projected net cash flows
(revenues minus costs) are summarized below (all in constant
1996 dollars).
While all of the net cash flow projections shown below are
positive under the base case assumptions for the input variables
(e.g., project costs, market share projections, residual asset
value, etc.), there is substantial uncertainty in these net cash
flow projections. A probabilistic simulation analysis was
completed to gauge the impact of this uncertainty by modeling
several key variables with probability distributions to reflect
the uncertainty in their values. Thousands of possible future
net cash flow results were generated for each strategy based
upon the various possible values and associated probabilities
for the key input variables. The results of the simulation
analysis are also shown below, with the NPV of net cash flows
shown for four different values from the probability distribu-
tions generated from the simulation. The "low-high range"
identifies the lowest and the highest values generated. The
"10%-90% range" identifies a range of values for which there is
a 10% chance that the actual NPV would be less than the low
value and a 90% chance that the actual NPV would be less than
the high value. A key insight from this uncertainty analysis
was that the risk is generally higher for those strategies
requiring greater capital outlays, even after the residual
value of the assets is taken into consideration. (Note, NPV
values in parentheses are negative NPVs.)
STRATEGY #1 - LEASE EXISTING INFRASTRUCTURE WITH NO RESIDENTIAL
SERVICE REQUIREMENTS (1a, 4a)
* Capital Cost = $0
* Ongoing Costs = $130,000/year in year 1;
$20,000/year thereafter
* Staff Requirements = <1 new position
* 10 Year NPV of Net Cash Flows (base case) = $4.1 million
* 10 Year NPV of N.C.F. (low-high range) = $1.0 - $10 million
* 10 Year NPV of N.C.F. (10%-90% range) = $2.3 - $6.3 million
STRATEGY #2 - LEASE EXISTING INFRASTRUCTURE WITH RESIDENTIAL
SERVICE REQUIREMENTS (1a, 4b)
* Capital Cost = $0
* Ongoing Costs = $270,000/year in year 1;
Decreasing to $70,000/year by Year 4
* Staff Requirements = <1 new position
* 10 Year NPV of Net Cash Flows (base case) = $4.9 million
* 10 Year NPV of N.C.F. (low-high range) = $1.1 - $9.4 million
* 10 Year NPV of N.C.F. (10%-90% range) = $2.6 - $6.6 million
STRATEGY #3 - DARK FIBER RING (1b, 2a, 3c)
* Capital Cost = $750,000
* Ongoing Costs = $210,000/year
* Staff Requirements = 2 new positions
* 10 Year NPV of Net Cash Flows (base case) = $7.0 million
* 10 Year NPV of N.C.F. (low-high range) = ($1.2) - $21 million
* 10 Year NPV of N.C.F. (10%-90% range) = $1.4 - $10 million
STRATEGY #4 - COMPETITIVE ACCESS PROVIDER NETWORK (1b, 2b, 3c)
* Capital Cost = $3,000,000
* Ongoing Costs = $250,000/year in year 1;
$850,000/year thereafter
* Staff Requirements = 7 new positions
* 10 Year NPV of Net Cash Flows (base case) = $7.1 million
* 10 Year NPV of N.C.F. (low-high range) = ($10) - $60 million
* 10 Year NPV of N.C.F. (10%-90% range) = ($3.9) - $33 million
STRATEGY #5 - DARK FIBER RING WITH FIBER EXTENSIONS FOR CABLE
CO-OP'S HFC NETWORK (1b, 2a, 3a)
* Capital Cost = $2,900,000
* Ongoing Costs = $280,000/year in year 1;
$300,000/year thereafter
* Staff Requirements = 3 new positions
* 10 Year NPV of Net Cash Flows (base case) = $20 million
* 10 Year NPV of N.C.F. (low-high range) = ($0.8) - $40 million
* 10 Year NPV of N.C.F. (10%-90% range) = $8.5 - $27 million
STRATEGY #6 - COMPETITIVE ACCESS PROVIDER NETWORK WITH FIBER
EXTENSIONS FOR CABLE CO-OP'S HFC NETWORK (1b, 2b, 3a)
* Capital Cost = $5,000,000
* Ongoing Costs = $300,000/year in year 1;
$860,000/year thereafter
* Staff Requirements = 7 new positions
* 10 Year NPV of Net Cash Flows (base case) = $21 million
* 10 Year NPV of N.C.F. (low-high range) = ($7.1) - $84 million
* 10 Year NPV of N.C.F. (10%-90% range) = $8.7 - $48 million
STRATEGY #7 - DARK FIBER RING AND CITY-CONSTRUCTED HFC
NETWORK (1b, 2a, 3b)
* Capital Cost = $14,000,000
* Ongoing Costs = $520,000/year in year 1;
Increasing to $2,600,000/year by Year 3
* Staff Requirements = 27 new positions
* 10 Year NPV of Net Cash Flows (base case) = $8.6 million
* 10 Year NPV of N.C.F. (low-high range) = ($27) - $21 million
* 10 Year NPV of N.C.F. (10%-90% range) = ($17) - $0.6 million
STRATEGY #8 - COMPETITIVE ACCESS PROVIDER NETWORK AND CITY-
CONSTRUCTED HFC NETWORK (1b, 2b, 3b)
* Capital Cost = $16,000,000
* Ongoing Costs = $530,000/year in year 1;
Increasing to $3,100,000/year by Year 3
* Staff Requirements = 31 new positions
* 10 Year NPV of Net Cash Flows (base case) = $9.7 million
* 10 Year NPV of N.C.F. (low-high range) = ($33) - $54 million
* 10 Year NPV of N.C.F. (10%-90% range) = ($19) - $21 million
(Note, none of the above capital cost estimates include costs for
customer premise equipment which are assumed to be borne entirely
by the end user or service provider.)
A dark fiber backbone strategy that was a blend of Strategies #3
and #5, consisting of a fiber ring with enough fiber for both the
high demand business market and the residential and small
business market, emerged as the strategy that offered the balance
of risk and reward that best met the City's telecommunications
objectives. This strategy was described as a positioning
strategy from which the City could later extend fiber into
residential neighborhoods or add electronics if determined to be
appropriate by the City Council. Given the relatively low cost
and low risk nature of the dark fiber backbone strategy, the
City was able to finance the strategy using funds from the
Electric Rate Stabilization Reserve.
Although Phase 5 of the Telecommunications Strategy Study was
originally intended to involve development of a business plan
for the recommended strategy, the dark fiber backbone strategy
was straightforward enough that Phase 5 could be converted to an
implementation phase so that the City could position itself in
the telecommunications marketplace as quickly as possible.
STATUS OF THE PALO ALTO FIBER BACKBONE
The dark fiber backbone was originally intended to be a 15 mile
fiber ring with about 240 fibers (one 96 strand fiber cable for
the business market and one 144 strand fiber cable for the
residential market). Following a series of meetings with
prospective users of the fiber backbone, including telecommuni-
cations carriers, Cable Co-op, Internet service providers, the
Palo Alto Unified School District, and local businesses, the
design was modified to better serve the prospective customers.
The fiber count was standardized at 144 strands so that the City
could get the greatest volume discount and most rapid delivery
for the cable. The original design concept was modified so that
the distinction between "business" and "residential" cables was
removed as the single ring was converted to a series of seven
rings with either 144 or 288 fibers along any given segment.
This enabled the City to expand the route to cover 27 miles
without requiring more fiber or exceeding the $2 million budget
for the project. With the current design, adjacent rings can be
combined to form larger rings, resulting in many more than 7
possible ring topologies. Portions of rings can also be
licensed to form point-to-point connections. The latest fiber
backbone design can be viewed at "www.city.palo-alto.ca.us/
palo/city/graphics/map.jpg".
Roughly 60% of the backbone construction has been completed.
A contractor has been working with City staff since June to
help accelerate the remaining construction. With the exception
of one three mile portion of the planned backbone, which is being
deferred for roughly one year so that the installation can be
coordinated with the creation of a planned underground utility
district, construction is targeted for completion by the end of
October.
The City is currently licensing fiber to one customer, Brooks
Fiber Communications. The City has received additional inter-
connection requests and inquiries from other parties with whom
deals are expected to be signed soon. The City anticipates
recovering costs within 3-5 years with mature net cash flows in
excess of $1 million thereafter.
FUTURE DIRECTIONS
City staff are currently looking at various options to address
the City's telecommunications objective of "accelerated deploy-
ment of a broad range of advanced broadband telecommunications
services to all of the citizens and businesses in Palo Alto."
Internal discussions are underway to examine potential actions
that the City may take to further achieve this objective while
still achieving the City's other objective of "limited or no
financial risk exposure to the City." More information will
be forthcoming as a clearer direction emerges from these
discussions.
I hope you find this information useful in your discussions.
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Van Hiemke
Telecommunications Manager
Utilities Department
City of Palo Alto
250 Hamilton Avenue
Palo Alto, CA 94062
Phone: 650-329-2275 Fax: 650-326-1507
van_hiemke@city.palo-alto.ca.us
http://www.city.palo-alto.ca.us/palo/city/utilities
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