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2000-03-15 Agenda Packet - Board (18)
TDPUD STAFF REPORT TO: Board of Directors FROM. Alan Harry, Director of Telecommunications Services SUBJECT. Nevada County LAFCo; District Application to Provide Telecommunication Services DATE. March 8, 2000 AGENDA #S SUMMARY/BACKGROUND This item was `tabled"at your February 25, 2000, meeting and rescheduled for the Board's regular meeting of March 15, 2000, at the request of Board President Hemig. As a point of historical reference, during the Districts 1998 Strategic Planning Session staff was directed to look into the ability of the District to provide telecommunications services to the Truckee Community. As such staff contracted with RMI, now Navigant Consulting, to prepare a feasibility study for the provision of such services. This report was originally brought before you in October of 1999 as the `Telecommunications Business Plan for the Truckee-Donner Public Utility District: Since that time staff has revised specific language, per Board recommendations, to ensure that the document follows the intent of the Board. At the Districts regular meeting of October 20, 1999, the Board approved the District's Application to Nevada County LAFCo to activate its latent power to provide telecommunications services, and, adopted Resolution No. 9913 Initiating Proceedings To Activate A Latent Power To Provide Telecommunications Services. Soon thereafter staff submitted the Districts application, resolution, and draft Telecommunication Business Plan to Nevada County LAFCo for their review. In January of this year the Board directed staff to contract with Sierra Market Research to prepare and conduct a telecommunications survey. On February 16, 2000, the Board received a presentation from Sierra Market Research as to their findings. To date the Board has received information supporting the viability of the District providing telecommunications service within the Truckee community. As such staff recommends that the District submit this data, the `Telecommunications Business Plan for the Truckee-Donner Public Utility District; and the `Truckee-Donner Public Utility District Expanded Services Study'; as attachments to its Nevada LAFCo application. Further, staff recommends the attachment of a memorandum from District Counsel Steve Gross regarding "Operation and Accounting of District Utilities" As the Board is aware, a final decision on the District entering the telecommunications business can not be made until Nevada LAFCo approves its Application. As such, further activities will not occur until that time. Upon receipt of Nevada LAFCo's approval staff intends to return to the Board for the approval of specific pieces of the telecomm plan including system design, project financing, plans & specs, and the award of bids. At every step of this process information providing greater detail will be brought before the Board. With each request for action the Board will have the option to cease all activities relating to the provision of telecommunications services. Additionally, staff is in receipt of correspondence from Nevada LAFCo's Executive Officer, SR Jones, attached, advising the District that a $5,000 deposit is required for `outside counsel" to assist in the application review process. Staff has been in contact with Ms. Jones and recommends that the Board approve the payment of a deposit to Nevada LAFCo for the review of the District's Application. RECOMMENDATION. 1) Accept the "Telecommunications Business Plan for the Truckee-Donner Public Utility District", 2) Accept the "Truckee-Donner Public Utility District Expanded Services Study",and 3) Authorize the District General Manager to issue a deposit to Nevada County LAFCo in an amount not to exceed$5,000 for the review of the District's application to activate it's latent power to provide telecommunications services. TELECOMMUNICATIONS BUSINESS PLAN FOR THE TRUCKEE-DONNER PUBLIC UTILITY DISTRICT Prepared For TRUCKEE-DONNER PUBLIC U'TILTY DISTRICT Prepared By WE Navtgant- UNPUBLISHED WORK©FEBRUARY 2000 TABLE OF CONTENTS TELECOMMUNICATIONS BUSINESS PLAN FOR THE TRUCKEE- DONNER PUBLIC UTILITY DISTRICT Section rage 1.0 INTRODUCTION......................................................................................... .....................1-1 2.0 BUSINESS CASE OVERVIEW............................................................................................2-1 3.0 NETWORK MODEL HIERARCHY...................................................................................3-1 4.0 KEY FINDINGS AND DATA .............................................................................................4-1 5.0 FINANCIAL ANALYSIS.....................................................................................................5-1 6.0 CONCLUSIONS AND RECOMMENDATIONS.............................................................6-1 7.0 NEXT STEPS..........................................................................................................................7-1 r t t r_ i SECTION 1 INTRODUCTION Telecommunications and technology advances are transforming the world into a global information-based economy. Federal legislation to deregulate the telecommunications industry promotes competition: ➢ The Telecommunications Act of 1996 encourages electric utilities such as the Truckee- Donner Public Utility District (TDPUD) to provide telecommunications services in their local communities. ➢ Institutions, from municipal governments to local school boards, are attempting to harness the benefits afforded by advancing telecommunications technology, while struggling with complex social and economic challenges that accompany rapid change. A passive, low profile, wait and see attitude towards deployment of advanced technology has attendant risks in its own right, as evidenced by the impact of technological advances in the in the transportation industry in previous generations: ➢ Once booming communities became ghost towns as they were bypassed by newly constructed railroad systems. ➢ Many of America's greatest cities languished for decades as suburban expressways and commuter rail lines ushered an unprecedented exodus,from the urban core, sapping their energy and vitality. As such, the economic and social progress of the Truckee community is intertwined with technological change. An information superhighway, now comprised of fiber optics and broadband telecommunications services, promises to reshape American communities once again. Connectivity and transmission quality will increasingly differentiate smart communities and serve as a magnet in attracting upscale businesspersons and professionals. Conversely, communities that are not prepared to respond to the challenges posed by the information superhighway risk economies that underachieve, in the extreme, becoming — electronic ghost towns. More homes and businesses in the TDPUD's service area are routinely using the Internet. Truckee's increasingly affluent residential customers will require greater access to advanced communications technologies and seamless interconnection to the outside world. For example, telecommuting technologies enable people to work at home more effectively, and are changing the way homes are being designed. ➢ Telecommuting-oriented services can accommodate virtual business office environments, complete with high-speed data, videoteleconferencing, high-resolution graphics,and high-fidelity sound. 1-1 IINMRODUCITON Telecommuting from Truckee-Donner can enhance the quality-of-life of its residents without a compromise of business effectiveness and productivity. Robust economic development of year-round resort communities such as Truckee-Donner may hinge on the telecommuting phenomenon, whereby Bay Area executives could maintain virtual offices or bases of operation in an extended vacation retreat. However, Truckee's small serving area may not be sufficient to attract private enterprise to deploy an advanced fiber optic telecommunication infrastructure, which would be particularly well suited to this application. THE TDPUD TELECOMMUNICATIONS INITIATIVE TDPUD's seeks to usher in a new era of increased telecommunications services in the interests of its constituencies in the Truckee Donner area, affording increased choice and expanded business and educational opportunities through telecommunications, while strengthening its internal operations through deployment of a fiber optic network. ➢ The TDPUD believes that it is uniquely positioned to be a facilitator of change within the Truckee Donner community — and intends to build upon its 75-year tradition and reputation as a provider of reliable,high quality electric and water service. ➢ TDPUD anticipates that its outstanding reputation in the community will enable it to enter the telecommunications service arena with immediate brand recognition and a high level of community acceptance. Fulfillment of the TDPUD's increasing need for more sophisticated electric utility billing, metering, and customer services to meet the challenges of the deregulated electric industry is intertwined with the availability of a modem telecommunication transport system, encompassing high speed data communications, the Internet, e-commerce, and automated meter reading. In this context, the TDPUD has explored the prospects for deploying an advanced telecommunications network throughout its serving area for the purposes of: ➢ Improving the quality of telecommunication services on behalf of its constituents and, in particular, increasing accessibility to the information superhighway throughout the Truckee-Donner serving area. ➢ Managing TDPUD's internal operations more efficiently, delivering more competitive services to municipal constituents in an area of increasing deregulation. The TDPUD Board of Directors, at its 1998 Strategic Planning session, embraced the goal of building a fiber optic infrastructure, with an initial focus on improving utility efficiency through 1-2 INTRODUCTION automated meter reading, load control, substation and piunp management, outage detection and more. Controlling a strategic resource as a potential source of additional revenues that would d offset the costs of TDPUD's internal telecommunications costs and electric and water utility operations. ➢ Telecommunications networking Provides a means of furthering regional cooperation and providing more efficient services by working jointly. 'ointl . 1-3 SECTION 2 BUSINESS CASE OVERVIEW The TDPUD plans to establish a fiber optic backbone network that will provide a highly reliable broadband telecommunications facility to meet its internal requirements. The planned fiber route, as shown in Figure 1, follows a pathway of preexisting electric utility poles, which provides an economic means of establishing the required network infrastructure. The fiber backbone, approximately 35 miles in length, essentially girdles the residential areas of the Township and traverses the length of Donner Pass Road. Installation of the fiber optic backbone presents an opportunity to accommodate the requirements of other public, educational, and government (PEG) agencies as well. The telecommunications network can be further leveraged to provide commercial telecommunications services to the TDPUD's existing residential and business customer base within the District. Telecommunications services could also be made available to prospective telecommunications customers in the surrounding region. i This Business Case evaluates TDPUD telecommunications business strategies and options, 1 and, based on in-depth analysis, recommends a course of action for the TDPUD that will achieve effective utilization of TDPUD's vital telecommunications network resource. Objectives are to: ➢ Provide a prioritized development plan that establishes realistic short term goals while laying a foundation to pursue attractive market opportunities in the future ➢ Assess the impact of current and future service requirements on fiber optic backbone infrastructure construction ➢ Provide the District with the information needed to optimize fiber optic backbone deployment ➢ Evaluate potential telecommunications business opportunities that would generate revenues to offset the costs of internal TDPUD Electric and Water Department telecommunications upgrades and general operations ➢ Assess the financing requirements and mechanisms to proceed with project implementation if the telecommunications initiative proves to be viable ➢ Determine the merits of prospective partnership agreements with telecommunications and Internet service providers for the purpose of sharing capital investments and operating costs 2-1 BUSINESS CASE OVERVIEW ➢ Determine the value of the TDPUD's fiber optic backbone route as a basis for establishing business relationships and evaluating business opportunities. I i i t . { 2-2 SECTION 3 NETWORK MODEL HIERARCHY Network models were prepared for each level of the following telecommunications service hierarchy: ➢ A core network to meet the Electric and Water Department's internal requirements ➢ An extension of the core network to accommodate the needs of other PEG agencies ➢ An expansion of the core network to a high capacity fiber backbone route,' and lease of available fiber capacity (or dark fiber) to telecommunications carriers and possibly large businesses ➢ Equipping network facilities and enhancing network capabilities for sale of high-speed commercial telecommunications services (1.5 megabit and possibly 45 megabit bandwidth channels) to business customers ➢ A hybrid fiber/coax infrastructure capable of supporting Internet,CATV, Internet, and alternative forms of telephone service to residential communities. Business models incorporating elements of the network models were developed to evaluate the opportunities for lease of dark fiber;provisioning of high-speed transport services; and Internet, CATV, and telephone service capabilities. ..The financial viability of each service was assessed from a vantage point of cash flows 4rid contributions to offset TDPLTD's telecommunications and operations costs. Analysis of services was performed on an incremental basis to facilitate the service- evaluation process. Potential service revenues (or in some cases revenue requirements); expenses, and capital expenditures were determined at each level of the network hierarchy which was a staging point for the next level of the hierarchy. By this means, incremental revenues for a particular service could be directly associated with incremental investments. The TDPUD's core network was the starting point, which was expanded to accommodate each successive set of service requirements. Each major section of the fiber backbone is sized in accordance with varying telecommunications traffic requirements. 'Revenue requirements are the revenues necessary to cover annual expenses and an objective return on investment. This approach is applied in lieu of revenue estimates that are based on assessment of market demand. 3-1 SECTION 3 Capital investments and revenues for the network hierarchy are shown in Exhibit 1 on the following page. The first row is the requirement for accommodation of TDPUD's intemaI telecommunications needs. The subsequent rows indicate the revenue opportunity at each service level and the associated capital investment (for telecommunications infrastructure, fiber, and electronics). The ratio of (tenth-year) annual revenues to total investment produces a gauge of bang for-the-buck associated with each service category. F fA v L 3-2 Capital Investments and Revenues for Network Hierarchy Exhibit 1 Network Hierarchy 1m .Nat IncranwM CumuaWe Service Associated Revenues/ CumuaMe tOYears hrvestmeM Above Core Irtw "a ImesbruM Peverags Irreast.0 Pevemres Comments Core TDPUD SCADA Network 170111155 0 1708855 170E B55 /06700 Pudic,Etlucalim A Govemmenl Network 0 $OW 106 700 Electric&Water De rrmeM hiarrtal re Uramants Business Network 0 1 70B 855 0 0 106]00 Data Nchaerk to. Tmckee kmteutlorss 328`�3 328 51B 037 403 328.60 153 497 0.47 280197 ExterWat d Dala Network To beeirlaw" Leased Fiber Nelwodc 338873 667421 nd HeadeM 3.363,180 2 338673 70000 §0.21 330187 leased ro Tcom ele Service PrProviderHFC Inirasimqure a 4,090,BOi ,3767676 Fibers Inlemel Fleadand&Markel Development ,456 278228 Sys 4 259 196 Hybrid IBter/maz network antl headend to suppo4 Iniamel8 CATV CATV Market Deveb M 5,938,051 584.378 914,576 Eleq(oMcs in headend to IMedace Web Internet Service Provider 2,294,828 6,554,024 8,282,878 5.886.603 2,865,852 §059 3,780,428 atam for TDPUD sarvkfg area households Network Hierarchy i Irwa Irxxe S Years IrwmeM Cunula0ve Service Associated Ravertues/ CumWalWe seInert fnroM Above Core Imeslmerit imestrneM Peveme's ImesimaM Reverwes Commer8s Core TDPUD SCADANelwork 1708855 0 1708855 1706355 Pubi 1f3789 5SOW113789 ElegdcB Wafer De dmeM hlernalre ulrerttenls k,Ed.flm A Gwemmenl Nerwoi, 0 0 1 708855 Business Network 0 0 113789 Data Network to some Truckee Jwautims 326 548 328,548 037 403 32850 134 240 0.41 248 029 Exlenslm of Data Network To BusBtessas Leased Fiber Nelwurk 338873 667,42/ 37g27g 338873 70,000 HFC Inlrasimqure and lieadend $0.21 318 029 Fibers leased to Telecom SeM.Provider 3.363,180 4,030,601 5,739,456 HyMdl�er/coax network and headend to support Ir ATV Headend 8 Markel DevebprneM 150,343 4.180,944 5,889,799 Inlemel&CATV CATV Market Development 307,880 625,909 Electrons M headend to IMedace with Inlemat Service Provider 1,073.825 5,254.769 603,624 4.587.349 2,059,740 §052 2,685,649 tents he TDPUD SewilIg area households Network Hierarchy irtcramaMal Incrartwo Cumulative Service Associated Revelalas/ Cumulative 2 Years IrrvesimeM Above Cae Imalnte,i Ir"MeeM Air erwee ImeslmeM Rgverwes Comments Core TDPUD SCADANelwork 1708855 0 Pubic. 1708855 .,4/708855 118400 §0.07 118400 ElegticB Water De Business er nmeM inlenal re uramer4s Pu ,Educallm 8 Gm ms emni Network 0 0 1 708 855 0 0 /18 400 Data Network to serve Leased Fibber N.Iwodc Tmckae k�snluliore 215017 215017 t923871 `2i 017 37/43 §017 IM,543 Extensimot Data Natwork Toflw;;sses ei 338873 Fleadsrtl HFC lnimslruqura and 553889 262744 338873 700W $021 225543 Fibers leased to Tetecom Service Provider 3,363,160 3,917,070 5.625,925 lNemet Headend&Markel DevetcpmeM Hybrid rdcs(noes network and headend Wit,to support Iniemel 8 CATV 92,747 4,009,2W 6,048,914 152,60i 378,144 EledroaslarrMcsntDPLK)serving ongarea with Inlemal Servioa Provtler CATV Mantel DevebmteM 327,747 4,337,206 8,048,060 3,789,9i8 1,352,456 §0.40 1,730,800 ems for TDPUD sorving area hwusahgds SECTION 4 KEY FINDINGS AND DATA The following is a summary of key findings and data with regard to incremental buildup of system capacity and costs: INFRASTRUCTURE The cost of a preparation of a 35-mile backbone route infrastructure necessary for interconnecting Electric Department and Water Department facilities -- excluding the fiber optic cable -- is $590,000. These costs are primarily for preparation of existing poles along TDPUD's existing right-of-way to accommodate fiber optic cable, along with installation of new poles in limited sections to provide network connectivity. The use of existing electric utility poles results in substantial savings by comparison to new construction. The intrinsic value of this infrastructure should be reflected in structuring partnership agreements with telecommunications service providers. CORE TDPUD FIBER NETWORK An advanced broadband system is essential for accommodating diverse telecommunications requirements, ranging from basic voice through broadband imaging. Fiber is the technology of choice for delivery of broadband services. ➢ Fiber is a robust technology,with infrastructure having a useful lifetime of twenty years or more. The risk of stranded investment in fiber infrastructure as a result of technological obsolescence is low. ➢ Fiber has virtually unlimited capacity. With suitable electronics fiber can transport gigabits of data on a single pair of fiber strand. Electronics will continue to evolve and improve fiber transport capabilities. ➢ Fiber has excellent transmission quality, and relatively few repeaters are required to boost the signal. Reliability is enhanced through the use of a fiber ring architecture, which enables the signal to be transmitted in two directions simultaneously, maintaining connectivity in the event of a fiber cut. A fiber optic route is required as part of a wide area network to accommodate the TDPUD's internal communications and a modem Supervisory Control and Data Acquisition (SCADA) system. Basic requirements of the TDPUD can be met with a minimum-sized sheath of from 24-strands to 48-strandsof fiber at an installed cost of$287,000. The capital expenditures for both infrastructure and fiber, including engineering and design costs, is $910,000. The additional cost of SCADA telecommunications network electronics to serve 4-1 KEY FINDINGS AND DATA the electric utility substations, water utility pumping stations and other TDPUD facilities is $798,000,for a total capital investment of$1,708,000. Benefits of the core fiber network are derived from both reduced costs to the TDPUD and increased productivity of the TDPUD operations. This reflects the combined impact of a reduction in telecommunications bills, an increase in productivity (doing the same job more efficiently), and improved performance (providing expanded services and capabilities). A telecommunications network would facilitate the integration of office and operations centers. Increased flexibility in the location of facilities and the potential for District-wide coordination of functions could be achieved. Applications include: ➢ Operations support for engineering and planning, purchasing, meter servicing, field crew scheduling and administration,customer services, etc. ➢ Database management for material storage, vehicle parking and maintenance, warehousing,transformer and meter shops,etc. ➢ Wireless network interfaces to gather data from automated meter reading (AMR) devices,for both electric and water systems,as they become operational. The estimated dollar value of cost reduction and productivity/performance enhancements is conservatively estimated to be in excess of$100,000 annually, including yearly saving of $40,000 in energy costs alone, derived from managing water storage pumping schedules through an integrated electric/water utility SCADA system. INCREMENTAL COSTS OF A DOWNTOWN-AREA PEG NETWORK Other public, education, and government institutions can be accommodated on the core fiber backbone at no additional cost for fiber and infrastructure. However,route extensions and electronics deployed at PEG sites would be needed to interconnect the facilities to the backbone. PEG-related costs would be borne by each organization,as follows: ➢ Reimbursement of Capital Expendihires - It is presumed that the District would procure and install electronics on behalf of the PEG network user. The PEG entity, in turn, would reimburse the City for capital expenditures associated with dedicated, site- specific electronics, or network nodes (the largest construction program expenditure). This could be a one-time capital payment, or an annual annuity, to offset the TDPUD's cost of construction. By way of example, the School District could be responsible for the collective costs of network nodes required by individual school systems. ➢ Shared Annual E.rnenses - Annual expenses, including operations and depreciation (for common network plant and electronics), would be allocated to PEG users based on the percentage of network nodes in service. Benefits derived from telecommunications services are assumed to be in proportion to the number of active nodes. Allocation 4-2 KEY FINDINGS AND DATA factors reflect would reflect the distribution of nodes as the PEG network expansion progresses. Much of the electronics associated with common central office equipment could also be shared,and capital expenditures allocated in similar fashion. Incremental expenses associated with the PEG component of an integrated TDPUD/PEG network would be substantially less than for two or more stand-alone networks. Allocated costs that would also cover a proportionate share of PEG-related network operations and administration, and would enable these institutions to realize substantial savings. As capital expenditures and expenses are flowed-though, they have not been incorporated in the current financial analysis. ' HIGH SPEED TRANSPORT SERVICES The Town of Truckee does not have a core of large businesses that would likely justify provisioning of business-oriented services as a stand-alone operation. Rather, sale of broadband services (1.5 megabit and possibly 45 megabit pipes) to businesses in the Downtown Truckee area (along Donner Pass Road) is positioned as an economic development resource that would provide existing businesses with access to leading-edge broadband technology at deeply-discounted, affordable prices. Dedicated fiber rings to serve the business community and associated electronics could be installed and maintained by TDPUD in conjunction with the internal TDPUD network and PEG operations. Revenues would be reflect a fixed monthly charge associated with allocation of fixed network costs, and a usage sensitive charge for use of high-speed data, Internet, and alternate access services. An incremental investment of approximately is estimated $328,000 to establish , network nodes for accommodation of the business cdmmunity, which would generate corresponding revenues of approximately$153,000 annually. BACKBONE ROUTE EXPANSION Lease of dark fiber is a potentially attractive business and has the lowest level of operational complexity of any service under consideration. The fiber route can be significantly expanded in cross sections ranging from 24/48 fibers to cross-sections ranging from 48/144 fibers at a cost of$338,000. This capacity would be adequate for leasing fiber ' The network model incorporates the PEG requirements,which can be evaluated as specific requirements are identified. This would entail reaffirming the interest and degree of commitment on the part of PEG agencies, such as the educational institutions,and the hospital,and their willingness to contribute capital costs and share annual expenses. The construction budget and priorities for network deployment would be updated in view of responses received,and the baseline scenario refined accordingly. Mechanisms for funding the PEG's share of construction costs would be established, and estimates for network procurement and installation activities modified accordingly. 4-3 KEY FINDINGS AND DATA to a CATV service provider, Competitive Local Exchange Carrier (CLEC), or competitive access providers (CAPS) for their commercial service applications. The expanded capacity is achieved for a capital expenditure of approximately$9,700 per route-mile, in contrast to a cost of $26,700 per route-mile for deployment of a new fiber route of equivalent capacity. The upside potential for revenue generation—as well as preservation of future service opportunities—substantially outweighs the risk of underutilized fiber capacity. Necessary arrangements for network connectivity would have to be made to accommodate customer requirements (e.g., to PacBell central offices and long distance carrier points-of-presence). The total capital investment for an expanded network, which would also accommodate TDPUD,PEG,and business requirements,would be$2,376,000 HIGH SPEED INTERNET AND CATV SERVICE Delivery of high-speed Internet (10MHz to 100 MHz) and CATV services (750 MHz) requires construction of a hybrid fiber/coax (HFC) network or an equivalent high speed advanced technology network arrangement. In an HFC environment, coaxial cable runs of 2,000 feet or longer fan out from the fiber node to distribute the broadband to residences throughout the network serving area. Initial capital investment necessary to make broadband Internet and CATV service universally available (measured in terms of percent of homes passed) to the area's 9,800 households is$3,076,000,including costs of the expanded HFC coax infrastructure, and electronics at the fiber nodes, along coaxial cable runs, and at the headend. Another$287,000 in infrastructure expansion would be incurred over time to accommodate anticipated growth to 13,600 during the subsequent ten-year period,yielding a total investment of$3,363,000 2 High speed Internet access would be provided in conjunction with the HFC network for an initial investment of only $92,000 associated with headend electronics. This investment would increase to approximately$228,000 after ten years. The business case presumes that a partnership agreement would be entered into in conjunction with an ISP. The ISP partner would be responsible for supplying cable modems to its Internet subscribers and for managing day-to-day Internet service operations. Internet subscribers would be charged S30 per month for cable modem service; and TDPUD and the ISP partner would share revenues on a 50/50 basis. It is anticipated that 6 percent of homes would initially subscribe to Internet service, and that subscribership would increase to 25 percent over a period of ten years. CATV service would initially be made available to virtually all homes in the TDPUD serving area and nearby communities. The business case presumes that approximately 24 Growth is through infill of existing neighborhoods, such as Tahoe Donner, and through new developments. Both aspects of growth are considered in the business analysis. 4-4 KEY FINDINGS AND DATA percent of the homes passed would subscribe to services offered by the TDPUD at the outset. After 10 years it is anticipated that subscribership would increase to approximately 50 percent of homes passed, leveling off after that time. Additional investment for accessing individual residences (drops and set-top boxes) would be approximately S327,000. Incremental investment to develop the CATV market through the tenth year would be $2,294,000, accommodating increasing subscribership in existing serving areas, addition of fiber infrastructure as new roads are constructed, and addition of new fiber nodes and coax facilities to accommodate growth in the number of residences. INTEGRATED NETWORK The total investment for a fully integrated telecommunications network after ten years would be $8,263,000, of which the community-wide broadband Internet and CATV network would account for$5,887,000. The total capital investment per CATV subscriber is estimated to be approximately$1,000 -- in addition to the core TDPUD SCADA network. Capital investment , the percent distribution of expenditures, and investment per subscriber are shown on the following pages. TELEPHONY Cable telephony could also be provided in conjunction with the HFC network. As cable telephony requires high incremental investment (specifically, a digital switch) and entails substantial operational complexity (e.g., Emergency 911 services), a venture into cable telephony would advisedly be done in partnership with aCLEC. Analysis indicates that offering telephone service at this time-- in competition with the local exchange carrier was not advisable. However, the technology for non-traditional telephone service offerings is changing rapidly, and telephony via the Internet (Telephone over Internet Protocol) is becoming increasingly attractive. Telephone over IP is presumed to be widely available within a period of several years; however, no revenues and investment are embedded in the existing Internet service. CAPACITY MANAGEMENT Fiber requirements can vary significantly, depending on the number of CATV service providers within the community and the number of fibers required per CATV node (e.g., four versus six fibers). Consideration was given to the case of one CATV provider versus two CATV providers,with each requiring from four to six fibers per fiber node. The range of incremental costs to cover the maximum requirement (two CATV providers to the minimum requirement (one CATV provider with four fibers per node) is approximately $120,000. The difference in cost corresponds to approximately five percent of overall HFC program costs. Installation of fiber to accommodate the maximum requirement and is appropriate as a form of insurance that guarantees accommodation of several service 4-5 KEY FI,NDINGS AND DATA providers. The additional fiber is provides a contingency in the event of unanticipated network demand and unanticipated future requirements. 4-6 SECTION 5 FINANCIAL ANALYSIS Income Statements, Balance Sheets and Cash Flows for a 15-year period, commencing in 2000 (corresponding to the initial program year) are provided in Exhibits 2 through 4. Assumptions and guidelines underlying this analysis are included in Appendix 1. ➢ Total annual revenues increase from $1.3 million in Year 1 to $4.8 million annually in Year 15. Operating expenses increase from $1.1 million to $2.3 million during the corresponding period. Operating margins, the difference between Revenues and Operating expenses are positive throughout the period,increasing from$236,000 to $2.4 million during this time span. ➢ Net Income, including loan origination fees and interest payments, is negative for the initial two-year period, but turns positive in the third year and continues to increase over the 15-year horizon. Earning exceed $1 million by the eighth year, $1.5 million in the 110 year,and more than$2 million in the 13" year. ➢ Capital expenditures are$5.6 million at the inception of service and$500,000 during the first year. Annual capital expenditures of from $200,000 to $400,000 are incurred annually on a going forward basis to accommodate network growth. ➢ The capital construction program is to be financed through issuance of a Certificate of Participation (COP) for$6 million,payable in full after 15 years, with interest-only due during the first two years. The interest-only feature 4 o alleviate cash flow pressures during the startup period. Origination fees for the 'COP are approximately $250,000; and the equivalent of a security deposit, corresponding to one year's payment is to be held in escrow for 15-year duration of the COP. Interest earned on the escrow account would be available as an offset to annual interest due on the COP. ➢ In addition to COP financing, dedicated SCADA electronic systems are to be financed separately through the TDPUD's capital fund, independent other telecommunication. initiatives. Telecommunications Assets and Liabilities are shown in Exhibit 3. ➢ Assets comprise plant at costs less a reserve for depreciation, and a cash reserve, which for purposes of tracking benefits derived from telecommunications operations, is allowed to accrue throughout the period. ' Assets increase from $6.5 million in Year 1 In practice, these funds would be released for use by the TDPUD to offset costs associated with electric and water utility operations. 5-1 FINANCIAL ANALYSIS to $17.7 million in Year 15, by which time a cash reserve of $15.7 million has been accumulated. > TDPUD's equity increases from$550,000 in Year 1 to over$17 million by Year 15. Cash flows are provided in Exhibit 3. > TDPUD's cash position is positive throughout the 15-year period taking into consideration non-cash expenses (depreciation) and earnings from operations. > Annual cash flow is negative only during the second year,but is covered through funds available through issuance of the COP in the prior year. ➢ Engines for earnings growth are Internet service, which affords substantial margins under the prescribed partnership arrangement with an ISP, and CATV service, which affords substantial return on investment. f , 5-2 TDPUD Telecommunication Business Case-Income Statement Exhibit 2 Pro ram Var 0 1 a 10 it 1R Y3 1 15 6 Rare SCADA Bena6ls 8 Casl SeWnpa 121,633 118,400 118,832 115,285 113789 112,314 110,867 108,450 100,061 108,J00 105.366 104,059 102,TI] 101,522 100,291 83,086 PEG Paymom488oen1om Revenues 0 3),143 80,05E 120,15] 134,240 153,497 153,497 153,497 153.497 1W.497 153,497 153,4W 153,497 153,497 163,497 1n ON LenneE(N Cootd otoo 70,000 70,000 70,000 70,000 70,000 70,000 N,000 >0,W0 70,000 70,000 70,000 70,000 70,000 70,000 J0,000 M,000 497 Internet lNal ConlnOulbn) 102233 152,601 203,625 255,364 307,880 M1,236 415,495 470,727 526,9% 583,3)9 642,942 >02,>62 ]63,91] B2fi,488 6MOOS 9M.00O CAN 992,590 1352456 1,621333 1.854,280 2059. ]40 2.244393 2413535 2,5)1,3M 2,>21,252 2,865.852 3,00]319 314],388 3,26],482 3,428701 3,5]2p60 3.]19,560 200 G : ireome 1286.d55 1.M0600 2091.842 2415096 2.685849 2841440 3163,398 33]5,046 3.5>8,808 3]80,428 39]8124 4Y>]]04 43M,656 6,580206 4,)BB,d00 4,99]122 lesa'Bae N)aM and CgNeclWns 11,388 15,653 18,980 21,940 24,fi23 2],099 29.4M 31,638 33,)82 35,882 3).9fi3 10S.,042 42,134 44,254 d6di1 48,e15 Pbn:intorest on Sacu' De 4 51,888 54.880 5488fi N,M 54888 54888 54886 Sd 868 Sd,886 54886 54,88fi 0;,.2 5d,e66 54,866 54.888 54,686 TOW lemre 1329954 1J69833 2.12]]dB 2660042 2]15911 2968.22J 3.188,859 3,388,294 3.600,912 3]11.1 11 3,896.04] 4192,518 1390405 6,590638 4,]948]4 5,.13 E P amN 259,]88 M,M 4151M 4]69)6 531 10 M'Sas 787 666]19 J033>6 J40,4B5 M6,629 812,2]8 Bd]813 883,544 919,728 958,59 Lkpoo°W boo,a Foos 49628 61,623 8106] 92]14 102887 112 12p8T/ 128569 136000 163.293 150,368 157 MO 164,373 171,435 1]8,603 16591] 418169 4805>2 513 Y88 5 ,= 550829 58830D 580,930 60)280 836582 655948 886439 5]1,990 603,088 63a,552 663,691 696512 6elee8Makee 30000 8500 6.500 8500 6,500 8500 8,500 6500 6500 DDealioia 6500 6,500 61500 61500 61500 6,500 6.500 POO.Seo6oes(reolnk,,.) 48,568 IM563 13),]58 137,756 13J,756 137,J56 137,756 13],]58 13),]56 137,756 137,756 137,756 137,756 13],]56 137175fi 13>,756 PWq Mamta�arno(kcSdkg Vefiklea) 83,907 102,507 1to= 113,2M 118,997 119.497 128,333 1251958 MOSS 1341009 1401330 145,407 150.553 155,754 1601162 166,766 tlBRw SOSO 19000 la,000 18,000 iS000 is'" 18,000 18,000 181000 16,0o0 18,0o0 18,000 181000 18,000 18,000 "nor, E nsee BWe8ahxl Cost 60,883 13385 111338 9,>M 8570 ]65] 8972 O.MM OJOS 5.864 5711 5633 -S,6t5 5,646 ]1] 823 General&P4minuVaBon ExecWva MannOn n(8 St." W,750 13%M 133,00o 133,000 MOOK) /33.oW 133.000 133,000 133,000 133,OW 133,00o t33,000 133,000 133,000 133.000 i33,000 EMP4onB Mft(M En Aoyees) 46,498 85,S94 93,002 93= 93.002 93.002 93,002 93.002 93,002 93,002 93,002 93,002 93,002 83,002 93,002 83,002 Si,Uecmber SUN &M4 11,575 13,994 16,078 1],90) 19,540 21,027 MOP 23.710 24,961 WIM 2],381 28,579 29,784 311OCG 32245 G9ar General BA kft"Son 16800 189o0 16801 IS." 18900 1 900 18900 IS." 169M 16,900 16.900 16900 16,900 16.900 MOM 16900 ra8 1093,838 1395.6)8 1550389 1.6445S5 i>33.45] 1,812,047 1M.884 1,9W,558 2.043052 2t09,]1B 2,190,813 2125.16] 2.205,1)9 2,285,BM 2,369,061 2,451,000 at kcwne 236118 3J4155 S1) 8 80348] 982.455 1/5>190 1298.9]e 1d3>,Mfi t,55>,860 1689]t3 1805234 206]38t 2,iB5,226 2304965 2430.813 2552392 Lese:lnarest vie Flrarckl9 EgrertlBwes Finaociny Costs For Cen6cate of POUcOa9on 250,000 low, N Gn cvnOceleot Pvlidpvion 420,000 420,000 dS000 401,375 381,447 36011M 33],30] 312,893 28fi,J]1 258,820 228,912 196,911 162,8]0 126,032 86,8b 46,683 Interest On TDIk D R rve ose Fuo,. 0 0 0 0 0 D 0 0 0 0 0 0 0 0 0 0 Tots reea 1.J63.B36 1815 BIB 19J0389 2045930 2114903 2,1]2.180 2WIN 22J3,452 2,329.8E3 2368538 2,419725 2322W8 2,367.M 2.411.534 2450,891 2495.883 Nal lrmme d33,882 -451M 157.359 402.112 601,008 7977W7T 961.669 1,124�8421 1.271089 1,4SO,8931 1,576,321 1.870,4701 2,022.556 2.1]8934 2343,983 2,50)509 TDPUD Telecommunication Business Case- Balance Sheet Exhibit 3 Waanm Yam p 1 1 1 1 ] 1 4 1 5 1 8 1 ] 1 6 1 9 1 10 1 11 1 12 1 tJ 14 is 16 6elerca Shael Cash Reserve 309,818 52,158 iT/,353 388.92d 821,384 1.466,621 2282,095 3,2]2,138 4,328,810 S,60M1,5]2 8,93),t32 6,412,345 1p,02],814 11,]68,925 13,]12809 15,744,99i 18.W.M Sear*Depoe 48 Pcc1ueA lntm66f 6880]0 BBBo]0 BB90]0 6660]0 6080]0 6680](1 6880]0 BBB.OT) 8880]0 808 pJp BBS,O]0 8060]p 8860]0 886,0]0 6 :070 686.070 666.070 Nelvro�k FacilNeem Cost 5,554,013 6,048.060 6,355,591 8,548,508 6,963,624 ],189,]]t ],401,568 ),]05,83] ],936,44] 8,282819 8,SB3,66B 8,931,652 92)d,)86 9,602,350 9,9]8,802 t0.320,510 Lev:DelxeciaBon Reserve 0 4/8168 M,Z t1t11,= / 521 2,493,IW 3061450 3650380 4257860 4,894242 5550.190 8236629 6,608588 ].411,858 8.066,209 e,)099W 9408,412 Net Pi6n1 5554,013 5,82],89i 5, 850 5138569 4,821,528 4470475 4128320 151186 3448.M 3,0 ,M 2712689 2W] 2123083 1,M,128 1556141 1,268JU 922,098 IM Assets 655p p90 6368118 3 ,M 6211562 832 980 6.8 ,M 7M8 ))09391 8461M7 9,=,M7 1033649p ii.455855 12M6 14,338123 15955019 1]699,)63 20,2UJ, UeMli ea f3alar�w Due Cn CeNiigete of PaNcge9gn 6,000,000 8,000000 8,000,0.0 S,T.Y1,93a $,448230 5,144,610 4,818,660 4,669.8p0 4,096,]20 3.69),420 3,2]0,1]0 2,813,020 2.323,860 1,800,460 1,240,4'20 64f,f80 0 BgmKe Due on lT)PUD Telenxn geemve 0 0 0 0 0 0 0 D 0 0 0 p p 0 0 0 0 M D E OO ,M 6M,118 6M2M 5]3393p SM6238 5,141613 48/8866 446 M 40 1= 389)428 3,2)0,1]8 2.613021 2321863 18 ,W9 1,240A28 641.16] p TOPUDE 550.000 3 118 =,03 4]1.832 6] 9W 1,48,M 22T],819 3,238,488 4,384,330 5,83W ],068312 1,40,05 1p513103 12,535,659 t4,]14,593 i),056,5]6 20,252.t55 iTotal liadliees BTDPUD EquM -I 8550000 6368,116 83202I3 8211562 6928980 6625385 ]098485 ]]0839t 8d6105) 93328d] 103364&1 11455655 12838866 14336123 15,955 p19 i].699.)63 20,252155 1 1 TDPUD Telecommunication Business Case-Cash Flows Exhibit 4 r m Year 0 1 2 3 4 6 8 ] 8 9 10 1l 12 13 14 15 18 kat of Fu CaglallrnesMaeN 5,SStr,013 492,048 309.531 192,9f] 215,539 199,Sn 2%,ta8 211,]9S 304,2]t 230,6t0 326,a32 330,990 33],]84 343,133 32],565 3]6,251 351,90@ Loan Or,.Wm Clwg 250.000 Se 0O "(law Year Paym t) 686.070 Pdal Ma Oue Cn Ceni(rale d P tlon 4200D0 42p,O0p B88,0]0 M,070 686.070 666070 W070 686,0]0 6 .070 688070 686,070 686,070 6 ,0]0 686,070 688,070 866.0>0 T CaN ppiow SAW, 82 912046 ]29531 8>8986 801,809 BBS Bd] 9/2 i6 89]085 990,3a1 916,8]9 1,012,501 101],059 1023.853 1,029.203 i3Ot3,634 1,062321 1037978 dF CeMcete of Pad pa&w 6'",WO MPtW SCRDA Ippra (CapBal& ,,Q 800,OW R".d Same,Dwp ODplv888,070 ra . rrw�» 238.118 374,152 Sn,359 803,48] 802,455 - 1,15],190 1.298,976 1,W7.2W 1,SSZA60_ IAW.713 1,805,230 2,067,W1 2,185.226 2,30a,966 2,43A813 2,=6 2 �ehO^ 418169 4a0A>2 513.180 630.562 550829 568 588830 60],280 636A82 6 .M 686.438 571,W 6 .M 634552 MWI 698.512 Tdat Cash lydbw 8800.000 854 88 854726 f090557 1334069 1539083 17254W 1887906 2045015 219,"2 2395861 2d916)3 2.639322 2.798,314 2.939.518 3.04 3.9369>a Nd Caeh lnPow,CONow Fart 308918 25>760 125196 2113]t 432 d80 84743] 8132]4 890041 1p54 9 127])63 1333160 1474613 1,615468 1759,112 1,925.884 2,032.183 28d9.9% Oumtan0i 0alance on CaNfcete 8.000,000 8,000,000 8,000000 5.733 B30 8,449236 5,144813 tr,818686 tr,a89.8Sf 4098,>2] 3,897,429 3,2]0,1]8 2813,021 2,323,663 1,600a84 1,2d 426 841,16] 0 SECTION 6 CONCLUSIONS AND RECOMMENDATIONS There are strong incentive for the TDPUD to assume a proactive role in telecommunications, as a service provider, facilitator, coordinator, and partner with an Internet service provider. The business case demonstrates that the integrated telecommunications plan affords an attractive business opportunity for the TDPUD under the prescribed scenario,to: ➢ Create a viable telecommunications network that is capable of generating substantial, revenues that make the system self sustaining. ➢ Make a significant contribution towards defraying the costs of electric and water operations, In addition to serving its internal and PEG telecommunications requirements, TDPUD telecommunications initiatives should focus on high-speed Internet and CATV services. Business services should be provided as an extension of core network to further economic development in the Donner Pass Road corridor. TDPUD should not provide traditional telephone service at this time,but may enter this market as an extension of Internet service (e.g.,second-line or teen-line service) as the technology matures. The financial analysis indicates that the prospects for TDPtTD's success in the Internet and CATV markets are high. Substantial earnings are realized, even with relatively conservative estimates of market share. Significant economies are realized as a result of TDPUD's ongoing utility operations,which are reflected in the financial analysis. The level of resources required to effectively rum the business fit well within the size and scope of the Districts current operations. Staffing requirements are modest; the fiber backbone investment dovetails with requirements for an expanded SCADA system, and cash flows remain positive throughout the 15-year study period. Priority should be given to establish the fiber backbone route and HFC platform to maximize the opportunity within the level of resources available through the COP. The integrated telecommunications plan leverages the resources of the TDPUD and is an effective means of accelerating the introduction of advanced technology to the Truckee area, which could otherwise languish if left to the devices of existing telecommunications carriers. i 6-1 CONCLUSIONS AND RECOMMENDATIONS > These carriers either view Truckee as a low-priority market,by virtue of the limited size of the opporriuuty relative to larger communities, or lack the financial strength, staying power, or commitment to service of the TDPUD. > The TDPUD initiative would enable the Truckee area to control its destiny in furthering technology-dependent trends such as telecommuting, which have significant economic development ramifications for this resort area. > There is a natural fit between the TDPUD's operation and administration system that would achieve significant cost savings relative to a telecommunications start-up. These efficiencies are reflected in annual expenses in Exhibit 2. ➢ The earnings stream from CATV and Internet operations would be recycled within the Truckee area in the form of capital improvements and lower utility bills. Findings and recommendations are supported in the body of the report and in the accompanying detailed network model and financial analysis. The dynamic model developed by Navigant Consulting, for Districts and municipal owned utilities has addressed related what if questions and explored the impact of changes to specific guidelines and assumptions. This model has also been employed to explore a range of strategies and scenarios in-depth, in the process of establishing the baseline scenario for in- depth analysis. 6-2 SECTION 7 NEXT STEPS A network implementation plan that incorporates network design engineering, procurement,construction, and operations are recommended as a follow-on to the business case analysis. This would entail: ➢ Preparation of detailed network layouts and infrastructure designs for accommodation of near term and long term service requirements. ➢ Establishment of backbone route segment fiber counts to accommodate two CAN service providers.' ➢ Provisions for interconnection with outside service providers for high-speed Internet and network access services. ➢ Preparing network specifications suitable for obtaining quotes and bids. iJ ➢ Provisions to secure construction program financing through a $6,000,000 Certificate of Participation (or similar vehicle) with a 15-year term and provision for interest-only payment for the first two years. ➢ Provisions for budgeting $800,000 in TDPUD capital expenditures for dedicated SCADA electronics (outside of the framework of the overall telecommunications project). ➢ Reaffirmation of the interest and degree of commitment to the telecommunications project on the part of municipal and county governments, educational institutions, the hospital, and other PEG institutions. TDPUD would need to: • Assess the willingness of PEG entities to contribute capital costs and share annual expenses. • Establish PEG-related budgets and priorities for network deployment in view of responses received. Develop budget estimates for network procurement and installation activities accordingly. • Establish construction cost rebate and allocation mechanisms for finding TDPUD's share of construction costs. ' The incremental cost for a second CATV provider is$120,000. 7-1 NEXT STEPS > Prepare standardized contracts and service agreements with telecommunications service providers. > Enter into negotiations with prospective partners for provision of ISP services. > Continue to explore opportunities for lease (or sale) of dark fiber. 7-2 APPENDIX 1 GUIDELINES AND ASSUMPTIONS ACCOMMODATION OF INTERNAL REQUIREMENTS The network requirements of the TDPUD define core network capabilities. Core network costs include infrastructure costs and a (hypothetical) 24 to 48-strand fiber backbone, as a reference framework for a dedicated SCADA network. This is for the purpose of establishing incremental costs corresponding to additional services and functions, as discussed below. > Possible high-speed data requirements of public, educational, and government (PEG) agencies would be accommodated on fiber rings that are separate from the TDPUD ring. ➢ All TDPUD nodes are to be activated during the initial year of operation. ➢ All telecommunications locations are multiplexed. Electric and Water SCADA measurement stations are aggregated at telecom nodes. ➢ Savings of $40,000 annually are attributable to reduced energy costs for water storage and pumping station operations, derived through an integrated electric/water SCADA system. ➢ Operational efficiencies and cost savings will be derived within the Electric and Water ti utilities through enhanced SCADA and network'-reliability. These benefits are estimated to be$80,000 annually or approximately one percent of revenues. ➢ Although provision is made to accommodate PEG institutions,no revenue contribution or allocation of costs is considered in the baseline TDPUD scenario. EVALUATION OF EXTERNAL MARKET OPPORTUNITIES The business case considers the following services: > Dark Fiber - Lease of fiber capacity (dark fiber) to telecommunications service providers. > Bandwidth - Provisions to accommodate business customers' telecommunications needs in the form of 3 to 5 MHz (to possibly 100 MHz) bandwidth pipes in conjunction with the data network. > Internet - Mass market, high-s^eed Internet service, provided in conjunction with a hybrid fiber/coax(HFC)network or other architectures. 1-1 GUIDELINES AND ASSUMPTIONS CATV - Provisions necessary to make CATV services available to all TDPUD residences. It is presumed that several municipal CATV service providers would be competing for residential subscribers. Telephony - Provisions to accommodate telephony in conjunction with an HFC overbuild are to be limited to telephone in conjunction with Internet services (Telephone over Internet Protocol). FIBER DEPLOYMENT The backbone network is comprised of a fiber ring and linear segments as shown in Exhibit 1. The backbone is to provide access to all neighborhoods in the TDPUD serving area and selected communities beyond the current TDPUD serving area. > Backbone fiber cross sections are to be sized in anticipation of long-term requirements. The relatively low incremental cost of the fiber strand (e.g., the difference in cost between installation of 48 versus 96 fiber facilities, or between 96 versus 144 fiber facilities) warrants consideration of the larger cross sections, particularly in view of the uncertainties in market demand for bandwidth, the number of video service providers, and the rapid expansion of demand for information technology and telecommunications services. ➢ The backbone network topology is defined by connections between CATV node points, and between TDPUD facilities and Electric Utility substations. -r ➢ The distribution network is defined by;coaxial cable runs emanating from fiber nodes to provide access to homes throughout the residential community. ➢ Backbone sections comprise approximately 35 miles, and the distribution sections will comprise approximately 110 miles when all home are passed. ➢ The fiber is predominantly aerial, utilizing TDPUD right-of-way and poles. Limited underground sections are utilized in the downtown area. SCADA/PEG/BUSINEss NETWORK The following entities are to be accommodated by the TDPUD data network: > TDPUD Electric Utility ➢ TDPUD Water Utility > Other Utility Districts Education Institutions&School Districts 1-2 GUIDELINES AND ASSUMPTIONS > Public Institutions(e.g.,Hospitals & Libraries) Municipal and County Governments > Large Businesses Small Businesses(Aggregated Nodes) Locations requiring extensions are to be served by a minimum of 12 fibers, of which 6 are to be spliced initially. Dual entrance is not required. 1-3 APPENDIX 2 CURRENT TDPUD OPERATIONS TDPUD, as a local agency with a long-term service record, furnishes electricity to 8,700 customers and water to 6,400 customers in the Truckee area. ' As reflected in its mission statement,TDPUD is committed to the well-being of the Truckee community, bringing innovation, competence and trustworthiness in the delivenj of water and electric services. TDPUD, as a non-profit, publicly owned utility, is governed by officials elected by District voters. TDPUD's policies and rates are established by the Board of Directors, which conducts studies and assesses implications of new legislation and alternatives. TDPUD is a member of the Northern California Power Agency (NCPA), which provides schedule coordination, engineering, and regulatory services support. The District is a participant in the Truckee River Operating Agreement (TROA) governing the quantity of water that can be diverted and depleted from the Truckee River Basin. The District service area encompasses the following communities: Community Electric Water Downtown Truckee x X Armstrong Tracts x x Biltz Tract x x Donner Lake x Gateway x x Glenshire(portions) x Meadow Park x x Olympic Heights x x Ponderosa Palisades x x Ponderosa Ranchos x x Prosser Heights x x Prosser Lakeview x x Sierra Meadows x x Sugar Pine Estates x Tahoe Donner x x Sierra Pacific Power Company and Pacific Gas and Electric serve surrounding areas. Del Oro Water Company serves Donner Lake; Glenshire residents receive water from the Glenshire Mutual Water Company. 2-1 CURRENT TDPUD OPERATIONS Growth in the TDPUD's service territory has been consistent for the past twenty years. The population of Truckee is growing at a rate of approximately 2.5 percent, and is expected to continue for the foreseeable future. This growth will add approximately 300 new homes per year to the customer base; and commercial growth is expected to continue at a comparable pace. ELECTRIC SYSTEM TDPUD purchases its energy through bilateral contracts with entities outside the Truckee area,primarily Idaho Public Power. Power is brought to the TDPUD's four substations and one metering point over Sierra Pacific Power Company's transmission system. Power is then distributed over the TDPUD's fifteen circuit arrangements to its 8,700 electric. customers. TDPUD anticipates that it will be doing business with a different set of entities and evolve new relationships with its customers as competition replaces the traditional monopoly. structure: ➢ Customers will be responsive to lower prices, increasingly reliable service, quicker reaction to outages, more convenient business practices, and knowledgeable customer service representatives. ➢ TDPUD will need to remain price competitive for the services that it provides. WATER SYSTEM TDPUD acquires its water from deep aquifers within the Truckee groundwater basin area:. Water is transported to Truckee's high elevations through a series of pump stations and stored in strategically placed water tanks located throughout the community. The water system is designed to maintain high pressure for fighting urban fires as well as for all domestic water uses. Access to water supplies will likely become more extensively regulated in the future and be - subject to quantity limits. TROA will constrain the development of future wells, and resources available throughout the Truckee River Basin. ➢ The quality of the water in the groundwater basin is critical to keeping water costs low. A groundwater management program, in conjunction with other users of the basin, may be required. ➢ Limitations on water supply will require conservation measures in the future. As such, there will be increasing pressure to implement a metered water rate. Opportunities for cost saving through efficient energy management of pumping stations have been identified;but this requires integrated electric and water SCADA operations. 2-2 APPENDIX 3 TELECOMMUNICATIONS PRODUCTS AND SERVICES TO BE OFFERED BY TPUD The TDPUD market for telecommunications service includes: > Residential customers who could benefit from price competition and enhanced service quality. > Large institutions and businesses desiring to establish their own alternate access arrangements,and small businesses. > Intermediaries, such as long distance inter-exchange carriers (IXCs), competitive local exchange carriers (CLECs), competitive access providers (CAPS), Internet service providers (ISPs),and CATV service providers Initially four types of telecommunications services are be offered by the TDPUD: ➢ High-speed data transport > Internet data transport > Cable television ➢ Lease of dark fiber These services are to accommodate the growing telecommunications needs of the greater Truckee area,and are discussed,in turn,in the following sections. HIGH-SPEED DATA TRANSPORT High-speed data transport on fiber optic SONET systems are to be offered on a wholesale basis to the PEG and business community. It is anticipated that high-speed digital lines will be available from point-to-point in standard and non-standard arrangement,including DS1 (1.5 MHz), 3 to 5 MHz bundles, DS3 (45 MHz), and possibly higher capacity connections — up to 100 MHz. The lines will be available on a non-discriminatory basis to local and long distance carriers,local value-added service providers, and local businesses. The availability of these lines, at an estimated cost of less than half the existing comparable high-speed copper lines, could bring choice and price competition to the greater TDPUD business community. > TDPUD Applications - The needs of the electrical transmission and distribution sections of TDPUD will be addressed, with transport services to all substations. The optical fiber backbone facility will be capable of accommodate growing utility 3-1 TELECOi IMUNICATIONS PRODUCTS AND SERVICES TO BE OFFERED BY TDPUD requirements for system control and data acquisition (SCADA), high speed data transport, and interconnection of the Electric Department's substations. Business Applications - Lines between offices are to be available for teleconferencing, data networking, image transfer, or telephones. New leased lines will be provided to customers within shortened intervals. Customers will have low-cost access to telephone service providers. Individual businesses will benefit from competitive prices and prompt service. Redundant fiber optic paths are be utilized to provide highly reliable transport service. ➢ Private Data Networks - Data network applications are anticipated to be the most common application on the system, meeting the performance and growth expectations driven by business computer use. The system will meet the reliability and security needs of critical business applications. Data lines will be extended directly to inter- exchange carriers allowing them to competitively reach customers without using the local exchange carrier. Long distance carriers could have the ability to offer local telephone service directly to customers by providing dial tone and switching service over the fiber SONET system. These interconnections with regional communications companies could provide more choices to customers. Access to alternate central offices and alternate points-of presence (POPS) may be available to businesses. ➢ Value Added Services-Providers of value-added service are to obtain high-speed lines and provide custom telecommunications applications. For example, value-added service providers can design, install and configure-a business wide area network, composed of several local area networks linked with routers, which convert local area network signals for transmission on the SONET system. ➢ High-Speed Transport Service for Local Schools and Public Safety - The high-speed telephony and data transport network will be constructed to meet the transport needs of primary and secondary schools, junior colleges, public safety offices, other special districts, and libraries, if they so desire. These offices can use transport facilities for expanded internal communications and their services to the community. INTERNET DATA TRANSPORT Internet data transport would be offered on the hybrid fiber coax (HFC) system in partnership with Internet Service Providers (ISPs). Cable modems provide a data connection directly to the ISP, bypassing the telephone network, enabling high-speed Internet access for homes and small businesses. Subscriber could use Internet services for entertainment, education, and shopping for other products and services, with delivery of information in the form of multimedia text, images, animation, sound and video. ➢ Cable Modems vs. Standard Telephone Lines-Cable modems deliver data up to 1,000 times the speed of standard telephone lines. Customers could quickly search and retrieve information such as stock quotes, weather reports, and headline news. 3-2 TELECOMMUNICATIONS PRODUCTS AND SERVICES TO BE OFFERED BY TDPUD Providing high-speed capability removes restrictions of telephone lines on size and complexity of Internet features, and frees the telephone line and network for telephone calls. Home computers could be continuously connected to the Internet, performing work without impacting telephone use. Restoring the household telephone for traditional use could also preserve the current flat-rate local telephone billing system. > Cable Modems vs.ISDN-Integrated Services Digital Network (ISDN) was invented to make digital service available in the telephone network to homes. Cable modems provide approximately 100 times the speed of an ISDN line used for data. As home services become digital, the quality and variety of services the telephone network can deliver increases. ISDN enables many new telephone services, as well as data speeds of 144 KHz, two to four times the speed of standard telephone modems. As with common telephone lines, ISDN lines are switched circuits, tying-up capacity while the line is in use. ISDN lines have the same inherent impacts that standard telephone lines have on telephone network availability when used for Internet access. ➢ The following table illustrates TDPUD's sample ISP (Internet Service Provider) offering as compared to other services currently available in the Truckee area. ISP Type Speed Cost Per Month($) (bits per second) TDPUD Cable Modem 10,000,000 30.00 platform Telis Dial-up 1,200 to 28,800 19.95 Sierra Net Dial-up 1,200 to 28,800 25.00 JPS Dial-up 1,200 to 28,800 11.95 The GRID Dial-up 56,000 $19.95 AOL Dial-up 1,200 to 28,800 19.95 to 21.95 Compuserve Dial-up 1,200 to 2,8800 $21.95 > One-Way Cable Systems - Competing products, which deliver high-speed data, such as Direct Broadcast Satellite or Cable Data on one-way cable systems, continue to use telephone lines for the return path. Use of such products tends to exacerbate the already overloaded telephone system. 3-3 TELECOMMUNICATIONS PRODUCTS AND SERVICES TO BE OFFERED BY TDPUD CABLE TELEVISION Offering full service cable television directly to local homes could bring price, programming, picture quality, and service-level competition to the greater Truckee area. The system that delivers Internet data transport service also provides cable television. The use of fiber optics optimizes system operation and performance. TDPUD could offer a wide range of programming, including local broadcast, news and information, sports, arts and entertainment, movies, family, as well as public access, education, and government (PEG channels). ➢ Basic Channels - The basic tier offers channels received from local commercial broadcasters (ABC, CBS, FOX, NBC, PBS, UPN & WB), community-access programs, municipal television, local educational channels, and a television guide. The approximate cost could be $10.00 per month. The incumbent provider does not currently offer a service tier of this type. ➢ Expanded Basic Channels - The total price for this package could be approximately $15.00 per month for 21 channels including the basic cable channels, 30 channels of digital music, and a converter box offering access to pay-per-view movies and events and Web surfing.The incumbent provider does not offer a service tier of this type. ➢ Super Expanded Basic Channels - Super Expanded Basic channels includes basic and expanded basic channels, for a total of 48 channels at a total price of$30.00 per month. This compares with the incumbent's offering of$38.68 for 36 channels. ➢ Premium Channels - Premium channels such as HBO, Showtime and Starz! are included would be favorably price by comparison to services currently provided. DARK FIBER The Attributes of Dark Fiber - Dark fiber is a passive material, requiring only minimal operations and administration support. The lease or sale of dark fiber capacity places primary responsibility for applications and installation of electronics in the hands of the intermediary (e.g., CAPs) or end-user. The user may choose to use fiber to transport massive amounts of bandwidth (e.g., OC-3, OC-12, and OC-48) via high-powered (and costly) electronics—in which case the cost of fiber is no object—or the fiber may be used to transport low-speed data as a highly reliable, wire-like commodity, in which case cost is a critical factor. A tradeoff between the cost of fiber and the cost of electronics comes into play—high cost fiber installation shifts attention towards more sophisticated electronics for the same basic 3-4 TELECOMMUNICATIONS PRODUCTS AND SERVICES TO BE OFFERED BY TDPUD application. The elasticity of fiber demand reflects the substitution of electronics for fiber capacity. The ability to install and utilize more fiber strands allows the use of less expensive electronic equipment. Conversely,higher prices for lease of dark fiber will result in use of more expensive electronics to reduce the required number of strands to achieve a market objective. Prices in other communities that offer dark fiber range from$200 to $40 per strand-mile per month,as shown below. Fiber Strand Price($/Fiber-Mile/Month) Municipality Spot Price Best Price Rationale Palo Alto' 222(178) 185(148) Reduce prices by 20 percent Burbank' 175 135 Scarce resource,bandwidth goal Eugene,OR - 150 100 Test market initially Longmont,CO 4 37 Economic development tool Williams 125 83 CLEC experience Alameda - - Offering frozen at 4 fibers PacBell - - Not offered.Engineering request , Conduit Prices Based on 4Inch Diameter Shell($/Mile/Month) PacBell 20 120 Locations dependent San Francisco 440 Williams'estimate The City of Palo Alto has installed a network for the sole purpose of leasing dark fiber.The spot fiber price,as cited in its marketing brochure, is $2,591 per fiber-mile per year, corresponding to $216 per fiber-mile per month. Various bulk discounts are offered,with a minimum discounted price of$86 per fiber-mile per month. Demand from CLECs and CAPS,the primary market for dark fiber,has not yet materialized. 'The City of Burbank has leased fiber at$175 per month,but only a small percentage of total capacity has been leased. 3-5 APPENDIX 4 EXAMPLES OF INITIATIVES BEING TAKEN BY OTHER CITIES Glasgow, Kentucky Glasgow has established a citywide network with broadband capabilities that would otherwise not available from either the local telephone or cable television companies. Glasgow has considered the municipal-owned broadband network as the economic engine to power the community into prosperity during the coming information age. The two elements that provided the economic justification for the project were electric energy management and competitive cable television. Today competitive cable television and telephone are available; and a 4 MHz per second citywide computer network ties together all Glasgow homes, schools, businesses and govemment agencies. ➢ The citywide network connects stand-alone PC's and file servers with their associated workstations in any home or business throughout the city. ➢ The network is also connected to a T-1 circuit that allows anyone on the Glasgow network to have 1.5-megabit speed access to the Internet simply by clicking on the Netscape icon to establish the connection, without any_connection to a telephone or a telephone modem. ➢ The system is used to synchronize traffic signals in town so streets carry the optimurv. amount of traffic, thus achieving higher efficiency in the investments the city has made in streets,roads and highways. Ashland.Oregon The City Council adopted the goal of building a fiber optic ring with an initial focus on improving electric utility efficiency with automated meter reading, load control, substation management, and outage detection. Ashland's fiber optic network now provides a telecommunications infrastructure that would not otherwise have come to the community. The network meets the municipal-owned electric utility's need with respect to positioning for electric deregulation; provides high quality telecommunications services to the public; and helps reduce utility operations costs. Cable TV services provide an additional $3.2 million in revenue for -- an additional capital cost of$1.5. 4-1 The Internet connection is the fastest available. Software companies are creating state-of- the-art products to make use of the network's capabilities. The network is long-term economic development tool by: ➢ Enabling local businesses to compete more effectively. ➢ Providing PEG institutions and large businesses significant opportunities to utilize new technology to reduce costs, improve service and implement distance learning and training concepts. • Providing the City's schools with unparalleled access to high-speed data and video. ➢ Giving the local college's off-campus students and faculty high-speed data solutions.. ➢ Enabling the hospital to improve its service to the community ➢ Providing residents a choice for Cable TV programming. ➢ Providing high-speed data access to the home -- significantly enhancing the community's growing numbers of home businesses. Alameda.California The City, situated on a 12.4 square mile island, operates a municipal electric utility. The electric distribution system is comprised of 94 miles of overhead circuitry and 92 miles of underground circuitry. Alameda's population of 80,000 experienced significant growth. It s a wealthy community, with half the households having incomes over $50,000 and witfi, an average household income of$68,000. The City has adopted an aggressive approach to telecommunications market entry: ➢ Alameda is offering cable television and Internet services to residential users and. providing telephony to government institutions. ➢ Internet service is being provided to public and private schools, and excess fiber capacity (dark fiber)is being leased to commercial providers. ➢ Alameda's strategy was to overbuild the existing CATV plant of TO and offer competitive CATV services. Construction of a two-way hybrid fiber/coax system began in January 1998 and is now complete, with a capital investment of approximately $8 million. A break even level of 4,500 customers was anticipated by the year 2000. A fiber optic ring was also installed in 1996 for internal use and for a lease through a competitive access provider and that already has achieved a break-even threshold. Responsibility was assigned to the Bureau of Electricity that hired marketing and operations personnel. 4-2 To this point, the City has attracted over 200 high tech companies as evidenced by a concentration of software programming networking, and peripherals manufacturing, biotech and related service opporttuuries. It developed Alameda Point, what used to be the Alameda Naval Air, which is lmdergoing conversion to private and commercial uses, with nearly 3 million square feet being converted into commercial facilities and another 3 million square feet available for new development. 4-3 APPENDIX 5 REGULATORY CONSIDERATIONS There does not appear to be any obstacle at Federal or State levels that would prohibit the District's entry into the telecommunications market, either as a provider of services, a participant in a joint venture relationship or partnership, or as a facilitator to promote telecommunications infrastructure development. ➢ Federal Guidelines - The Telecom Act of 1996 encourages new entrants—including Districts--into telecommunications to stimulate competition. Districts possess the requisite legal authority to undertake the installation, operation, and maintenance of a broadband communications network serving internal and public needs. Interconnection and unbundling of network elements has reduced barriers to entry. But municipalities and Districts must be mindful of level playing field issues. A five percent franchise fee has been incorporated in the business case analysis to ensure that the Town of Truckee would maintain its source of revenues from the CATV franchise. ➢ State Guidelines - California state statutes do not require a District or publidyrowned utility to obtain approval or authorization from the California Public Utility Commission (CPUC) before becoming a telecom operator. Cities and other public jurisdictions (including public utility districts) are not under the jurisdiction of the CPUC and do not require a Certificate of Convenience for selling common carrier services or any advanced telecommunications services. ➢ County Guidelines-The development of a District broadband communications system requires compliance with applicable provisions of the Local Agency Formation Committee(LAFCO). ➢ TDPUD Charter - The TDPUD's charter does not impose any restrictions on the provisioning of telecommunications services. 5-1 3: APPENDIX 6 SENSITIVITY ANALYSIS Sensitivity analyses were undertaken to assess the impact of possible shortfalls in revenues due to lower revenue per household and lower than anticipated subscriber demand. 30 Percent Reduction in Revenues Per Subscriber In this scenario, fierce competition from Satellite Television and the incumbent carrier forces a 30 percent reduction in average revenue per subscriber to hold market share. In this case total annual revenues increase from $1.0 million in Year 1 (versus $1.3 million in the base case) to $3.5 million annually in Year 15 (versus $4.8 million in the base case). Operating expenses increase from $1.0 million (versus $1.1 million) to $2.1 million (versus $2.3 million) during the corresponding period. Operating margins, the difference between Revenues and Operating expenses are positive throughout the period, increasing from $ $15,000 (versus$236,000) to$1.5 million(versus$2.4 million) during this time span. r� Net Income,including loan origination fees and interest payments,is negative for the initial four-year period,but turns positive in the fifth year and continues to increase over the 15- year horizon. Earning approach $500,000 by the eighth year, $800,000 in the W year, and more than$1.1 million in the 13"year. 75 Percent Reduction in Subscribers in First Year; 50 Percent Reduction in Subscrbers in Tenth yLar In this scenario, due to competitive forces and lack of subscriber interest, adequate demand fails to materialize, particularly in the formative years. Only 25 percent of the estimated subscriber base are realized in the startup phase (6 percent of homes passed),reaching only half of the estimated subscriber base in the tenth year(25 percent of homes passed). In this case total annual revenues increase from $500,000 in Year 1 (versus $1.3 million) to $3.1 million annually in Year 15 (versus $4.8 million). Operating expenses increase from $800,000(versus$1.1 million) to$1.9 million (versus $2.3 million) during the corresponding period. Operating margins are negative for the initial four-year period, with losses decreasing from $300,000 to $100,000 during the period; but margins turns positive in the fifth year and continue to increase over the 15-year horizon, from $ $11,000 (versus $236,000) to$1.2 million(versus$2.4 million) during this time span. Net Income,including loan origination fees and interest payments, is negative for the initial nine-year period, but turns positive in the tenth year and continues to increase over the 15- year horizon. Losses are over $900,000 in the first year, but decrease to $200,000 by the eighth year. Earnings approach $200,000 in the W year, and reach more than $600,000 in the 13� year. The sensitivity analysis indicates that there is substantial latitude in achieving business success. Even revenues are slashed by 30 percent to business is viable. It would take 6-1 SENSITIVITY ANALYSIS drastic reductions in estimated subscribership to undermine the viability of the telecommunications enterprise over the long term. The staying power of the TDPUD can sustain the business during unanticipated problems encountered during the formative years, until the business matures and revenues are secured. Alternative Construction Scenarios The TDPUD network utilizes an aerial system. An alternative, underground route is also available along Donner Pass Road.' Consideration was given to utilization of this underground route as a means of cost reduction and construction avoidance. Use of underground facilities is not recommended for the following reasons: ➢ Construction cost savings would not be material. The cost of fiber would be virtually the same, whether underground or aerial infrastructure was utilized. Savings in fiber placement on the TDPUD's existing poles would be offset by the costs of pulling fiber, and installation of additional attach points (involving manholes or handholes). ➢ Use of conduit for the backbone could result in stranded capacity for long-haul telecommunications network applications. As such, the opportunity costs of tying-up conduit capacity would overshadow any short-term benefits. • The potential value of TDPUD's two two-inch conduits should be considered from a construction-avoidance perspective. • An equivalent 16-mile two-inch conduit would at a cost of approximately $30 per foot to construct, with a corresponding construction avoidance value of approximately$2- million for each conduit pathway. ➢ If, during the next several years, these two conduits were sold at a construction avoidance value of $5 million (or more), these revenues could be applied to retire TDPUD's Certificate of Participation obligation. If this were realized, the net cost of TDPUD telecommunications network would,in effect,would be reduced accordingly! Provision has been made for use of underground conduit in a 2,000-foot segment along Donner Pass Road where aerial facilities may not be available. Z This does not take into consideration cost savings realized by the electric utility in installation of electric conduit. 6-2