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HomeMy WebLinkAbout2.a. FTTH/Rudder FranchiseAGENDA ITEM: FTTH /Rudder franchise issues AGENDA SECTION: p(Ci,l1/2)0h PREPARED BY: Dwight Johnson, City Administrator AGENDA NO. v2 A ATTACHMENTS: Memo for May 13 Council workshop APPROVED BY: 04) RECOMMENDED ACTION: Staff plans to propose that the Council take action on July 21 to revoke the franchise for FTTH /Rudder effective on October 21, 2009 (about 90 days from the July 21 Council meeting). 4 ROSEMOUNT CITY COUNCIL City Council Workshop Meeting July 15, 2009 EXECUTIVE SUMMARY BACKGROUND Earlier this year, staff wrote a letter to FTTH /Rudder detailing alleged franchise violations. Subsequently, the company agreed that it was not meeting all franchise requirements and waived its right to a public hearing on these issues. FTTH /Rudder has made it clear that they are not able to continue to build out the community as required by the franchise agreement. At the May 13th council workshop meeting, staff identified various alternative strategies that emerged from meetings with FTTH /Rudder (see attached memo). Staff updated the council on this issue at the June 10, 2009 workshop meeting. At that time, we reported that: P"I"TH /Rudder had been largely unresponsive to us Velocity Telephone had presented a conceptual plan that requested a partnership with the City in which we would provide a backup guarantee for $1 million of a revolving letter of credit to assist build out on a "small project" basis, and The City Attorney's office had indicated that this is beyond the City's legal powers. The current update is that: FTTH /Rudder has continued to be largely unresponsive to us, giving us only one short email update Velocity reports that the company has been significantly unresponsive also in providing information to them. They have no interest in buying at the price FTTH /Rudder is now asking. No large companies have shown any interest in acquiring FTTH /Rudder at this time. Staff held another meeting with Velocity on July 7` Velocity continues to be interested in providing service to Rosemount if some kind of partnership can be established with the City. At a minimum, this would include the City's active support and endorsement, but may also require some kind of financial backing. PROPOSED NEXT STEPS With the lack of any real forward motion on the sale of FTTH /Rudder, and the lack of evidence that FTTH /Rudder is proceeding with any real sense of urgency and cooperation, staff believes that there is no reason to further delay action on the franchise violations. Options for addressing the franchise violations include financial penalties, revocation, or both. Revocation is justified, since the buildout of the community according to a prescribed timeline was a central part of the franchise renegotiation in January, 2008 and the company agrees they have not met this requirement. However, staff believes that it is in the public interest for the revocation to actually take effect at a future date about 90 days from now for the following reasons: It wilLallow the City to inform E vermoor residents that some of their services will be affected and allow them time to take action FTTH /Rudder will have a greater incentive to sell once a deadline is set for them. A potential barrier to another company showing interest in providing fiber service to Rosemount would be removed. The City would be taking control of the situation rather than waiting for others to act. The potential of a precipitous "pull the plug" event for Evermoor residents is minimized. This scenario may ultimately allow the City to control the fiber assets in our right -of -way. The main risk factor for the City is that in 90 days we might be the cause of a disruption of service that might otherwise not have occurred so soon. The Council should also discuss the possibility of financial penalties in addition to a franchise revocation. FTTH /Rudder may not have the ability to pay such penalties, but they are not yet in any official bankruptcy proceeding. AGENDA ITEM: Discussion of franchise issues relating to FTTH /Rudder and Charter AGENDA SECTION: PREPARED BY: Dwight Johnson, City Administrator AGENDA NO. ATTACHMENTS: City letter detailing FTTH violations; letter of response from FTTH; info packet from FTTH APPROVED BY: RECOMMENDED ACTION: Consider options for addressing FTTH /Rudder franchise violations and Charter Communications bankruptcy. ROSEMOUNT CITY COUNCIL City Council Workshop Meeting: May 13, 2009 EXECUTIVE SUMMARY ISSUE FTTH /Rudder has acknowledged that they are in violation of their franchise with the City. They have waived their right to a public hearing, and have met with staff to identify several optional strategies for the immediate future. FTTH /Rudder has indicated they do not have the financial ability to continue to develop and operate a system in Rosemount. BACKGROUND The City entered into a franchise agreement with I- H Communication, LLC in 2002 to provide high speed fiber optic cable throughout the City. In January, 2008 the City Council agreed to a revision in the franchise agreement that changed several provisions including the schedule for the required build out of the City. The schedule requires the build out to occur over a three year period and the first phase was to have been completed by December 31, 2008. While some conduit was installed in the Fall of 2008, no energized cable was installed as required. The revised franchise agreement was made with Rudder Capital Corporation which bought out FTTH with the approval of the City. Other franchise violations included lack of payment of required franchise fees, the failure to provide a letter of credit to the City, and consistent failure to cablecast various governmental and educational programming as required. Mr. Robert Vose, our attorney at Kennedy and Graven who specializes in franchise matters, detailed these violations in a letter to the company dated March 12, 2009. A meeting was subsequently held with FTTH /Rudder representatives at City Hall on April 8, 2009. The company indicated that it could not continue financially and various alternative strategies were discussed (see attached letter from Mr. Kevin Kawell of FTTH). The alternative strategies include: 1. FTTH attempts to sell the company to a large telecom company 2. FTTH attempts to sell to a smaller, regional telecom company following adjustments to the franchise requirements 3. FTTH could sell to the City 4. City could enter into a partnership and help provide below market financing for a new buyer 5. City could enforce franchise revocation which would require FTTH to terminate cable service (but not telephone or internet). City could also seek to impose penalties for franchise violations. Mr. Vose will be present to discuss these options and what impact they might have on the City and the FTTH subscribers within Rosemount. In addition, Charter Communications has declared bankruptcy, and Mr. Vose will also advise the City Council on what actions might be needed by the City to address this issue. Charter Communications has stated that they intend to continue operations during and after bankruptcy proceedings. BRIEF DISCUSSION OF FTTH OPTIONS Option one above is the best outcome, but seems improbable. A large telecom company would have the capital resources to build out the system by December 31, 2011 as currently required. Option two depends on the City's willingness to consider a much longer time frame for the build out of the City, since a smaller telecom company will probably not have the resources to move faster. Options three and four would require direct financial involvement by the City. Option five is justified, but FTTH indicates that if the franchise is revoked it will likely seek to terminate telephone and internet services in addition to cable services (such action would be subject to PUC approval) and declare bankruptcy. This would result in hundreds of Rosemount customers losing cable, internet and /or telephone service and having to find another provider. Additionally, while the City is entitled to impose penalties for the various franchise violations, FTTH failed to provide a letter of credit and is apparently insolvent making collection difficult. The Council needs to determine if it wishes to entertain any of the first four options, or move directly to option five which relates to enforcement of the franchise through revocation or penalties. 2