COUNCIL OF THE CITY OF PHILADELPHIA PUBLIC HEARING BEFORE COUNCIL COMMITTEE ON PUBLIC PROPERTY AND PUBLIC WORKS - - - Room 400, City Hall Philadelphia, Pennsylvania Tuesday, October 31, 2000 2:08 p.m. - - - BILL 000452 - An ordinance granting permission to RCN Telecom Services of Philadelphia, Incorporated to construct, own, operate, maintain, replace, and remove a telecommunications system in, over, and under the public rights-of-way and streets of the City of Philadelphia, and operate and maintain a video programming service over such telecommunications system, pursuant to the provisions governing open video assistance in the Telecommunications Act of 1996, under certain terms and conditions PRESENT: COUNCILMAN JAMES F. KENNEY, Chair COUNCILWOMAN JANNIE BLACKWELL, V. Chair COUNCILMAN DAVID COHEN COUNCILMAN FRANK DICICCO COUNCILMAN WILSON GOODE, JR. COUNCILWOMAN JOAN L. KRAJEWSKI COUNCILWOMAN DONNA REED MILLER COUNCILMAN RICHARD MARIANO COUNCILMAN MICHAEL A. NUTTER COUNCILMAN ANGEL ORTIZ COUNCILWOMAN BLONDELL REYNOLDS BROWN COUNCILMAN FRANK RIZZO COUNCILWOMAN MARIAN B. TASCO - - - VINCENT VARALLO ASSOCIATES, INC. Registered Professional Reporters Eleven Penn Center, Suite 600 Philadelphia, PA 19103 (215) 561-2220 2 10/31/00 PUBLIC PROPERTY & PUBLIC WORKS COMMITTEE I N D E X Page RCN Panel Scott Burnside, Regulatory and Governmental. . John Pitts, Philadelphia Manager . . . . . . . 5 Tom Steel, Regulatory Counsel. . . . . . . . . 41 6 City Panel Andres Perez, Commissioner, Public Property. . 119 Jos. James, Dep. Commissioner, " " 121 Others Lawrence Jarrett, Time Warner. . . . . . . . . 182 Ed Pardini, Comcast. . . . . . . . . . . . . . 191 Harry Wang, Comcast. . . . . . . . . . . . . . 216 Wes Hutchinson, Wharton Marketing Professor 201 Dave Davis, WPVI President, Gen. Mgr. . . . . 257 Lance Haver, Consumer Education Protection . . 281 Ed Mooney, Local 13000 . . . . . . . . . . . . 286 Dina Mendros, Citizens for Consumer Justice. . 291 Reverend Shine, Memorial Baptist Church. . . . 296 Will Daniel, Wilco Electronics . . . . . . . . 305 Philadelphia Community Access Coalition Gretchen Clausing. . . . . . . . . . . . . . . 308 Inja Coates. . . . . . . . . . . . . . . . . . 313 Kevin Murphy, Wynnefield Residents Assoc. . . 318 Richard Royal, Community Involvement Corp. . . 323 Time of Deliverance Television Ministry Joan Preston . . . . . . . . . . . . . . . . . 326 Barberton Davis. . . . . . . . . . . . . . . . 327 Robert Olivetti, Private Citizen . . . . . . . 331 3 10/31/00 PUBLIC PROPERTY, BILL 000452 P R O C E E D I N G S
Good afternoon, ladies and gentlemen, the Committee on Public Property is now in session. I'd like to make one statement prior to the beginning of testimony. The issue of cable competition is an important one for the future of the City. Better cable television, phone service, and Internet access are all critical elements if the City wants to be able to attract more residents and keep those that may be considering leaving. As a government, we must ensure that all of our residents have available to them the most up-to-date technology and the greatest diversity of services at competitive prices. Deregulation ultimately provides only benefits to the consumer, and I am very hopeful that this hearing will result in better services and lower prices for all Philadelphians. But at the same time, we must ensure that a level playing field is created for everyone competing so that there is no competitive edge given to any specific company or service. Further, the City must be adequately compensated for its use of its public 4 10/31/00 PUBLIC PROPERTY, BILL 000452 rights-of-way. Our current cable franchise holder should be commended for the quality of service they have provided over the years and for the impressive commitment they have shown in helping make our city a better place to live. We should demand nothing less than this high standard for many future service providers. I thank everyone present for participating, and I hope that this hearing will resolve all questions about this very critical issue. This committee has been convened to hear testimony on Bill No. 000452, which is an ordinance granting permission to RCN Telecom Services of Philadelphia, Incorporated to construct, own, operate, maintain, replace, and remove a telecommunications system in, over, and under the public rights-of-way and streets of the City of Philadelphia, and operate and maintain a video programming service over such telecommunications system, pursuant to the provisions governing open video assistance in the Telecommunications Act of 1996, under certain 5 10/31/00 PUBLIC PROPERTY, BILL 000452 terms and conditions. Would you please for identification for the record and proceed with your testimony.
Mr. Burnside, even though this system is -- it's not as high-tech as the stuff you brought with you, even though it's new. Would you pull the microphone a little bit closer to you. Thank you very much.
Thank you again, Mr. Chairman. I'm Scott Burnside, Senior Vice President for Regulatory and Governmental Affairs for RCN Corporation. And to my right is Mr. John Pitts, Vice President, Area Manager in the Philadelphia area for RCN. Our formal testimony has been filed, our written formal testimony has been filed, and what we would like to do here today is start our presentation with -- and I'll run through just our agenda -- the video, and then we have a little bit 6 10/31/00 PUBLIC PROPERTY, BILL 000452 more detailed Power Point presentation on the terms and conditions and details of the agreement as proposed.
Okay, so the first order of business for us is about a four-and-a-half- minute video followed by a Power Point presentation that Mr. Pitts and I will go through. So let's begin with the video. (RCN video shown.)
Thank you very much, Mr. Burnside, for the additional part of your presentation.
Thank you, Chairman Kenney and members of the Philadelphia City Council Committee on Public Property. My name is John Pitts, and I am the Vice President and Area Manager for the Philadelphia market, and although RCN is new to this market, I have been a part of the Philadelphia telecommunications industry for over ten years. I was the Vice President and General Manager of Greater Media here in Philadelphia from 1994 to 1999, and that's after being the Director of Engineering for four years 7 10/31/00 PUBLIC PROPERTY, BILL 000452 prior to that. As Vice President and Area Manager's for RCN's Philadelphia market, my goal is to deliver the same high-quality service that I did in my previous role. I'd like now to begin with a short presentation. What I plan to cover is who we are, talk a bit about our services, the idea that Philadelphians want choice, and then follow up with RCN and our commitments to the community. Let me start with who we are. Basically, we are the first and largest single provider of cable TV, local and long-distance telephone, high-speed Internet, all over our state-of-the-art fiber optic network. And one of the driving forces behind us being able to offer and deliver this revolutionary service is the substantial capital backing that we've been able the achieve over the years. This map depicts the areas where RCN is currently in operation, already offering service. The residents in these areas are enjoying the benefits of competition, and as you can see from the map, we are located in seven of the ten most densely populated markets in the United States. 8 10/31/00 PUBLIC PROPERTY, BILL 000452 And it's important to note that in each of these markets, we are funded through profitability. In this market, residents are already enjoying the benefits of competition. The towns that you see listed there are Folcroft, Ridley Township, Eddystone, and Sharon Hill and already have the benefit of having competition because of RCN. We currently have other towns under construction in that area and our reach is expanding every day. Now that you know who we are, let me talk a little bit about our services. We brand our packages as: Resilink, and Resilink is more than just cable TV; actually, it's a package of cable TV, high-speed Internet, and local and long-distance telephone, as you see there. Our cable component -- the cable component as a package is 85 basic channels, and the basic includes Disney, an 18-channel digital tier (we brand that Digitalvision), 45 channels of CD-quality music, multiplex premiums, and over 35 pay-per-view channels. And we've decided to include the map 9 10/31/00 PUBLIC PROPERTY, BILL 000452 that depicts our phone territory, just because it's such a powerful visual. You see the area codes listed there, 610, 215 and into Delaware 302? All of our customers can call into those areas for a flat fee, no extra charge. We feel that that provides a significant savings to our phone customers. Our bundles come in four different varieties. We have them branded as bronze, silver, gold, and platinum. Each of the packages have a different combination of two or three services with a variety of feature sets, and they range in price from $69 to $139. And there are details of these packages in the written testimony that you all have. ) I've touched on the prices of our bundles; now I want to talk a little bit how competition affects prices. I'm sure many of you have seen this headline and most of us know here that competition and price have been a hot topic in the City lately. As you can see from this front page from the 15th of this month's Philadelphia Inquirer headlines outlining cable 10 10/31/00 PUBLIC PROPERTY, BILL 000452 prices, noting that Philadelphia has amongst the highest cable rates in the country. Now, we're going to demonstrate later in this presentation that competition does in fact lower rates.
And that's only one of the benefits of RCN coming into Philadelphia, and this article is also in your testimony. Now let me show what the network looks like and describe how it works. Our local network originates with a mega pop that you see here, it's located in Montgomery County. The mega pop houses our Lucent five-year (unintelligible) switch, which controls all of our phone products, a digital (unintelligible) and Internet routing equipment for our cable modems. There's a self-healing fiber optic silent ring that circles the entire metropolitan area. We then strategically place hub sites near large pockets of homes. Now, these hub sites are actual structures, usually between 5 and 10,000 square feet in size. And in those hub sites, we house local video equipment for local video insertion. It also acts as a sort of a central office for our telephone product. There's 11 10/31/00 PUBLIC PROPERTY, BILL 000452 also equipment that controls cable modems just for the pockets of homes that they serve. Once fiber leaves, the hub site, it travels through the neighborhoods, either aerial or underground, depending on the area that we're in, feeding fiber optic notes. Those are the devices that you see there. That's actually the transition point from fiber or glass to RF, or coaxial cable. It's important to note that from the hub site up until those fiber nodes, it's all fiber. And those nodes are no more than 900 feet from any house that we serve, so we're driving fiber deep, very deep into the system. From the fiber optic nodes, we go with coaxial cable to telephone poles or to a pedestal right in front of the home that we're going to serve. And then using drop-cable, the typical drop coaxial cable that the incumbent cable companies use, we feed all of the homes in the neighborhood. Once we're at the home, we place a device on the side of the home called the "remote subscriber unit," or RSU. And this is a smart 12 10/31/00 PUBLIC PROPERTY, BILL 000452 device that is used to control all of the services in the home. From that device, we feed coaxial cable, and generally, it's the same cable that's already in the home, to feed the computer in the home for high-speed Internet service on the same coax to the television for our video product or cable television product. And then using twisted pair, it's still fed from this RSU, but twisted pair, and again, it's typically the wire that's already in the home, and we feed the telephones in the home for local and long-distance telephone service. And it's important to note that that's a full-featured telephone set, all of the features that customers are used to hiring. Now let's talk about competition, a core element of RCN as corporate philosophy, and I can tell you that the people of Philadelphia want the competition. According to an independent study that we commissioned by TNS Intersearch, a well-respected research firms, and the full results of this study is in your testimony, Philadelphians are strongly in favor of choice. As you can see from the top line results here: 79 percent feel that competition 13 10/31/00 PUBLIC PROPERTY, BILL 000452 will increase a variety of programming; 81 percent feel that competition will improve customer service; 83 percent feel competition will improve overall cable service; and amazingly, 84 percent favor just having a choice of cable companies. Now, is there any wonder why the incumbent cable operators would prefer that we not enter the market with these kind of numbers? We realize that no monopoly gives up their power voluntarily, but I think this is a clear indication that Philadelphians would like to have the opportunity to have choice. It's not just -- the Philadelphians are not alone in their belief of what competition will bring; the FCC has actual findings that mirror these responses.
The sixth annual FCC report, which you see here a quote from it -- and actually, the report is included in the testimony -- clearly states that when incumbent cable operators are faced with competition, they do a number of things. They respond by lowering prices, adding channels at no additional cost, and improving customer service. It's important to note that this finding from the FCC is based on 14 10/31/00 PUBLIC PROPERTY, BILL 000452 what actually points happens where competition exists. This is not theoretical. Let me talk for a minute now about how we will actually bring competition to the citizens of Philadelphia through our construction plan. This map depicts our build schedule, and we plan to construct our network in cable franchise areas originally designated as Areas 4 and Areas 3. That is, the northeast, north, and northwest sections of the City. You see the numbers that start from the upper right and sort of work their way down from 1 to 7 are actually the years that we plan to construct each of these neighborhoods. And by the end of our third year of construction, we will be providing services to areas including Lexington Park, Bustleton, Torresdale, Holmesburg, Feltonville, Hunting Park, and Juniata Park.
I'm sorry, Mr. Pitts, that's at the end of seven years?
Yes. We project the entire 15 10/31/00 PUBLIC PROPERTY, BILL 000452 project --
-- the numbers that exist in here are the 1, 2, 3, 4, 5, they represent years?
Okay. So as we move down from far Northeast down, the first year, second, third, and so on?
Yes. Area -- you see the number 3 between the two 5's, that actually is Juniata Park, Huntington Park, Feltonville. 16 10/31/00 PUBLIC PROPERTY, BILL 000452 Actually, the area that we are projecting to build is the exact same area that Comcast operated for the existence of their first term here in Philadelphia. So it's down to Susquehanna Avenue, all of the Areas 3 and 4.
So the other parts that are not numbered, those areas you don't plan to cover at all?
The gray areas are Franchise Areas 1 and 2. Those areas are not included in our build schedule.
At this point. Those are areas that are -- right, they are included in this application.
But it is important to note that this is the exact -- this is the identical area that Comcast operated, I guess, for the first ten or fifteen years. Let me move on to talk about 17 10/31/00 PUBLIC PROPERTY, BILL 000452 facilities. We plan to set down roots in the City. We need -- in order to operate, we've projected that we will have 60,000 square feet of technical operations space, occupying two centers, employing -- or housing 200 employees. In terms of hub sites, the hub sites that I showed you, the 5 to 10,000 square-foot buildings, between 4 to 6 sites, totaling 60,000 square feet, with probably 30 people working, and general office space for positions such as sales, marketing, and provision and things of that nature, another 20,000 square feet in 2 sites, or 120,000 -- I'm sorry, 120 people. By entering Philadelphia, we will create many business and employment opportunities I'd like to talk a little bit about those right now. We project that to build our network, we will spend somewhere in the area of $250 million, employ 50 to 60 small-business contracting firms, that will, in turn, give jobs to 400 to 500 individual subcontractors. And that's for the areas you see listed there -- engineering, make-ready network construction, and 18 10/31/00 PUBLIC PROPERTY, BILL 000452 hub site construction. And there are obviously significant wage tax -- positive wage tax implications there. And we're very committed to partnering with MBEC, the Minority Business Enterprises Council, to use approved vendors in construction in the Philadelphia area for the areas that you see -- you see most of the construction hub site suppliers. In fact, we've already started to utilize their approved vendors list for our Delaware County operation. In the area of other jobs, we project, in order to support the Philadelphia market, we will hire somewhere in the area of 350 jobs -- that is, 350 new jobs -- in areas that you see listed. There is installation and repair, maintenance, sales, marketing, engineering management, some back office, with a projected payroll of $14 million per year. And we just calculated the wage tax calculation there of $680,000 per year. And these are not low-paying jobs; these are management jobs in all of the areas that you see listed there, high-tech positions. 19 10/31/00 PUBLIC PROPERTY, BILL 000452 Now, we're committed to diversity. It's another one of our core principles. Thirty percent of all of our jobs in all classifications -- and this is in the testimony, in the OVS agreement -- will go to minority employees, and 7 percent of all jobs will go to women. As we 8 stated before, we are committed to partnering with 9 MBEC, and we've discussed these goals with them, 10 and we are all working together. 11 Now, to speak about our commitments to 12 the City and also to the community, I'm going to 13 turn the mike back over to Scott Burnside. 14
Thanks, John. 15 There's a requirement in the 1996 16 Telecommunications Act that when a competitive 17 over-builder like RCN enters a city or a market, 18 the license to provide service must contain terms 19 and conditions that keep the city whole. You can 20 go ahead and flip the next one. So customers who choose to go from one cable company to another can do so without causing any financial harm to the City. The terms and the conditions of the RCN-Philadelphia agreement must exceed those level playing field requirements, and 20 10/31/00 PUBLIC PROPERTY, BILL 000452 specifically they include: A $1.875 million commitment consisting of a $1.125 million commitment to area public access capital support; (Applause.)
A $250,000 grant -- I'm sorry, a $250,000 commitment to government access capital support; A grant of $250,000 for educational access; Employment training and subcontracting contribution of $250,000; And the PCDC loan fund of $250,000 for the benefit of MBEs and WBEs. Go to the next one. In addition, as you can see from this particular slide, the commitment contains: A five-channel public access; A five-channel educational access; And a two-channel governmental access commitment, in addition to leased access channels, as needed; (unintelligible) programming for municipal services and institutional services. 21 10/31/00 PUBLIC PROPERTY, BILL 000452 Now, I would like to make the following statement with respect to public access. We've set aside a total of channels, 5 of which are 5 for public access. We did so because the 6 incumbent cable operator has a similar 7 commitment. RCN believes that the commitment of 8 channel capacity and the supporting capital 9 commitments are real; therefore, we want to 10 acknowledge Philadelphia Community Access 11 Coalition and tell you that we view those 12 dedicated channels as a viable way to attract customers to RCN. (Applause.)
Working with the City and in accordance with the City's procedures, establishing an access corporation, RCN will have publicly provided programming on the air for our customers' enjoyment when we provide service. (Applause.)
Now, with respect to our commitments to the community, I want to say -- and actually, I want to echo, Mr. Chairman, what you said at the outset: RCN, we all have great respect for our competition, they've set a high 22 10/31/00 PUBLIC PROPERTY, BILL 000452 standard for good corporate citizenship. And RCN, as we build our business in Philadelphia, will do our very best to meet or exceed that kind of corporate citizenship because I think that's what will help us gain market share and a foothold in this market. And you can see from the various overheads that are rolling through what we have committed to. So in conclusion, we're just going to wrap up by sort of summarizing what we've talked about here for the last few minutes. A $250 million commitment in construction for people, facilities, and the delivery of network: Several hundreds of new jobs; A $1.875 million contribution to public education and government service; And we thoroughly believe that we, on one hand, have demonstrated our capability and our sincere interest to compete here in Philadelphia, and we believe that Philadelphia is absolutely ready for competition. And that concludes the formal presentation. 23 10/31/00 PUBLIC PROPERTY, BILL 000452
Thank you very much for your presentation. It was well-organized and very interesting to watch and listen to. Before we go to questions from members of the committee, I have a few requests for information that I want to give to you now so you'll have an opportunity to try to get this information. And I would suggest that any individuals here working for you at RCN or Comcast or any other interested department, when questions are asked for information, that someone be responsible for kind of taking those notes and making sure that we can get this information, whether it's written information or verbally responded-to information as soon as possible. From my perspective, there's a couple things I would like to see that you may or may not have access to. First of all, I'd like to get copies of all the agreements that RCN has with all of the surrounding communities -- Folcroft, Ridley Township, Sharon Hill -- if they are, in fact, able to be provided from any proprietary standpoint. I'd like to see what similar 24 10/31/00 PUBLIC PROPERTY, BILL 000452 relationships and deals have been made with those communities. I'd like, if you have access to, the demographics by race and income of areas -- the proposed areas for Service Areas 3 and 4. And also, if you have it, because of your planning in the future, the race and income demographics for Service Areas 1 and 2. Additionally, I'd like to know if you could possibly provide us with a list of your current subcontractors, what services they perform, and where they are located, as it relates to your regional business here already in Philadelphia. And if you could provide for the Chair some diversity and demographic information on employment in cities like -- comparable cities to Philadelphia -- Boston, Chicago, not necessarily Seattle, but some cities that -- four or five cities that are comparable to Philadelphia in its diversity and in its ethnic breakdown, okay? So the Chair -- I think Councilman Clarke had a question, and then we'll go through, and I have some additional questions to ask. 25 10/31/00 PUBLIC PROPERTY, BILL 000452
Excuse me, Mr. Chairman. Several, but not all, of those issues, as I was writing them down, I think we can and are prepared to address here now. So if you want to go through that list, fine. If you want to go to other questions --
Well, let me give you a chance to mentally prepare to answer the questions that you can answer today, and then we'll go through some of the Councilmembers' questions now. So I'm sure you have enough staff back there to work away at it, unless you have this all up here.
Thank you, Mr. Chair. Mr. Chair, accurately, you touched base on a couple of questions that I was going to ask with respects to the demographics. Could you also include the current usage by any individual in the two areas in question with any cable franchise. I'd like to see what's going on there in those 10/31/00 PUBLIC PROPERTY, BILL 000452 particular areas as it relates to subscribers currently.
If the question is current subscribership to cable TV in those areas that the incumbent operator has?
I think that the City would have a better feel for that than we would.
All right. So what you're telling me is that when you made a decision to select these two areas, you had no sense of what the current subscriptions were in that area?
Generally speaking, but I wouldn't have a number that I would want to give as testimony.
I said, generally speaking -- as I said at the outset, my history is, I've been in cable TV in this market for ten years, so I have a general feeling for the level of 27 10/31/00 PUBLIC PROPERTY, BILL 000452 penetration, and some of the business decisions we've made were based on some of those things. But in terms of how many customers, the cable companies that exist now have, that would be a better question for them than for us.
You do not know, okay. And in terms of your selection of those initial areas for a fit-out, what was the basis for that decision?
Yeah. There were a number of things that went into that decision. I think it's fair to say that we arrived at that decision jointly during the negotiations process with the City. And I suspect that when they have time to testify, they will give their own opinion. But we selected two franchise areas 28 10/31/00 PUBLIC PROPERTY, BILL 000452 because we thought that it was reasonable to expect us to build at least two. It is probably unreasonable to expect any one company to build all four at the same time, in a timely fashion. So rather than try to do a citywide franchise with build-out schedules that could, in fact, extend beyond a reasonable time frame, we scaled it to and used the existing segmentation of the City in four franchise areas.
So it had nothing to do with your ability to wire above-ground? I mean --
Yes. There are aerial and underground areas as well as backyard -- I mean, rear attachment in all areas. So, no, it wasn't. And we do aerial and underground builds in other cities. So it. . . And if I understand your question correctly --
I mean, I'm just trying to get a sense of your business decision, and if you're saying that the City essentially 29 10/31/00 PUBLIC PROPERTY, BILL 000452 told you to go to those two areas initially, then so be it, and then I'll have ask those questions of the City as to why did we make those determinations that you should go there. But you kind of gave me the impression that you kind of just threw a dart on the board and decided to go in those two franchise areas. It has nothing to do with, you know, current subscriptions, it has nothing to do with above- ground or below-ground wiring? I mean, it's just an area that you decided to go in?
Well, one thing that -- from our aspect, the fiber sonic ring that we're going to use to feed into the City is coming from the north, and it would extend down. So whether we were building Areas and or Areas and 4, we would still have to build through Area 3 and 4 to get to Area 1.
So it was closer to the electrical outlet, in other words?
You need an extension cord to get down to the other area.
I mean, there were many 30 10/31/00 PUBLIC PROPERTY, BILL 000452 facets to the decision. From our aspect, that was one thing that did look at, but it was sort of a mutually-decided thing on which areas we would build, after deciding that we weren't in a position or it didn't make sense to build all four, we had to choose two. And it wasn't underground -- it wasn't for any of the reasons that you mentioned -- underground, arterial, or -- I mean, a technical consideration that made sense to us. Once we came to that decision, okay, now we will be starting an area that is directly connected to our (unintelligible) that feeds the area. So technically, it does make sense.
I just want to add one other thought to that process. And, again, I think that there certainly is room for your own administration's input into how we collectively came to this agreement because, obviously, there were two sides at the table. But originally, we, 31 10/31/00 PUBLIC PROPERTY, BILL 000452 from a regulatory perspective, filed an OVS application, which does not require --
Can I ask you another question, 'cause there's three of us at least, and maybe more, at the table. And as you answer that question, what we don't understand is why this is an OVS development and not simply a franchise agreement. And what -- and the City has the same question to answer when they come up, why this is an OVS agreement and not a franchise agreement, as all other operators that have served cable service in the City have done.
Well, it's actually an interim OVS agreement that transitions to a franchise. It has many of the same properties -- this agreement has many of the same properties, including full build-out of each of the two franchise areas.
What's the advantage or disadvantage -- well, what's the advantage to the company by having an interim OVS agreement as opposed to a full-blown franchise discussion? I mean, obviously, these discussions have been going on for quite some time, back into 32 10/31/00 PUBLIC PROPERTY, BILL 000452 the last administration. Why would it not simply have been done as a franchise as opposed to an interim agreement?
That's -- that really is a question that I cannot answer, except by saying that for all intents and purposes, the content in this agreement is a franchise agreement. There is very little difference. And we're prepared to do and meet all of the obligations of a franchise. In fact, most of them have already been pounded out in this agreement, so --
You're speaking to novices here about the details. I wasn't here during the last go-round cable discussion. In the Public Property Committee, we did some stuff with Comcast and came in to take over these -- purchase these other companies. But the issue of -- considering the length of time that's gone on in this discussion and considering the fact that you say you have no 22 problem doing a franchise agreement, why is it an interim OVS agreement and not a franchise agreement? And you said you can't answer the question, so I guess it will have to be a question 33 10/31/00 PUBLIC PROPERTY, BILL 000452 for the Department of Public Property to --.
I think it's a fair question. It's not that I can't answer the question. I think it's a question that really, really resides -- the answer resides with the City.
Could you ask him for really -- as I, just on the record, for those of us who are not into the technology, could you define what an open video system is and then what is that difference between that and the cable system that we're not obviously not here to discuss. And --
I will try to do that in as short of time period as I can. OVS was a concept that made part of the '96 Telecom Act. It was designed actually to encourage the very thing that's happening here -- competition in the cable market. It was designed and separated distinctly from the franchise concept. In theory, it gives an OVS operator the right to come into a city and, in effect, start offering service. It doesn't require a full 34 10/31/00 PUBLIC PROPERTY, BILL 000452 build-out, it does not have all of the same properties that a franchise has.
By nature, then, I would suppose -- and correct me if I'm wrong. By nature, then, an OVS agreement is an easier and -- could it offer an OVS -- a party to an OVS agreement more of an advantage over a franchisee? I mean, there are certain things that are beneficial to the OVS agreement-holder that is distinctly different and less than official to a franchisee, whether they're existing or new.
Well, Mr. Chairman, I would say that what was intended in the Telecom Act for OVS and what is real are two separate things, because you would presume that in reading the Act and the following rules promulgated by the FCC governing OVS that an OVS operator, whether it be RCN or someone else, come barging into a city, say, Here we are, we're ready to do business, get out of our way. And that's, obviously, inside-the-beltway thinking and not practical reality. So in terms of the content of our agreement, our proposed agreement with the City, 35 10/31/00 PUBLIC PROPERTY, BILL 000452 even though it is described as an OVS agreement or an interim OVS agreement transitioning to a franchise, it is, for all intents and purposes, a franchise. It includes a full build-out, it includes all of the commitments to keep the City completely whole. And I think that the distinction is one without a difference.
Just hold on one second, please. Councilman Nutter has a question.
There is -- may I just finish one last thought on that process, Councilman?
Okay. With respect to the interim nature of this OVS agreement, again, I don't presume to answer for the City; they will undoubtedly have some answers of their own on the subject. But one thing that the interim agreement does is, it gives you, the City of Philadelphia, the opportunity to see if RCN is in 36 10/31/00 PUBLIC PROPERTY, BILL 000452 fact measuring up to its commitments in this agreement. Obviously, it requires us, from the very beginning, to start pooling capital and employ people from the beginning to build the network. We're not going to do that on a simple two-year agreement. It --
I guess the question is, then, why would -- why would not this have been the attempt to get a franchise agreement from the very beginning? Because I understand this discussion has been going on as long as since 1996, and all of that discussion, whether it's with the last administration or with this particular regime of public property, many of whom, if not all, were a part of the last administration's public property department, that this would be a regular franchise. I mean -- and then you have the commitments necessary and the long-term opportunity to build out at a pace that you felt was comfortable and lucrative enough for you to stay in the business. For example, I guess the question is, if you were to come in here and, over a two-year period on an interim agreement, could you then 37 10/31/00 PUBLIC PROPERTY, BILL 000452 just pull the plug and decide that you're not going -- it's not worth it and that you move on? As opposed to signing a regular franchise agreement for a specific length of time, more than two years? I mean do you have an exit, do you have the ability to exit with an OVS agreement as opposed to what you would have with a franchise?
The -- no. The -- the liabilities in this agreement, and I think they are in Section 4, of the OVS agreement, liquidated damages are, I believe, exactly what they would be in a long-term franchise agreement and will, in fact, be --
Where is the document, in the book? 38 10/31/00 PUBLIC PROPERTY, BILL 000452
Yeah, it's in the binder. Yes, sir, in the binder. I can quickly summarize.
The entire agreement is not in your binder, but we have our copy hear, and we can distribute it.
But I would hope that we could get additional copies to either Public Property, or RCN could give the members of the committee and Councilmembers present copies of the OVS agreement.
I'm sorry. So for the moment, they're saying that the agreement is not in all of the materials that we've received, it's not in the binder?
The entire agreement is not, but we can get that to you very quickly.
No. We've distributed the agreement prior to this distribution, and I'm not --
I said we distributed the entire agreement previous to our distribution today. And for the members of Council that do you not have it, I will see that you get it before the meeting's over.
Let me just -- I can quickly summarize it and you can see the details later on. But, for example: Failure to complete the construction 40 10/31/00 PUBLIC PROPERTY, BILL 000452 carries a $2,000-a-day liquidated damages statement; Failure to comply with any other rules or any other components of the -- in the agreement, $1,000 a day; Failure to provide data and documentation, $250,000 a day. So the liquidated damages, the overall liquidated damages section which is 4, I think, is exactly what it would look like in a franchise.
I mean, hate to keep beating a dead horse here, but if it looks like a franchise, acts like a franchise, competes like a franchise, why is it an OVS agreement? Again, I mean, I'm sorry, but you happen to be sitting at the table, and I guess it is a public property question. But, I mean, if all the elements you contend in your testimony are, in fact, a franchise-like agreement, I see no -- then I can't understand the reason why we're considering an OVS agreement as opposed to a franchise. And if there's some legal -- I mean, if there's people here that can answer that question 41 10/31/00 PUBLIC PROPERTY, BILL 000452 or -- I'd be happy to -- I just want to try to --
Maybe we can add a little bit to the answer by asking -- I'm going to call up Mr. Tom Steel (ph.) --
-- from RCN, who was responsible, in a large part, for negotiating the agreement with the Public Property Department.
My name is Thomas K. Steel, Jr. I'm Vice President and Regulatory Counsel for RCN.
We've negotiated a number of interim OVS agreements in other cities; for 42 10/31/00 PUBLIC PROPERTY, BILL 000452 instance, the City of Boston, The city of Washington, DC. In New York City, you had a longer-term OVS agreement. I can't speak for the City directly, but I know during our negotiations what was particularly attractive to the City was the idea that they would essentially have two bites of the apple. They could create a franchise -- we move very quickly in OVS agreement into a franchise negotiation, 120 days we're committed to starting a franchise negotiation process, so we move quickly into a franchise process. While we're doing that in over a period of a year or how ever long it takes to negotiate the franchise, the City was intrigued with the idea of having an opportunity to evaluate our performance, and I think that was the key. They saw an example of our -- of an interim OVS in other cities and thought it might work well here. But in every way when we negotiated this, and you'll see that in the appendices, Appendix I has franchise terms. In every way, we've negotiated a franchise pretty much to be able to move quickly into that mode early in the 43 10/31/00 PUBLIC PROPERTY, BILL 000452 process, depending on how well we do, I suppose.
We'll have the City and we'll take them through probably the same questioning process. Do you want a franchise?
Well, why didn't you just negotiate a franchise agreement, then?
We were ready to go either way. And we essentially did negotiate a franchise agreement, even though it's called an interim OVS and it has these added terms.
And it has these added terms of, you know, two years, and then the other terms for folding it into a franchise. 44 10/31/00 PUBLIC PROPERTY, BILL 000452
Mm-hmm. From your perspective, what are the pluses and minuses of either an OVS versus a full franchise?
In these other markets I spoke of in particular, there is a layer of state regulation that would delay our ability for our speed to market. So what the advantage there was that we would have an OVS and then move into a construction mode much more quickly than we would under a state process.
It's really seamless to us. We could go either way; it was the call of the City.
It was the call of the City as to which way they would like us to approach competition.
But you have no 45 10/31/00 PUBLIC PROPERTY, BILL 000452 objection to going the franchise route.
No. As I said before, we expect to be involved very much in the franchise negotiation with pretty much the terms that are already set in about four months.
And under this particular agreement, are there any television services involved in what you will be doing over the next few years should this go forward?
Was the question, are there any television services included in the agreement?
This development does not. It involves the ability for RCN to provide 46 10/31/00 PUBLIC PROPERTY, BILL 000452 cable television or video services in these two market areas or franchise areas.
Right. And the agreement is for two years, and what will be constructed in the course of that two-year time period? The graphic of the City is not back up on the --
If you can put the graphic of the City back up, you can read in the presentation the -- are we going to get the map back up? Okay. Then where you see and --
-- that will delineate Year and Year of our construction program so that during the interim agreement, we begin construction in 1 and 2 up in the Northeast section.
And in that time period, at what point in time during the two-year period would someone actually turn on the television set with RCN in service?
So it only takes a year? How long does it take to build -- 47 10/31/00 PUBLIC PROPERTY, BILL 000452
Well, our plan would be to -- and this is how we deliver service in all the areas that we serve. We would begin construction, and then after a certain portion is built, we would start to offer service while we're building beyond that. So I would suspect that six months into construction, we may be able to service our first customer, while we're moving on with construction.
In Year 2, how many customers would you anticipate would either be in the coverage area? Obviously, that doesn't mean you sign up everybody whose house you go past, but how many people are you talking about that point?
I could probably tell you homes better than customers. That will probably take a second for me to get for you.
Okay. Mr. Chairman, I think questions my have gone beyond the yield that I asked for. It's a new train of mind: I'm actually keeping track of what I'm doing.
Just in fairness, Councilmember Rizzo has been waiting for a couple 48 10/31/00 PUBLIC PROPERTY, BILL 000452 times and we got off on a couple different areas.
I'd like to go back to the slide where you basically laid out what this means for Philadelphia in the areas of jobs, et cetera. I want to make sure for the record that it's clear that all of the jobs that you indicated and the construction jobs, et cetera, will directly benefit Philadelphia. And my question is, what other support outside of the City will support this construction and permanent jobs that RCN will allegedly bring to Philadelphia? I'd like to know beyond Philadelphia, what is not going to be located and housed here within the City limits?
Our -- the mega pop that I described in the graphic, that has our five-year (unintelligible) switch and our digital (unintelligible), that is actually in Trooper, in Montgomery County. So those -- the functions surrounding 49 10/31/00 PUBLIC PROPERTY, BILL 000452 the support of that will still -- will not be in the ear. My office is in that -- is in that facility. All of the technical support field service, dispatch, sales provisioning, that's the group that actually deals with the phone numbers for our phone products, those will all be inside of the City limits.
And also I guess it's fair to add, in anticipation of the question later, our corporate headquarters will remain in Princeton.
I could understand, you know, your corporate headquarters being wherever you want them to be, but I can't figure the Trooper part. Could you -- why are you -- why Trooper and not Darrell Clarke's district or some other Councilmatic district or Councilman DiCicco's district? (Applause.)
Well, we will place facilities inside of the City limits. A technical operation center, which actually I had a picture up of a typical one, we'll have to have one of those per each area that we serve, and that's the 50 10/31/00 PUBLIC PROPERTY, BILL 000452 sort of central point.
But technically is there any reason you need to be in Trooper?
Well, if you looked at a map of the entire five-county area, Trooper is pretty much dead-center. And technically, when we looked at this whole market, it made sense for our (inaudible) and central switch to be somewhere that was centrally located. Based on growth, it's going to make sense. And besides, we didn't have a franchise there, we didn't have an OVS or a franchise here, we have no operations here. And as we have an operation and we start to gain customers, it would definitely make strategic business sense for us to place the people close to where the work happens, so that's what we'll do.
Trooper's up and operating, and it's been operating for over a year now. The services in Delaware County, the customers that we're serving right now, they're fed. Their phones are being fed from being Trooper, their 51 10/31/00 PUBLIC PROPERTY, BILL 000452 video is being fed from Trooper. But those -- that main site that feeds hub sites, and those are actually -- I mean, they're not minor structures; these are major pieces of technical real estate that we'll have to get and we'll place those throughout the market that we serve.
My final question for this round is, the seven-year construction schedule, if I can remember, I believe that the cable companies accomplished the build-out in a shorter period of time, in seven years, maybe it was five. So why --
Two to four? Okay. Why is it going to take you seven years?
Well, we're projecting to take five years per area with overlapping years, that's how get the seven years. We're starting Area 4 in Year 1, and for the first three years that we're building, primarily in just Area 3, and in the third year, we start building in Area 3. So in each area, we're building -- it's taking us 52 10/31/00 PUBLIC PROPERTY, BILL 000452 five years to construct, and that's similar to the time frame that the original builds took.
May I also add to that, sir, that if my history of the original build is accurate, no one company actually built multiple franchise areas in the City of Philadelphia at the same time. There was business acquisitions, but no one constructed. You divide the City into four and you were awarded four separate franchises to four separate companies. And if you equate that -- and I don't want to put words in anybody's mouth, but if the question is, if we had one franchise area, could we build it in four years? the answer is clearly yes.
The financing, the dollars to put this system together, is that a factor? And could you just describe briefly? And, again, this is the first time I've had an opportunity to review. And if you've sent other members of City Council documents, I haven't received anything, so I'm working on this cold today. The amount of money that it's going to 53 10/31/00 PUBLIC PROPERTY, BILL 000452 take to accomplish that today, is all that financing in place to build this entire system?
The answer to your question is, yes, it is. RCN is funded to profitability on a corporate basis. We expect that to occur sometime in 2002. Now, at the present time -- and we also say that we have not ever, and continue to say, we have never entered and will not enter a new market without the ability to fully build it out. So in answer to your question, even in theory, if the financial markets stayed closed, as they are right now, on a temporary basis, that RCN would be able to internally fund the build-out beyond 2002. Now, it's highly improbable that financial markets would stay closed for a full seven years, so we will be able to continue on our growth and expansion plan in new markets. But Philadelphia, to RCN, is not a new market. And I -- let me repeat again, we have never come to a market where we couldn't fully build out our plan. So the answer is, yes, the funding is 54 10/31/00 PUBLIC PROPERTY, BILL 000452 fully in place to build out in Philadelphia and in all of the suburbs.
Before I recognize Councilmember Brown, I want to add -- make an addendum to the request for information I had made earlier. Councilmember Tasco is interested in the diversity record in cities like Chicago, Boston, and similar cities to Philadelphia. She would like the employment complement to be broken down into management, operation, sales, and secretarial so that we have an idea as to within that diversity of employees, where people fall in management and in lower levels of the company. Councilmember Brown?
Thank you, Mr. Chairman. Good afternoon, gentlemen. Good afternoon.
My questioning is in line with what Councilmember Rizzo has mentioned but also more directly in line with what 55 10/31/00 PUBLIC PROPERTY, BILL 000452 Councilwoman Tasco has requested and related to the composition and makeup of your workforce. You indicated in your presentation that you anticipate 350 new jobs. Help me understand how you arrived at 30 percent -- and I have a blank here because I don't remember what that was -- and percent women. What moved you to that 9 decision; based on what you've done in other 10 cities or based on what Philadelphia looks like? 11
Well, those numbers mirror 12 the targets that the incumbent cable companies 13 have right now. And I can tell you that 14 currently, just using good equal-opportunity 15 employment practices, we're exceeding those 16 numbers right now for our operation in this 17 region. 18
What strategy, or 19 strategies, do you have in place for ensuring that 20 low- and moderate-income residents ultimately end up with opportunities at RCN?