MINUTES FOR THE STUDY SESSION
ASHLAND CITY COUNCIL
November 29, 2005
Civic Center Council Chambers
1175 E. Main Street
CALL TO ORDER:
Mayor Morrison called the meeting to order at 5:00 p.m. in the Civic Center Council Chambers. He announced that this was an opportunity for the Council to hear the AFN Options Committee's report and that no public testimony would be heard at this time.
Councilors Jackson, Silbiger, Hardesty, Amarotico and Chapman were present. Councilor Hartzell arrived at 5:11 p.m.
1. AFN Options Committee Presentation
AFN Options Committee Chair Michael Donovan introduced committee members Richard Barth, Paul Collins, Paul Mace, Don Mackin and Kevin Schultz.
Mr. Donovan presented a brief explanation of the process and noted that the committee received significant public input, including input from local ISP's, Hunter Communications, the AFN Programming Committee, past AFN Director Dick Wanderscheid, and City Staff. He explained that the committee has identified several options and are recommending a preferred strategy. Mr. Donovan stated that the committee strongly recommends that Council direct staff to present legal and financial findings with regard to the following options no later than January 15, 2006, so that a decision to pursue one of the following courses of action could be followed with due haste. He noted that the following recommendations are a two-pronged strategy and should happen in tandem with one another:
|-||•||Pursue on an expedited basis the sale of AFN to one of several entities that staff is currently holdings discussions with. The objective of these discussions should be to elicit a non-binding letter of intent. Bidders should include the following in their indication of interest: a) proposed purchase price range; b) required due diligence necessary to firm up their bid; c) estimated time range to complete such due diligence; and d) any contingencies that might affect their proposal. Staff should contact each bidder to ask that these non-binding indications of interest be received no later than December 15, 2005. Staff should provide each bidder with any basic information necessary for such bidder to submit its indication of interest. Once these indications are received, staff and the committee can clarify and evaluate the letters and make appropriate recommendations to the City Council.|
|•||Council should direct staff to contact three or more qualified investment banking firms specializing in the sale of CATV/Internet systems similar in size and scope to AFN. The purpose of this exercise is to: a) solicit input on the salability of AFN to third parties and, perhaps more importantly, the likely proceeds to be received; b) to understand the length of time required to complete such a process if undertaken; c) to understand the costs involved in completing such a process; and d) to exert additional pressure on the three parties above to consummate the transaction.|
|•||At the same time the Council pursues the two recommendations above, the City should simultaneously pursue the Spin-Off option, initially by having counsel analyze various options, and ultimately by putting in place all necessary measures so that, should AFN not be sold, the Council is in a position to move quickly to pursue this option with a minimum delay, but in no event later than January 15, 2006.|
Mr. Mace spoke on how the options were weighed and noted that the committee's conclusion does not recommend either option, but rather puts forward to the Council two paths that should go forward in parallel. Mr. Mace stated that this decision needs to be made by the Council and each of the recommended actions will benefit them in the decision making process.
Mr. Mace listed the options that were rejected by the committee, which were: 1) convert AFN to a common carrier; 2) purchase Charter's subscriber base in Ashland; 3) maintain the status quo; 4) immediate shutdown; and 5) continue City ownership of AFN with an enhancement of products and programming.
Mr. Mace clarified why the 'Maintain & Enhance' option was eliminated from the committee's recommendations. He stated that surprising the competition is half the battle in business and with the current set-up, the City is required to have their discussions in public and competitors are privy to plans well in advance of them being executed. He also stated that historically, the decision making process regarding AFN has been cumbersome. He explained that governmental entities tend to not come to decisions swiftly, and that this was counter to how a telecommunications business operates. Mr. Mace commented on how the decision making process was 'broken' and noted a situation where an opportunity arose but was not acted on. He added that similar situations with AFN have been repeated several times.
Council questioned if the decision making issues could be resolved by hiring someone who had autonomy so that decisions would not have to come to Council for approval. The committee clarified that given the way the City is required to run, they do not believe this person could be provided with sufficient autonomy. Mr. Mace added that the rules governing city contracts are constantly changing and are prohibitive to running a business in a highly competitive atmosphere. Mr. Mackin noted that the structure of a city is not designed to operate strategically in a competitive marketplace.
Mr. Schultz shared his opinion that even if AFN was spun-off to a separate entity, it was still going to be a struggle. He stated that the spin-off option would provide a better way to operate because the business would no longer be constrained by the issues of a public entity, however the services would still need to keep up with technology. Mr. Schultz added that if Ashland had a larger population base and there were more households to serve, his opinion might be different; but stated that it would not be easy to capture market share from Charter.
Mr. Mace commented on some of the other negatives with the Maintain & Enhance option. He noted that the committee examined the budget and discovered that AFN is charged $500,000 in central service fees for this year alone; which is 20% of AFN's annual budget. He stated that the City of Spanish Fork, which has a similar fiber network and budget, allotted $70,000 in central service fees for equivalent services. Mr. Mace stated that the central service fees are one of the major reasons why AFN is operating in the red every year and stated that it became clear to the committee that if AFN was not operating as an entity under the City, it would operate considerably more efficiently. The committee explained that in the next few years, the competitive picture was going to get bleaker, not better; however it was noted that they unanimously agreed that the value of the fiber infrastructure would be fully realized at some point in the not too distant future. The committee also commented on the hiring of a new IT Director and stated that the salary rate proposed by the City would not attract the right candidates. It was noted that if the Maintain & Enhance option only had one of these challenges, this option might been able to go forward; but it is the combination of all of these issues that made the committee unanimously agree that Maintain & Enhance was not the best option.
Mr. Collins stated that no matter how agile AFN becomes, it has only one competitive advantage and that is it belongs to the community. He stated that any plan going forward that cannot or does not leverage this advantage to the fullest extent is doomed. He added that the person in charge of AFN not only needs to have operational and management flexibility, they also need to be a shameless advocate and leverage this sole advantage that will help AFN survive and prevail in this market.
Mayor Morrison recaptured the discussion and asked Council if there was further information they required in order to take the next steps.
Council Chapman agreed with the actions recommended by the committee that would determine the value of AFN and stated that retaining the infrastructure would pose the most benefit to the City. He voiced his uncertainty regarding the cable television services and noted that the internet services have been successful. Chapman voiced support for taking immediate action and noted the need to hire an IT Director.
Mr. Donovan stated the whole subject of debt needed to be discussed. He noted that the City has 15.5 million dollars in debt regardless of what happens with operational revenue and expenses and suggested more discussion into the hiring of an IT Director. He shared his opinion that this might be putting the cart before the horse and cautioned the Council against taking a step that might need to be undone.
Mr. Collins shared his opinion that an interim AFN Director might be beneficial in helping to preserve the value of AFN while they move through this difficult process.
Mr. Mace agreed that the Council should move forward and make a decision swiftly. However he disagreed that they should engage in interim activity prior to a decision being made. He stated that there is sufficient staff to maintain the system and suggested that they evaluate their management and decision making process before putting more middle managers in place.
Councilor Silbiger voiced his support for the committee's recommendations and stated that they need to move fast. He noted that everyday that a decision is not made, $2,000 is added to the debt.
Councilor Jackson voiced support for following the committee's recommendation for a Spin-Off and agreed that an IT Director would help move this forward.
Councilor Hartzell questioned what would happen after a sale or spin-off. She agreed with the value of the infrastructure to the community and stated that this should be maximized.
Mr. Mace noted that Charter was not the only potential buyer of AFN. Mr. Barth stated that they need to consider how much it would cost to rebuild the system 5-10 years from now and suggested that this would be useful information to have when making the decision.
Councilor Amarotico voiced his support for the committee's recommendations and questioned if the committee discussed splitting the cable and internet services. Mr. Donovan stated that the committee consulted with staff and it would be very difficult to separate these two services. Mr. Mace added that an outright sale of AFN would involve selling the customer base, selling the equipment and leasing the facility. He stated that this was quite common in telecommunications, but having the two services separate but using the same equipment would get confusing.
Councilor Hardesty voiced support for the analysis and recommendations of the committee. He requested additional discussion of the Spin-Off option and questioned the costs that would be involved.
Mr. Schultz explained that in terms of additional funding that would be required, the Spin-Off option was better than the Maintain & Enhance option, however the spin-off business would clearly need some working capitol to upgrade the programming and provide products that AFN currently does not offer. He stated that at this point, they do not know what level of commitment would be required of the City or what level of debt the spin-off business would be able to assume.
Mr. Donovan commented on the asset of the community owned fiber and stated that this aspect needed to be shamelessly promoted. He stated that this calls for a different job description than that of just an IT Director. He stated that this person needs to have key public relations and communication skills and they need to understand the partnerships that will be necessary to build in this community. Mr. Donovan noted that the committee shares the Council's concerns regarding the capital outlay, however unless the Council asks the spin-off organization to come forward with cash in their pockets, the City is going to have to put something on the table in order to make this work.
Mr. Schultz stated that if the Council decides to pursue the spin-off, it should be the executive committee that does the hiring of the director.
The committee commented on the debt of AFN and explained how the 9 million dollar debt was accrued.
Mayor Morrison voiced his appreciation for the committee and their report.
City Administrator Gino Grimaldi explained that Council's next step is to schedule this for discussion at the December 20th Council meeting. In addition, they need to further explore whether or not to proceed with the hiring of an IT Director. Mr. Grimaldi requested that the Council provide additional questions to staff prior to the December 20th meeting. He also noted that Council would be making some decisions regarding the debt at their next meeting, including whether to delay the implementation of the surcharge.
Meeting adjourned at 6:58 p.m.
Barbara Christensen, City Recorder
John W. Morrison, Mayor