PURPOSE:

This resolution authorizes Burbank Water and Power to terminate the Fiber Optic Use Agreement with ICG Telecom Group, Inc. and ICG Holdings, Inc. (collectively �ICG�), a telecommunications company based in Englewood, Colorado.

BACKGROUND:

ICG provided telecommunications services much like Pacific Bell and GTE and represented the competition that developed over the years following the deregulation of the telephone industry. The presence of these competitive suppliers encouraged the development of additional telecom services at lower prices. However, mergers and acquisitions have taken their toll on many upstart telecommunications companies, as is the case with ICG. Their recent acquisition by MPower Communications is a direct result of ICG�s financial distress.

The City of Burbank and ICG entered into a Fiber Optic Use Agreement effective January 31, 1997 for a term of 15-years. ICG Holdings was added as a party to the Agreement through a first amendment executed July 10, 1997. ICG commenced bankruptcy proceedings on November 14, 2002, which was acted upon by the District Court of Delaware on August 28, 2002. ICG continued to make their annual payments of $155,520 per the agreement each year. A second amendment to the Agreement executed March 16, 2004, changed the annual billing to quarterly billing.

We know of no customers in Burbank who use the ICG leased fibers.  It does not appear to be a source of revenue. We have suspected that ICG would be unable to continue to hold this agreement as it proceeded with its re-structuring.

The ICG Agreement includes provisions for the termination of the Agreement by paying an amount equal to half of the remaining sum of the lease payments, or about $583,000.

In a letter dated September 2, 2004 to Ronald E. Davis, BWP�s General Manager, ICG requested to enter discussions with the City of Burbank to terminate the Agreement. The letter and attachments were forwarded to the City Attorney�s office for review and comments and discussions began between BWP�s Telecom Section and ICG. The results of those negotiations are contained in the termination agreement before you.

We then developed an approach with ICG that proposes to exchange high performance carrier grade telecommunications equipment as well as fiber facilities that are of value to BWP in exchange for the termination of this subject Agreement.   

ANALYSIS:

The ICG Fiber Use Agreement has generated $1,166,400 in revenue for the City.  The Agreement has been in place for just over half of its 15-year term.  If ICG would be able to continue its payments required under this Agreement it would generate an additional $1,166,400.  However, in light of ICG situation and the apparent lack of revenue from this lease ICG is not able to continue to justify the continuation of this agreement.  The best option is a termination of the existing agreement that results in the most benefit to Burbank.

As a practical matter this Agreement has served the purpose which caused BWP to enter into this agreement.  It has generated sufficient revenue to pay for the initial construction of fiber facilities.  These facilities have been expanded since then with revenue from the other customers.  Even with those additions, the fiber facilities have no debt and have generated a positive net income.

In determining how we might best develop a favorable termination with ICG we considered its situation and contrasted that situation with BWP�s.  These telecommunication providers must have sufficient assets in place in order to provide service to its projected customers.  These companies generally failed because they failed to develop the customer base required for its business plan.  As a result these companies often have surplus assets.

In contrast, BWP has few telecommunications assets other than fiber cable.  While we use telecommunications equipment, that equipment is heavily utilized and is in need of expansion or replacement.  Further, ICG has made two significant improvements to its network.  Those improvements include an alternate connection with LADWP at its Receiving Station E and connections with SBC.  BWP sought to secure surplus telecommunication equipment from ICG as well as taking over the alternate connections to LADWP and SBC. 

With the above objective in mind, BWP Telecom Section negotiated with ICG to secure sufficient ICG-owned equipment and facilities to be equal to the remaining value of the Agreement to be terminated.

BWP proposed to acquire from ICG telecommunications equipment, referred to as SONET equipment, which would work with the existing BWP network.  BWP presently transports its electrical system control and monitoring information as well as, security camera images over a SONET network composed of twenty-one (21) substation multiplexers operating at speeds of 155 million bits per second, also known as OC-3. ICG agreed to provide two (2) OC-48 SONET network devices valued at $500,000, when new, that will increase system capacity and speed data transfer rates by a factor of sixteen-times their current level. This will also result in a capital expenditure savings to the Electrical Services Division, who would have otherwise included this upgrade in a future budget.

ICG also agreed to transfer ownership the fiber substructure and cable facilities which includes redundant ingress/egress and connectivity to the SBC central office at the corner of Third Street and Palm Avenue and 1.5 miles of existing overhead fiber cable that provides another point of connection between BWP�s fiber network and LADWP�s fiber network at Receiving Station E. Receiving Station E is the major point of interconnection for BWP with LADWP and others.  The termination of the Agreement will also free up system capacity, returning the eight (8) strands of fiber leased by ICG to BWP�s backbone for future leasing.

FISCAL IMPACT:

Termination of the ICG Fiber Optic Use Agreement will reduce BWP�s fiber revenue by $155,520 annually, however, even with this loss dark fiber leasing revenue remains strong with the FY2004-05 revenue projection at $993,868.  This revenue stream is not essential for the operation of the fiber system.

In exchange for the termination ICG will provide the following:

• SONET Network equipment that will allow for a significant upgrade in the capability of the BWP SONET Network

• An alternate connection to Receiving Station E for improved reliable monitoring and operation of BWP facilities at this important BWP electrical interconnection point.

• Dual underground interconnections with SBC for improved reliability at its central office in Burbank

In addition, BWP will regain the use of the fibers that were previously leased to ICG.

This exchange is comparable to the consideration required under the Agreement by ICG for early termination of the Agreement.

RECOMMENDATION:

Staff recommends that the City Council approve this resolution, which authorizes the General Manager of Burbank Water and Power to execute the termination of the existing ICG Telecom and ICG Holdings, Inc. Fiber Optic Use Agreement.

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