AN IN-DEPTH LOOK AT CLICK! FINANCIALS Ma May 20, 20 20, 2015 15 - - PowerPoint PPT Presentation

AN IN-DEPTH LOOK AT CLICK! FINANCIALS

Ma May 20, 20 20, 2015 15

• Bac

ackground an and 1997 T Telec elecommunicatio ions S Stu tudy y (Bob Ma Mack ck)

• Wh

What h has c s changed? (B (Bob

• b Ma

Mack ck)

• Sm

Smar art meter er t tec echnolo logy ( (Joe e Tellez ellez)

• Click!

k! f finan ancials ials: C Cost allocatio ation (Bill B l Berry) y)

• Moss A

Adam ams, LLC revie iew ( (Julie D ie Des esim imone) e)

• Clic

lick!’ !’s reven enues es d do not c t cover er its its c costs ts (Bill ill B Ber erry)

• Su

Summary (Chris is R Robin inson)

AGENDA

2

Section

• n 1

Bob Mack Deputy Director for Government Affairs How w Click! go got its s start, a and nd ho how t the he 1997 telecom

• mmunications st

study use used to

• laun

unch Click! c comp

• mpares t

to

• actua

ual gr growt wth

• Some objectives reached (competition, enhanced

services). Others were not (# of cable customers, revenues, profits)

• Always anticipated Click! would recover its costs,

including Click!’s share of original capital investment

• By

By 1996, T TCI I was s the on

• nly cable T

TV provider, w with 3 h 36 c cha hannels

• No
• other v

viable p provider of

• f In

Internet or

• r T

TV

• No
• viable p

provider of

• f high

gh-speed d data se service for

• r Tacom
• ma P

Power’s (C (City Li Ligh ght) sy system c con

• ntrol
• l

BACKGROUND

4

• Cable T

TV co competiti tion, with u upgr graded s syst ystem

• Bro

roader er a and greater er Intern ernet s service f e for busines esses es a and r residen ences es (Frank Russel ell, et et al.) .)

• Taco

coma ma Power ( (City ty Light) s syst ystem m improveme ments ts and nd syst ystem co m cont ntrol, r reliability ty an and e effic icie iency

• Tw

Two-way c communic icat atio ions w with P Powe wer cu cust stome mers

TACOMA’S IDENTIFIED NEEDS

5

• Pr

Prepared b by o

• utside team, with TPU

TPU s staff assi sista stanc nce

• Repo

port i include ded: d:

• Review of the telecommunications industry
• Survey of other cities
• Local communications business plan
• “The Residential Market” - Market Data Research Corp.
• “The Current Business Market” - Market data Research Corp.
• “Future Market to Serve” - APEX Business Solutions
• “Telecommunications and Economic Development” - Bruce

Mann and Sue Heath

• “Economic Development in the Greater Tacoma/Pierce County

Area” - APEX Business Solutions Project Team

1997 TELECOMMUNICATIONS STUDY

6

Residential c cust ustom

• mer sur

survey - 606 h house seholds

• 78% of Tacom
• ma househol

eholds have c e cable T e TV

• 44

44% wou

• uld

ld p pic ick Click! C ! Cable T e TV – if if op

• ptions a

and prices es w were s e similar.

• Mor
• re wou
• uld

ld sw swit itch if if Click! C ! Cable T e TV had more

• ptions
• ns a

and l lower er pric ices

Business a ss and Inter ernet S t Survey

• 200 businesse

sses s surveyed d – 61% 1% u use e Internet net (limited ed a acces ess)

• 18%

8% of ho households onl nline

CUSTOMER RESEARCH - 1996

7

Id Identified benefits t to

• “C

“City Li Light”

• System “co

control a and nd out utage ge repor

• rting

ng”

• Performanc

nce “ e “moni nitor

• ring

ng and prevent ntive e maintenan ance ce”

• Cost

t estimate for the t he two items a above

• $15

$15 million

• n
• Inter

eractive e “commu mmunicat cation l link t k to custome mers”

• Bet

etter er services es than n competitor

• rs
• Hi

High-spe speed, , low-cos

• st I

Inter erne net

• Regiona
• nal econom
• nomic d

devel elop

• pment

nt

• Additiona
• nal revenu

enue t e to C City Light ht a and Ci City

1997 PUB/COUNCIL PRESENTATIONS

8

• “Fail t

to gai gain market s share”

• No

Non-co comp mpetit itiv ive p product ct

• “Constr

truction a and O O&M costs sts substantia ially lly e exceed e estima mates”

IDENTIFIED RISK FACTORS

9

“The T Telecommunications P Pro roject … … shall be a an integra ral Light Division o

• pera

rating respo ponsibi bility a y and f functi tion.” .”

• Cit

ity L Lig ight o

• perates Clic

lick!

• ISPs

Ps s solic icit ited t to p provid ide In Internet se servi vice

Financing

• After c

consid idering ing b both b bond nd i issuanc nces a and Light ht D Divis isio ion n investme ment nt, d determi minatio ion w n was t to f financ nce with L h Light ht Divis isio ion a n advanc nces

• “Expens

nses” l ” list p present nted to C Counc ncil il inclu luded “ “Debt Service ce”

• “Pro F

For

• rma I

Incom

• me St

e Statem emen ent” p proj

• jec

ected ed “ “Incom

• me

e Availa ilable le f for P Plant nt S Servic ice, D Debt R Retir ireme ment nts” a ” at $1.4 millio llion f n for 1 1999-3rd y year o

• f o
• peratio

ion ( n ($14 m millio llion i n in 2015)

ORGANIZATION OF TELECOMMUNICATIONS UTILITY

10

• Proj
• ject “s

t “shall b be e op

• pera

erated ed in in a busin iness-like manner… er…” ” (C (Cou

• uncil p

pres resenta tati tion)

• Assum

umed ed net et p prof

• fit b

by 1 1998 98 – 2nd y year o

• f o

f oper eration

• If op
• per

erated ed “in “in a a busin iness lik like e ma manner, th the e sys ystem em would g d generate sufficient re revenues t to make the system self elf susta tain ining.” (C (Cou

• uncil p

pres resenta tati tion)

• On

Only ly “cu “custome mers wh who

• choo
• ose t

to

• buy” ca

y” cable le T TV “w “wou

• uld

ld b be e charged f for

• r th

them.

• em. No
• ta

tax mon money w wou

• uld

ld b be e used ed and you

• ur elect

electric r rates es w wou

• uld

ld not t in increa ease b beca ecause of

• f th

this is new ew sy syst stem…” (C (Cou

• uncil p

pres resenta tati tion)

CROSS-SUBSIDY ISSUES

11 11

• June

ne 1 1996: : $45-55 m million

• September 1

1997: : $96 million

• Oct

October 1 1997: : $99.4 .4 million

ORIGINAL COST ESTIMATES

12

• 5,000

10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 Actual CATV Subscribers Projected CATV Subscribers

Few ewer er cable c e customer mers than projected ed

1997 PROJECTIONS VS. ACTUAL

$- $10 $20 $30 $40 $50 $60 $70 $/ Av Average Monthly B Bill ill Actual CATV Programming Cost Projected CATV Programming Cost

Higher er programmi mming c costs

• The projections are from an appendix to the 1997 financial statements
• The 1997 projection brought to current dollar values using core CPI from the Bureau of Labor Statistics

$0 $10 $20 $30 $40 $50 $60 Mill illio ions Actual Revenue Projected Revenue

Lower r revenues th than p projected

13

• 5,000

10,000 15,000 20,000 25,000 30,000 Actual ISP Customers Projected ISP Customers

ISP cust stom

• mers vs.
• s. proj
• jected

Section

• n 2

2 Bob Mack Wha What ha has c cha hang nged in n 20 y years?

• Did not anticipate decline in cable TV use
• Advent of broadband Internet, social media, mobile

devices, over-the-top content amid rising cable costs have accelerated change

• Hybrid business model prevents Click! bundling and

benefitting from margin on broadband Internet

TELECOMMUNICATIONS GROWTH TRENDS 1998 TO 2016

15 15

Ca Cable T TV & & ISP Cust Customer Co Coun unts

5,000 10,000 15,000 20,000 25,000 30,000 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Cable TV ISP

Customer Counts

Clic lick! C Cab able TV V in introduced in in 1998 to s

• stimulate

co competiti tion, n, imp mprove ca cable & & teleco com m service ces s loc locally ally, an , and buil ild f fou

• undatio

ion for

• r smart g

grid id

1998-2000: CABLE TV GROWTH MODE

16 16

• Decision made to employ

hybrid business model: Click! Cable TV and private Internet – no bundling

• Tacoma City Light believes

cable to the home is the best way to establish the smart grid

• ISPs begin offering Internet to stimulate competition locally
• Roughly 36% of Americans report using the Internet in 1998

(Pew Research Center)

• Nearly 70% of U.S. household subscribe

to cable TV (Nielson)

2001-2003: INTERNET, ISP GROWTH MODE

17 17

Bo Both Cl Click! Ca Cabl ble T TV and d ISP ISP c customer ba bases gro row a as I Intern ernet becomes es m mainstrea ream

• August 2000 – 50% of

people use Internet

• Broadband begins in 2000

with 3% adoption

• Dial-up access peaks in 2001

with 41% of Internet users

• By 2003, dial up in permanent decline as broadband grows
• Google becomes popular as a search engine
• Video on demand (VOD) & Digital Video Recorders (DVRs)

introduced

• Industry first move to bundled packages

2004-2006: CABLE COMPETITION PROLIFERATES

18

• By 2006, 73% of American

adults use Internet

• 42% use broadband;

23% dial up

• YouTube begins operations,
• nline video use soars
• Facebook commercially available in 2006
• Satellite TV gains 29% share in the marketplace nationally
• Bundling options aggressively marketed - double & triple play
• Click! first pays retransmission consent fees in 2006

No Non-traditional c l com

• mpetitor
• rs t

to

• cab

able le T TV V enter market, d demand f d for faster Internet g grows

2007-2009: CABLE COSTS SOAR, BUNDLES BECOME NORM

19 19

• Netflix introduces streaming

video

• Hulu, Roku, and Amazon

Prime Instant Video begin

• perations
• iPhone & Android smartphones

introduced

• Pew Center reports more things connected to Internet than

people on Earth

• Consumers begin to buy video content separately

New techn hnol

• log
• gy a

and nd b birth h of

• f soc
• cial media d

dri rive Inter ernet ad adoptio tion while C ile Clic lick! C Cab able T le TV c V costs in increa ease

2010-2012: ALTERNATIVE FORMS OF STREAMING BECOME POPULAR

20 20

• Cable TV continues cost

increase amid poor economy, fueling “Cord Cutters” and “Cord Nevers”

• 2009 FCC digital TV

switchover

• The tablet is first introduced
• Click! customer count begins downward trend as the ISP

customer counts rise

• Click! Strategic Plan recognizes issues with two business

models

• Build out of TPU network stops

Consumer er conten ent c consum umption p prefer eren ences es c change e as streaming b becom

• mes

es m mainstrea eam, m mobile d e devices p prol

• lifer

erate e and ca cabl ble co costs gr grow

2013-2015: INTERNET ECLIPSES CABLE

21

• Click! retransmission consent

fees grow over 825% since ’06; programming costs up 123% since ’03

• 87% of Americans report

using the Internet; 70% of American adults have broadband at home

• 74% of American adults use social media
• Facebook reports 1.44 billion active users
• More video is uploaded to YouTube in 1 month than the 3 major

U.S. networks created in 60 years

• 64% of American adults own a smartphone

with Internet

Intern rnet e emerg rges a as leade der r – both C Click! a and C Comcast now exper erien ence more I ISP custome

• mers t

than c cable T e TV as cable c costs ts c conti tinue t to rise

CLICK! MANAGEMENT TIMELINE

22

2009 2010 2011 2012 2014 2015

Further build-out

• f Click! network

halted – proposed new build areas do not meet financial return requirements Click! headcount and capital budget significantly reduced. Introduced retail Internet concept (change hybrid model) to Public Utility Board and City Council Click! provision

• f retail Internet

service (Plan A) proposed, but not approved. Cooperative approach with ISPs directed by policymakers (Plan B). Customer growth targets are accepted and modest revenue increases result. Approached by Wave Broadband. Negotiated proposal. Proposed leasing Click! Network to private

• perator.

Would eliminate Click! financial losses, provide improved customer products, continue competitive

• pen-access

network.

2013

Click! financials and customers continue to decline. Consultant re- engaged to examine alternatives to Plan B. Consultant developed

• ther options.

Leasing to private

• perator was

determined best option. Click! financial challenges are growing. Consultant engaged to examine potential future Click! business models. Update on strategy to Public Utility Board members.

SUMMARY

Orig riginal C Click lick! b bus usiness p pla lan vs. cur current situation

• Proved to be overly optimistic in terms of network build-out costs,

programming costs, market share, revenues

• Assumed recovery of all related costs, including Click!’s share of the
• riginal capital investment
• Did not foresee the industry evolution to wireless power metering

systems

• Did/could not foresee the significant increase in broadband internet

utilization, and decline in cable television utilization

• “Hybrid” model involving private ISPs prevents product “bundling” to

match competition

• “Hybrid” model involving ISPs prevents Click from enjoying the retail

margin available from broadband Internet

23

Section

• n 3

3 Joe Tellez Chief Technology Officer Ho How sma w smart me meter t technol

• log
• gy (c

(called advanced me metering infrastructure, or

• r A

AMI) I) has c s changed si since T Tacom

• ma P

Power laun unched th the G e Gateway y pr project

• Tacoma Power was ahead of its time
• Industry-wide adoption of wireless technology for AMI
• Tacoma Power doesn’t need a wired telecommunications

network for metering

AMI TECHNOLOGY INDUSTRY

2000 2014 2002 2004 2006 2009 2012

Competing technologies (wired vs. wireless) in varying states of maturity AMI entrants considered very early adopters Deployment costs between $500-$600 per Smart Meter (power

• nly)

Wireless solutions dominate new AMI deployments and focus on meter reading benefits Smart Grid Investment Grant drives more AMI growth and vendors flood the market Smart Grid Investment Grant period ends, vendors begin to consolidate and offer more ‘out of the box’ solutions AMI deployment costs now between $180 - $200 per meter – benefits extend to utility

• perations

2010

Web technologies & mobile devices

• ffer ‘two-way’

communication

• ver

wireless and replace in-home displays

2008

In home displays for billing and consumption notifications considered high cost

5-6% 25-30% Market Penetration: 25

AMI TECHNOLOGY AT TPU

1998 2015 2002 2004 2006 2009 2012

Vision of Electricom AMI over HFC Network development begins Pilot Gateway meter deployment begins Pay-As-You- Go pilot with in-home displays leveraging Click! Network Pilot deployment stops due to high deployment and maintenance costs associated with custom wired meter technology Smart Utility Plan: Continue to

• perate

Gateway until end of life AMI business case evaluating go forward

• ptions

leveraging wireless technology

2000

Fiber network supports substation connectivity and automation

26

GATEWAY METERS NOW OBSOLETE

• Ongoing

ng meter er r reliab eliabilit ity is issues es an and hig igher er-th than- expec ected ed in inter ernal s support costs

• No supplier availab

lable le t to sustain tain Gateway m y met eters

• Alt

lter ernative e supplier liers o

• f coax

ax w wir ired ed s smar art meter ers nonexis isten ent

• Wir

ireles eless s smar art meter er p pric ice p poin ints ts d droppin ing for both th p power er an and wat ater er

Gateway en end-of

• f-life f

fact ctors s co contr ntributed to t the he

• verall

ll d decli line in in the use of

• f Clic

lick! N Network t to

• ser

erve e Tacoma P Power’s A AMI n need eeds

27

Section

• n 4

4 Bill Berry Rates, Analysis and Planning Manager A close

• ser l

look a

• ok at how T

w Tacoma

• ma P

Power alloc

• cates

cost

• sts t

to

• Click! N

Network

• Click! Cable and Internet services rely on the

telecommunications network far more than the electrical system

• Click! should be responsible for 94% of all

telecommunication costs based on review of actual usage

ALLOCATION SCENARIOS

29

• 2013/1

/14 4 fi financials, bu budg dgets and r d rates r refl flect ct ap approximatel ely 75/25 allo allocatio ion b betw tween een Clic lick! an ! and Elec Electric

• The

e Clic lick! f ! fin inancial tr tren end pres esen ented ed o

• n 3/31 wi

with h the Wave B Broadba dband d pr propo posal showed 1 d 100% 00% of t the telecommunic icatio ation e expenses a as a an approxim imatio ation

• f
• f the

he ne new w cos

• st a

alloc

• cation
• n
• Bas

ased ed o

• n ref

efined an anal alysis an and a a th thir ird-par arty r ty review, th the e cost allo t allocation movin ing forward is is 94/6

$ in millions

2009 2009/10 20 2011 11/12 12 2013/ 3/14 14

(Projected)

201 015/16 16

(Budget)

20 2015 15

(Budget)

Revenue

$46.2 $49.1 $53.5 $59.5 $29.8

O&M

($57.6) ($58.3) ($60.0) ($67.0) ($33.5)

Cash sh flow a w after O&M &M

($11.4) .4) ($9.2 .2) ($6.5 .5) ($7.5 .5) ($3.8 .8)

A&R and capital

($25.8) ($7.4) ($5.4) ($7.6) ($3.8)

Cash sh flo low a after A&R a and d capi pital

($37.2) .2) ($16.6) .6) ($11.9) .9) ($15. ($15.1) ($7.6 .6)

Debt service

($3.9) ($3.9) ($3.9) ($3.9) ($2.0)

Net cash f flo low

($41.1) .1) ($20. ($20.5) ($15. ($15.8) ($19. ($19.0) ($9.5 .5)

FINANCIAL TREND - OVERALL

30

Numbers rounded, may not add up

TOTAL TELECOMMUNICATIONS O&M COSTS

• Programming Fees
• ISP Advantage
• Customers Sales & Service

Programming / Marketing

• Physical Maintenance of Fiber Network

HFC Network Support

• Installation of Service Drops

Customer Installation Support

• Network Engineering
• Broadband Services
• Network Service Assurance

Network Services

• Click! General Management
• Business Support Systems
• Sales & Marketing Administration

Admin/IT Cost

Total: $33.5 Million

31

HFC Network Support $3 Customer Installation Support $3 Network Services $3 Admin/IT Cost $4 Programming & Marketing, $21

All T ll Tele lecommunicatio ion O&M C Costs ts 2015/16 A Average ge ($Mil illi lions)

WHY DO WE ALLOCATE?

32

• Clic

lick! is ! is par art o t of Tacoma Power er

• Telec

elecommunicatio ions o

• per

erati ations ar are e supported ed by y 17 wor

• rkgrou
• ups (c

(cos

• st cent

nters), ), 1 10 of

• f whi

which p h provide some s e support to elec electr tric sys ystem ems

• Co

Cost sts s should ld be e allo allocated ed in in a a reas easonable m e man anner er to under erstand Clic lick! f ! fin inancia ial p per erformance an e and mak ake s e sound busin ines ess dec ecis isio ions

• Power

er r rat ates es should ld n not b t be e hig igher er th than an v valu alue o e of ser ervices es r ren ender ered ed

COST ALLOCATION HISTORY

33

2000 2000

• Price Water

erhouse C e Cooper ers recommen mmended ded that t telec ecommu mmunication c costs b be allocated ed bet etween een C Click! k! service ces a and e elect ctric s c service ces

2002 2002-2003

• Staff det

eter ermi mined ed that a allocation s should d be appr proxima matel ely 7 75/25 b bet etween een Click! k! a and electric

• Proj
• jected u

usa sage b base sed on

• n build

ld-out ut to su

• suppor
• rt A

AMI

• A 2003

2003 s study b by Vi Virchow K Krau ause & & Co

• Co. c

. conf nfirmed the 7 75/25 a alloc

• cation
• n is

s reason sonable

• Allocation is us

used fo for fi financi cial als , , budgets a and nd r rates ( (currently, as well)

2012-2013

• Staf

aff co conducted a a new i internal co cost al allocation an anal alysis

• Resul

ults sh showed a alloc

• cation
• ns sh

shou

• uld be 96/

96/4 bet etwee een Click! k! a and e electric

• New

ew alloc

• cations

s have been use sed for

• r planning,

, but not fo formally a adopted fo for fi financi cial als , , budge gets ts & & rate tes

20 2015 15

• Moss
• ss Adams,

s, LL LLC engaged to

• review n

new a alloc

• cation
• n m

method

• dol
• log
• gy
• As part o
• f

f the heir a ana nalysis Moss Adams int ntervi viewed staff f and nd r recommended u updating the he 2013 3 study with current fi financial al info format ation

• Sta

taff up updated th the s stud tudy which r resul ulted i in 94/ 94/6 allocati tion fa factor bet etween een Click! k! a and electric

NETWORK SUPPORT & ASSURANCE COST ALLOCATIONS

• 555300, 562700, 562800, 555600

Cost Centers

• Maintain the operations of the HFC network: engineering, design, conversion work, safety equipment,

repairs, and operating supplies in order to keep the fiber and coaxial assets performing as intended. Work Description

• 100% to Electric

Current Allocation

• Allocated costs based on total number of customer meter connections. All connections to a customer meter

allocated to electric. All remaining drops allocated to Click! commercial. Changes to Allocation

34

Click! Electric Click! Electric Allocation 0% 100% 51% 49% Average 2015/16 Expenses $0 $3,601,365 $1,851,698 $1,749,666 Current Proposed

SERVICE INSTALLATION COST ALLOCATION

• 553500

Cost C Cen enter

• Installation and removal of coaxial service drops

Work Description

• 50/50 allocation between Click! and Electric

Current Allocation

• Based on the proportion of work orders related to wired AMI meters relative to all other work
• rders

Changes to Allocation

35

Click! Electric Click! Electric Allocation 50% 50% 98% 2% Average 2015/16 Expenses $1,302,156 $1,302,156 $2,552,226 $52,086 Current Proposed

DISPATCH COST ALLOCATION

• 553600

Cost C Cen enter

• Manages workload and scheduling of the service and installation technicians

Work Description

• 100% allocation to Click!

Current Allocation

• Based on time spent working on wired AMI meter orders relative to other activities

Changes to Allocation

36

Click! Electric Click! Electric Allocation 100% 0% 93% 7% Average 2015/16 Expenses $486,143 $0 $452,113 $34,030 Current Proposed

PROPOSED O&M COST ALLOCATION CHANGES

37

2015 5,252,766 $ 2016 5,769,380 $

Does not include debt service, taxes, or capital

Cost Center Description Click! Electric Click! Electric Click! Electric Click! Electric Click! Electric HFC Network support 555300 Click Network Oper 0% 100% 51% 49%

• $

3,237,152 $ 1,664,433 $ 1,572,719 $ $1,664,433 ($1,664,433) 562700 PwrT&D HFC NtwrkCns 0% 100% 51% 49%

• $

1,661,373 $ 854,221 $ 807,152 $ $854,221 ($854,221) 562800 PwrT&D HFC Ntwrk Eng 0% 100% 51% 49%

• $

447,264 $ 229,968 $ 217,296 $ $229,968 ($229,968) Customer Installation Support 553500 Click Svc Install 50% 50% 98% 2% 2,604,313 $ 2,604,313 $ 5,104,453 $ 104,173 $ $2,500,140 ($2,500,140) 553200 Click Tech Op Admin 50% 50% 80% 20% 342,639 $ 342,639 $ 550,691 $ 134,587 $ $208,052 ($208,052) 553600 Click Dispatch 100% 0% 93% 7% 972,286 $

• $

904,226 $ 68,060 $ ($68,060) $68,060 Network Services 555400 Click Broadband Svcs 50% 50% 99% 1% 1,176,936 $ 1,176,936 $ 2,330,334 $ 23,539 $ $1,153,398 ($1,153,398) 555500 Clk!Ntwk Engineering 0% 100% 95% 5%

• $

1,359,223 $ 1,291,262 $ 67,961 $ $1,291,262 ($1,291,262) 555600 Click Net Svc Assur 0% 100% 51% 49%

• $

1,856,940 $ 954,775 $ 902,165 $ $954,775 ($954,775) Admin/IT Cost 551100 Click Admin 50% 50% 94% 6% 1,598,813 $ 1,598,813 $ 3,002,143 $ 195,483 $ $1,403,330 ($1,403,330) 552200 Click Mkt Admin 100% 0% 100% 0% 2,393,718 $

• $

2,393,718 $

• $

$0 $0 552100 Click MrktBusOpsAdm 100% 0% 100% 0% 413,484 $

• $

413,484 $

• $

$0 $0 552600 Click Busns Sys 50% 50% 100% 0% 830,627 $ 830,627 $ 1,661,255 $

• $

$830,627 ($830,627) Other (Unchanged) 552300 Click Marketing Svc 100% 0% 100% 0% 37,271,387 $

• $

37,271,387 $

• $

$0 $0 552400 Click ISP Adv 100% 0% 100% 0% 553,700 $

• $

553,700 $

• $

$0 $0 552500 Click Cust Sales 100% 0% 100% 0% 2,802,132 $

• $

2,802,132 $

• $

$0 $0 553700 Click Converter Inv 100% 0% 100% 0% 878,405 $

• $

878,405 $

• $

$0 $0 77% 23% 94% 6% 51,838,441 $ 15,115,281 $ 62,860,587 $ 4,093,135 $ 11,022,146 $ (11,022,146) $ Difference Allocation Factor Summary Projected 2015/2016 O&M Expenses Current Proposed Current Allocation Proposed Allocation

MOSS ADAMS LLP | 38

Tacoma Public Utilities Click! Cost Allocation Consulting Report

May 20, 2015 Julie Desimone, Partner Jennifer Chu, Manager

MOSS ADAMS LLP | 39

SCOPE

• Review of the allocation method as described in

TPU’s 2013 Click! allocation change draft document dated March 18, 2013

• Gain an understanding of the changes made to

the allocations from an earlier 2003 allocation study.

MOSS ADAMS LLP | 40

PROCESS

• Read and gain an understanding of the 2013

Allocation Memo

• Requested supporting documentation
• Interviewed key employees and stakeholders
• Developed recommendations to 2013 allocation

memo

MOSS ADAMS LLP | 41

ANALYSIS

• Recommended a few changes to the 2013

allocation memo

• Read the 2015 allocation memo noting our

recommendations were incorporated

• Full details of our analysis can be found in our

report dated May 20, 2015

MOSS ADAMS LLP | 42

CONCLUSION

• The 2015 memo outlines an updated proposed

methodology to be used in determining the allocation of telecommunications capital investment and operating expenses between Electric and Click! commercial applications.

• The overall conclusion of this consultation is

that this methodology as applied is consistent with current uses of the telecommunications network.

MOSS ADAMS LLP | 43

THANK YOU!

Section 6 6 Bill Berry Clic lick! r ! revenues d do n not c cover it its costs

• Operating revenues do not fully cover operating

expenses and taxes

• Operating revenues do not cover any of the annual

capital requirements

• Operating revenues do not cover imputed debt

service

• Even if imputed debt service were not included,

Click! would still run at a deficit and the business model would still need to change

45

RECONCILIATION TO FINANCIAL SCENARIOS

45

2015/1 /16 A Average –$ in millions

* Assumes 17.5% cable TV rate increase in 2015 and 10% cable TV rate increase in 2016, and 10% ISP rate increase in August 2016

100% Telecom O&M 94% Telecom O&M Allocation to Click! Rev even enue Current Revenue $27.4 $27.4 Revenue from Rate Increases* $2.3 $2.3 Total Rev even enue $29.7 $29.7 O&M Expen ense e + Taxes es Click! $32.4 $30.5 HFC $1.1 $1.0 Total O&M + Ta Taxes $33.5 $31.5 Cashfl flow a aft fter O&M + Taxe xes ($3.8) ($1.8) A&R + Capital $3.8 $3.8 Net Cashflow after A&R + Capital ($7.6) ($5.6) Imputed Debt Service $2.0 $2.0 Net et Cash F Flow ($9.6) ($7.6)

IMPUTED DEBT SERVICE

46

• The Virchow Krause in 2003 allocation studies determined that

27.4% of the original Tacoma Power capital investment in telecommunications plant is used by and allocable to Click!

• Tacoma Power financed with cash rather than bonds
• Intention from the beginning was for Click! to be self-

sustaining, and repay its share of the capital investment

• That has not happened, so Tacoma Power has used imputed

debt service assumptions in its financial analyses - original investment repaid by Click! over 20 years at a 5.5% interest rate

• Whether or not debt service is included, Click! revenues do not

cover the costs for Click! services

CLICK! REVENUES & EXPENSES

94/6 COST ALLOCATION

47

($15,000,000) ($10,000,000) ($5,000,000) $0 $5,000,000 $10,000,000 $15,000,000 $20,000,000 $25,000,000 $30,000,000 $35,000,000 $40,000,000 $45,000,000 2013 2014 2015 2016 Imputed Debt Service Capital Taxes O&M Gross Revenues Net Cash

• Includes imputed debt service
• Assumes 17.5% cable TV rate increase in 2015 and 10% cable TV

rate increase in 2016, and 10% ISP rate increase in August 2016

• Numbers may not add up due to rounding

Section

• n 7

Chris Robinson Tacoma Power Superintendent Summa mmary

48

SUMMARY

49

• Original vision for Click! was optimistic, placed emphasis on cable

TV and committed to an unsustainable hybrid business model

• The hybrid business model has not been able to withstand

business environment and consumer consumption changes

• Wired network no longer needed to support AMI – industry shifted

to wireless, as will Tacoma Power

• A recent review of network use indicates that Tacoma Power

should be responsible for 6% of total telecommunications costs

• Moss Adams confirms that the utility’s allocation methodology is

consistent with the current use of network

• Under the current business model, Click! revenues do not cover

the cost of Click! services – whether factoring in debt service or not