June 30, 1998

 To:Works and Utilities Committee

 From:Barry H. Gutteridge, Commissioner, Works and Emergency Services

 Subject:Amendment to Agreement to Facilitate the Expansion of Access Rights to Municipal Road Allowances - Metronet Communications Group Inc.

 Purpose:

 To authorize an amendment to the current agreement between Metronet Communications Group Inc. and the (former) City of Toronto for the purposes of installing, maintaining and operating a fibre optic telecommunications network, in order to encompass the entire new City of Toronto area.

 Funding Sources, Financial Implications and Impact Statement:

 The proposal will result in enhanced revenue generation potential to the City in the form of lease payments for City conduits and accelerated revenues related to the permission granted to Metronet to access the road allowances. No costs to the City are involved.

 Recommendations:

1. That City Council authorize an amendment to the Agreement with Metronet Communications Group Inc. to allow Metronet to enter upon the Public Highways under the jurisdiction of the City of Toronto beyond the bounds of the former Toronto city limits, for the purposes of installing, maintaining and operating a fibre optic telecommunications network throughout the City and renting spare City duct capacity, subject always to the City's requirements and permissions for construction within the street allowance; and

1. That the amended Agreement with Metronet contain such terms and conditions as have been negotiated and agreed to between the parties and described generally in this report, and approved by City Council, and such other terms and conditions as may be satisfactory to the Commissioner of Works and Emergency Services and the City Solicitor to protect the interests of the City.

 Background:

 Metronet Communications Group Inc. has approached City staff with a request to expand the terms and conditions of its current Agreement entered into with the former City and Metropolitan Toronto Councils which authorizes the firm to install, maintain and operate a fibre optic telecommunications network on public road allowances. Currently focussed on the downtown core, Metronet seeks permission to extend its network within municipal road allowances beyond the former Toronto city limits which represents the present scope of the Agreement.

 Comments:

 Introduction

 Upon evaluation of submissions received in response to a Request for Proposals (RFP) the former City of Toronto Council, at its meeting of June 23 and 24, 1997 authorized an agreement between Metronet Communications Group Inc. and the City involving:

 (i) a lease of a decommissioned high pressure watermain system in the downtown core and other City-owned decommissioned pipe located within the (former) City of Toronto, in accordance with the RFP, for the purposes of installing, maintaining and operating a high speed fibre optic telecommunications network and sub-leasing space for third party-owned cables within the pipes; and

 (ii) a licence by way of a Municipal Access Agreement to allow Metronet to enter upon the Public Highways under the jurisdiction of the (former) City of Toronto for the purposes of installing, maintaining and operating the network throughout the City, subject to the City's requirements and permissions for construction within the street allowance.

 The Agreement sets out the parties' rights and obligations related to such work and includes a comprehensive compensation package to the City with substantial direct revenues accruing. The Metropolitan Toronto Council, at its meeting of August 13 and 14, 1997, among other things, approved the installation of the telecommunications network within the limits of Metro roads located in the former City.

 As part of its overall plan to expand its services in 1998 and beyond, Metronet Communications Group, Inc. has indicated that it wishes to proceed with installation of its fibre optic network beyond the downtown area and into other areas of Toronto.

 Assessment

 The expansion of the fibre-optic network by Metronet to various areas of the City is a positive development, in that the objective of encouraging a competitive, technologically advanced telecommunications infrastructure to benefit area businesses is supported. The build plans for 1998 submitted by Metronet suggest a backbone route that will loop through the Don Valley/Don Mills Road corridor to Consumers Road in the East York and North York communities, to the North York Centre area along Sheppard Avenue, connecting downtown via the Yonge Street corridor. New construction will not necessarily be required along the entire route, as other options such as spare Bell or City conduit, abandoned gas mains or Hydro pole attachments will be explored.

 In general, the terms and conditions of the present agreement are readily applicable to the expanded geographic area, with certain minor amendments. A brief synopsis of the current agreement terms is provided in Appendix A, attached. As Council is aware, the current agreement contains a comprehensive compensation package to the City with substantial direct revenues accruing. Staff have taken the view that the additional rights and opportunities afforded to Metronet through expanding its area of operation should be accompanied by enhanced value to the City.

 In respect of the value associated with the access rights for the road allowance two aspects have been negotiated. First, the proportion of gross revenues payable annually would be expanded to be applicable to the revenues generated throughout the entire expanded area of the City. Second, the minimum annual prepayment amount would be increased. Specifically, the component of the agreement calling for an annual minimum payment would be increased by 15%. Of course, at such time as the gross revenue share exceeds this minimum amount, the gross revenue formula would be applicable.

 Other minor changes will need to be incorporated in order to amend the agreement. These include mainly definitional items to reflect the expanded boundaries and new City corporate structure, and certain conditions related to the varying and evolving permitting procedures. As well, Metronet and City staff will have to review the provisions of the form of Sublease which Metronet is required to use when subleasing City-owned pipe under the Agreement so as to ensure that it remains consistent with the main Agreement.

 Use of Spare City-owned Conduit Capacity

 Through their technical assessment, Metronet has identified various options available to complete their network extension as set out above. One of these involves the use of spare capacity in certain City-owned traffic control system duct and conduit structures. Staff are recommending that authority be granted to enter into an agreement with Metronet for the rental of such space, coinciding with the term of lease of the underground watermain system. The general terms and conditions proposed are as follows:

 Annual Rental fees- Don Valley Parkway/Highway 401/Freeway routes - $5.00 per metre

 - Lake Shore Boulevard route - $5.00 per metre

 - Don Mills Road/Yonge Street/Arterial routes - $10.00 per metre

 Technical- Where the RESCU system has only 1 spare duct, Metronet is responsible for installing a separate fibre cable supplied by the City, at no costs to the City. This installation would include, but not be limited to sections along Lake Shore Boulevard and the Don Valley, among others, as determined by the General Manager, Transportation Services.

 Metronet and the City would jointly locate and inspect the portions of duct to be used by Metronet and any clearing or refurbishing required for Metronet's purposes would be at no cost to the City.

 Conclusions:

 The proposal by Metronet Communications Group Inc. to expand the scope of their current agreement in order to enable installation of an extended telecommunications network throughout the City of Toronto is a positive initiative for the proponents and the City in terms of facilitating the deployment of a current, competitive telecommunications infrastructure to areas not presently enjoying such options.

 The terms and conditions of the current agreement, which was authorized by both the former City and Metropolitan Toronto Councils in 1997, are readily applicable to the expanded geographic area, with certain minor amendments as set out in this report. The amended conditions negotiated which expand Metronet's opportunities will also enhance the City's revenue generation potential over and above the substantial direct revenues accruing under the terms of the current agreement. More particularly the City's share of gross revenues will be calculated on the basis of the total revenues generated in the larger geographic area. As well the minimum annual payment will be increased on the basis of an agreed-upon factor of 15% over and above the value in the current Agreement.

 Contact Name and Telephone Number:

 Andrew Koropeski, Director

Infrastructure Planning and Transportation Division

392-7711

 Dave Kaufman

General Manager

Transportation Services

Barry H. Gutteridge

Commissioner

Works and Emergency Services

 Appendix A:Summary of Terms and Conditions of current Agreement between Metronet Communications Group and City of Toronto

 Lease of the Decommissioned Watermain System

 The Agreement grants Metronet exclusive rights to the use and occupancy of the decommissioned pipe system in the downtown core, as was the intent of the RFP, subject to the third party provisions discussed below. The company, at its sole cost prepares the portions of the system (refurbish, clean, install inner duct and other facilities such as maintenance holes, etc.) for its own and third party use for the implementation of fibre optic systems. The company will maintain and manage the pipe system throughout the term of the Agreement.

 Lease Revenues

 The Agreement calls for the City to receive revenues from 3 basic component sources related to the pipe system. It should be noted that all revenues are subject to annual adjustment based on the Consumer Price Index. (Staff would be pleased to advise Councillors of the details of the business arrangements at an in-camera session, as non disclosure provisions in the Agreement do not permit us to release these figures.)

 i) One time lump sum and annual fixed fee

 ii) Fees per Metre for Metronet-owned Cable

 iii) Fees per Metre for Third Party Users

 Over the first 5 years, substantial portions of the lease revenues to the City are guaranteed.

 With respect to the mechanisms for payment, consolidated network and third party plans are to be submitted to the City 2 months prior to each anniversary date for the purpose of calculating cable installation. The City has rights to permit auditors to inspect all financial records, contracts, accounts, etc., for the purposes of verifying Metronet's calculations and payments. Any such information is proprietary and confidential, subject to the Municipal Freedom of Information and Privacy Act.

 Provision of Dark Fibre and/or Preferred Service Rates for City Use

 Further compensation to the City is provided by a grant of dark fibre for its own current and future telecommunications and information systems purposes for a nominal one-time amount. More specifically, dark fibre strands are to be provided, up to the length of the Metronet fibre backbone, in locations where and when the City specifies. The City would be responsible for the cost of lateral connections to the main pipe, however, Metronet is responsible for ongoing maintenance of the dark fibre and laterals. The City has the option of requesting that Metronet construct the laterals at cost or may construct its own lateral connections, provided that Metronet does the actual connections to the backbone portion of the system.

 The company has also included an offer to the City for the provision of " lit" fibre services at terms reflecting "the best industry price".

 Performance Requirements

 One of the primary goals of the City is to ensure that the successful proponent did in fact deliver a viable telecommunications system in the abandoned pipe structure and not simply purchase this asset to "lock-out" potential competitors. The financial guarantees in the Agreement provide a strong incentive for Metronet to install a legitimate telecommunications network. In addition, provisions have been included to either guarantee or further encourage levels of performance based on installed cable.

 With respect to third party cable installation, Metronet is to a very large extent dependent on the market. In this regard, the City agreed to the third party rate structure to ensure that prohibitive pricing is not employed, as well as to the terms and conditions of the standard sub-lease. Further, Metronet agreed to provide funding for a joint City/company third party marketing effort to attract third parties to sub-lease the system if specified targets are not met.

 Third Party-Sub-Lease of the Pipe System

 It is the City's intent to encourage competition in the telecommunications market in Toronto. This is explicitly acknowledged in the Agreement and will be facilitated by permitting other parties to sub-lease spare innerduct capacity in the underground pipe system. Pursuant to the RFP, Metronet, being the lessee of the pipes and hence manager of this asset, is required to accommodate other telecommunications providers. Metronet is entitled to use for its purposes a maximum of 40% to 50% (two of 4 or 5 innerducts), with the remaining being available to third parties. Any single third party operator would be permitted a maximum of two innerducts as well. To ensure that third parties are also actually using this space for its intended use, the City has the option to require the termination of any sub-lease if the third party has not lit its fibre within 6 months of the fibre being ready for use. A sub-lease agreement to be entered into by Metronet with third parties is included as a Schedule to the Agreement. Any substantive changes to the terms and conditions including fees charged require the City's concurrence.

 Third Party Charges - It is reasonable and fair that Metronet recover its costs related to the pipe system, and third parties not expect to use the system at more favourable rates than Metronet. The rate to be charged to third parties for use of pipe Metronet would have already refurbished is comprised of 3 components:

 - per metre cable fee to the City for use of the pipes.

 - per metre cable fee representing one-third (assuming Metronet occupancy plus 2 third parties) of the refurbishment cost to Metronet.

 - per metre cable fee to the City, representing a proportion of the annual fixed fee for access rights to the public streets.

 In the event that a third party wishes to use a portion of the pipe system that Metronet has not refurbished, the third party would pay the actual costs. If subsequently either Metronet or another third party were to enter these refurbished pipes, the original company would be reimbursed the appropriate portion of its costs. Metronet will also charge an annual maintenance fee prorated on the basis of actual costs. Installation of third party plant within the system will be done by Metronet at cost, or there are provisions to allow qualified third parties or their qualified contractors to undertake the work under Metronet inspection. Metronet will be the sole party to perform any necessary works on the pipe structure.

 Construction and Workmanship Responsibilities

 Metronet is not permitted to occupy any portion of the public highway whatsoever for any purpose other than the design, construction, operation and maintenance of a high speed fibre optic system. Their use of the public highway is under the same conditions as any other private entity or utility. They have to apply for and obtain a street allowance construction permit, street occupation permit, pavement cut permit and public utility coordinating committee approval. Compliance and observance of all statutory requirements, rules, regulations and by-laws is also required and is their responsibility to secure. Work methods have to conform with standard City of Toronto construction guidelines and specifications including any requirements for the installation of underground services. Further, upon completion of any construction, installation, maintenance or operation of the data system, the public highway will be restored to a safe and proper condition to the satisfaction of the Commissioner of Works and Emergency Services.

 All permit fees are to be borne by Metronet. Likewise, revenues accruing to the City under the lease or MAA will be exclusive of all charges or expenses, including license fees, the goods and services tax, provincial sales tax, tariffs including and not limited the gross receipts tax, applicable at the time of execution of the agreement and any future taxes, charges or tariffs which may arise from any jurisdiction and will not be drawn down or credited against any payments owed by Metronet to the City.

 Metronet will pay any costs incurred by the City or a utility company for the construction, maintenance or repair of its facilities damaged or disturbed arising from the implementation, operation or abandonment of the network. Infrastructure installed and operated by Metronet which interferes with other services located within the highway may be removed and/or relocated at the discretion of the Commissioner at the expense of Metronet.

 Metronet has obtained valid public liability and property damage insurance showing the types of coverage, the amounts and the effective dates of insurance, satisfactory to the City Solicitor. The City is named as an additional insured party in the policy. The insurer will have to provide the City with 30 days notice of any amendment, revocation or cancellation of insurance.

 Access Licence

 The Agreement with Metronet contains provisions to allow the company to enter onto and install plant within the former City of Toronto's public highways beyond the pipe system, subject to specified terms and conditions. The access provisions granted to Metronet work in tandem with the lease provisions.

 In exchange for the benefit of having access to the City's public highways, Metronet has agreed to pay to the City an annual amount equivalent to a percentage of its gross revenues as defined, and adjustments related to the lease component. The amount is consistent with or better than the agreements being achieved in other Canadian jurisdictions (Vancouver, Edmonton). It is recognized that the industry is in a state of considerable flux and expansion, and staff were concerned throughout that although this is currently an appropriate level of compensation, flexibility must be maintained to reflect emerging trends in the marketplace throughout the term of the Agreement. Certain protections in this regard have been incorporated.