How does he justify the 20 percent datum for major-market middle

systems? By noting that the following "typical" systems have required extensive underground construction:

All of these systems are located in the sixth largest market-- Boston, Massachusetts. Mitchell appends these data as Table A-2, but he neglects to inform us that:

1. Franchises have been awarded in only Chelsea and Somerville. In Boston and Brookline, system design and franchise awards have not been consummated.

2. In Somerville, current construction plans call for very little digging of new trenches for underground cable since existing telephone company ducts can be used. All told, only 7.3 percent--not 21.6 percent -will be placed underground in existing ducts and in new conduits.

3. Chelsea plans to bury approximately 20 percent underground

in existing utility ducts. No new trenching is planned.

4.

City engineers in Boston are emphatic in stressing that no new underground construction will be allowed in Boston. All underground cable will be placed in existing utility ducts.

5. Brookline has not made any final decision on the extent of underground CATV system required, but it is likely that 20 percent of system will be laid underground in existing utility ducts.

In short, Mitchell's "documentation" of underground cable percentages is substantially in error. City officials in each of the four cities cited are frank to admit that little new trenching will be undertaken in their communities because of its prohibitive private and social costs.

What is required is substantial documentation of the extent

of underground construction in "typical" systems--especially those in the largest, most dense markets. In order to shed light upon this question, we attempted to contact all of the systems which are either operating or under construction in the central city of the top 50 markets with the exception of New York City. The responses which we received by telephone are documented in Table C-8.

20-344 - 73 - 23

Outside California and New York City, underground cable

percentages rarely exceed 5, and in California--where new housing construction is especially important--underground cable costs are often much lower than those specified by Mitchell because the television cable is buried at the same time that other utility lines are laid. Thus, there is little sound data from actual or prospective cable systems that underground percentages will "typically" average 10 or 20 in even the largest markets. In cities such as New York, Washington, or San Francisco, where topography and other unusual circumstances dictate burying cable at great expense, higher subscriber fees will be paid by television homes. But, these cities should not be used as the model for "typical" systems in calculating rates of return. To do so would bias the results severely. Timing of Capital Expenditures. A second assumption

b.

which leads Mitchell to underestimate the internal rate of return on cable systems is his assumption (and the assumption of Comanor-Mitchell) that the entire plant is constructed at the beginning of the first year. In virtually every system, construction is phased out over more than one year, and in many completion requires three or more years. In their study of the Dayton-Miami Valley system, the Rand researchers assumed that the distribution system would be built in a three-year period, with 21 percent completed in the first year, 44 percent built in the second year, and 35 percent in the third year. We utilize an intermediate pattern in our calculations in the next section, a pattern which dictates higher rates of return since it reduces the present value of capital expenditures at any calculated discount rate.

Mitchell assumes that his large underground cable percentages will be achieved at a cost of $15, 480 per mile because he implicitly assumes that large cities will allow and even require cable companies to trench and lay conduit throughout the core city area. In fact, this is not likely

to occur in many large cities because of the costs and discomforts created by the trenching and filling process. Many cities require, instead, that the telephone or electric utility company provide conduits for other purposes. These conduits are laid when other utility lines are laid, and cable operators may be required to use them.

In cities such as Seattle, San Jose, and Los Angeles,

underground cable is laid at the same time utility companies bury their cables. This leads to much lower costs than independent de novo construction hypothesized by Mitchell. Even where underground construction is undertaken independently, the cost of laying cable can vary enormously. Oakland is laying 38 channels of cable underground at an estimated cost of $19, 000 per mile while San Francisco, across the bay, is encountering costs of up to $50,000 per mile and more. These differences are reflected in different monthly charges--$4.45 for Oakland and $6. 25 for San Francisco.

21

Where cable is simply strung through underground ducts, the cost per mile may even be lower than aerial construction. One study conducted by the Stanford Research Institute' found that this type of construction cost only $3,000 per mile, or at least 25 percent less than aerial construction. Maintenance costs may be greater for this alternative, however, since major repairs or alterations may require the assistance of other utility companies who share the same ducts.

In Mitchell's rate of return calculations, it is assumed that the entire plant is rebuilt in each 15-year generation. Moreover, because of the assumption noted above, this plant is replicated at the beginning

21 Stanford Research Institute, Business Opportunities in Cable Television, March 1970.