HomeMy WebLinkAboutORD 2005-002 ORDINANCE NO. 2005-02
� AN ORDINANCE OF THE CITY COUNCIL OF THE CITY
OF GRAPEVINE, TEXAS ESTABLISHING THE MAXIMUM
PERMITTED BASIC RATES SERVICE TIER RATES
CHARGED BY COMCAST CABLE; PROVIDING A
SEVERABILITY CLAUSE; DECLARING AN EMERGENCY
AND PROVIDING AN EFFECTIVE DATE
WHEREAS, the City of Grapevine, Texas franchises cable television service for
the benefit of its citizens; and
WHEREAS, the City is the grantor of a franchise ordinance by and between the
City of Grapevine and Comcast Cable ("ComcasY'); and
WHEREAS, in accordance with the applicable provisions of the
Telecommunications Act of 1996 (herein the "Telecom Act") and rules adopted by the
Federal Communications Commission ("FCC") and all other applicable federal and state
law and regulations, the city has undertaken all appropriate procedural steps to regulate
the basic service rates; and
WHEREAS, in accordance with applicable FCC regulations the City adopted an
ordinance providing for the regulation of rates charged by cable television operators
�HI � within the City and providing for reasonable opportunity for interested parties to express '
their views concerning basic cable regulations.
NOW, THEREFORE, BE IT ORDAINED BY THE CITY COUNCIL OF THE CITY
OF GRAPEVINE, TEXAS:
Section 1. That all matters stated above are found to be true and correct and are
incorporated herein by reference as if copied in their entirety.
Section 2. Findings:
1. On or about March 1, 2004, the City of Grapevine received Comcast's
FCC Form 1240 filing.
2. The City engaged the services of C2 Consulting Services, Inc. to provide
assistance in the review of Comcast Form 1240 to determine the
reasonableness of the proposed basic service tier rates.
3. On or about May 14, 2004, C2 Consulting Services, Inc. submitted a
M preliminary report regarding the Form 1240.
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4. On or about June 14, 2004, Comcast provided an Operator Selected Rate
for Basic Service of $10.89.
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5. C2 Consulting Services, Inc. conducted additional analysis based on
Comcast's provision of certain contractual information not previously
provided by Comcast.
6. On or about July 31, 2004, C2 Consulting Services, Inc. submitted a final
report concerning Form 1240. C2 Consulting's report is attached hereto as
Exhibit "A", and is incorporated in its entirety.
7. On or about October 29, 2004, Comcast provided a response to the
consultant's report.
8. Based upon the information received from Comcast and the consultant's
report, the City concludes that the Form 1240 rate of $11.69 as filed by
Comcast is reasonable.
9. The FCC user fee should not be greater than $.06 per month.
Section 3. Conclusions:
` The City has an obligation to timely act upon the pending rate application
consistent with the current FCC rules and regulations. Comcast's submittal of the FCC
#� � Form 1240 is reasonable.
Section 4. Orders for Action:
Based on the foregoing Findings and Conclusions, the City hereby enters the
following orders:
1. The Maximum permitted basic service Form 1240 rate of $11.69, with a
maximum FCC User Fee of $.06, as adopted by the City in Ordinance
No. 2005-02 is hereby ordered.
2. This effective date for this rate is for a period of one year beginning in
June 1, 2004.
Section 5. If any section, article, paragraph, sentence, clause, phrase, or word
in this ordinance, or application thereto any person or circumstance is held invalid or
unconstitutional by a court of competent jurisdiction, such holding shall not affect the
validity of the remaining portions of this ordinance; and the City Council hereby declares
it would have passed such remaining portions of the ordinance in spite of such
. invalidity, which remaining portions shall remain in full force and effect.
ORD. NO. 2005-02 2
Section 6. The fact that the present ordinances and regulations of the city of
Grapevine, Texas, are inadequate to properly safeguard the health, safety, morals,
peace, and general welfare of the public may creates an emergency which requires that
'd;i.'k�;-_�
this ordinance become effective immediately upon passage.
PASSED AND APPROVED BY THE CITY COUNCIL OF THE CITY OF THE
CITY OF GRAPEVINE, TEXAS on this 18th day of January, 2005.
APPROVED:
1",lilliam D. Tate
Mayor
ATTEST:
" Lin Huff
City Secretary
APPRVED AS TO FORM:
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John F. Boyle, Jr. �
City Attorney
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ORD. NO. 2oo5-oz 3
EXHIBIT "A" TO ORD. NO. 2005-02
. , � , Page 1 of 8 �
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C}N�ULTING SERVICES, INC. '
7801 Pencrass (972) 726-7216
Dallas, Texas �524t3 (972) 726-021Z (faxj
. —
July 31, 2004
Ms.Jennifer Hibbs
City of Grapevine
PO Box 94105
Grapevine,Texas 76051
Dear Ms.Hibbs:
C2 Consulting Services, Inc. ("C2") provides the following final report concerning a review of
the FCC Form 1240 submitted to the City of Grapevine, Texas (the "City") by Comcast of
Illinois/Texas , Inc. ("ComcasY'or the"Company") on or about March 1, 2004. Contained herein
is a summary of the findings and recommendations.
This study does not constitute an examination of the financial condition of Comcast or its parent
company. Therefore, C2 cannot and does not express any position with regard to the accuracy or
validity of the financial information provided by Comcast during the course of the analyses.
OVERVIE`ti OF THE FILING
According to the information provided by Comcast, the number of basic service channels
remained at hventy-nine (29) during the true-up periods. No additional changes are proposed
through May 2005.
Comcast has filed a Maximum Permitted Rate (`1��IPR") for the Form 1240 of$11.69, which is
not inclusive of the FCC User Fee. In order to make a comparison to the current rate, we must
add to the filed rate Comcast's proposed$0.06 monthly FCC User Fee. The result is an effective
Form 1240 rate of$11.75; $0.61 higher than the current maximum permitted rate for the Form
1240 of$11.14, and $1.41 hi�her than the currently charged rate of$10.34. Comcast originally
chose not to pro��ide its actual Operator Selected Rate ("OSR") for which the City issued a tolling
order for the Form 1240 facial incompleteness. Ho�vever, as of June 14, 2004 the Company
pro�-ided an OSR of$10.89, setting the effective rate of this filin� at July 14, 2004. On the rate
form as tiled, the Company included the calculated MPR only for the Form 1240 as its OSR on
the forn�.
Anothec noted change from prior filin�s is th�t Comcast is requestin� a second true-up period for
the month ot December 2003. "Chis providcs for the entire calendar year of 2003 to be true-up so
that futurc true-up periods ��•ill bcgin �vith January. The I'CC rules allow for such an adjustment
., . and providc for thc comp��tation of a srcond truc-up period i�l ��Iodule G oE'the Form 1240.
�� EXHIBIT "A" TO ORD. NO. 2005-02
� : Page 2 of 8
� Ms.Jennifcr F-Iibbs
; July 31,2004
Page 2
There are three major factors that explain Comcast's proposed chanbe in the MPR for basic
� service:�
'i 1. The actual inflation rate was greater than the rate used in the projected period in the 2003
; filing along with the added inflation for the projected period in this filin�. This results in
� an increase to the current rate of approximately$0.20 per subscriber per month.
` 2. The true-up component change from 2003 increases the rate by approximately$0.27.
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� 3. The extemal costs are projected to increase by approximately $0.14 per subscriber per
': month as compared to the 2003 projected costs.
k ANALYSIS OF THE FILING
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�
Project Objectives and Activities
The project objectives are three-fold:
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1. Assessment of the completeness of the filings with regard to the information and
documentation that must be filed with the City
� 2. Assessment of the reasonableness of the proposed computations in light of City's
prior rate decisions, FCC regulation, recent FCC rulings, and rate treatment in other
; similar jurisdictions
; 3. Assessment of the reasonableness of the proposed computations in light of the system
specific costs and subscriber data
Given these objectives, C2 conducted the following project activities:
i • Review of the filing to assess the completeness based on the FCC Form instructions
' • Review of the filing to identify any issues with respect to the data and/or
' methodologies employed by Comcast
; • Submission of follow-up data requests and subsequent revie�v of Comcast's
' responses
• Development of potential alternatives available to the City in establishing maximum
permitted basic service rates
• Review of programming contracts subsequent to the issuance of the preliminary
report
Summary of Findings
C2 identified five main issues with respect to Comcast's proposed computation of the basic
� service rate. These issues are:
• Comcast incorrectly computed its FCC User fees based on the FCC order;
• Comcast has not supported its requested increases in programming costs;
"` ` �Again,these comparisons can ouly be made if the$0.06 FCC User Fee is added to Comcast's proposed
MPR for tlle Form 1240.
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� EXHIBIT "A" TO ORD. NO. 2005-02
� Page 3 of 8
Ms.Jcnnifer I�Iibbs
� July 31,2004
Page 3
• Comcast has not explained discrepancies in subscriber counts for certain months
ineluded in the analysis;
� Given the above changes, the inflation factor should be refreshed in accordance with
.
FCC rules; and
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� • Comcast has used an incorrect effective date of the 2003 rates and related true-up of
� those cost figures
�
' 1. Incorrect Computation of FCC User Fees — As originally discussed in the
4 Preliminary Report
(
The FCC has found that the FCC User Fee should be one of the components of the external costs
€ calculated on Worksheet 7. This is evidenced by the Form 1240 Instructions for Worksheet 7 that
! requires:
Line 708 Commission Regulatory Fees For the Period. Enter the total Commission
; regulatory fees for the period.
i Also on point is 47 C.F.R. §76.922(fl(1),which provides:
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External costs shall consist of costs in the following categories:. . . (vi)Commission cable
television system regulatory fees impose pursuant to 47 U.S.C. §159.
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In the instant filing, Comcast has excluded FCC User Fees in its projected period. Based on
Comcast's response to a request for information asking for the Company's rationale for such
exclusion,the Company stated:
`The monthly recovery schedule for this fee is deternuned by the FCC and allows for
' adjustment more than one time per 12-month period, if required. . . We believe it is
' appropriate to remove this fee from the FCC Form 1240 filing. This treatment has been
found acceptable by other regulated L.FAs in the Atlantic Division?
In C2's opinion, if the FCC did not believe that FCC User Fees should be included in the Form
; 1240 computation, it would have amended the formulae. Therefore, it is inappropriate and not in
� compliance with the FCC instructions for the Company to exclude the FCC User Fee in
� developing the MPR for basic service.
�
� In the instant filing, the adjustment to the Projected Period to not only include FCC User Fees as
� required, but to develop the maximum amount that can be collected results in an increase to
� Comcast's rate shown on Line I9. However; with Comcast's proposal to charge the $0.06
separately from the Line I9 rate,the adjustment is, in reality, no chan;e to the total rate that will
p be charged to the subscriber.
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2. Unjustified Programming Expense — As originally discussed in the Preliminary
� Report
� Based on the Fornl 1240 formulae,programming expenses paid to outside programmers are to be
i trued-up and projected for the new rate year. On the Grapevine basic service tier,there are four
�'.:,-:,�
''Response toRFI 12�10-11 received on or about Apri17,2004.
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EXHIBIT "A" TO ORD. NO. 2005-02
• � Page 4 of 8
' Ms.Jcnnifcr IIibbs
! July 31, 2004
Page 4
, channels that require additional programming costs be included in the rate development.
Comcast proposes to increase the averabe programming cost per subscriber by approximately
� $0.13 over the programming rates included in the 2003 rate decision.
4
; In order to assess the reasonableness of the programming cost increases, the City submitted the
� following request for information:
�
! Provide supporting documentation used for the development of the programming costs
kshown on Attachment 4 to the filing and used in the development of costs on Worksheet
7, Include in your response actual contracts, invoices, correspondence, and programmer
� notification, which supports the amount directly, or indirectly assigned as well as
�
� programming costs by channel. . . .'
The Company responded that it would provide such information with the execution of a
4 confidentiality agreement. However, subsequent to such execution, Comcast provided what it
termed as "Programming Invoice Information," but did not provide any contract supporting
documentation. In fact, the invoice information only showed the City specific line item, and was
described by Comcast as being internally generated. In an e-mail communication with a Comcast
representative,the following statement was made:
The Corporate Prog-ramming Department generates these invoices on a monthly or
quarterly basis depending on programming service. This is a mare efficient methodology
than having the MSO provide the appropriate subscriber counts to each programming
vendor to generate an invoice back to the MSO.°
However, without contractual information supporting the development of the invoice costs, the
, Company has not provided the necessary information to the City for verification of accuracy.The
FCC has been very clear on the issue of providing supporting documentation, even if such
documentation is considered confidential and proprietary. In the Third Order on
Reconsideration, the FCC found:
In the Rate Order, we stated that franchising authorities will have the right to collect
f additional information-including proprietary information-to make a rate determination in
; those cases where cable operators have submitted initial rates or have proposed increases.
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I � . . .we find that franchising authorities and the parties to a rate proceeding must have
access to the information upon which the rate justification is based. Such access is
' essential to permit the franchising authority to make an informed evaluation, based on
{ complete information,of the reasonableness of the rate in question.b
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� In fact, ComcasYs own attorneys petitioned the FCC in 1995 to restrict the access to such
j information by proposing to provide an external auditor letter that the proprietary information
; concerning programmer contracts was true and correct. In response to that request,the FCC
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; �RFI 1240-8,subnutted to Comcast on or about March 23,2004.
� �E-mail fi•om Mr.Craig Schmid to Ms.Connie Cannady,dated April 13,2004
"''``� 5 T/tirtt O�'der a�Recauideration, 9 FCC Rerl. 43/G 1994),pnragrnph 74
6 Ibid.,paragr�ph 77.
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r EXHIBIT "A" TO ORD. NO. 2005-02
� � Page 5 of 8
Ms. Jcnnifer 1Iibbs
July 31, 2004
�' ��� Pa�e 5
� declined to consider the request without a formal rulemaking procedure and reafFirmed the
findings in the Third Order on Reca�sideration.�
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Without such information, the City may consider disallowing any chan�e in probramming costs
� over that approved in the true-up period of the 2003 review. To do so would reduce Comcast's
� proposed Form 1240 rate by approximately$0.28.
i Alternatively, if the City accepts the "invoice" information provided as support for its rate
& computation, C2 notes that there still exist some errors with respect to the monthly costs reported.
{ These include the reporting of higher rates for two months on the Form 1240 than supported by
�k the invoices, and including programming rates that are considerably higher per subscriber when
; using the subscriber counts in the filing. Conecting only for those errors results in a decrease to
pComcast's proposed Form 1240 rate of$0.025.
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{ Update to Preliminary Report
�
� In its response to several of the Form 1240 preliminary reports,the Company criticized C2 for not
',• aclrnowledging C2's review of certain contracts provided to the City of Dallas. However, C2
'� notes that the preliminary reports were issued prior to the City of Dallas being able to obtain the
contractual documents. C2 also points out that even if the documents had been provided prior to
E the issuance of the preliminary report, C2 was bound by a Comcast required confidentiality
; agreement not to use such information for any other city analysis.
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d Given these circumstances, C2 issued a follow-up request to Comcast that the Company provide
all contracts related to the City of Grapevine. On July 19`h, these contracts were made available
with C2 follow-up questions answered by Comcast on July 29, 2004. Based on the contractual
� i information and explanatory responses, C2 finds that the proposed programming costs for the
City of Grapevine are significantly overstated. The proposed costs do not take into account
� certain rate issues provided for in the contracts.
Computing the rates based on the new information reduces Comcast's proposed programming
expense by approximately$0.07.
E 3. Conflict in Subscriber Counts—As originally discussed in the Preliminary Report
� During the 2003 rate review, C2 requested the monthly subscriber counts from December 2002
� through March 2003. These counts were used to evaluate the reasonableness of the projected
period subscribers and to determine the FCC user fees for the December 2002 year. Of course,
these three months are part of the true-up period in this filing,�vith the subscriber counts used to
determine programming expense, FCC user fees, copyright fees and the projected period
; subscriber counts.e
� A comparison of the December 2002 through February 2003 counts provided last year to those
j included in this filing revealed an approximate .4%discrepancy. Gomcast reported these counts
� lower than reported in this filing. VJhen asked to explain, the Company did not provide an
i explanation,but merely stated:
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'"�""`� 'Letter to Cole,Raywid&Braverman front the PCC,DA 95-1175,released May 26, 1995
$Comcast used the average subscribers for d�e tnie-up period as dle monthly projected period subscribers.
�>...�
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EXHIBIT "A" TO ORD. NO. 2005-02
� Page 6 of 8
Ms.Jcnnifcr Elibbs
July 31, 2004
` Page G
� „ There are minor variances between these totals. . .these total are the basis for the
; Company's annual SEC lOK filing.`'
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1n C2's opinion, the counts should not change from one year to the next for the same monthly
� historical periods. Therefoce,C2 re-computed the subscriber counts using the origii�ally provided
� information. The impact on the rate is less than$0.41.
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� 4. Refreshing the Inflation Factor -As origivally discussed in the Preliminary Report
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'I`he fourth issue relates to the inflation factor used for both the true-up periods and the projected
� period. The Form 1240 methodology allows for an inflation adjustment to be projected for each
� rate year. Such projection becomes part of the tnie-up computation in the next rate filing. Based
� on FCC regulations, a cable operator is to use the most recent information published by the FCC
� concerning quarterly inflation factors to be applied.10
�
� Comcast has recognized this requirement in an amended filing that it recently submitted to the
City of Dallas in which it changed the fourth quarter 2003 inflation factor from 1.66% to 1.50%
� and continued to use the 1.50% for the projected period. Making this adjustment changes the
� true-up periods to reflect all actual inflation factors and projects inflation based on the 1.50% for
i the projected period.
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` Update to Preliminary Report
On July 12,2004;the FCC issued the First Quarter Inflation Factor for Form 1240s of 2.84%. As
this is the most current factor, it must be used for the projected period of this filing in place of the
earlier factor of 1.50%. The change in inflation factors actually increases the Company's request
! to a point that the originally filed rate is reasonable when the FCC user fee is added.11 The
� impact of this refreshing is to actually increase Comcast's proposed rate by approximately$.13.
? 5. Unauthorized Effective Date—As originally discussed in the Preliminary Report
,
� During the 2003 review,the Company did not provide the Operatar Selected Rates before the end
i of October, even though it had filed for an effective date of June 1, 2003 for the rate filing. In
; passing its rate order concerning the 2003 filing, it is C2's understanding that the City changed
the effective date from June 1, 2003 to December 1, 2003 by adopting the findings of the
` November 10, 2003 C2 memo report. The date change was to take into account the fact that the
OSR information was received on or about October 30, 2003 and provide for an approximate
� thirty (30) day period from the time the inforrriation was received to the time the rates would be
' effective.
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The Company dict not appeal the City's Form 1240 ordinance with respect to this issue.
; Therefore, for ptuposes of this analysis, it is C2's opinion that December 1, 2004 is the effective
' date for the Form 1240 rate adopted pursuant to the 2003 Form 1240 filing.
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Gi�-en the abor�e scenario and the fact that Comcast has filed its 2004 Form 1240 with an
� �Response to P�FI 1240-4,received on or about Apri17,2004.
k 10 FCC Form 12=10 Instnictions,Part I:Module C[Revised 7uly 1996].
��Thz First Quarter Inflation Factors liave been the highest factors since 1995.
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� EXHIBIT "A" TO ORD. NO. 2005-02
Ms.Jennifcr I-tibbs Page 7 of 8
� July 31, 2004
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Page 7
inappropriate effective date of J�me 1, 2004, the entire Form 1240 formulae has to be adjusted.12
; The resulting changes include a true-up of the December 1, 2002 through November 30, 2003
period based on the 2002 adopted rate of$10.81. This computation was performed in accordance
with the formulae with the exception of removing the true-up component of this rate as it is
already embedded in the true-up of the 2003 adopted rate of $11.14. The computation was
�� performed using Modules A-F. Module G (December, 2003 true-up) was performed under the
� normal computations of the Form 1240, with the exception of adding the inflation for the Module
� F adjusted calculation. For next year's filinb, the 2003 rate of$11.14 will continue to be the
j appropriate rate on which to true-up the January 2004 through November 2004 time period.
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� Update to Preliminary Report
�
E In the recent ruling by the FCC (DA 04-1703) the FCC found that the Cities of Colleyville and
' Flower Mound could not alter the effective date from June 1, 2003 because they had not timely
; informed Comcast of the incompleteness of the 2003 filing due to lack of an OSR and demand
�
that an OSR be provided.More specifically:
�
We have recently held, however, that such postponement or tolling occurs only if the
� franchising authority decides that the cable operator's filing is incomplete and demands
, that the cable operator complete its Forms and declare an OSR. The Cities did not do that
f and therefore did not effectively toll the effectiveness of Comcast's rates. "
However, with respect to the City of Grapevine, the City did issue a request for information on
April 1, 2003, specifically requesting that the Company declare an OSR. As the information was
not provided, on May 2, 2003, the City demanded that the OSR be provided so that the City
Council would have complete information concerning the rates.14 Therefore, C2 continues to be
� of the opinion that the City "effectively tolled" the review period until such time that the OSR
was provided at the end of October 2003.
In order to provide the City with the option,however, C2 has computed the rates based on a June
1, 2003 effective date as well as a December 1, 2003 effective date, and incorporated the effects
of all other adjustments. The difference in the resulting rates is approximately$1.14.
� SUMMARY OF PRELIMINARY RECOMMENDATIONS
� Based on the above discussion,the City should consider the following:
� ■ Adjust the FCC User fees to reflect inclusion in the external cost calculation.
■ Adjust the programming expense to disallow those costs that have not been supported
� by contractual information
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■ Reflect subscriber counts as originally provided
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" �'The fomiulae do not currently take into account changing die effective date from that filed by the
` operator. Therefore,C2 has provided an`bff fornl"calculation in an attempt to reflect die true-up of rates
� that�vere effect according to City orders.
� 13 See Order,DA 04-1703,paragraph 32.
�{Letter fcom C2 to Ms.Robbin Pepper issued April 1,2003 and Letter from C2 to Mr.Dick Kirby on May
2,2003.
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EXHIBIT "A" TO ORD. NO. 2005-02
Ms.Jennifer Hibbs Pag@ $ Of $
July 31, 2004
` Pa�e 8
._ • Refresh the inflation computation to include the actual fourth quarter inflation factor
in the true-up periods and the first quarter inflation factor for the projected period.
• Adjust the filing to reflect the effective date of December 2003 for the 2003 Form
1240 adopted rate.
• Consider a Form 1240 MPR of$10.62(using the effective date of December 2003).
• Alternatively, the City could consider adopting a Form 1240 MPR of$11.71 (using
the effective date of June 2003.15
• Develop a rate ordinance for review by the City Council that adopts an effective rate
of this filing of July 14, 2004 based the regulatory thirty day period subsequent to the
time the OSR was provided by Comcast,
C2 greatly appreciates this opportunity to assist the City of Grapevine in its review of the Form
1240 filing. If you have any questions concerning these findings and recommendations, please
contact Ms. Connie Cannady at 972-726-7216.
Very truly yours,
C2 Consulting Services,Inc.
15 This rate calculation includes an adjustment to interest in Module H.The interest on any undec-
recoveries for the period June 2003 duough December 2003 should be disallowed. This is supported by the
' recent FCC Order DA 04-1703,released June 14,2004,paragraph 32. Therefore, if the City chooses to
adopt this rate of$11.71,the ordinance should so state tliis adjustment.