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HomeMy WebLinkAboutORD 2001-037 ORDINANCE NO. 2001-37 AN ORDINANCE OF THE CITY COUNCIL OF THE CITY OF GRAPEVINE, TEXAS ESTABLISHING THE MAXIMUM PERMITTED RATE FOR THE INSTALLATION AND EQUIPMENT RATES CHARGED BY AT&T BROADBAND, DECLARING AN EMERGENCY AND PROVIDING AN EFFECTIVE DATE WHEREAS, the City of Grapevine, Texas ("the City") 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 AT&T Broadband ("AT&T"); and WHEREAS, in accordance with 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 equipment and installation rates; and ,�v.� WHEREAS, in accordance with applicable FCC regutations the City adopted an ordinance providing for the regulation of rates charged by cable television operators within the City for the equipment and installation rates and related equipment and installation charges and providing for a 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. Findings: 1. That on or about October 1, 2000, the City of Grapevine received AT&T's FCC Form 1205 filing. 2. That the City engaged the services of C2 Consulting Services, Inc. to provide assistance in the review of AT&T's FCC Form 1205 to determine the reasonableness of the proposed equipment and installation rates, attached hereto as Exhibit "A". {� 3. That AT&T instituted a rate adjustment based on its Form 1205 filing effective January 1, 2001. 4. That based upon the information received from AT&T and recommendations from C2 Consulting Services, Inc., the City concludes that operator selected rates for installation and equipment rates are reasonable with the exception of the rate for a truck trip. Section 2. Conclusions: The City has an obligation to timely act upon the pending rate application consistent with current FCC rules and regulations. AT&T's submittal of the FCC Form 1205 received on or about October 1, 2000, is hereby approved with the exception of the rate for a truck trip which is not reasonable. Section 3. Orders for Action: Based on the foregoing Findings and Conclusions, the City hereby enters the following orders: 1. Approve the operator selected rates proposed by AT&T for installation and equipment rates with the exception of the rate for a truck trip. - � 2. Based on the information received from AT&T and recommendations from C2 Consulting Services, Inc. which is attached hereto as Exhibit "A" and ��., included herein for all purposes, the maximum permitted truck trip rate is $21.76 effective May 1 st, 2001. 3. AT&T is hereby required to refund to its current customers any amounts charged to them based on the Form 1205 rate adjustment, which were in excess of the rates approved herein. Section 4. 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 creates an emergency which requires that this ordinance become effective from and after the date of its passage, and it is accordingly so ordained PASSED AND APPROVED BY THE CITY COUNCIL OF THE CITY OF GRAPEVINE, TEXAS on this the 15th day of May, 2001. APPROVED: •<._._. .� ''�°'' Vllilliam D. �'ate Mayor ORD. NO. 2001-3� 2 ATTEST: Lin a Huff City Secretary APPROVED AS TO FORM John F. Boyle, Jr. � City Attorney ;�„�.., ORD. NO. 200�-3� 3 �xNie�r� to � .����1'� Pa9e ---L_.._ of ..�:.....,, ONSULTING SERVICES, INC. 7801 Pencross Ln. Tel. (972) 726-7216 Dailas,Texas 75248 y,, Fax (972) 726-0212 February 13,2001 Mr. Rick Moore Ms. Melisa Leal Information Systems Manager Assistant to the City Manager City of Coppell City of Grapevine PO Box 478 PO Box 95104 Coppell,Texas 75019 Grapevine, Texas 76099 Ms. Patricia Royal Nicks Cable Services Manager City of Irving 233 South Rogers Road Irving, Texas 75060 Dear City Representarives: C2 Consulting Services, Inc. ("C2") has completed the evaluation of the FCC Form 1205 filed by Paragon Cable ("Paragon" or the "Company"} with the Cities on or about October l, 2000.1 This is Paragon's second year to file a Form 1205 for Ciries' review of its proposed changes in equipment monthly lease rates and installarion and maintenance charges since implementation of flie Social Contract provisions in 1996? The Cities continue to have original jurisdicrion with respect to the review and regulation of charges resulring from the Form 1205 computations. Ttus study does not constitute an examinarion of the financial condition of Paragon or its parent company. As such, C2 cannot and does not express any position with regard to the accuracy or validity of the fmancial information provided by Paragon during the course of the analyses. BACKGROUND In its 2001 Form 1205 filing, Paragon proposes installarion rates that are on average 39% greater than the 2000 rates. With respect to the equipment rates, the proposed addressable converter rate shows the largest variarion, with Paragon actually charging a rate (operator selected rate or "OSR") that is considerably less than the maximum pernutted rates ("MPR") computed by the Form 1205 formulae. � 1 Subsequent to the filing of the Form 1205, AT&T Broadband assumed operation of the systems. However,for purposes of this report,Paragon will continue to be referenced as it filed the Form 1205 and supplied the supporting documentation. '`Soeial Co�rtract for Time 6�'arner Cable("Social Co�riract'j, as approved by the FCC in Social Cotitract f�r Tinte bf�ar�tcr,ll�femorairdum Opi�riar crnd Order, FCC 95-478,released November 30, l 995,("Social � Contract Order"), City Representatives EXHIBiT ��:.� TO ��'�� `� Febivary 13, 20o t pag8 � r,r of Page 2 The following table provides a comparison of the current rates, Paragon proposed maximum � pernutted 2001 rates, and Paragon's operator selected 2001 rates: CONIPARISON OF EQUIPMENT AND INSTALLATION RATES Paragon Paragon Paragon ~''2000 Rates Proposed 2001 Proposed 2001 MPR OSR Hourly Service Charge 529.78 �32.48 $32.48 Service Install-New �29.78 �u43.19 $43.19 Install-Reconnection $17.27 $17.21 $1721 Upgrade of optional services $17.27 $25.98 $25.98 Downgrade of optional services $17.27 532.48 �25.98 Additional connect at installation $13.40 $21.76 $21.76 Additional connect-separate $27.40 $32.48 $32.48 Truck Trip $17.27 �21.76 �25.98 Changing Tiers $2.00 �25.98 $2.00 Monthly Lease Rates Remotes �0.29 $0.32 $0.32 Non-Addressable Converter �0.62 $0.58 $0.58 Digital,Addressable Converters 53.39 $5.09 $4.41 Consistent with the previous Form 1205 filing, Paragon's proposed 2001 rates are based on the components of Fonn 1205 filings developed for the following five Tiine Warner divisions operating in Texas: • Austin Division • Houston Division(East and West, with East being previously operated by TCI) • San Antonio Division , • Southwest Division • Waco Division � Therefore, each individual Form 1205 was revie�ved for accuracy and the appropriateness of any computations. SU1��Ii�IARY OF FINDINGS Based on the infonnation provided by Para�on, it appea�•s that the primary reasons for the ,��,,n increase in the installation and equipment rates are as follows: City Representatives ExH�e�r�. ro �°1:�Z I�ebru�y 1�, 2001 Pags _.s�.._. Of � Pabe 3 1. The Company experienced a si�nificant increase in the hourly rates charged by outside contractors for installation and repair and maintenance of remotes and converters. 2. The amount of time required to perform installation activities increased significantly iu large part due to what appears to be an increase in digital installations. 3. The capital investment in digital and analog addressable converters substantially increased due to providing digital services (with the rec�uire�nent of a di;ital converter). Increase in C�ntract Lnbar Expense Most of die five divisions use outside contractors to assist in installation activities and repair and maintenance of converters and remotes. These costs have been a component of the Hourly Service Charge(`HSC") used prunarily to develop the installation rates.3 �.:� An analysis of the costs and associated hours related to contract labor for the last t�vo years showed: • The total number of contract labor hours assigned to the equipment basket remained stable beriveen the 2000 filing and the 2001 filing; and • The total contract labor costs reported in the 2001 filing increased approximatety 45%fi-om the costs included in the 2000 filing. The Company provided the explanation that such costs had increased in various parts of Texas due to the availability of qualified technicians. The laUor pool has narrowed significantly �iven � all of the cable and telecorrununications construction that is in progress. For example, the greatest increase in contract labor noted in the five divisions was in the Dallas metroplex area. Although the increase ui contract labor is significant, the Company has provided data that supports these costs during the fiscal year period noted, (October 1999 through September 2000). The FCC regulations allow for recovery of actual costs incurred by the cable operator associated �vith regulated equipment and installation activiries. Increase in Time Reyuirentents for Instullation Activities Paragon proposes to adjust the time requirements for each of its installation activities for which a rate has been proposed. Remember that the HSC is multiplied by each of these time frames to detennuie the inaximum permitted rate for a particular installation activity. The increases in ti�ne requireinents appear to be primarily related to inclusion of digital seivice installation activities. Tliis is in large part due to the blending of the time requirements for atialob installation and the time requirement for di;�ital installations.`' This blending�vould affect -- � 3 To the extent outside contractors are used to repair and maintain remotes and converters,their hours are multiplied by the HSC and ldded to the capital investment to detern�ine the equipment rates. x�:.;� ��lany operators have separate installation rates for analo�J and di�ital. It appears that Para�on has developed an avera�e rate to be charged for either type of installation activity. . Q�������' City Representatives EXt`1181Y� TO pf r � February 13, 2001 Pag ..--�--- Page 4 any installation activities that might include a digital installation, digital upgrade, digital outlet or digital problem requiring a technician review. Capital Investment in DigitaUAdclressable Converters The driving factor in the increase in digital/addressable converters is the capital investment made by the Company in digital converters during the fiscal year in question. A review of the amount of di�ital/addressable converter net book value as of September 1999 compared to the level at September 2000 showed an approximate increase of 50% without any notable change in the number of com�erter boxes in service.' Clearly the cost per unit of d�e digital converters is significantly higher than the analog converter boxes. This, coupled with the fact that customers are tracling out the older, less expensive units for digital boxes, increases the monthly rental rate required per unit for actual cost recovery (as provided by FCC regulation). Calculation Issues C2 notes rivo issues with respect to the calculation of the Form 1205 and the resulting proposed rates. These are: �. 1. The Company used estunated costs and investment for tlie month of September 2000; and - ` 2. The proposed rate for a Truck Trip does not appear to be in accordance with the Form 1205 ma�ciinum permitted rate as calculated. a.) Estimated Espenses In accordance widi FCC inshuctions, the Company has a recent rivelve-month period for calculating its Fonn 1205. As stated above, the period is noted by the Company as being from October 1, 1999 through September 30, 2000. However, the Company did not use the actual costs and investment levels as of September 30`h, but instead estimated this month's ainounts to be included. Tl�e FCC instiuctions are clear that the Foim 1205 is intended to recovery the actual costs of customer prernises equipment and operating expenses for installation and equipment related activities. Although using an estimate of the investment levels and expenses for the month of Septeinber 2000 does not appear to have a major impact on the Fonn 1205 computations, it is not in accordance �vith the FCC requirements.b 11ie FCC regulations do allow for�a time period other than a recent t�velve-inonth period, but any alternative time period is subject to acceptance by the franchising authority. 5 Remember that the monthly rate for converters is derived by dividin�the cost recovery component by the number of units actually in service. The cost recovery component is comprised of the labor costs to repair �� ° and maintain,the annual depreciation on the investment, and the annual return on the investment. 6 Para�on provided the actual September investment levels and depreciation for Schedules.A and C,which :�:,� showed some increase in the levels used in the Form 1205. Althou�h not a complete update of the September information, this suggests that the estimates used were reasonable. EXHIBIT__�l._ TO � ����� City ftepresentatives �" Of �_ Febniary 13, 2001 Page _.__.�— . Page 5 � C2 recommends that the Cities require Paragon (no�v AT&T) to file future Fonn 1205 filings based on actual costs and not estimated costs. b.) Nlaximum Perinitted Rate for Truck Trip In the letters submitted by Paragon to the Cities on or about tliirty days prior to the rate increase in Janu�u�y, the Company listed the current rates and the new rates for installation and equipment rental. The new rate for a"truck ri-ip" was noted as $25.98. However, upon review of the actual Form 1205 calculations, it appears that a truck trip requiring .67 hours to complete results in a ma�imum pennitted rate of$21.76 (.67 hour times the HSC of$32.48).' C2 recommends that the cuiTent rates beina charged for a truck trip be lowered to the maxiinum pennitted rates computed on the Form 1205 as filed. SUM�IARY OF RECOIVIMENDATIONS Based on the above findings and conclusions, the Cities should consider taking the following acrions: 1. Approve the operator selected rates proposed by Paragon for installation and equipment rates as being reasonable with the exception of the rate for a truck trip. 2. Adopt a maximwn permitted truck trip rate of$21.76 rather than the $25.98 proposed by the Company. + Y 3. Provide for additional infonnation to be submitted by the cable operator with the filing to better clarify flie reasons for major cost uicreases. 4. Require the Company to use only actual costs/investment in future Form 1205 filings. C2 appreciates having this opportunity to work with the Cities of Coppell, Grapevine, and Irving in review of the Fonn 1205 rates. If you have any questions regarding tlus report or need clarifications as to the recoimnendations, please contact Ms. Connie Cannady at (972) 726-7216. Very truly yours, , � �. C�n��„�� S'w��-�-,� . , � � C2 Consulting Services, Inc. ' It is not clear from the Form 1205 filing if the.67 is related to the tnick trip of up�rade/do�vngrade of service. Claritication has been rec�uested from Paragon. However,the truck trip, upgrade and downgrade are all bein�charged at a rate of�25.98. One of these rates should be lowered to the$21.76 maximum � permitted rate shown on the Form 1205.