HomeMy WebLinkAboutItem 15 - AT&T Broadband Rate Review0
r
MEMO TO
FROM:
MEETING DATE
SUBJECT
RECOMMENDATION:
ITEM 0 _./ r_
HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL
ROGER NELSON, CITY MANAGER V 1V
MAY 15, 2001
AT&T BROADBAND RATE REVIEW
City Council consider the approval of two rate order ordinances to reject the AT&T
Broadband rates established by FCC form 1240, to approve the installation and
equipment rates established by FCC Form 1205, and to order new maximum permitted
rates and issue a refund.
FUNDING SOURCE:
The rate order does not have a financial impact. The city will continue to collect revenue
according to our franchise agreement of 5% of gross receipts.
BACKGROUND:
The City of Grapevine received notice of AT&T's FCC filing in September 2000.
Connie Canady, C2 Consulting, Inc., was hired to provide an analysis of FCC Forms
1205 and 1240 related to AT&T's rates for the year 2001. The reports are included for
your review. The staff recommends two courses of action based on the report:
a) The City Council deny the AT&T rate increase filed in the 1240 and establish
maximum permitted rate of $9.82, effective June 1, 2001, based on the
consultant's report.
b) The City Council accept the installation and equipment rates established in
FCC Form 1205 filing with the exception of the rate for truck trip, and establish
a maximum permitted rate of $21.76, effective May 2, 2001 for the truck trip
rate.
The City of Grapevine retains regulatory authority only on specific services. AT&T, upon
approval of the rate order, must comply with the new rate structure effective
immediately. In addition, AT&T must also issue credits for the difference between the
May 9, 2001 (10:15AM)
k
city rate order and the company's effective rates. AT&T has the right to appeal the rate
order to the FCC. During this process, we contacted AT&T and worked with Nancy
Murphy who handles rate issues for this system. The City of Grapevine agreed to
accept a revised rate after AT&T resubmitted its FCC 1240 to include a higher inflation
rate. The attached memo, with revised recommendations, from Connie Canady reflects
this change to the maximum permitted rate for the basic service charge.
It should be noted that while working with C2 Consulting Services, Inc., Staff also
contacted the other communities who are serviced by AT&T Broadband. C2 Consulting
Services also reviewed the FCC forms filed in Irving and Coppell. The FCC Forms filed
in those communities reflected the same financial justification for the increases.
Representatives from the neighboring communities will also be forwarding
recommendations to their respective City Councils based on the work completed by C2
Consulting Services.
Staff recommends approval of the rate order ordinances. The Utilities Committee and
the City Attorney have been briefed on the rate order and support the approval of the
ordinances.
May 9, 2001 (10:15AM)
/.�r�- /___ lA �0
AN ORDINANCE OF THE CITY COUNCIL OF THE CITY
OF GRAPEVINE, TEXAS ESTABLISHING THE MAXIMUM
PERMITTED BASIC SERVICE TIER RATES CHARGED BY
AT&T BROADBAND CABLE, 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") (formerly recognized as Paragon
Cable); 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 laws
and regulations, the City has undertaken all appropriate procedural steps to regulate the
equipment and installation 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
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 1240 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 1240 to
determine the reasonableness of the proposed basic service tier
rates, attached hereto as Exhibit "A".
3. That AT&T instituted a rate adjustment based on its Form 1240
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 the rate proposed by AT&T for maximum permitted
service rate is not reasonable.
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
1240 received on or about October 1, 2000, is hereby rejected, for the reason that the
proposed rate is not reasonable.
Section 3. Orders for Action:
Based on the foregoing Findings and Conclusions, the City hereby enters the
following orders:
1. AT&T's request for maximum permitted basic service rate of $10.01
included in its Form 1240 filing is hereby denied.
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 rate for the basic
service tier is established at $9.82 effective June 1st, 2001.
3. AT&T is hereby required to refund to its current customers any amounts
charged to them based on the Form 1240 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.
ORD. NO. 2
ATTEST:
F.AIWJ
E WONSU TING SERVICES, INC.
7 801 Pen cros s
Dallas. Texas 75248
May 9, 2001
Ms. Melisa Leal
Assistant to the City Manager
City of Grapevine
200 South Main
Grapevine, Texas 76051
Dear Ms. Leal:
(972) 726-7216
(72) 726-0272 (fax)
Pursuant to your request, I have reviewed the information provided by AT&T concerning the use
of the fourth quarter 2000 inflation factor for the Form 1240 projected period. In my opinion, the
Company's request to refresh the inflation factors used in my January 2001 report to the City is
reasonable.
As noted in the report, I recommended that the City use the most recent inflation factors
available. At that time, the FCC had released the third quarter 2000 factor (1.62%). In April,
2001, the FCC released the fourth quarter factor of 1.99%. Replacing the 1.62% with the 1.99%
for the projected period computation results in a maximum permitted basic service rate of $9.82.
1 recommend that the City adopt the revised $9.82 basic service rate. Any variation between the
1.99% and the actual inflation factors during the projected period (0' quarter 2000 through 3d
quarter 2001) will be "trued -up" in the next filing based on the actual inflation factors for those
respective quarters.
Please call me if you have any questions.
Very truly yours,
Constance T. Cannady
President
Cy
7801 Pencross Ln. Tel. (972) 726-7216
Dallas, Texas 75248 Fax (972) 726-0212
January 10, 2001
Ms. Mehsa Leal
Assistant to the City Manager
City of Grapevine
PO Box 95104
Grapevine, Texas 76099
Dear Ms. Leal:
C2 Consulting Services, Inc. ("C2") has completed its review of the FCC Form 1240 submitted to
the City of Grapevine, Texas (the "City") by Paragon Cable ("Paragon" or the "Company") on or
about September 30, 2000. The following report provides a brief discussion of the issues noted
during the review and C2's recommendations regarding potential City Council actions in
response to Paragon's proposed basic service rate.
This study does not constitute an examination of the financial condition of Paragon 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 Paragon during the course of the analyses.
OVERVIEW OF THE FILING
According to the information provided by Paragon, the basic service tier continues to include
twenty-two (22) channels. Prior to the January 1st implementation of the filed rate,' Paragon
was charging $9.36 for basic service programming based on the City's approved Form 1240
computation for the 2000 rate year. Based on Paragon's proposed Form 1240 filing of $10.01, the
Company has increased the basic service rate by $.65 per subscriber per month. The rate year is
January 1, 2001 through December 31, 2001.
There are three major factors that explain Paragon's proposed increase in the basic service rate:
The difference between the actual rate charged and the True -Up Period rate as
adjusted for inflation and number of subscribers is approximately 5.22 higher than
the True -Up segment built into the prior Form 1240 computations — impact $,22
increase; 2
1 Based on paragraph 92 of the Thirteenth Order on Reconsideration, FCC 95-397, released September 22,
1995, a cable operator may implement a proposed rate ninety (90) days after it has filed for the rate change
with the franchising authority. However, the franchising authority has one year from the date of the filing
in which to render a final decision. Such decision is retroactive to the beginning date on which the
proposed rate was charged.
2 In large part, this is due to three factors: (1) a lower rate of 9.06 actually charge during the first three
months of the true -up period (Oct 1999 through Dec 1999); (2) a reduction in the number of subscribers of
Ms. Melisa Leal
January 10, 2000
Page 2
t
2. Paragon proposes to use a higher inflation factor in its current Form 1240 true -up
period than what was estimated in the projected period for the 1999 filing — impact
$.15 increase; and
3. Paragon proposes an additional projected year of inflation in its current Form 1240
that will be trued -up next year pursuant to FCC regulations — impact S.28 increase.
ANALYSES OF THE FILINGS
Project Objectives and Activities
The project objectives are three -fold:
Assessment of the completeness of the filings with regard to the information and
documentation that must be filed with the City.
Assessment of the reasonableness of the proposed computations in light of FCC
regulations, and FCC rulings.
Assessment of the reasonableness of the proposed computations in light of City
actions resulting from analysis of the 1999 Form 1240 computations and subsequent
rate order.
Given these objectives, C2 conducted the following project activities:
1. Review of the filings to assess the completeness based on the FCC Foran instructions.
2. Review of the filings to identify any issues with respect to the data and/or
methodologies employed by Paragon.
3. Submission of follow-up data requests and subsequent review of Paragon's
responses.
4. Review of FCC decisions and City orders that clearly have an impact on Paragon's
proposed methodologies.
5. Development of potential alternatives available to the City in establishing maximum
permitted basic service rates.
Summary of Findings
C2 identified two main issues with respect to Paragon's proposed Form 1240 computation. These
issues are identical to the issues addressed by the City during the 1999 Form 1240 analysis:3
Paragon inappropriately included estimated subscribers in its True -Up Period
computations.
approximately 41''o; and (3) an increase in the true -up inflation rate that not only effects, the amount of the
true -up, but also become an integrated component of the total rate going forward.
In the 1999 Form 1240, Paragon included estimated subscribers and external costs for the period October
1999 throuC hh December 1999 in order to ha%,e a full t"el��e month period true -up. Hoy\�e\ er, the Cite
pointed out that such "estimates" were not appropriate in light of the FCC regulations regarding, True -Up
Period computations. Therefore, Paragon
Ms. Melisa Leal
January 10, 2000
Page 3
2. In conjunction with correcting the true -up period, the inflation factors to be applied
during both the true -up period and the projected period need to reflect the most recent
information available.
Discussion
1. Use of Actual Information For True -Up Period
As discussed in the January 28, 2000 C2 Report to the City, the Form 1240 methodology
incorporates a series of calculations that involve an accounting of the actual costs previously
projected for the prior rate year and an allowance for projecting certain cost increases/decreases
for the upcoming rate year. In each annual Form 1240 filing, the projections from the prior
computation are to be "trued -up" to actual costs/subscribers, and any over/under-collections are
taken into account in the development of the new rates.
In the Thirteenth Order on Reconsideration, the FCC noted:
Because the true -up will examine what costs were actually incurred, it can only examine
costs as of the date the Form 1240 is filed. As a result, and because the Form 1240 must
be filed at least 90 days before the proposed increase is scheduled to take effect... and
the projections are made for the year beginning with the proposed implementation date,
the period applicable for the true up 11vill not exactly coincide with the previous year's
projections. For example, if an operator files annually on October 1 for rates to take
effect on January 1, the true -up will cover the period from the previous October through
September, but the projections will apply to the period January to December.
Paragon's 1999 filing was submitted on September 30, 1999, for a rate year beginning January 1,
2000, and with a proposed true -up period from January 1, 1999, through December 31, 1999,
even though the infonnation available to Paragon at the time of the filing was only through
September 30, 1999. Based on the FCC regulations as well as FCC rulings concerning this issue,
the City ordered that Paragon could only "true -up" through the actual information available at the
time of the filing.'
With the instant filing, Paragon again has used estimated data for the last month of the true -up
period (September 2000). Even the Form 1240 filing is dated on September 28, 2000, two days
before the close of the month. In C2's opinion, only actual data from the entire month of
September 2000 should be used in the True -Up Period.
The impact of changing the subscriber and external cost data from the estimates filed to the actual
data has an insignificant impact on the basic service rate, but should be mandated given the FCC
reaulations.
' See paragraph 79, footnote 1;1, FCC 95-397, released September 22, 1995.
The FCC has issued a number of decisions concerning this issue, many of which have been related to
filings submitted by Paragon in other jurisdictions. For example see Orders, DA 97-I852, released August
29, 1997 (S 9) and DA 1936, released September 9, 1997 (�. 9).
Ms. Melisa Leal
January 10, 2000
Page 4
2. Adjustment to Inflation Rates
The Form 1240 methodology allows for an inflation adjustment to be projected for each rate year.
Such projection becomes part of the true -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 .6 At the time of Paragon's current Form 1240
filing, the latest published inflation factor for any of the true -up period in question was for the
first quarter of 2000. Paragon used this factor of 3.00% not only to true -up the nine -months of
the true -up period, but also to project for the twelve months ended December 2001.
On October 4, 2000, which is shortly after Paragon filed its current Form 1240, the FCC
published the second quarter inflation factor at 2,40%. On January 9, 2001, the FCC published
the third quarter of 2000 rate of 1.62%. These factors should be used for the second and third
quarter computations in 2000 with the 1.62% factor used for the Projected Period.
Typically, if the inflation factor used is the only issue found in a franchising authority's review of
a Form 1240 filing, the FCC has found in favor of the cable operator using what was the most
recent data available at the time the filing was made. The FCC detailed this policy in the Third
Order on Reconsideration as follows:
We share National Cable Television Association's concern that rates adopted in an effort
to comply with our rules as quickly as possible may become unreasonable solely as a
result of using later data to refresh the calculations. Operators should not be penalized
for making good faith attempts to comply with our rules in a timely manner.
When current rates are accurately justified by analysis using the old data (and that data
was accurate at the time), cable operators will not be required to change their rates.. .
When current rates are not justified by analysis using the old data (so that a rate
adjustment would be necessary in any event), cable operators will be required to correct
their ratespursuant to current data. In these circumstances, the resulting rates must be
based on current data.` [emphasis added]
Clearly, if the franchising authority finds adjustments need to be made other than those
attributable to the inflation factors, the FCC has found that the inflation factors can be adjusted
with data that became available subsequent to the date of the filing. The FCC's position on this
issue is evidenced in the above cited Portland Order (DA 97-1852). In that decision, the FCC
found error with Paragon's use of estimated data in its true -up computation for CPST rates and
also made an adjustment to reflect current inflation factor data:
Tltis adjustment required that we refresh Operator's inflation factors 8
Therefore, because Paragon's rate year 2001 Form 1240 true -up period should be adjusted to
reflect actual September 2000 subscriber and cost data the inflation factors for both the true -up
period and the projected period need to be adjusted to include the most current data available.
Th,- impact of making such adjustment is to reduce the current Fonn 1240 proposed basic service
rase calculation by approximately S.22.
FCC Form 1240 Instructions, Part 1: Module C [Revised Jule 1996].
See Third Ordki, oir Reconsideration, FCC 94-=10, released March 30, 1994, paragraphs 93 and 94.
r ` See Order, DA 97-1852, released August 29, 1997, paragraph 10.
Ms. Melisa Leal
January 10, 2000
Page 5
SUM'INIARY OF RECOMMENDATIONS
Based on the above findings, C2 recommends the following adjustments be considered by the
City in determining the maximum permitted monthly basic service rate:
1. The True -up Period should only reflect the actual subscriber and cost data for the
month ended September 30, 2000.
2. The inflation factors should be adjusted to reflect the published factors through the
third quarter of 2000.
3. The City should consider ordering a maximum permitted rate for the Form 1240
computation of $9.79 rather than the $10.01 proposed by Paragon.
4. The City should order Paragon to issue refunds to subscribers within ninety (90) days
of a rate order based on the difference between the ordered rate and the January 1,
2001, implemented rate. Interest on the refund amount should accrue to the time the
refund is issued.
C2 greatly appreciates having this opportunity to work with the City of Grapevine. If you have
any questions regardingie Cathis report, the project activities, or any of the recommendations, please
contact Ms. Connie at (972) 726-7216.
Very truly yours,
C2 Consulting Services, Inc.
Foderat Communications Commission
it'ashineton, DC 20554
8. Status of Previous Filing of FCC Form 1210 (enter an -x" in the appropriate box)
Approved by OLfB 3060-WkS
YES NO
• an FCC Form 1210 been previously flied with the FCC?
- If yes, enter the date of the most recent filing:—� (mmlddlyy)
YES NO
b. Has an FCC Form 1210 been previously filed with the Franchising Authority?
If yes, enter the date of the most recentfding: —� (mmlddlyy)
9. Status of FCC Form 1200 Filing (enter an "x" in the appropriate box)
YES NO
a Has an FCC Form 1200 been previously filed with the FCC?
If yes, enter the date fried:—(mmlddlyy)
YES h0
b. Has an FCC Foran 1200 been previously filed with the Franchising Authority?
If yes, enter the date filed: (mmlddlyy)
10. Cable Programming Services Complaint Status (enter an "x" in the appropriate box)
YES h0
a. Is this form being filed in response to an FCC Form 329 complaint?
If yes, enter the date of the complaint: (mWddlyy)
YES h0
11. Is FCC Form 1205 Being Included With This Filing
12. Selection of "Going Forward- Channel Addition Methodology (enter an "x' in the appropriate box)
=Check here 9you are using the original rules [MARKUP METHOD].
=Check here 9 you are using the new, alternative rules [CAPS METHOD].
If using the CAPS METHOD, have you elected to revise recovery for YES NO
channels added during the period May 15,1994 to Dec. 31,1994?
13. Headend Upgrade Methodology
`.tOTT.' Open,'ors muslce,,VYro, the Ccmwi rsian lbea-ehkibSl vfo use /his' uy,;raae melte do%v aodauacb an egwpmenl6s/aoddepiecialihe schedule.
ffl. Check here if you are a qualifying small system using the streamlined headend upgrade methodology.
Part I: Preliminary Information
Module A: Maximum Permitted Rate From Previous Filing
a b c d e
I -ire Line Description Basic Tier 2 Tier 3 Tier 4 Tier 5
Al Current.Ia-eimum Permitted Rate $9.3563
'tkA-A,,I- T1. C„T,�-.41,U: .
Line
a b e d e
Line Description Basic Tier 2 Tier 3 Tier 4 Tier 5 {
B1
Average Subscribership For True -Up Period 1 9.833
132
Average Subscribership For True -lip Period 2
B3
Estimated Average Subscribership For Projected Period 9,898
11Anrinl, r`• Tnrlafir,n T.,f-.. 4;.,,,
Line Line Description
C1 Unclaimed Inflation: Operator Switching From 1210 To 1240
1 rr:-='.
C2 Unclaimed Inflation: Unregulated Operator Responding to Rate Complain(
i s ,,.
C3 Inflation Factor For True -Up Period 1 f Wks I
4 Inflation Factor For True -Up Period 2 fWks I5
IC
Current FCC Inflation Factor
Module ll: Calculating the Base Rate
a b e d e
Line Line Descri tion Basic Tier 2 Tier 3 Tier 4 Tier 5
D; Curent Headend Upgrade Segmeri 11100W
Current External Costs S,—,ment $0.2422
)3 Current Caps.Method Segment S0.0 rk
Current.Iarkup.tettied Se;ment $0.0000 t
Current Channel Movemeet and Deletion. Segment $O.GCY�O
Do Current True-UpSegment $0.0;94
FCC Fern.:
Par' 2 >I c:c..:(: Ftcci
Federal Co rnunications Commission
Washington. DC 20554
Current Inflation Segment $0.09336
Base Rate [Al -D 1-D2-D3-D4-D5-D6-D7j 59.0011
Part II: True -Up Period
Module E: Timing Information
E, What Type of True -UP Is Being Performed? (Answer "1','2'. or -Y. See Instructions for a description of these types.)
S'1 go to Module I. If '2', answer E2 and E3. If '3', answer E2. E3. E4, and E5.
E2 Number of Months in the True -Up Period I
E3 Number of :Months between the end of True -Up Period 1 and the end of the most recent Projected Period
E4 Number of hfonths in True -Up Period 2 Eligible for Interest
E5 Number
_r, cks Truo-t',p Period 2 Ineligible for Interest
Module F: Maximum Permitted Rate For True -Up Period i
a b c
Basic Tier 2 Tier 3
Line Line Description
F1 Caps Nfethod Segment ForTrue-Up Period l (Wks 21
F2 Markup Method Segment ForTrue-Up Period I [Wks 3) �'0
F3 Chan fvtnnt Deletn Segment For True -L p Period L (Wks' 4!S) �'�
F4 True -Up Period 1 Rate Eligible For Inflation [D8+FI+F2+F3) 59.0011
F5 Inflation Segment for True -Up Period I [(F4•C3)-F4] $0.2021
F6 Headend Upgrade Segment For True -Up Period I [Wks 61
F7 External Costs Segment For True -Up Period I [Wks 71 $0.2459
F8 True -Up Segment ForTrue-Up Period 1 $0,0203
F9 Max Perm Rate for True -Up Period 1 [F4+FS+F6+F7+F8] $9.4693
Module G: Maximum Permitted Rate For True -Up Period 2
a b c
Linc Line Description
Basic Tier 2 Tier 3
G: Caps Method Segment For True -Up Period 2 (Wks 21
G2 Markup Method Segment For True -Up Period 2 [Wks 31
G3 Chan Slvmnt Deletn Segment For True -Up Period 2 [Wks' 4f5)
G4 TU Period 2 Rate Eligible For Inflation [D8+FS+Gl+G2+G3)
G5 Inflation Segment for True -Up Period 2 [(G4"C4)-G4)
G6 Headend Upgrade Segment For True -Up Period 2 [Wks 61
G7 External Costs Segment For True -Up Period 2 [Wks 71
G8 True -Up Segmeot For True -Up Period 2
G9 Max Perm Rate for True -Up Period 2 [G4+G5+G6+G7+G8)
Approved by DMB 3060-06s?;
4
4
e
Tier 5
e
Tier 5
I'CC
\!ic;csa6 Exacl 4 C Va,ia2
Approved by O'NIB 3060-06.35
Federal Communication Commission
washington. DC 20554
Part III: Projected Period
s-r_.3..t_ T. LT a... ldP'rmittPr1 Rate
Line
Line Description
iY1 V V 411. 1.
a b c d e
Basic Tier 2 Tier 3 Tier 4 Tier 5
I l
Caps ale al Segment For Projected Period [Wis 23
12
Markup Method Segment For Projected Period [Wks 31
$0•0000
13
Chan Mvmnt Deleln Segment For Projected Period [Wks 4/5]
$0.00
Pro). Period Rate Eligible For Inflation [D8+FS+GS+I1+I2+13j
$9.2032
_
Inflation Segment for Projected Period [(I4'C5)34]
$0.1491
16
Headend Upgrade Segment For Projected Period [Wks 61
17
External Costs Segment For Projected Period [Wks 71
$0.243
IS
True -tip Segment For Projected Period
$0.1934
19
Max Permitted Rate for Projected Period [I4+IS+I6+17+I8]
$9.7886
110
Operator Selected Rate For Projected Period
$10.01
,1ble: ThemarununrpermdiaJrarel;;tursJono/lakemlaacroun/anrmTundGabi/in•}'oumarbace.!!y'ouhaeepmsiausly'beencYdemdbylheCommission or>•orv/rxa//ran�msmgauraon;rron�.rwr�r:«u��.
t'nu are no/mile t'ed rtr'orr obh`atioa /o mate such refunds a o'en i/'lbepemvtledrne is G�gher Zhao !be conJesledra/e ory'oru'ctarenlra/e.
Certification Statement
WILLFUL FALSE STATEMENTS MADE ON THIS FORM ARE PUNISHABLE BY FINE AND/OR IMPRISONMENT
r, IS CODE TITLE 1s SECTION 1001) ANDIOR FORFEITURE (U.S. CODE, TITLE 41, SECTION 503).
I certify that the statements made in this form are true and correct to the best of my knowle a and belief. and are made in good faith.
Signature Date
Name and Title of Peron Completing this Form:
Telephone number Fax Number
FCC F:;:
�!r....::L'
Federal Communications Commission
Washington, DC 20554
Worksheet 1 - True -Up Period Inflation
For instructions, see Appendix A of Instructions For FCC Form 1240
Line
Pew
FCC Inflation Factor
101
102
103
104
105
106
107
108
109
110
111
112
113
Month 1
Month 2
Month 3
Month 4
Month 5
Month 6
Month 7
Month 8
Month 9
Month 10
Month 11
Month 12
Average Inflation Factor for True -Up
Period I
1.96%
1.96%'
1.96%
3.000,
3.00%
3.00%
2.40%
2.40%
2.40%
1.62%
1.62%
1.62%
1.0225
11.3
115
116
117
118
119
120
121
122
123
124
125
126
Month I3
Month 14
Month 15
Month 16
Month 17
Month 18
Month 19
Month 20
Month 21
Month 22
Month 23
Month 24
Average Inflation Factor for True -Up
Period 2
Approved By OMB 3060-0635
FCC Form 12-'-
Page
2»Page 1 Nlicrosof Esccl 4.0' %':r;ier, Jul; 191, -
ORDINANCE NO.
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
Federal Communications Commission
WasUagtoa, DC 20554
Worksheet 7 - External Costs
True -Up Period
For instructions, see Appcndbt A of Instructions For FCC Form 1240
Question t. For which time period aro you lilting out this worksheet^ (Put an "a" in the appropriate box.)
Question 2. How long is the first period, in months, for which rates arc being set with this worksheet?
Question 3. How long is the second period, in months, for which rates are being set with this worksheet?
Approved By ONIB 3060-0685
True -Up Period Projected Period
X
12
0 —
0
a c e
Lin. Line Description Bt csic Tler 2 Tier 3 Tier 4 Tier 5
Period 1
External Costs Eligible for Markup
701
Cost of Programming For Channels Added Prior to 5,'15194 or
After 5:15,94 Using Markup Method For Period
St,, 330.27
702
Retransruission Consent Fees For Period
50.00
70-,
Copyright Fees For Period
$10,26539
704
External Costs Eligible For 7.50'b Mark-up
S22-595 66
705
Marked Up Eternal Costs
524,290.3345
External Costs Not Eligible for Markup
719
706
Cable Specific Taxa For Period
50.00
707
Franchise Related Coats For Period
50,00
703
Commission Regulatory Fees For Period
$4,719.72
709
Total External Costs For Period
529,010.0545
710
Monthly, Pet -Subscriber External Costs For Period 1
$0.2459
Period 2
77ternal Costs Eligible for Markup
Cost of Programming For Channels Added Prior to 5!15./94 or
After 5'15.94 Using Markup Method For Period
712
Retranonission Consent Fees For Period
713
Copyright Fees For Period
714
External Costs Eligible For 7.5? o Nfarkup
715
Marked Up External Costs
External Costs Not Eligible for Markup
716
Cable Specific Taxes For Period
717
Franchise Related Costs For Period
713
Cotnntission Regulatory Fees For Period
719
Total Exlcrnal Costs For Period
720
Monthh'. Per -Subscriber External Costs For Period 2
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CATTEST:
m
7801 Pencross Ln.
Dallas, Texas 75248
February 13, 2001
Mr. Rick Moore
Information Systems Manager
City of Coppell
PO Box 478
Coppell, Texas 75019
Ms. Patricia Royal Nicks
Cable Services Manager
City of Irving
233 South Rogers Road
Irving, Texas 75060
Dear City Representatives:
Tel. (972) 726-7216
Fax (972) 726-0212
Ms. Melisa Leal
Assistant to the City Manager
City of Grapevine
PO Box 95104
Grapevine, Texas 76099
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 1, 2000.' This
is Paragon's second year to file a Form 1205 for Cities' review of its proposed changes in
equipment monthly lease rates and installation and maintenance charges since implementation of
the Social Contract provisions in 1996.2 The Cities continue to have original jurisdiction with
respect to the review and regulation of charges resulting from the Form 1205 computations.
This study does not constitute an examination 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 financial information provided by Paragon during the course of the analyses.
In its 2001 Form 1205 filing, Paragon proposes installation 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 variation, with Paragon actually charging a rate (operator selected rate or
"OSR") that is considerably less than the maximum permitted 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.
Social Contract for Time Warner Cable ("Social Contract' ), as approved by the FCC in Social Contract
for Time Warner, Memorandum Opinion and Order, FCC 95-478, released November 30, 1995, ("Social
Contract Order"),
C_
City Representatives
February 13, 2001
Page 2
The following table provides a comparison of the current rates, Paragon proposed maximum
permitted 2001 rates, and Paragon's operator selected 2001 rates:
COMPARISON OF EQUIPMENT AND INSTALLATION RATES
Paragon
Paragon
Paragon
2000 Rates
Proposed 2001
Proposed 2001
MPR
OSR
Hourly Service Charge
$29.78
$32.48
$32.48
Service
Install - New
$29.78
$43.19
$43.19
Install - Reconnection
$17.27
$17.21
$17.21
Upgrade of optional services
$17.27
$25.98
$25.98
Downgrade of optional services
$17.27
$32.48
$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
$3.39
$5.09
$4.41
Consistent with the previous Form 1205 filing, Paragon's proposed 2001 rates are based on the
components of Form 1205 filings developed for the following five Time 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 reviewed for accuracy and the appropriateness of any
computations.
SUMIN1ARY OF FINDINGS
Based on the information provided by Paragon, it appears that the primary reasons for the
01- increase in the installation and equipment rates are as follows:
City Representatives
February 13, 2001
Page 3
1. The Company experienced a significant 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
in 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 requirement of a digital
converter).
Increase in Contract Labor Expense
Most of the 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 primarily to develop the installation rates.
An analysis of the costs and associated hours related to contract labor for the last two years
showed:
• The total number of contract labor hours assigned to the equipment basket remained
stable between the 2000 filing and the 2001 filing; and
• The total contract labor costs reported in the 2001 filing increased approximately
45% from 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 labor pool has narrowed significantly given
all of the cable and telecommunications 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 in 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
with regulated equipment and installation activities.
Increase in Time Requirements for Installation 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
determine the maximum permitted rate for a particular installation activity.
The increases in time requirements appear to be primarily related to inclusion of digital service
installation activities. This is in large part due to the blending of the time requirements for
analog installation and the time requirement for digital installations. `t This blending would affect
To the extent outside contractors are used to repair and maintain remotes and converters, their hours are
multiplied by the HSC and added to the capital investment to determine the equipment rates.
I inv operators have separate installation rates for analog and digital. It appears that Paragon has
developed an average rate to be charged for either type of installation activity. v
City Representatives
February 13, 2001
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 DigitaUAddressable 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 digital/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 converter boxes in service.5
Clearly the cost per unit of the digital converters is significantly higher than the analog converter
boxes. This, coupled with the fact that customers are trading 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 two issues with respect to the calculation of the Form 1205 and the resulting proposed
rates. These are:
1. The Company used estimated costs and investment for the month of September 2000;
and
2. The proposed rate for a Truck Trip does not appear to be in accordance with the
Form 1205 maximum permitted rate as calculated.
a.) Estimated Expenses
In accordance with FCC instructions, the Company has a recent twelve-month period for
calculating its Form 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`", but instead estimated this month's amounts to
be included.
The FCC instructions are clear that the Form 1205 is intended to recovery the actual costs of
customer premises equipment and operating expenses for installation and equipment related
activities. Although using an estimate of the investment levels and expenses for the month of
September 2000 does not appear to have a major impact on the Form 1205 computations, it is not
in accordance with the FCC requirements .6 The FCC regulations do allow fora time period
other than a recent twelve-month period, but any alternative time period is subject to acceptance
by the franchising authority.
` Remember that the monthly rate for converters is derived by dividing 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.
Paragon 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. Although not a complete update of the
September information, this suggests that the estimates used were reasonable.
City Representatives
February 13, 2001
Page 5
C2 recommends that the Cities require Paragon (now AT&T) to file future Form 1205 filings
based on actual costs and not estimated costs.
b.) Maximum Permitted Rate for Truck Trip
In the letters submitted by Paragon to the Cities on or about thirty days prior to the rate increase
in January, the Company listed the current rates and the new rates for installation and equipment
rental. The new rate for a "truck trip" 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
maximum permitted rate of $21.76 (.67 hour times the HSC of $32.48).7
C2 recommends that the current rates being charged for a truck trip be lowered to the maximum
permitted rates computed on the Form 1205 as filed.
SUMMARY OF RECOMMENDATIONS
Based on the above findings and conclusions, the Cities should consider taking the following
actions:
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 maximum permitted truck trip rate of $21.76 rather than the $25.98 proposed by
the Company.
3. Provide for additional information to be submitted by the cable operator with the filing to
better clarify the reasons for major cost increases.
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 Form 1205 rates. If you have any questions regarding this report or need
clarifications as to the recommendations, please contact Ms. Connie Cannady at (972) 726-7216.
Very truly yours,
C2 Consulting Services, Inc.
It is not clear from the Form 1205 filing if the .67 is related to the truck trip of upgrade/downgrade of
ser -Vice. Clarification has been requested from Paragon. However, the truck trip, upgrade and downgrade
are all beim, 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.