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HomeMy WebLinkAboutItem 07 - Comcast CableITEM 0 1 MEMO TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL FROM: ROGER NELSON, CITY MANAGER ey, / MEETING DATE: FEBRUARY 17, 2004 SUBJECT: ORDINANCE ESTABLISHING THE EQUIPMENT AND INSTALLATION RATES CHARGED BY COMCAST CABLE COMMUNICATIONS, INC. RECOMMENDATION: City Council to consider an ordinance establishing the equipment and installation rates charged by Comcast Cable Communication, Inc. and take any necessary action. FUNDING SOURCE: No funding required. BACKGROUND: The City of Grapevine regulates basic service, equipment and installation charges billed by Comcast Cable Communications, formerly AT&T Broadband. Current Federal Communication Commission (FCC) regulations allow cable operators to file annual adjustments to their equipment and installation charges. The City Council can only set maximum permitted rates. On March 1, 2003, Comcast submitted FCC Form 1205 that is used to establish Comcast's equipment and installation charges. These charges are the maximum charges Comcast can bill for the one-year period. Comcast has the option to choose a lower rate called an operator -selected rate as long as it does not exceed the council approved maximum permitted rate. The City hired C2 Consulting Services to review Comcast's Form 1205 Filing this year. The City Council adopted Ordinance No. 2002-43 on June 18, 2002 that ordered the maximum permitted rate for the installation and equipment rate charged. Comcast had not chosen its operator selected rates this year, and staff has been working with Comcast to determine these rates. February 6, 2004 (3:16PM) This ordinance will establish the maximum permitted equipment and installation rates allowed by Comcast Cable Communications for a period of one year beginning December 1, 2003. The maximum permitted equipment and installation rates established in the ordinance will set the rates at the same rates that have been in effect since June 18, 2002. City Staff has reviewed this issue with members of the Council Utility Committee and recommends approval. I c7. February 6, 2004 (3:16PM) r asa liiff:101101F, ina M1 -1 AN ORDINANCE OF THE CITY OF GRAPEVINE, TEXAS ESTABLISHING THE EQUIPMENT AND INSTALLATION RATES CHARGED BY COMCAST CABLE COMMUNICATIONS, INC., 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 Communications, Inc. ("Comcast"); and WHEREAS, the City Council approved Ordinance No. 2002-43 setting the Maximum Permitted Rates for equipment and installation rates charged by TCI Cablevision of Dallas; 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 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. All matters stated above are found to be true and correct and are incorporated herein by reference as if copied it their entirety. Section 2. Findings. 1. On or about March 1, 2003, the City received Comcast's FCC form 1205 filing. 2. The City engaged the service of C2 Consulting Services, Inc to provide assistance in the review of Comcast's FCC form 1205 to determine the reasonableness of the proposed equipment and installation rates. 3. The City adopts the findings of C2 Consulting Services, Inc. as reflected in , their reports of May 2, 2003, and November 16, 2003, which reports are attached hereto as Exhibits "A" and "B" and incorporated herein by reference. 4. Based upon the information received from Comcast and information from C2 Consulting Services, Inc., the City concludes the rates proposed by Comcast are not reasonable. 5. The City concludes that in the absence of reasonable rates proposed by Comcast, the rates approved in Ordinance 2002-43 are found reasonable for equipment and installation rates charged by Comcast. Section 3. Conclusions 1. Comcast's submittal of the FCC from 1205 received on March 1, 2003, is hereby rejected for the reason that the proposed rates are not reasonable. 2. The following rates are found reasonable: Hourly Service Charge: $28.49 Install — Unwired Home (Aerial within 125 feet) $43.99 Install — Prewired Home (Aerial within 125 feet) $27.99 Install additional outlet — connect initial $13.99 Install additional outlet — connect separate $21.99 Other install — relocate outlet $18.99 Other install — upgrade (non -addressable) $15.99 Other install — downgrade (non -addressable) $10.99 Other install — upgrade/downgrade(addressable) $ 1.99 Connect VCR — connect initial $ 5.99 Connect VCR — connect separate $12.99 Remote control (all units) $ 0.30 Converter Box (Basic Service Only) $ 2.00 Converter Box (all others including High Definition TV (HDTV) capabilities) $ 4.80 Customer Trouble Calls $16.99 3. The following rate is found unreasonable: Digital additional outlet $5.95 Section 4. Orders for Action. Based on the foregoing Findings and Conclusions, the City hereby enters the following orders: Comcast's request for equipment and installation rates included in its 1205 filing is hereby denied. ORD. NO. 2 2. Comcast is hereby ordered to implement the foregoing rates in Section 2 (2) effective December 1, 2003. 3. Comcast is hereby order to implement the rate of $0 for the digital additional outlet effective December 1, 2003. 4. Comcast shall immediately undertake all necessary steps in accordance with applicable FCC regulations to determine if customer refunds are warranted. Comcast must provide the City with a refund liability analysis no later than thirty (30) days from the passage of this ordinance. If refunds are warranted, all refunds shall be remitted by Comcast to the appropriate customers within ninety (90) days of the passage of this ordinance. Section 5. Emergency Clause 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. Section 6. Effective Date That this ordinance shall become effective from and after the date of its passage. PASSED AND APPROVED BY THE CITY COUNCIL OF THE CITY OF GRAPEVINE, TEXAS on this the 17th day of February, 2004. MITZ"JefTow"s ATTEST: F.Al ---• Mus fel I• ORD. NO. 3 May 2, 2003 Mr. Keith Rinehart Communications Manager City of Grapevine 2000 Forest Ridge Drive Grapevine, Texas 76021 Ms. Debra Wallace Assistant Finance Director City of McKinney 222 N. Tennessee McKinney, Texas 75069 Mr. Steve Williams Director of Budget and Research Town of Flower Mound 2121 Cross Timbers Road Flower Mound, Texas 75028 Ms. Melisa Leal Assistant to the City Manager City of Grapevine PO Box 95104 Grapevine, Texas 76099 Dear City Representatives: EXHIBIT "A" Ms. Patricia Royal Nicks Cable Services Manager City of Irving 233 South Rogers Road Irving, Texas 75060 Ms. Shelli Seimer Assistant to the City Manager City of Allen One Butler Circle Allen, Texas 75013 Ms. Lynda Humble Assistant City Manager City of DeSoto 211 E. Pleasant Run Road DeSoto, Texas 75115 C2 Consulting Services, Inc. ("C2") has completed its analysis of the FCC Form 1205 submitted to the Cities by their respective Comcast affiliate ("Comcast" or the "Company") on or about March 1, 2003. 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. OVERVIEW OF THE FILING In its 2003 Form 1205 filing, Comcast proposes to significantly increase the charges for the following activities and equipment: • Additional outlet at initial time from installation to increase by approximately 14% • Additional outlet at separate time from installation to increase by approximately 12% • Non -addressable downgrade of service to increase by approximately 19% • Connect VCR to increase by approximately 14% • Customer trouble call charge to increase by approximately 20% • Basic -only converter charge to increase by approximately 296% • Non -basic only converter charge to increase by approximately 100% The above increases are based on a comparison of Comcast's 2002 Operator Selected Rates ("OSR") and the Maximum Permitted Rates ("MPR") in this filing.' The following table provides a comparison of the City's adopted 2002 rates and Comcast proposed maximum permitted 2002 rates: COMPARISON OF EQUIPMENT AND INSTALLATION RATES City Ordered Comcast Comcast 2002 Proposed 2003 Proposed 2003 MPR OSR Hourly Service Charge $28.49 $30.92 Not Filed Service Install - Unwired home $43.99 $45.81 Not Filed Install - Prewired home $27.99 $30.34 Not Filed Install - Additional connect initial $13.99 $15.98 Not Filed Install - Add. connect separate $21.99 $24.62 Not Filed Move outlet $18.99 $20.72 Not Filed Up/downgrade $1.99 $1.99 Not Filed Downgrade non -addressable $10.99 $13.10 Not Filed Upgrade non -addressable $15.99 $16.44 Not Filed Changing Tiers N/A $16.44 Not Filed Connect VCR initial $5.99 $6.82 Not Filed Connect VCR separate $12.99 14.76 Not Filed Customer Trouble Calls $16.99 $20.42 Not Filed Remotes $.30 $.33 Not Filed Basic only converters $2.00 $7.92 Not Filed Non -basic only converters $4.80 $9.67 Not Filed ---- 1 In the past, AT&T Broadband has filed Operator Selected Rates with its filing. Comcast has not included any OSRs and has stated that it will not do so until 30 days prior to rate implementation. Therefore the comparisons can only be under the assumption that Comcast will implement the MSR from this filing. Although Comcast has assumed the AT&T Broadband systems, the 2003 filing is based only on the AT&T Broadband operation prior to the merger. In fact, the financial information used in this filing is actually 10 months annualized (January -October 2002 annualized) due to the decommissioning of the AT&T Broadband financial systems as of October 2002. Comcast petitioned the FCC to allow for such estimation and received response on February 26, 2003. The FCC found that Comcast's proposal appeared reasonable, but also stated: Should this issue arise in the context of any specific rate appeal, the Commission, would, of course, have to give consideration to whatever additional information might be adduced in the course of that proceeding.2 In C2's opinion, the City has every right to challenge the reasonableness of the resulting computations from the "annualization" methodology. SUMMARY OF FINDINGS Based on a review of each of the sample "area" system Form 1205 computations, the computations of equipment and installation charges incurred at the corporate level, and Comcast responses to requests for information, C2 has separated its findings into two alternative categories: A. Alternative One — Comcast has failed to support its proposed change in equipment and installation rates. 1. Comcast has provided insufficient and sometimes conflicting information to show that the proposed "annualization" methodology is reasonable and representative of the ongoing operations of the former AT&T Broadband properties. 2. Comcast has refused to provide responses to requests for information necessary to determine the reasonableness of the proposal computations. B. Alternative Two — Comcast's proposed changes in equipment and installation rates could be adjusted as follows: 1. The rate of return used by Comcast is inappropriate. 2. The Company inappropriately included commissions for the technical, installation, dispatch, and common staff in calculating labor expense in Schedule B. 3. The employee counts at the Material Service Centers and the Customer Service Centers should be representative of going forward counts. 2 DA 03-566, released February 26, 2003. 4. Comcast inappropriately included costs for converter maintenance without including the hours. 5. Consideration should be given to adjusting the depreciation rates for converters from 3 to 5 years given the lower overall depreciation of Comcast. 6. The inventory of converters at the Material Service Centers should reflect the inventory counts for fiscal year 2001. Alternative One Discussion Al. Insufficient Supporting Documentation The FCC regulations provide a framework in which to review the reasonableness of a Form 1205 filing. To begin with, the Form 1205 instructions require that a Company file a Form 1205 annually within 60 days of the close of its fiscal year. Typically, this has been the case with AT&T Broadband in filing its Form 1205 information on March 1st of each year. Additionally, the FCC instructions provide: However, when there has been an unusual change in operations, data from a representative month may be used for the calculation of rates, subject to acceptance by the franchise authority or, when applicable, by the FCC. 3 Although Comcast has continued with the March 1 filing date, there are a few major differences: This filing is not the 2002 fiscal year information for AT&T Broadband as this company did not exist in the same form for the entire 2002 period. There potentially have been significant changes in the operations of these properties subsequent to the take-over by Comcast. In C2's opinion, Comcast must provide sufficient supporting documentation to show that the financial information and the annualization methodology are reasonable given the FCC regulations. This includes providing information that may be subsequent to the Comcast/AT&T merger which may be more representative of future costs and operations. A point of fact, the merger was complete prior to the end of the test year in this filing. A franchising authority's ability to require that an operator provide data that justifies its Form 1205 methodology is evidenced in DA 98-1642. In this case, the franchising authority denied the rate increase partially on the basis that insufficient supporting documentation was provided by the operator. The FCC found in favor of the City's position and stated: TCI also has not met its burden of justifying how its averaging methodology produces reasonable equipment and installation rates... 3 Form 1205 [Revised August 1996] Instructions for Determining Costs of Regulated Cable Equipment and Installation, General Instructions. . . .it has not submitted sufficient information to assure the City that the cost experience or costing methodology it used represents a fair determination across its systems. Given the FCC's position, it is C2's opinion that Comcast must demonstrate that not only does the 10 months annualized produces reasonable rates, but also that using the 10 months of AT&T Broadband information produces results that are representative of ongoing operations. Comcast has failed to do so. Examples of insufficient information are as follows: RFI 1-15 — Given all of the changes in the AT&T Broadband operations since October 2002, please provide a written justification that the 10 months of data used in the Form 1205 filing are representative of the continuing operations and costs. Comcast responded by referring to the letter from the FCC referenced above and presumably the statement in its preparation documentation: "October year -to -date - financial information was used because it was the last complete month under the former AT&T Broadband management structure and chart of accounts."' No additional information was provided to demonstrate that the operations of the AT&T Broadband properties have not changed significantly subsequent to October 2002. C2 asked a number of questions to determine the extent to which employee counts and expenses have changed since the merger and received essentially two standard responses: "The AT&T Broadband accounting system has been decommissioned; therefore retrieving information by each month is unattainable." "We are attempting to retrieve the data you have requested, when available we will provide as a supplement to this RFI." In addition to specific financial data, C2 requested that Comcast provide written explanation of the significant increases from the 2002 filing in employee salary, depreciation expenses, converter maintenance, gross book values etc. Comcast responses merely referred to the original computation sheets provided without including any explanation of the changes. In C2's opinion, Comcast has not justified the increases. As 4 First RFI for the City of Grapevine, dated April 16, 2003. a result, the City cannot make an informed determination that the increases are reasonable and/or representative of ongoing operations. With respect to converters, there is a noticeable drop in the number of converters in service when compared to the 2002 information (resulting in an increase in the rates). Comcast responded that the drop is due to the decline in the number of customers of 439,451. However the decline in the number of converters is 1,694,132. Even more interesting is the fact that Comcast reports this considerable decline in converters, but only an approximate 13,000 decline in the number of remotes. Again, in C2's opinion, Comcast had failed to provide sufficient information to support its case. C2 also noted that some of the responses to the requests were inconsistent with other information provided. For example, C2 requested the following: RFI No. 1-26 — Of the 20 sample systems, which GLs are still in existence in the same manner as they were for the Form 1205 analysis? Comcast response — All GLs were still in existence as of October 31, 2002 in the same manner as they were for the Form 1205 analysis.5 However, there is a hand written note on one of the workpapers that suggests that there were GL changes subsequent to the beginning of the Form 1205 analysis. The notation states: Population for sample systems was sent to Dr. Bob Hannum for sample system selection after August 2002 close. Area AW 1904 was selected as a sample system and then in September, the field eliminated AW 1904 and rolled the general ledgers in with AW 1903. Because the sample system was already selected, I kept AW 1904 and allocated the data from AW 1903 based on subscribers in the GLs that were originally put into AW 1904. In fact, there are a number of sample systems that have been determined by allocating from larger GLs based on subscribers. In these instances, the Company was unable to determine the "true" salary amounts between technicians and installers and therefore, assumed equal allocation of costs between these two categories. Since it is the percentage of salary that is ultimately used to develop the allocation of other costs in the equipment basket, Comcast's 50/50 allocation of costs (but not necessarily hours) has not been adequately supported. 5 First RFI for the City of Dallas, received March 25, 2003. A2. Refusal to Provide Requested Data Comcast's responses to requests for information were, in several cases, refusals to provide the requested material. Examples of these are as follows: RFI No. 1-13 - Provide copies of the Comcast system Form 1205 filing for 2002. Please note any differences between the approach taken by Comcast and that taken by AT&T in preparing the Form 1205 for 2002. Comcast response — The Grapevine TX FCC Form 1205 filed in 2002 was submitted by AT&T Broadband on or about March 1, 2002. Comcast did not file an aggregate, company -wide, Form 1205 in 2002.6 Based on this response, C2 asked the question a different way: RFI No. 1-16 — Provide an example of ANY OF THE Comcast Form 1205 filing for 2002. Please note any differences between the approach taken by Comcast and that taken by AT&T in preparing the Form 1205 for 2002. Comcast response — ... Comcast did not file an aggregate, company -wide Form 1205 for 2002.' And yet another way: RFI No. 1-40 — Provide a copy of ANY OF THE Comcast Form 1205 filing for 2003. If such filing is based on something other than a national level, provide the Form 1205 filing that includes systems that are geographically closest to the Grapevine System. Comcast response — Please refer to question 1205-16 [referenced above].$ Clearly, Comcast does not want to City to review its Comcast property filings. In C2's opinion, this information is reasonable in light of the fact that Comcast is now operating the former AT&T Broadband properties and the accounting systems have been merged. 6 Based on the First RFI for the City of Grapevine, dated March 25, 2003. Based on the First RFI for the City of Grapevine, dated April 16, 2003. s Ibid. Another example category deals with depreciation expense on converters. The increase in this expense is largely responsible for the significant increase in proposed converter rates. RFI No. 1-39— Provide the depreciation rates used by Comcast for the asset categories included in the Form 1205 filing. Comcast response — Please refer to Exhibit Asset Category Listing. [Presumably, Comcast believed that C2 was requesting the AT&T Broadband depreciation rates that were used in the filing as the response points only to the latter rates.]9 Asked another way: RFI No. 4-04 - Provide the straight-line depreciation rates used by Comcast (not AT&T Broadband) in its Form 1205 filing(s) for 2000, 2001, 2002 for remotes, converter 1 and converter 2. Please do not response to this question by reference to the AT&T Broadband data already provided. This question refers only to Comcast without AT&T Broadband as a component. Comcast response — The Company believes that the straight-line depreciation rates used by Comcast (not AT&T Broadband) for 2000, 2001, and 2002 are not relevant to the review of the FCC Form 1205 filing which was calculated using AT&T Broadband Books and Records January 1, 2002 — October 31, 2002 that is currently under review. 1 A related RFI: RFI No. 4-06 - ... Will the 3 -year depreciation rate continue to be the rate going forward? If not, what will the new depreciation rates be for each type of converter and remotes? 9 Ibid. 10 Based on the 4"' RFI for the Cities of Grapevine, DeSoto and Grapevine, dated April 23. Comcast response — . . . The Company has not yet determined a change to the depreciation rates that will be used going forward." Based on this last response, it appears that the Company may be considering a change, but has not yet determined what it will be. Comcast has refused to provide the Comcast property depreciation rates. However based on a review of the third quarter 2002 1OQs for both Comcast and AT&T, where the overall average depreciation rates for Comcast are significantly lower than AT&T's, a change to incorporate the Comcast rates may result in lower depreciation expense than that filed in this case. Either way, in C2's opinion, Comcast has failed to support its position. There are other examples of Comcast's failure or refusal to provide the requested information. Given the significant increases in the resulting rates from those filed in the 2002 filing, it is imperative that Comcast provide sufficient information to support its proposal. Not only that, but it is absolute that the operations of the former AT&T Broadband systems will be different going forward than as presented by the financial information through October 2002. In fact, in a recent prospectus filed with the SEC on March 14, 2003, Comcast makes the following statement: The performance of AT&T Broadband Group prior to the AT&T Broadband spin-off may not be representative of the results of Comcast Cable Communications Holdings without the other AT&T businesses and therefore is not a reliable indicator of its future results. 12 Given Comcast failure and/or refusal to provide sufficient supporting documentation for its proposed changes in equipment and installation rates, it is C2's opinion that the City should consider disallowing any changes in the existing rates approved in 2002. Alternative Two Discussion Although C2 recommends that the City consider disallowing the requested increase in equipment and installation rates, C2 has developed estimated rates assuming that the Comcast reported information is reasonable. This alternative is provided only to give the City an option to complete denial of the Comcast rate filing. 11 Ibid. 12 Note that Comcast Cable Communications Holdings is formerly AT&T Broadband Corp. B1. Inappropriate Rate of Return Based on the FCC regulations, Comcast is allowed to earn a return on the capital investment made related to regulated equipment and installation activities. More specifically, the Form 1205 allows for the development of a before tax rate of return ("ROR"), and its application to the unrecovered balances of vehicles, tools, maintenance facilities, and customer premises equipment used to receive the basic service tier. One component of the ROR is the interest deductibility factor found on Schedule A, Line G4d. The importance of this factor is that it is used to determine the Company's effective tax rate for purposes of "grossing -up" the FCC presumed applicable after tax rate of 11.25%.13 The interest deductibility factor is computed by dividing the Company's actual interest expense by the total net assets of the Company for the period in question. During the review, C2 determined that Comcast has not used the net assets, but rather had used the gross assets of AT&T Corp. as of September 2002. The Company admits that this was an oversight and claims: The impact of the miscalculation is seen in the converter MPRs. Basic Only converter MPR calculated a $0.03 reduction from the original MPR, which changed from $7.92 to $7.89. The All Other converter MPR also calculated a $0.03 reduction from the original MPR, which changed from $9.67 to $9.6414 However, Comcast fails to identify the impact of using the higher interest deductibility factor (and thus higher rate of return) in each of the 20 sample system Form 1205s. Using the net asset computation in these filings, reduces slightly the proposed Hourly Service Charge ("HSC"). C2 has computed the alternative calculation using the net assets of AT&T Corp. which changes the rate of return from Comcast's proposed rate of 16.48% to 16.22%. However, C2 points out that this information is not representative of the going forward operations as AT&T Corp. no longer has anything to do with the former AT&T Broadband properties. An alternative is to use the computation used in the Comcast filings, but as mentioned above, the Company would not provide this information. Additionally, even Comcast Cable Communications, Inc. points out in its third quarter 10Q that: 13 Second Report and Order, First Order on Reconsideration, and Further Notice of Proposed Rulemaking, FCC 95-502, released January 26, 1996, paragraph 10. 14 Response to RFI No. 3-3 for the Cities of Grapevine and DeSoto, dated April 14, 2003. '` Subject to the closing of the AT&T Broadband transaction, Comcast will have a substantially higher amount of debt, interest expense and capital expenditures at the combined company. Therefore, even the current Comcast factor may not be reasonable depending on the company level at which the interest deductibility factor has been determined. 132. Inclusion of Commissions for Technical , Installation, Dispatch, and Common Staff Upon inspection of the supporting documentation provided by Comcast with respect to labor costs, C2 noted that the amount of labor expense allocated to the equipment basket includes commissions for technical, installation, dispatch, and common staff. Based on the FCC instructions, cable operators should identify the total labor expense and then allocate a portion of such expense based on installation and repair activities related to receiving the basic service. It is not clear that these "commissions" are related to the provision of basic service. If such were the case, then some portion of the commissions paid to marketing representatives and other staff not allocated to the equipment basket would apply. C2 requested that the Company provide a commission structure for each of the selected staff categories. As of the writing of this report, Comcast has not provided this data.15In C2's opinion, these commissions should not be included in that they appear to be given as a result of staff being able to "sell" other levels of service. The equipment basket is only to be related to the basic service and not other tiers or individual programming. B3. Adjustment to Common Staff Head Counts The AT&T Broadband Material Service Centers are located in Seattle and Chicago and essentially maintain the common asset inventories. The Customer Service Center is in Denver. The employee counts were provided by month for the 10 month period. The number of employees at the MSC dropped from 15 employees in January 2002 to 3 in October 2002. The CSC had 350 employees in January 2002 and 295 in October 2002. C2 requested that Comcast provide the current number of employees at each of the above locations that are only serving the former AT&T Broadband properties (since this filing is only related to these properties' collective costs). As of the writing of this report, Comcast has not provided this data. 15 This request received the response, "We are attempting to retrieve the data you have requested, when available we will provide as a supplement to this RFI." Additional supporting documentation is necessary to show that the 10 months annualized is reasonable. Given that the number of employees at each of these locations continued to decline over 2002, it does not appear that annualizing the existing data will result in a representative going forward amount. Therefore, C2 recommends that the common expenses and associated hours be adjusted to reflect the level of employees as of the end of the period. B4. Converter Maintenance Expense Based on the information provided with respect to the twenty sample systems, and as discussed above, Comcast merged several of the General Ledgers ("GL") included in the sampling by its consultants. In several of these cases, there were contract converter maintenance costs allocated to the sample system, but no contract hours. In other cases where there was no allocation from "rolled -up" GLs, the total contract maintenance expense was used to determine contract hours. Therefore, without additional information concerning the associated hours, C2 recommends that the converter maintenance costs in those systems without associated hours be removed. This adjustment, in combination with the change in calculation discussed in B1 through B3, results in an HSC of $29.82 compared to the filed HSC of $30.92; a 3.6% reduction. 16 B5. Change In Depreciation Expense AT&T Broadband changed its depreciation rates for converters from 3% to 5% in early 2000. However, now that Comcast has purchased these assets, it is unclear as to what the going forward depreciation rates will be. As discussed above, Comcast has refused to provide the requested information and has been vague as to whether the Company plans a change in the rates. Based on a review of the total company average depreciation (as a percentage of gross plant and equipment) it appears that Comcast has lower depreciation rates than AT&T. Therefore, as a possible alternative computation, C2 has estimated a restatement of converter depreciation expense, accumulated reserve, and deferred income taxes to reflect a five-year useful life. B6. Change in Inventory Counts 16 The current approved HSC is $28.49. Therefore, the increase would still be approximately 4.7%.Comcast filed for an approximate 8.5% increase. t , AT&T Broadband has included common assets in the form of converter and remote If inventories in prior cases. When comparing the 2001 with this year's filed 2002 inventory, C2 noted that the total converter inventory count had increased by over 36%. When asked about the changes in inventory, Comcast merely responded with reference to the numbers provided with no further explanation. Additionally, Comcast has been unable to provide the requested data concerning the extent to which these common locations only serve customers of the former AT&T Broadband systems or some other combination of customers. Given the significant increase in converter counts (not included in the "in-service" counts) with significant increases in capital expense (included in the asset amounts), it is C2's opinion, that there should be adjustment to the number of converters in service. Therefore, C2 moved the additional inventory from "surplus" to "in-service." The combined results of this adjustment, the adjustment to depreciation, and the lowering of the HSC is to reduce the converter rates from $7.92 to $5.74 for converter 1 and from $9.67 to $7.39 for converter 2. SUMMARY OF RECOMMENDATIONS Based on the above findings and conclusions, the Cities should consider taking the following actions: 1. Deny the requested change in equipment and installation rates filed by Comcast. 2. In the alternative, adopt equipment and installation rates that allow for the adjustments identified under Alternative Two and summarized on Exhibit A. C2 appreciates having this opportunity to work with the Cities 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. EXHIBIT "B" �ONSULTING SERVICES, INC. 7801 Pencross (922) 726-7216 Dallas, Teras 25248 (972) ?26-0212 (fax) ffummews To: Cable Coalition Members From: Connie Cannady — C2 Consulting Services, Inc. Date: 11/16/03 Re: Form 1205 Rates for Equipment and Installation At the end of October, Comcast provided notice of its proposed changes in several unregulated services, HDTV converters, and digital additional outlet monthly fees. It is C2's understanding that Comcast does not intend to change the equipment and installation rates established by the Cities during the 2002 review. Therefore, the Cities now have the Operator Selected Rates ("OSR") that we have been waiting for and can take final action on the Form 1205 filing submitted in March 2003. As you recall, the report submitted to you by C2 in May 2003 concluded that the Company had failed to satisfactorily support its Form 1205 filing. One of the major factors in not taking immediate action on the Form 1205 filing was that the Company had not provided its OSRs. In my opinion, the City Council would have been lacking critical information to make a fully informed decision. Therefore, I recommended waiting until the OSRs were known before rendering a final position on the filing. At the end of May 2003, the Company provided comment to the original Form 1205 report and argued that it had supported its computations in large part because of "the sheer volume of material it had provided to C2 Consulting." Unfortunately, it is not a matter of the quantity, but the quality of the information provided that continues to be lacking. Comcast continues to take the position that its historical operations by AT&T are not to be questioned on the basis of whether such costs are representative of ongoing operations. Only that such costs are to be recovered in a future period, Clearly, the FCC did not provide for absolute recovery of costs or it would have developed a true -up for the equipment and installation rates. Overall, in its response, Comcast did not provide any additional information or insight to satisfy the underlying conclusion by C2 that the Form 1205 did not meet the standards of reasonableness. With respect to the new proposal, there are two issues that need to be addressed. First is the Company's proposal for HDTV converters. The rate is stated to be $5.00 per month. In C2's opinion, the Company should not be allowed to charge a converter rate that is different from the rates charged to other converter subscribers ($4.80). Since the Company is not going to change the $4.80 rate, and the current Form 1205 should be denied in its entirety, the $4.80 should continue to apply to all non -basic only converter rentals. 17 The second issue is the proposed monthly charge for additional digital outlets. In FCC 93-428, the Commission found that there was no need to provide for monthly additional outlet charges as operators could not show that there were actual additional costs for providing the service through such outlets. However, the installation charges were allowed for any additional outlets at cost. In the same order, the Commission did say that with supporting documentation submitted by the operator to show (essentially on a cost of service basis) that there were additional costs incurred for each additional outlet on a monthly basis, the Commission would reconsider. Without such a showing, the Company's proposed $5.95 per month for additional digital outlets should be disallowed. Given that C2 continues to be of the opinion that Comcast has failed to support its current filing, and given that Comcast has now provided the OSRs to complete the required information on actual charges, C2 makes the following recommendations: The City should adopt a written decision that sets aside the Form 1205 as filed and reaffirms the 2002 rates as the approved rates for the 2003/2004 rate period. The effective date for such rates should be on or about the time of the final ordinance. " The Company could have filed for a new piece of equipment rate under a separate Form 1205, Schedule C, but has stated that it has already included the costs for the HDTV converters in its current Form 1205 non -basic only category. • The ordinance should specifically state that such rates shall be set for a period of one year from the effective date. • The ordinance should specifically state that all non -basic only converters, inclusive of HDTV and other recorders, will have a rate of $4.80 per month. • The $5.95 additional digital outlet monthly charge should be disallowed. If you have any questions, please call me at 972.726.7216.