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HomeMy WebLinkAboutItem 08 - Comcast CableMEMO TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL FROM: ROGER NELSON, CITY MANAGER MEETING DATE: FEBRUARY 17, 2004 SUBJECT: ORDINANCE ESTABLISHING THE MAXIMUM PERMITTED BASIC SERVICE TIER RATES CHARGED BY COMCAST CABLE COMMUNICATIONS, INC. RECOMMENDATION: City Council to consider adoption of an ordinance establishing the maximum permitted basic service tier rates charged by Comcast Cable Communications, Inc., and take any necessary action. FUNDING SOURCE: No funding required. BACKGROUND: On March 1, 2003, the City of Grapevine received Comcast's FCC Form 1240 filing. The filing requests an increase to $11.18 from $10.32 (an $0.86 increase). The basic tier includes 29 channels and, under the Federal Communications Commission rules, is the only rate regulated by the City Council. Upon receipt of this request, the City asked Connie Cannady of C2 Consulting to review the filing. Attached Exhibit A is Ms. Cannady's recommendation to allow the increase to $11.18. Her recommendation is based upon the following factors: ■ Form 1240 "true -up" rate was $0.75 higher than the average rate charged to subscribers during the true -up period. ■ Comcast is requesting an approximate 20% increase in programming costs in the projected period. ■ Comcast is requesting an increase because the net new amount of channels in the basic service increased by two, from 27 to 29. February 6, 2004 (3:19PM) On The Utility Committee has reviewed this request along with Staff, and recommends that the basic rate increase from $10.32 to $11.18. c7. February 6, 2004 (3:19PM) AN ORDINANCE OF THE CITY COUNCIL OF THE CITY OF GRAPEVINE, TEXAS ESTABLISHING THE MAXIMUM PERMITTED BASIC SERVICE TIER RATES CHARGED BY COMCAST CABLE; 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 ("Comcast"); 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 basic service rates and add-on rate for basic service; 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 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, THAT: 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: On or about March 1, 2003, the City of Grapevine received Comcast's FCC Form 1240 filing. 2. The City engaged the services of C2 Consulting Services, Inc. to provide assistance in the review of Comcast Form 1240 to determine the reasonableness of the proposed basic service tier rates. 3. The City adopts the findings of C2 Consulting Services, Inc. as reflected in their reports of May 1, 2003, and November 10, 2003, which are attached hereto as Exhibits "A" and "B" and incorporated herein by reference. 4. Based upon the information received from C2 and Comcast, the City concludes that the rate of $13.89 as the maximum permitted rate for the Form 1240 is reasonable. 5. The City accepts the proposed operator selected rate of $13.95 for the total basic service rate is reasonable. Section 3. Conclusions: The City has an obligation to timely act upon the pending rate application consistent with current FCC rules and regulations. The City, in adopting this ordinance, does not approve of Comcast's rate methodology. Further, the City does not waive the right to raise any issue regarding the basic service rate levels for past or future Rate Orders or appeals. This ordinance does not establish any precedent with respect to the benchmark level for the basic service rates. Section 4. Orders for Action: Based on the foregoing Findings and Conclusions, the City hereby enters the following orders: The maximum permitted basic service rate of $13.89 for the Form 1240 is hereby ordered. 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 immediately upon passage. 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. ATTEST: FTITNNMOVIN� �00� EXHIBIT "A" May 1, 2003 Ms. Melisa Leal Assistant to the City Manager City of Grapevine PO Box 95104 Grapevine, Texas 76099 Dear Ms. Leal: C2 Consulting Services, Inc. ("C2") provides the following report concerning a review of the FCC Form 1240 submitted to the City of Grapevine, Texas (the "City") by TCI Cablevision of Texas, Inc. ("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 According to the information provided by Comcast, the number of basic service channels increased from twenty-seven (27) to twenty-nine (29) during the true -up period. Four channels were deleted in August 2002, but six channels were added.' No additional changes are proposed through May 2004. Comcast has filed a Maximum Permitted Rate ("MPR") for the Form 1240 of $11.18; $0.86 higher than the current rate charged of $10.32, and $0.37 higher than the City adopted 2002 MPR for the Form 1240 of $10.81. Unlike previous filings by AT&T Broadband, the Company did not file an Operator Selected Rate ("OSR"), but has indicated that it will do so prior to rate implementation. Therefore, at this time, C2 can not accurately state that the proposed rates are for any time period other than the filed Projected Period of June 1, 2003 to May 2004.3 There are four major factors that explain Comcast's proposed change in the MPR for basic service: ' C2 notes that the filing has the Company name as TCI Cablevision of Texas, Inc. even though the operating company is now Comcast. 2 The channels deleted from basic service were Hallmark, Court TV -E, EWTN, and a shared channel between Bravo and Access. The added channels were TBS, WGN, KTAQ, SHOPNBS, LOCWET, and a leased access channel. 3 Although asked, the Company has refused to provide its planned date of implementation. I . The Form 1240 true -up rate was approximately $0.75 greater than the average rate charged to subscribers during the true -up period. This results in an increase that is built into the computation. When interest is added, the final increase to the current rate is approximately $0.84; 2. The first factor is somewhat offset by the reduction of last year's true -up amount of $0.54; 3. Comcast is requesting an approximate 20% increase in programming costs in the projected period, (an increase in part due to the changes in channel line-up); and 4. Comcast is requesting a "mark-up" for the net two new channels added to the basic service line-up. ANALYSIS OF THE FILING Project Objectives and Activities The project objectives are three -fold: 1. Assessment of the completeness of the filings with regard to the information and documentation that must be filed with the City. 2. Assessment of the reasonableness of the proposed computations in light of City's prior rate decisions, FCC regulation, recent FCC rulings, and rate treatment in other similar jurisdictions. 3. Assessment of the reasonableness of the proposed computations in light of the system specific costs and subscriber data. Given these objectives, C2 conducted the following project activities: • Review of the filing to assess the completeness based on the FCC Form instructions • Review of the filing to identify any issues with respect to the data and/or methodologies employed by Comcast • Submission of follow-up data requests and subsequent review of Comcast's responses • Development of potential alternatives available to the City in establishing maximum permitted basic service rates. Summary of Findings C2 identified four main issues with respect to Comcast's proposed computation of the basic service rate. These issues are: • Comcast incorrectly computed its FCC User fees based on the FCC order; • Comcast has not supported its requested increases in programming costs; • Comcast has inappropriately included an interest charge on its decision to delay the 2002 rate increase until July 2002; and • Given the above changes, the inflation factor should be refreshed in accordance with FCC rules. 1. Incorrect Computation of FCC User Fees One of the components of the external costs is the regulatory fee paid to the FCC. In the past AT&T Broadband has computed the amount of the FCC User fee based on the sum of monthly rates times the number of subscribers in that month.4 In last year's rate review, C2 noted that the actual payments made each September to the FCC by the cable operators are computed by multiplying the FCC approved annual rates per subscriber (not monthly) times the number of subscribers as of December of the previous year. In the instant filing, Comcast is proposing to continue the computations used by AT&T Broadband even though the error in the computation was brought to the attention of AT&T Broadband during the 2002 rate review. More specifically, for the September 2002 payment (which is included in the true -up period), FCC issued a Public Notice on August 5, 2002 which established the annual payment per subscriber at $0.53. On page 7 of this notice: A system's total subscriber fee can be determined by multiplying $0.53 times the number of subscribers as of December 31, 2001. In C2's opinion, the methodology employed by Comcast to compute FCC User fees is not entirely accurate. The amount reported on Worksheet 7 for the true -up period should be computed by multiplying $0.53 times the December 2001 subscriber counts. Additionally, the projected period amount should be computed by multiplying $0.53 times the December 2002 subscriber counts. The result of changing the FCC User fee computations is to reduce Comcast's proposed MPR by less than $.01. 2. Unjustified Programming Expense Based on the Form 1240 formulae, programming expenses paid to outside programmers are to be trued -up and projected for the new rate year. On the Grapevine basic service tier, there are five channels that Comcast reports as requiring additional programming costs be included in the rate development. Comcast proposes to increase the average programming cost per subscriber by over 20% between the true -up period and the projected period. In order to assess the reasonableness of the programming cost increases, C2 submitted the following request for information: Provide supporting documentation used for the development of the programming costs shown on Attachment 4 to the filing and used in the development of costs on Worksheet 7. Include in your response actual invoices/correspondence/notification, which supports the amount directly, or indirectly assigned as well as programming costs by channel. Be sure to include an explanation of any impacts on the actual and/or projected costs resulting from the merger. The Company responded by providing an internally generated schedule with nothing more than numbers that added to the information included on Attachment 4 in the filing. The information included a breakdown by channel, but no contractual supporting documentation. 4 Generally, the monthly rate has fluctuated between $.03 and $.05 per subscriber per month. During a 2001 rate review, C2 requested that AT&T Broadband provide the same information and was given actual contractual information by channel. This information included costs per subscriber through 2002. Without the same supporting documentation in this filing, particularly in light of the possible changes in costs subsequent to the merger, it is C2's opinion that Comcast should not be allowed the unsupported 2003 and 2004 proposed cost increases (or new costs not previously supported). The effect of adjusting the programming costs reduces Comcast's request by approximately $0.05. 3. Unjustified Interest Expense The Form 1240 methodology provides for the inclusion of interest on any over/under-recovery determined by means of the true -up of previously projected costs. Interest is computed at the FCC approved assumed cost of capital rate of 11.25%, which, due to the formulae, yields an effective interest rate of 11.57%. In the case of under -recovery, the interest inures to the benefit of the Company; in the event of over -recovery, the interest becomes an additional reduction to the rates. What makes the instant filing different from past filings is that Comcast's predecessor AT&T chose not to implement the 2002 rate filing on June 1, 2002 (the beginning of the rate year), but rather waited an additional month (July 1, 2002). Therefore, AT&T chose not to implement its true -up as quickly as FCC regulations allow; within 90 days of the filing. The regulations provide that an operator may delay the implementation of certain cost increases, plus any interest that has accrued up to the time the operator was entitled to put the increase into effect. If the operator chooses to delay the increase, the operator can recover this amount at a later time, but any additional interest on these costs ceases to accrue. As stated by the FCC in its Order:5 "... this policy ensures that where an operator makes a business decision to delay a rate increase, subscribers are not required to pay for the cost of the delay." In C2's opinion, because AT&T was entitled to put its 2002 rate into effect on June 1, 2002 (pending any City review), the Company should only be allowed to recover the difference between the rate actually charged in June 2002 and the "true -up" rate, with no additional interest. Adjusting the Company's proposed interest expense has a less than $0.01 impact on the resulting rate. 4. Refreshing the Inflation Factor The fourth issue relates to the inflation factor used for both the true -up period and the projected period. The Form 1240 methodology allows for an inflation adjustment to be projected for each rate year. Such projection becomes part of the 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 Comcast's current Form 1240 filing, the latest published inflation factor was for the third quarter 2002. Since Comcast's true - 5 FCC Order 95-397, paragraph 80. 6 FCC Form 1240 Instructions, Part 1: Module C [Revised July 1996]. up period is from December 2001 through November 2002, the inflation factors used were the fourth quarter 2001 and the first, second and third quarter 2002. The third quarter factor of 1.02% continued to be used for the fourth quarter 2002 component of the true -up period. Additionally, this third quarter factor was used for the entire projected period. However, on April 2, 2003, shortly after Comcast fled its current Form 1240, the FCC published the 2002 fourth quarter factor of 1.78%. The FCC has found: Typically, if the inflation factor used is the only issue found in a franchising authority's review of a Form 1240 fling, the FCC has found that the calculation should include the most recent data available at the time the filing was made.' If the franchising authority finds that 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 fling. 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: This adjustment required that we refresh Operator's inflation factors Therefore, because C2 is recommending that other adjustments be made to Comcast's fled Form 1240 computation, the true -up period inflation factor should be refreshed to include the fourth quarter factor. With respect to the projected period, the rules state that the latest published factor is to be used. Therefore, in C2's opinion, the inflation factor of 1.78% should also be used for the projected period in order to avoid potentially considerable underpayment in next year's fling. The impact of making the inflation factor adjustment is to increase Comcast's proposal Form 1240 basic service rate by approximately $0.12. ADDITIONAL ISSUE One underlying issue that should be raised is the fact that Comcast has not declared an Operator Selected Rate for this year's fling. As stated above, it appears from the filing that the $11.18 proposed Maximum Permitted Rate will be charged (if approved). Based on information received from Company representatives, the Company has yet to decide what the OSR will be and has not finalized any plans to notify subscribers of any basic service rate change.' These circumstances are significant for several reasons. First, based on FCC regulations, the Form 1240 fling is to be filed no later than 90 days prior to the planned implementation of the rate proposed. Based on the March 1 fling, this would indicate a June 1 date. However, according to the Company, a June 1 implementation date may not occur. This brings up another concern. Although the 90 day requirement is the minimum time, and companies can choose to file earlier than 90 days in advance, the Projected Period is supposed to reflect the period during which the company can recover projected changes in rates. Comcast has 7 See Order, DA 97-1852, released August 29, 1997, paragraph 10. 8 Such notification must be made at least 30 days prior to implementation. identified an increase of $0.86 and a Projected Period of June 1, 2003 through May 31, 2004. If the Company does not implement its rate change by June 1, then, under the FCC formulae, Comcast will likely accrue interest on any unrecovered amounts at an average rate of 11.57%. 9 Clearly, this is not the intent of the regulations to allow companies to file Projected Periods that begin before their plans to implement the rate increases. Unless the Company is forthright in providing the City and subscribers a planned implementation date, and unless such date is within 30 days of the Projected Period identified in this filing, the City may want to consider having the Company provide updated information prior to any final approval of a rate change. Alternatively, the City should clearly disallow any interest on the true - up of those months from June 2003 to the chosen Comcast implementation date in the 2004 rate filing. SUMMARY OF PRELIMINARY RECOMMENDATIONS Based on the above discussion, the City should consider the following: Given the summation of C2's analysis, and the fact that the change in the inflation factor more than negates the impact of all other adjustments, C2 recommends that the City approve the proposed Form 1240 MPR of $11.18. However, C2 recommends that if the Company does not implement this rate on or about June 1, 2003, it should not be allowed to accrue interest on any under -recovery for subsequent months where the rate change is not implemented. C2 greatly appreciates this opportunity to assist the City of Grapevine in its review of the Form 1240 filing. If you have any questions concerning these findings and recommendations, please contact Ms. Connie Cannady at 972-726-7216. Very truly yours, C2 Consulting Services, Inc. 9 This issue is discussed above. EXHIBIT "B" MONSULTING SERVICES, INC. 7 801 Pen cros s Dallas. Texas 25248 To: Jennifer Hibbs — City of Grapevine From: Connie Cannady — C2 Consulting Services, Inc. Date: 11/10/03 Re: Basic Service Rate Update (9 r 2) 726-7216 (9?2) 226-0212 (fax) As you recall, I issued a report in May 2003 concerning the basic service rate Form 1240 filing. In that report, there were several issues discussed, one of which was the insufficient supporting documentation for the increase in programming costs. At that time, I committed to follow-up with the Company for additional information and entered into a confidentiality agreement with Comcast to obtain such support. Using the additional information provided by Comcast with respect to the Grapevine system, I computed the revised programming costs shown on Worksheet 7 of the attached Form 1240. The effect of using the actual billings provided as well as future rates noted within the documents is to reduce Comcast's request by approximately $0.11. Much of this reduction is due to the fact that Comcast still did not provide 2003 and 2004 supporting documentation for three of the four channels on which programming costs apply. Other changes have occurred since the original report that must be taken into consideration. First, the FCC user fee has been increased from $0.53 per subscriber to $0.66 per subscriber for the 2003 payments. Therefore, I have increased the FCC user fee for the projected period in the filing. This increases the rate by approximately $0.01. Also, the inflation factors as published by the FCC have been updated to include the first and second quarter of 2003. On July 9, 2003, the first quarter 2003 factor was published at 2.39% with the second quarter 2003 factor published on October 7, 2003 at 1.0155%. Although the rules state that the latest published factor is to be used which would be the lowest rate of 1.0155%, it is my opinion that a blended rate of the quarters that will be included in next filing's true -up is more reasonable. I have used the latest three factors for their respective months and used the last factor of 1.0155% for the months not yet known in the 2003 true up period. This results in my recommended projected period inflation factor of 1.42% The impact of making the inflation factor adjustment is to increase Comcast's proposed Form 1240 basic service rate by approximately $0.06 instead of the original increase of approximately $0.12 noted in the May 2003 report. With respect to the Operator Selected Rate ("OSR") issue noted in the report, it is clear from the recent rate proposal that Comcast does not intend to change its current basic service rate of $10.33. However, the Company still has not submitted a Form 1240 with this rate identified. In a recent FCC ruling, the FCC found that a Form 1240 filing without the OSR rate identified on the form is considered "facially incomplete." In paragraph 15 of DA 03- 3127, the FCC found: On the same form, however, each company also justified a higher rate, its MPR, and left blank the line for the OSR... Each Form, lacking all the information required on it, arguably was "facially incomplete" and entitled each City to demand that the company fill in Line I10. Under the rules, incomplete rate forms toll the review process if the local franchising authority is unable to proceed with the review. Neither City, however, requested that the OSR be provided or otherwise contested the Form 1240 that had been filed with it. Given this finding, it is my opinion that the City could still consider the Form 1240 to be facially incomplete until the OSR is filled in and refiled, thus tolling the review period. Alternatively, we can assume that the notification of October 30, 2003 corrects this problem by providing the OSR for the instant Form 1240 filing. Given these updates in combination with the issues originally discussed, I make the following recommendations: • Adjust the FCC User fees to reflect the computation required by the FCC for payment remittance. • Adjust subscribers to reflect the historical information. • Adjust the programming expense to reflect only those costs that have been supported by contractual information provided. • Adjust the interest expense to exclude interest on any underpayment for June 2002. ■ Refresh the true -up period inflation to include the actual fourth quarter inflation factor. Refresh the projected period inflation factor with a blended rate using the fourth quarter 2002 and the first and second quarter 2003 inflation factors. ■ Consider a Form 1240 MPR of $11.14 per subscriber per month instead of Comcast's proposed $11.18. ■ Accept the proposed $10.33 rate as reasonable given that it is below the Form 1240 rate of $11.18.10 If you have any questions, please call me at 972.726.7216. 10 The current rate of $10.32 included a $0.04 FCC user fee when established in 2002. However, since the i FCC user fee has been increased, I have anticipated that the Company will charge a $0.05 fee to be added to the $10.28 shown on the October 30, 2003 notice.