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HomeMy WebLinkAboutO-1960-7-01ORDINANCE NO. 1960-7-01 ' AN ORDINANCE OF THE CITY COUNCIL OF THE CITY OF ALLEN, COLLIN COUNTY, TEXAS, ESTABLISHING MAXIMUM RATES THAT AT&T CABLE SERVICES MAY CHARGE ITS ALLEN CABLE TELEVISION SUBSCRIBERS FOR PROGRAMMING COSTS, EQUIPMENT AND INSTALLATION; FOR ORDERING REFUNDS; PROVIDING A SEVERABILITY CLAUSE; PROVIDING A REPEALING CLAUSE; PROVIDING A PENALTY OF FINE NOT TO EXCEED THE SUM OF FIVE HUNDRED DOLLARS ($500) FOR EACH OFFENSE; AND PROVIDING FOR AN EFFECTIVE DATE. WHEREAS, the City of Allen, Texas (the "City"), is the Grantor of a Franchise Ordinance executed on or about July 20, 1995, by and between the City of Allen and AT&T Cable Services ("AT&T'); and, WHEREAS, the City pursuant to the Cable Consumer Protection and Competition Act of 1992 (the "Cable Act") and the rules and regulations adopted thereunder by the Federal Communications Commission (the "FCC"), is certified to regulate the rates for the basic cable service tier and related equipment; and, WHEREAS, as local regulator of rates for the basic service tier, the City may within one year of receipt of proposed rates make a rate ruling on the proposed rates submitted by AT&T to be charged to subscribers of the basic service tier; and, ' WHEREAS, the City has reviewed the proposed rates submitted by AT&T and desires to make a rate ruling. NOW, THEREFORE, BE IT ORDAINED BY THE CITY COUNCIL OF THE CITY OF ALLEN, COLLIN COUNTY, TEXAS, THAT: SECTION 1. "FINDINGS: The City of Allen, Texas, finds as follows: L The City is the Grantor of a Franchise Ordinance executed on or about July 20, 19959 by and between the City and AT&T. 2. In accordance with the applicable provisions of the Cable Consumer Protection and Competition Act of 1992 and the rules adopted by the FCC, the City has undertaken all appropriate procedural steps to regulate the basic cable service tier and related equipment. 3. On or about Match 1, 2001, the City received AT&T's FCC Form 1205 and Form 1240. 4. The City bias engaged the services of C2 Consulting Services, Inc., to provide assistance to the City for review of AT&T's FCC Form 1205 and Form 1240. 5. On or about May 2, 2001, C2 Consulting Services, Inc., submitted a final report regarding a review of AT&T's FCC Form 1205. I6. On or about May 2, 2001, C2 Consulting Services, Inc., submitted a final report regarding a review of AT&T's FCC Form 1240. 7. On or about June 15, 2001, the City received additional information from AT&T concerning specific findings noted within C2 Consulting Services' final reports. ' 8. Based upon information received from AT&T, the calculations and recommendations from C2 Consulting Services, Inc., and the deliberations and advice of the Cable TV and Telecommunications Advisory Committee, the City makes additional findings regarding to FCC Form 1205 and FCC Form 1240 filed by AT&T, as set forth in the reports of C2 Consulting Services, Inc., which are attached hereto as Exhibits "A," "B." and "C" The City must act upon the pending rate request consistent with current FCC rate rules and regulations." SECTION 2. "CONCLUSIONS: The City of Allen, Texas, concludes as follows: 1. Programming Rates. The City concludes that the maximum permitted rate for the current basic service tier is $12.56. (This rate includes a Form 1240 rate of $11.37, plus a Form 1235 rate of $1.19). 2. Installation and Eauimment Rates (Form 1205). The City approves AT&T's operator selected rates, and the City concludes that the permitted rate for hourly service charges and other installation and equipment rates shall be as outlined in Exhibit "D" attached hereto and incorporated herein for all purposes. 3. The City concludes that AT&T should ensure that future filings consider the adopted ' findings, as set forth in Exhibits "C" and "D." 4. The City has an obligation to act timely upon the pending rate application consistent with current FCC rales and regulations. However, if the FCC alters the benchmark calculations resulting in a lower reasonable rate for Allen subscribers, the City bas an obligation to its subscribers to reconsider the pending analysis consistent with such changes the FCC may make in its regulations." SECTION 3. "ORDER FOR ACTION: Based upon the foregoing findings and conclusions, the City hereby orders the following: Pursuant to current FCC regulations, from the date of this order and until further order of the City, AT&T shall be permitted to charge a rate for the basic service tier, exclusive of any franchise fee but inclusive of the FCC regulatory fee, of not more than $12.56. This basic programming rate is comprised of a maximum permitted rate for the basic service tier (Form 1240) of $11.37, with a maximum permitted rate for system upgrade (Form 1235) of $1.19. 2. Pursuant to current FCC regulations from the date of the order and until further order of the City, AT&T shall be permitted to charge (exclusive of any franchise fee) an hourly service charge of not more than the amount ad forth in Exhibit "D," and AT&T shall be permitted to charge for installation services and leased customer ' equipment in the amounts set forth in Exhibit "D," attached to this Ordinance and incorporated as if fully set forth herein. Ordinance No. 1960.7-01, Page 2 3. The City hereby waives, for this rate order only, the requirement for thirty (30) day prior written notice to subscribers required by the City's Cable Communication Ordinance. 4. AT&T shall immediately undertake all necessary steps, in accordance with applicable FCC regulations to provide refunds to any subscribers who have been overcharged since July 1, 2001, based upon the difference between AT&T's current equipment and installation charges and the permitted equipment and installation charges approved herein. 5. AT&T shall take into consideration the City's findings when developing future filings for rete changes 6. AT&T shall provide the City evidence the order for actions "1" through "5" above have been complied with and that all refunds have been properly made in accordance with the Cable Act and applicable FCC regulations. 7. This Ordinance shall not be reconsidered should any further analysis pursuant to future FCC rules and regulations result in high rates to subscribers, unless such future FCC regulations mandates that the City order such an upward adjustment. 8. The City requests that AT&T continue to provide additional information when filing its FCC Form 1205 that demonstrates AT&T's quality control in the data collected in its aggregation of costs. ' 9. AT&T agrees to consider future FCC rulings with regard to the Sunset provision of Section 76.922(g)." SECTION 4. In adopting this Ordinance, the City Council of the City of Allen, Texas, is not approving or acgurescing many way whatsoever to the cost data and/or methodologies not specifically addressed in this Ordinance. Furthermore, the City Council of the City of Allen, Texas, is not waiving any rights to which it is entitled. SECTION 5. Should any word, sentence, paragraph, subdivision, clause, phrase or section of this ordinance, or of the Code of Ordinances, as amended hereby, be adjudged or held to be void or unconstitutional, the same shall not affect the validity of the remaining portions of said ordinance or the Code of Ordinances, as amended hereby, which shall remain in full force and effect. SECTION 6. All provisions of the Code of Ordinances of the City of Allen, Texas, in conflict with the provisions of this Ordinance be, and the same are hereby, repealed, and all other provisions not in conflict with the provisions of this Ordinance shall remain in full force and effect. SECTION 7. Any person, frim or corporation violating any of the provisions of this Ordinance or of the Code of Ordinances, as amended hereby, shall be deemed guilty of a misdemeanor and, upon conviction in the municipal court of the City of Allen, Texas, shall be subject to a fine not to exceed the sum of five hundred dollars ($500) for each offense, and each and every day said violation is continued shall constitute a separate offense. SECTION 8. This Ordinance shall take effect immediately from and after its passage, as the law and ' charter in such case provide; and it is accordingly so ordained. Ordinance No. 1960-7-01, Page 3 Ll DULY PASSED AND APPROVED BY THE CITY COUNCIL OF THE CITY OF ALLEN, COLLIN COUNTY, TEXAS, ON THIS THE 5m DAY OF JULY, 2001. APPROVEP: Stephen Terrell, MAYOR APPROVED AS TO FORM: ATTEST: 6�4 422xl� 1 el�-- Peter G. Smith, CIfY ATTORNEY Judy Mo n, CMC/AAE, CITY SECRETARY Ordimmce No. 1960-7-01 Page 4 I MONSULTING SERVICES, INC. 7801 Pancreas Ln. Dallas, Texas 75248 May 2, 2001 Mr. Keith Rinehart Communications Manager City of Bedford 2000 Forest Ridge Drive Bedford, 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 Dear City Representatives EXHIBIT A ORDINANCE NO. 1960-7-01 Tel. (972) 726-7216 Fax (972) 726-0212 Ms. Diane McWethy Assistant City Manager City of Colleyville 5400 Bransford Colleyville, Texas 76034 Ms. Shelli Seimer Assistant to the City Manager City of Allen One Bader Circle Allen, Texas 75013 Ms. Lynda Humble Managing Director — Management Svcs. City of DeSoto 211 E. Pleasant Ran 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 AT&T Broadband affiliate ("AT&T" or the "Company") on or about March 1, 2001. Contained herein is a summary of the findings and recommendations. This study does not constitute an examination of the financial condition of AT&T 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 AT&T during the course of the analyses. OVERVIEW OF THE FH.ING In its 2001 Form 1205 filing, and with the exception of the addressable converter, AT&T proposes to actually charge rates that include very little change from its proposed 2000 rates. AT&T's proposal includes operator selected rates ("OSR") that are significantly below the maximum permitted rates ("MPR") calculated pursuant to the Form 1205 formulae. The following table provides a comparison of the Cities adopted 2000 rates, AT&T proposed ' maximum permitted 2001 rates and AT&T's operator selected 2001 rates: ORDINANCE NO. 1960-7-01 EXHIBIT "A" - Page 1 of 6 F I City Representatives May 2, 2001 Page 2 ORDINANCE NO. 1960-7-01 COMPARISON OF EQUIPMENT AND INSTALLATION RATES City Ordered AT&T Proposed AT&T Proposed 2000 2001 MPR 2001 OSR Hourly Service Charge $27.00 $29.37 $27'99 Service Install - Unwired home $40.95 $45.10 $41.99 Install - Prewired home $22.50 $28.20 $24.99 Install - Additional connect initial $13.95 $14.45 $13.49 Install - Add. connect separate $18.95 $24.27 $19.99 Move outlet $18.95 $20.20 $18.99 Up/downgrade $1.99 $1.99 $1.99 Downgrade non -addressable $8.95 $12.41 $9.99 Upgrade non -addressable $14.95 $17.25 $15.99 Changing Tiers N/A N/A N/A Connect VCR initial $5.95 $7.10 $5.99 Connect VCR separate $12.95 $14.16 $12.99 Monthly Lease Rates Remotes $0.35 $0.39 $0.35 Basic only conveners $1.75 $3.21 $1.65 Non -basic only converters $3.85 $6.62 $4.25 Consistent with the 1997, 1998, 1999 and 2000 aggregated filings, the 2001 filing has the following components: The computation of the Hourly Service Charge ("HSC") based on the averaging of calculations made for forty sample systems as applied to the total number of systems that have the same sample characteristics (subscriber counts) • An allocation of common AT&T costs to each of the sample systems based on the number of subscribers • The computation of individual installation activities based on the HSC times an averaging of the time requirements reported by the forty sample systems • The computation of equipment rates based on AT&T's inclusion of certain costs at the AT&T level • The computation of converter rate categories that are dependent on the type of service rather than the type of equipment SUMMARY OF FINDINGS Based on a review of each of the sample system Form 1205 computations, the computations Of equipment and installation charges incurred at the corporate level and AT&T responses to ' requests for information, C2 notes the following findings: ORDINANCE NO. 1960-7-01 EXHIBIT "A" - Page 2 of 6 City Representatives ORDINANCE NO. 1960-7-01 May 2, 2001 Page 3 ' 1. The before tax rate of return proposed by the Company does not reflect the actual corporate information fm the fiscal year end in question (December 2000); 2. The Company inappropriately excluded contract labor hours related to capitalized drop labor expense; 3. The Company inappropriately assigned a significant number of hours to converter maintenance, thereby increasing the monthly lease rate for converters and remotes; and 4. The Company's computation concerning contract labor hours inappropriately weights the average hourly rate for contract labor, which results in an incorrect assignment of hours to converter maintenance. . 1. Rate of Return Based on the FCC regulations, AT&T is allowed to earn a term 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 rhe interest deductibility factor found on Schedule A, Line Cr4d. 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%.' 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. Due to the timing of the filing, AT&T used the net assets reported in its September 2000 100, and an annualized Known of the interest expense reported in the same SEC filing. Although not available to the Company as the time of its filing, the Company's 10K filing is now available and demonstrates slightly different amounts for each of these line items. By incorporating the actual 2000 year-end amounts, the interest deductibility factor is adjusted from the Company's proposed 10.8%to 12.49%. This change results in an adjusted ROR of 17.10%m compared to AT&T's proposed rate of 17.21%. 2. Exclusion of Capitalized Drop Labor As stated above, AT&T determines the total number of regulated home to be included in the equipment basket based cm a sample of 40 of its owned and or managed systems. The hours generally include regulated activities conducted by both in-house labor and contractors. With respect to contract labor, AT&T computed two separate components: hours for installation activities and hours for customer premises equipment maintenance and repair. C2 notes that AT&T's computation of contract labor hours for installation activities inappropriately excluded that portion of time related to capitalized drop labor. This would be appropriate to the extent that the capitalized expanse was not included in the development of the HSC. However, in two of the forty systems, the expense is included and the hours excluded Clearly, this mismatching of expense to hours should not be allowed. Rulemaking, ' Second Report and Order, First Order mn Reconudernumt, andFuriherNotice ojPropawd FCC 95-502, released January 26, 1996, paragraph 10. ORDINANCE NO. 1960.7-01 EXHIBIT "A" - Page 3 of 6 City Representatives ORDINANCE NO. 1960-7-01 May 2, 2001 Page 4 C2 recommends that the hours be increased to match the expense allocation. Conversely, the adjustment could be to exclude the expense and allow the hours to remain as proposed by AT&T. 3. Unjustified Hourly Contract Labor Rate for Equipment Repair and Maintenance C2 noted that one of the forty systems developed contract labor hours for repair and maintenance based on an hourly rate of $1.36. Using AT&T', formula, this hourly rate resulted in contractors repairing over 431,000 converters in a system that only has 88,000. The impact to the Form 1205 calculation was to include a much higher number of converter/remote hours assigned to the development of the equipment lease rates.' Based on the average hourly repair and maintenance rates reported for contract labor in the other sample systems, C2 computed an average hourly rate of $27.90. Using this rate results in approximately 21,000 units being repaired requiring approximately 3,500 hours. AT&T had reported approximately 73,000 hours of contract labor repair and maintenance for this system. 4. Average Contract Labor Hourly Rate for Repair and Maintenance Also with respect to contract labor, C2 noted that AT&T develops its contact labor hours by dividing the total contact labor costs for repair and maintenance by the average unit rate to repair such equipment times the average minutes to repay. However,the Company's fo untl1w, if there exists no unit repair rate for certain types equipment but 4 Company has that ' equipment in the system, the average rate is reduced to reflect the "0" rate for that percentage that is not being serviced. For example, if a system has 50% standard converters and 50% addressable converter, but only addressable are being serviced by contract labor at a rate of 525/unit, AT&T's computation would be as follows: Category Rate Percentage Avg. Rate Standard Converter $0 50% $ 0 Addressable Converter 525 50% $12.50 Average Rate $12.50 Dividing the total contract labor expense by a lower unit rate results in more units being included in the estimated total service hours than actually are being serviced. This increases the total number of hours being directly assigned to the development of equipment lease rates.' C2 recommends that AT&T only be allowed to develop an average unit contract labor rate by using equipment types that are actually being serviced by contract labor. 2 The number of repair and maintenance hours are multiplied times the HSC to develop repair and maintenance costs to be recovered in the monthly equipment lease rates. Although including more hours reduces the calculation of the overall HSC, the direct assignment of such hours increases the equipment lease rates. ' C2 notes that AT&T also weights the repair time in minutes to reflect the same proportions of equipment. Although this should lessen the potential error, it does not clearly reflect the activities being performed. ORDINANCE NO. 1960-7-01 EXHIBIT "A" - Page 4 of 6 City Representatives May 2, 2001 Page 5 ORDINANCE NO. 1960-7-01 ' SUMMARY OF RECOMMENDATIONS Based on the above findings and conclusions, C2 notes that the recommended adjustments to AT&T's proposed Form 1205 calculations only impact the maximum permitted rates as shown on Exhibit A. However, given that the operator selected rates are still lower, the Cities should consider taking the following actions: 1, Approve the operator selected rates proposed by AT&T for installation and equipment rates as being reasonable. 2. Require that AT&T make the appropriate adjustments in its next Form 1205 filing to address the issues noted in this report. C2 appreciates having this opportunity to work with the Cities in their respective reviews of the Form 1205 rates. if you have my questions regarding this report or need clarifications as to the recommendations, please contact Ms. Connie Carmody at (972) 726-7216. Very truly yours, C2 Consulting Services, Inc. ORDINANCE NO. 1960-7-01 EXHIBIT "A" - Page 5 of 6 LI I 1 a LU ORDINANCE NO. 1960.7-01 E On: -g8208'%Vss 28VE w2 Jiww �'A w.r`n�w wziig N U E O m A m u U N m b m m C fA C f O m � = N m u E '9 m p 4 N � O Zo ¢ d W 1 W U madE'S N W G O L a' Ol C N C A m= W C C Z c— V U m C a a o>> 7 Tm m W } WCj dl dl 0 0 0 O W O O O 2 j a 0 0 6 0 G 0 7 U U QO Nm V OG�CI l�rY �s�WeNa��wN�in HNW a O a` E12 'o a x� a fo'o, vO1i a um'i, cN oc o 0 0 0 0 0 0 0 0 a c o m a` s a a C f O m A m W m 4 m b m m C fA C f O m m u E '9 m p 4 O Zo ¢ d W 1 W E' moo madE'S N W G O L .- Ol C N C A m= W C C Z c— V U m C a a o>> 7 Tm m W } WCj dl dl 0 0 0 O W O O O 2 j a 0 0 6 0 G 0 7 U U W C 'y m � W O m K mZ m ORDINANCE NO. 1960.7-01 EXMBIT "A" - Page 6 of 6 EMONSULTING SERVICES, INC. 7801 Pencross Ln. Dallas, Texas 75248 May 2, 2001 Ms. Debra Wallace Assistant Finance Director City of McKinney 222 N. Tennessee McKinney, Texas 75069 Dear City Representatives: ORDINANtE MAY -4' EXHIBIT B 1960-7-01 Tel. (972) 726-7216 Fax (972) 726-0212 Ms. Shelli Seimer Assistant to the City Manager City of Allen One Butler Circle Allen, Texas 75013 C2 Consulting Services, Inc. ("C2") bas completed its analysis of the FCC Form 1240 for headend H0731A submitted to the Cities of Allen and McKinney, Texas (the "Cities") by TCI Cablevision of Texas, Inc. ("AT&T" or the "Company") on or about March 1, 2001. Contained herein is a summary of the findings and recommendations. This study does not constitute an examination of the financial condition of AT&T 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 AT&T during the course of the analyses. OVERVIEW OF THE FILING According to the information provided by AT&T, the number of basic service channels declined from twenty-eight (28) to twenty-seven (27) as of December 1, 1999 for the entire true -up period. No additional changes me proposed through May, 2002. AT&T proposes to decrease the basic service rate from an actual monthly rate of $12.76 to a rate of $12.31, or an actual monthly decrease of $.45. This proposed rate is for the rate year June 1, 2001 through May 31, 2002. The proposed rate is an OSR rate based on a proposed maximum permitted rate of $13.15. There we five major factors that explain AT&T's proposed change in the maximum permitted basic service rate: t As you recall, the total current maximum permitted basic service rate consists of the Form 1240 computation for the basic service rate ($11.58), plus a maximum permitted upgrade rate of $1.19 (as adopted by the Cities in 1999 and 2000). AT&T's proposed Form 1240 maximum permitted rate is $11.96 With the addition of the$1.19, the total proposed maximum permitted rate equals $13.15. The current Operator Selected (tate of $12.76 is $.01 less than the maximum permitted rate adopted by the Cities in 2000. The instant Operator Selected Rate of $12.31 is $0.84 less than AT&T's proposed maximum permitted basic service rate computation. ORDINANCE NO. 1960-7-01 EXHIBIT "B" - Page 1 of 6 ORDINANCE NO. 1960-7-01 City Representatives May 2, 2001 Page 2 1. The inflation factor estimated in the prior 2000 filing was lower that the actual inflation factor used in the true -up for this filing (increase effect); 2. Due to the timing difference between the true -up period and the projected period six months of the true -up are actually computed at rates that were established by the Cities in their 1999 review. This "Gap" provides for an over -recovery in periods where rates are decreasing each year (decrease effect);' 3. AT&T has projected that subscribers will significantly increase by approximately 15% from the average counts for the year ended November 2000 (increase effect); 4. AT&T proposed an increase in programming costs of approximately $.06 per subscriber per momb(increaw effect); and 5. AT&T proposed an additional inflation amount for the projected period (increase effect). ANALYSIS OF THE FUJ NG Project Objectives and Activities The project objectives are thme-fold: 1. Assessment of the completeness of the filings with regard to the information and documentation that must be filed with the Cities. 2. Assessment of the reasonableness of the proposed computations in light of Cities' prior rate decisions, FCC regulation, recent FCC ruliags, and rate treatment in other similarjutisdictions. 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 AT&T • Submission of follow-up data requests and subsequent review of AT&T's responses ' There exists a six -mouth lag between the and of the true -up period and the starting date of the new rate period. Because of this lag, the first six months of the true -up period in this filing relate to the last six months of the projected period from the 1999 filing. In 1999, the basic service rate charged by AT&T was $12.15. With the use of mob higher rate during the first six months of this true -up period to compete with a proposed true -up rate of $11.76 (Module F), the formula automatically calculates an over -recovery adjustment to be built into the new raze. ORDINANCE NO. 1960-7-01 EXHIBIT "B" - Page 2 of 6 City Representatives May 2, 2001 Page 3 ORDINANCE NO. 1960-7-01 Development of potential alternatives available to the Cities in establishing maximum permitted basic service rates Summary of Findings C2 ideatified four main issues with respect to AT&T's proposed computations of basic service rates. These issues are: • AT&T inadvertently did not include the rate components for the true -up period as ordered by the Cities in 2000; • AT&T's projected subscribers for the rate year that are siguificantly higher than the actual experience being reported; • AT&T incorrectly computed its programming costs for both the true -up period and the projected period; and • AT&T did not provide for the removal of the costs related to one channel that was deleted in December 1999. 1. 2000 Ordered Rate and Related Components As you recall, the Cities ordered a maximum permitted Form 1240 rate in 2000 of $11.58. This rate was approximately $.05 below that filed by AT&T and was based on adjustments to the franchise related costs (forced relocates) and the treatment on Worksheet 8 of the Form 1235 rates. The Company did not appeal this rate order, but rather agreed to the Cities' positions. In the instant filing, AT&T started with the rate and resulting Module D information based on the original 2000 filing. In discussions with AT&T representatives, the Company indicated that this was an inadvertent mistake and that the filing should have reflected the Cities' ordered rate of $11.58. The impact of correcting this error reduces the filed rate of $11.96 by approximately $.15. 2. Projected Subscribers The Form 1240 formula provides for projected cosilchaunel changes to be stated based on a per subscriber impact. In order to do so, the cable operators must also project the average number of subscribers that will be receiving services during the proposed rate year. AT&T employs a standard methodology for projecting subscribers by using a historical monthly growth rate applied to the last monthly subscriber level during the true -up period (which is November, 2000 for the instant filing). This same rate is applied to each month through the end of the projected period (which is May, 2002). An average of the resulting monthly subscriber counts for the period June, 2001 through May, 2002 is then used as the projected average subscribership. The number of subscribers for the Cities has shown a steady increase in the last two years. ' AT&T's method produces an average amber of projected subscribers of 36,607, or approximately 15% greater than the average during the true -up period. However, this same methodology projected subscribers in the last rate filing that were 9% greater than the actual ORDINANCE NO. 1960-7-01 EXHIBIT "B" - Page 3 of 6 City Representatives ORDINANCE NO. 1%0-7-01 May 2, 2001 Page 4 experience. Therefore, AT&T's standard methodology of continuing to increase over an additional eighteen month period (December, 2000 through May, 2002) does not appear reasonable based on a comparison of the estimates versus the actual experience in subscriber growth. Using a "best linear fit" methodology for the monthly subscribers for the period December 1998 through February 2001, the average monthly subscribers during the projected period (rate year) are computed at 34,270 (an 8% increase over the true -up period). By adjusting the average projected subscribership from AT&T's proposed 36,607 to 34,270, AT&T's proposed rate for basic service is reduced by approximately $0.01 per subscriber per month. 3. Incorrect Computa/im of Programming Costa Pursuant to the Form 1240 formulae, a cable operator is allowed to recover its actual programming costs for those channels offered over the basic service tier that require programming cost payment' The Company was asked to provide supporting documentation concerning each of the channels for which AT&T is requesting additional programming costs. Based on the information provided, there were several errors noted with respect to specific monthly per subscriber programming costs. C2 notes that the impact is minor, but does recommend that the changes be made along with other recommended adjustments in the computations. ' 4, inclusion of Residual Costs for Channel Deledon According to the filing, AT&T deleted the Shop At Home channel from the basic service tier on December 1, 1999. This deletion was a known change that occurred prior to the rate filing in 2000, but apparently AT&T chose not to reflex this change in its projected period fm that filing. in the instant filing, AT&T reports that the channel has been deleted from the basic service tier, but does not adjust the residual costs to exclude this channel.' AT&T responded to C2's requested justification for its position with a copy of C2's report to the City of Farmers Branch in 1999. In that filing, AT&T has increased the basic service rate for the residualcostsassociated with an added channel to the tier. C2 reported that, according to the literal interpretation of the FCC regulations, any changes in residual costs due to channel add/deletion were smset as of January 1998.' However, AT&T requested and received an emergency stay of the City of Farmers Branch rate order from the FCC. AT&T's position on this issue was as follows: s Many charnels are provided on the basic service tier that do not have additional programming costs associated with them The basic service rate includes a "residual" cost component for these channels. Only four of the current twenty-seven basic service tier channels have an additional programming con component built into the rates. 4 The FCC Form 1240 formula assumes that there exists a "residual cost" for each channel on the basic service tic. This residual cost is detemrined by deducting external costs (programming costs that are reviewed each year) from the tier rate and dividing by the total number of channels on the basic service tier. ' See C2 Report to Ms. Margaret Somereve, dated May 13, 1999. What AT&T does not report is that during the 2000 rate filing reviews, C2 recommended that components of Section 76.922(8) be allowed until such time that the FCC issued a definitive ruling on the sunsetting of this provision. As of the writing of this report, the FCC has not provided such a ruling. ORDINANCE NO. 1960-7-01 EXHIBIT 'xB" - Page 4 of 6 City Representatives ORDINANCE NO. 1960-7-01 May 2, 2001 Page 5 Unfortunately, Section 76.922(gxg), created to implement the sunset scheme, failed to precisely reflect the Commission's intent. By its language, all of Section 76.922(8) sunset on December 31, 1997, rather than simply the Caps and Headead Upgrade options set forth in subsections (g)(3) and (g)(7), respectively. TCI -D had always assumed the rale was marred by a clerical error. In fact, a sunset of all aspects of Section 76.922(8) makes no sense. Not only would it deny a cable operator a favorable rate adjustment for channel additions to a regulated tier, but it would also allow a cable operator to avoid an unfavorable rate adjustment for a channel deletion. [emphasis added]' In the instant filing, AT&T apparently has changed its position with respect to the channel add/deletion portion of Section 76.922(8). AT&T has failed to remove the residual costs associated with the deletion of the Shop At Home channel from the basic service tier. In C2's opinion, AT&T should continue to new channel add/deletions as if these adjustments were not sunset until such time that the FCC provides a definitive ruling on the umsetting of Section 76.922(g). One additional note with respect to this issue is that in the 2000 rate year, the Cities allowed AT&T to include "mark-up" costs that are also referenced in Section 76.922(g). The Cities reserved the right to re -compute the prior rates in the event that the FCC issued a definitive ailing regarding the sunset issue. It is only equitable to the subscribers of Allen and McKinney that if AT&T is taking the position that Section 76.922(g) has been sunset (an apparent reversal of the Company's earlier position), then the Company should be willing to recompute the rates to eliminate all prior inclusion of Section 76.922(g) related costs that have been allowed by the ' Cities since January 1998. The impact of removing the residual costs for the channel reduces AT&T's proposed rate by approximately $0.84 par month per subscriber. Inflation Rate Change Finally, based on the FCC regulations, if a franchising authority adjusts the rates as filed by the cable operator, it must refresh the inflation factors to reflect the most current information available. At the time AT&T filed the Form 1240, the most recent inflation factor available was for the third quarter of 2000 (1.626A). AT&T used this factor not only fm the months of October and November of its true -up period, but also w the inflation factor for the projected period. In April, the fourth quarter 2000 factor was released as 1.99%. C2 has incorporated this factor for October and November 2000 and used it as the projected period factor. The recommended final rate incorporates this new inflation rate. SUMMARY OF RECOMMENDATIONS Based on the above discussion, the Cities should consider the following: • Adjust Module A and D to reflect the Cities' Ordered rate in 2000 • Adjust the projected subscriber to better reflect the actual experience within the ' Cities subsequent to the true -up period. 6 See RequesrjorF.mergency Stay oJLocal Rnre Order, dated May 27, 1999 (filed on behalf of TO Cablevision of Dallas, Inc. concerning City of Fanners Branch Ordinance No. 2474). ORDINANCE NO. 1960-7-01 EXHIBIT "B" - Page 5 of 6 City Representatives May 2, 2001 Page 6 ORDINANCE NO. 1960.7-01 Adjust the programming costs to reflect updated information provided by the Company Adjust the residual costs for the deletion of Shop At Home in December 1999 Adjust the inflation factor to reflect the most recent FCC published rate of 1.9901- as required by FCC rulings when other adjustments are made to the filing. Consider a Form 1240 rate of $11.01 per subscriber per month as compared to the $11.96 proposed by the Company. C2 greatly appreciates this opportunity to assist the Cities of Allen and McKinney in their respective reviews of the Form 1240 Sling. If you have any questions concerning these Endings and recommendations, please contact Ms. Connie Carmody at 972-726-7216. Very truly yours, Ca C2 Consulting Services, Inc. ORDINANCE NO. 1960.7-01 EXHIBIT "B" - Page 6 of 6 EXHIBIT C ORDINANCE NO. 1960-7-01 Memorandum To: Ms. Shelli Siemer From: Ms. Connie Caanady Dab: 0628/01 Re: AT&T Basic Service Rate As you recall, our most significant recommended adjustment to the basic service rate was to remove the residual costs associated with one channel that AT&T reported to have been ' removed from the basic service tier. Subsequent to the issuance of our report, AT&T provided additional information that this channel (HSI) continues to be included in the basic service channel line-up. However, AT&T could not provide definitive proof that such channel was included in basic service during the true -up period. Given this information (and viewing verification from you), I recommend that the City consider including the residual costs for this channel in the projected period calculation. AT&T has agreed to stipulate to the resulting Form 1240 rate of $11.39. (See Memo from AT&T dated June 15, 2001). Incorporating both the Form 1240 rate of $11.39 and the previously adopted Form 1235 rate of $1.19 results in a maximum permitted basic service rate of $12.58. In addition, I recommend that the City request specific certification of channel line-ups in order to avoid this confusion in future filings. It does not appear that the City can solely rely on the printed channel lineups that have been provided as evidence in this and past rate filings. ORDINANCE NO. 1960-7-01 EXHIBIT "C" - Solo Page ORDINANCE RIf.Y9b11-`7-LT o SERVICE RATES Hourly Service Charge $27.99 Install - Unwired Home $41.99 Install - Rewired Home $24.99 Install - Additional Correction Initial $13.49 Install - Additional Connection Separate $19.99 Move Outlet $18.99 Up/Downgrade $1.99 Downgrade Non - Addressable $9.99 Upgrade Non -Addressable $15.99 Changing Tiers N/A Connect VCR hdtial $5.99 Connect VCR SSparsle $12.99 Monddy Lease Rates: Remotes $0.35 Basic Only Converter $1.85 Non -Basic Converter $4.25 ORDINANCE NO. 1%0-7-01 EXIMIT "D" - Solo Page