O-2059-6-02ORDINANCE NO. 2059-6-02
' 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 (5500) 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:
1. The City is the Grantor of a Franchise Ordinance executed on or about July 20, 1995,
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, 2002, the City received AT&T's FCC Form 1205 and Foran
1240.
4. The City has 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 March 29, 2002, the City received AT&T's amended FCC Form 1240.
6. On or about April 24, 2002, C2 Consulting Services, Inc. submitted a final report
regarding a review of AT&T's FCC Form 1205.
' 7. On or about April 29, 2002, C2 Consulting Services, Inc. submitted a final report
regarding a review of AT&T's FCC Form 1240.
8. On or about May 20, 2002, the City received additional information from C2
Consulting Services, Inc. concerning some specific findings related to the Form 1205
' findings noted within C2 Consulting Services' final report.
9. 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 "
10. 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 $13.25. Gids rate includes a Form 1240 rate of $12.06,
plus a Form 1235 rate of $1.19).
2. Installation and Equipment 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 has an obligation to act timely upon the pending rate application consistent
with current FCC rules and regulations. However, if the FCC alters the benchmark
calculations resulting in a lower reasonable rate for Allen subscribers, the City has 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 $13.25.
This basic programming rate is comprised of a maximum permitted rate for the basic
service tier (Form 1240) of $12.06, 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 set 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.
' 3. The City hereby waives, for this rate order only, the requirement for thirty (30) day
prim written notice to subscribers required by the City's Cable Communication
Ordinance.
Ordinance No. 2059-6-02, Page 2
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 rate 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 ndes 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(8).
' 10.
Customer Trouble Call Rates: Pursuant to current FCC regulations from the date of
this order and until further order of the City, AT&T shall: (i) inform customers of the
charge(s) for service prior to the Customer agreeing to have a representative of
AT&T come to the customer's premises for service; (ii) not charge a customer for
any service or service related issues that are not the fault of or caused by the
Customer or customer's own equipment; and (iii) not charge a customer for repeat or
return service calls to the customer's premises for service or service related issued
that were not sufficiently corrected previously."
SECTION 4. In adopting this Ordinance, the City Council of the City of Allen, Texas, is not approving or
acquiescing in any 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, firm 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.
Ordinance No. 2059-6-02. Page 3
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.
DULY PASSED AND APPROVED BY TBE CITY COUNCIL, OF THE CITY OF ALLEN, COLLIN
COUNTY, TEXAS, ON THIS THE 25Ta DAY OF JUNE, 2002.
APPROVED:
AM100
A WON
e•
APPROVED AS TO FORM: ATTEST:
Peter G. Smith, CITY ATTORNEY J.dy Morr6bn, CMC/AAE, CITY SECRETARY
Ordinance No. 2059-602, Page 4
MONSULTING SERVICES, INC.
7801 Pencross (972)726-7216
Dallas. Texas 75298 (972) 726-0212 Cfaxl
EXHIBIT "A"
ON iri4WIM�'ii i
To: Cities' Cable Rate Coalition
From: Connie Cannady
Date: 5/20/02
Re: Customer Trouble Call Rate
As you know, one of the recommendations sent to you concerning the Form 1205 was to disallow AT&T's
' requested "Customer Trouble Call" rate of $16.99. Subsequent to the issuance of the report, AT&T has provided
additional information to demonstrate that (1) the costs related to this charge are not new to the equipment basket
costs, and (2) that that customers will not be billed for those activities that are excluded in the calculation of the
Hourly Service Charge.'
However, in order to recommend acceptance of the rate, it is my opmion that three conditions must be met. First,
subscribers must not be billed for trouble calls due to problems not resulting from subscriber action. Second,
AT&T customer service representatives must inform subscribers of the potential charge and the types of issues that
could give rise to the charge before a technician is sent. Third, in circumstances where the problems is not
completely corrected during the fust visit, the subscriber will not be charged again for a repeat call to correct the
initial problem.
AT&T was informed of these conditions during a meeting at the City of Bedford. No objections have been
received to date. In the event that the Cities can include the above conditions within their respective ordinances, I
recommend that the $16.99 "Customer Trouble Call" rate be adopted.
These were the two issues identified in the C2 report that gave rise to the recommendation to disallow the rate.
Ordinance No. 2059-6-02, Page 5
April 29, 2002
Ms. Debra Wallace
Assistant Finance Director
City of McKinney
222 N. Tennessee
McKinney, Texas 75069
Dear City Representatives:
EXHBIT `B"
Ms. Shelli Seimer
Assistant to the City Manager
City of Allen
One Butler Circle
Allen, Texas 75013
C2 Consulting Services, huc. ("CT) has completed its analysis of the revised FCC Form 1240 for headend
0731A submitted to the Cities of Allen and McKinney, Texas (the "Cities") by AT&T Broadband ("AT&T'
or the "Company") on or about March 1, 2002. 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 increased by one to
twenty-eight (28) with the addition of the Home Slopping Network during the true -up period. No additional
changes are proposed through May, 2003. AT&T proposes to increase the basic service rate from an actual
monthly rate of $12.31 to a rate of $12.81, or an actual monthly increase of $.50.'
There are essentially two major factors that explain AT&T's proposed change in the maximum permitted
basic service rate:
1. The inflation factor estimated in the prior 2001 filing was significantly lower than the inflation factor
used by AT&T in the true -up for this filing. (The estimated inflation was 1.99% compared to AT&T's
proposed 2.43%);
' As you recall, the total current maximum permitted basic service rate consists of the Form 1240 computation for
the basic service rate ($11.37), plus a mammum permitted upgrade rate of $1.19 (as adopted by the Cities in 2001).
The current Operator Selected Rate of $12.31 is $.25 less than the maximum permitted rate adopted by the Cities
in 2001. The instant Operator Selected Rate of $12.81 is $.68 less than AT&T's proposed maximum permitted
basic service rate computation.
Ordinance No. 2059-6-02, Page 6
2. Due to the timing difference between the true -up period and the projected period, six months of the
true -up are generally computed at rates that were established by the Cities in a review two years prior.
' However, AT&T has assumed that the subscribers paid the lower 2001 rate for all but two months of
the true -up period.
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 most 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 rulings, and rate treatment in other similarjurisdictions.
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
' • Development of potential alternatives amlable to the Cities in establishing maximum permitted
basic service rates.
Summary of Findings
C2 identified four issues with respect to AT&T's proposed computations of the Form 1240 basic
service rate. These issues are:
• AT&T incorrectly computed its FCC User fees based on the FCC order;
• AT&T has inappropriately included an interest charge on its decision to delay the 2001
rate increase until July 2001;
• AT&T had inappropriately included the 2001 rate during that portion of the true -up
period where the rate was based on the 2000 approved rates; and
• Given the above changes, the inflation factor should be refreshed in accordance with FCC
rules.
Ordinance No. 2059-602, Page 7
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 has computed the amount of the FCC User fee based on the sum of monthly rates times the
number of subscribers in that month. Generally, the monthly rate has fluctuated between $.03 and
$.05 per subscriber per month.
During the review, C2 noted that AT&T was proposing an increase in the monthly rate from $.04 to
$.05. When asked to support this increase, AT&T responded that it was an estimate of the increase
anticipated from the FCC. Based on discussions with FCC representatives, C2 discovered that the
FCC had, in fact, proposed an increase in an annual amount per subscriber from the current rate of
$.49 to $.53. However, more importantly, C2 determined that the actual payments made each
September to the FCC by the cable operators are computed by multiplying these annual rates per
subscriber (not monthly) times the number of subscribers as of December of the previous year.
More specifically, for the September 2001 payment (which is included in the true -up period), FCC
Order 01-196 established the annual payment per subscriber to be $.49. Paragraph 38 of this order
provided:
' For regulatees whose fees are based upon a subscriber, unit or circuit count, the number of
regulatees' subscribers, units or circuits on December 31. 2000, will be used to calculate the fee
payment.
FCC Order 02-92 proposes to increase this annual amount to $.53 per subscriber.
In C2's opinion, the previous methodology employed by AT&T 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 $.49 times the December 2000 subscriber counts. Additionally, the projected period
amount should be computed by multiplying $.53 times the December 2001 subscriber counts. The
results of changing the FCC User fee computations is to reduce AT&T's proposed MPR by less than
$.01.
2, 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.
Ordinance No. 2059-6-02 Page 8
As stated above, a significant component of the 2002 Form 1240 true -up period calculation is based on the
fact that there is still six months included in the true -up during a period in which the rate is based on the 2000
filing (GAP period). Because of the manner in which the formulae was established, AT&T is allowed to
recover not only the difference between this lower amount charged and the trued -up rate in Module F, but also
to accrue interest at the 11.25% rate.
What makes the instant filing different from past filings is that AT&T chose not to implement the
2001 rate filing an Jane 1, 2001 (the beginning of the rate year), but rather waited an additional month (July
1, 2001). 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:3
.. 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 2001 rate into effect on June 1, 2001 (pending
Cities' review), their should be no interest adjustment to the recovery of the difference between the
' rate actually charged in June 2001 and the "true -up" rate. Adjusting the Company's proposed
interest expense has a de minimus impact on the resulting rate.
3. True -Up Computation of Revenue Received
L
pursuant to the Form 1240 formulae, a cable operator "trues -up" its revenue received from basic
service by multiplying its average subscribership during the period times the actual monthly rates
charged for the service. This computation takes place on Worksheet 8 of the Form and included six
months during the period in which 2000 rates were charged and six months during the period in
which 2001 rates were charged (remember the "Gap" discussion in prior reports).
Two months into the true -up period (December 2000 -January 2001), and discovered during the
Cities' 2001 review, the Company lowered its rate to take into account a channel that had been
deleted. This became an issue in the 2001 review and was treated in the channel deletion section of
the Form 1240. However, in lowering the rate during the "Cap" period, AT&T still charged more
than the 2000 Form 1240 of $11.58 because it could add a portion of the Form 1235 rate of $1.19.
More specifically, AT&T charged $12.31 during the majority of the tore -up period rather than the
rate of $12.76 that was charged in December 2000-Jaunary 2001.
'FCC Order 95-397, paragraph 80.
Ordinance No. 2059-602, Page 9
In completing Worksheet 8 for the 2002 filing, AT&T only reflected the 2000 maximum permitted
rate for the months of December 2000 and January 2001. Based on the Form 1240 formulae, this is
' clearly incorrect. Because AT&T charged a rate that was greater than the maximum permitted Form
1240 rate, it stands to reason that the rate charged for the Form 1240 computation was the approved
$11.58, not the lower 2001 rate of $11.37. In fact, the FCC has ruled on a similar issue in the matter
of Bresnan Communications Company, Order on Reconsideration, released September 7, 1999:
[t]he FCC Form 1235 add-on is a yearly amount based on Operator's actual costs for
upgrading its system. It is not a projected amount and is therefore not subject to true -up
through the FCC Form 1240. Operator cannot increase its yearly FCC Form 1235 add-on
through the true -up process, nor is Operator required to reduce its FCC Form 1235 add-
on through the true -up process. Therefore, we require Operator to use an of its FCC
Form 1240 MPR for purposes of determining Operator's actual CPST rate on
Worksheet 8, even if Operator has not fully implemented its combined MPR from both
its FCC Form 1240 and FCC Form 1235. This allows the FCC Form 1235 add-on to have
a neutral effect on Operator's FCC form 1240 calculations. [emphasis added]°
Clearly, based on this ruling, the appropriate rate to be used on Worksheet 8 for the period February
' 2001 through June 2001 is the 2000 adopted Form 1240 rate of $11.58. Adjusting Worksheet 8 to
include the maximum permitted Form 1240 rate for the "Gap" period reduces AT&T's proposed rate
by approximately $.09.
L
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 conceming quarterly inflation factors to be applied.'
At the time of AT&T's current Form 1240 filing, the latest published inflation factor was for the thud quarter
2001. Since AT&T's true -up period is from December 2000 through November 2001, the inflation factors
used were the fourth quarter 2000, and the first, second and third quarter 2001. The third quarter factor of
2.25% continued to be used for the fourth quarter 2001 component of the true -up period. Additionally, this
third quarter factor was used for the entire projected period. However, on April 9, 2002,
shortly after AT&T filed its current Form 1240, the FCC published the fourth quarter 2001 factor of negative
.11%.
Typically, if the inflation factor used is the only issue found in a franchising authority's review of a Form
1240 filing, the FCC has found in favor of the cable operator using what was the most recent data available at
the time the filing was made. This policy was detailed by the FCC in the Third Order on Reconsideration as
follows:
r DA 99-1779, released September 7, 1999, paragraph 5.
'FCC Form 1240 hatiuctions, Part I: Module C [Revised July 1996].
Ordinance No. 2059-6-02, Page 10
We share National Cable Television Association's concern that rates adopted in an effort to comply
' with our rules as quickly as possible may become unreasonable solely as a result of using later data to
refresh the calculations. Operators should not be penalized for making good faith attempts to comply
with our rules in a timely manner.
When current rates are accurately justified by analysis using the old data (and that data was accurate
at the time), cable operators will not be required to change their rates... When current rates are not
justified by analysis using the old data (so that a rate adjustment would be necessary in any event),
cable operators will be required to correct their rates pursuant to current data. In these circumstances,
the resulting rates most be based on current data! [emphasis added]
Clearly, 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 filing. The FCC's position on this
issue is evidenced in the above-cited Portland Order (DA 97-1852). In that decision, the FCC found error
with Paragon's use of estimated data in its true -up computation for CPST rates and also made an adjustment
to reflect current inflation factor data:
This adjustment required that we refresh Operator's inflation factors'
Therefore, because C2 is recommending that other adjustments be made to AT&T's amended 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. However, in C2's
' opinion, it is unlikely that we will continue to have negative inflation during the projected period. To include
a decline in the rate now may result in a significant true -up amount in the next filing, plus 11.25% interest.
Therefore, in C2's opinion, using an average factor for the last four quarters produces a more reasonable
factor for the projected period.'
The impact of making the inflation factor adjustment is to reduce AT&T's proposal Form 1240 basic service
rate by approximately $.14.
SUMMARY OF
Based on the above discussion, the Cities should consider the following:
• Adjust the FCC User fees to reflect the computation required by the FCC for payment
remittance.
• Adjust the interest expense to exclude interest on under -recovery in the month of June
2001.
° See Third Order on Reconsideration, FCC 9440, released March 30, 1994, paragraphs 93 and 94.
See Order, DA 97-1852, released August 29, 1997, paragraph 10.
° If the actual -.11% fourth quarter inflation factor is used for the entire projected period, the resulting rate is
$11.84. However when this rate is added to the Form 1235 ate of $1.19, the resulting maximum permitted rate
would be $13.03. AT&T's proposed operator selected rate of $12.81 is still below this amount.
Ordinance No. 2059-6-02. Page 11
• Adjust Worksheet 8 to reflect the approved maximum permitted Form 1240 rate during
the "Gap" period.
' Refresh the true -up period inflation to include the actual fourth quarter inflation factor.
• Use the average inflation factor for the last four quarters for the projected period.
• Consider a Form 1240 rate of $12.06 rather than AT&T's proposed maximum permitted
Form 1240 rate of $12.30. Since the operator selected rate is still below the adjusted
maximum permitted (with the addition of the Form 1235 rate of $1.19), the operator
selected rate of $12.81 should be accepted.
C2 greatly appreciates this opportunity to assist the Cities of Allen and McKinney in their 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, hic.
Ordinance No. 2059-6-02, Page 12
1 April 24, 2002
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
' Mr. Rick Moore
Information Systems Manager
City of Coppell
PO Box 478
Coppell, Texas 75019
Ms. Patricia Royal Nicks
Cable Services Manager
City of Irving
233 South Rogers Road
Irving, Texas 75060
Dear City Representatives
EXBTBIT "C"
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 Butler Circle
Allen, Texas 75013
Ms. Lynda Humble
Assistant City Manager
City of DeSoto
211 E. Pleasant Run Road
DeSoto, Texas 75115
Ms. Melisa Leal
Assistant to the City Manager
City of Grapevine
PO Box 95104
Grapevine, Texas 76099
Ms. Donna Huerta
City of Lewisville
1197 West Main
Lewisville, Texas 75067
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, 2002. 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.
Ordinance No. 2059-6-02, Page 13
OVERVIEW OF THE FILING
' In its 2002 Form 1205 filing, AT&T proposes to significantly increase the charges for the following
activities and equipment:
• Installation for pre -wired aerial to increase by approximately 12%
• Additional outlet at separate time from installation to increase by approximately 10%
• Non -addressable downgrade of service to increase by approximately 10%
• Basic -only converter charge to increase by approximately 8%
• Non -basic only converter charge to increase by approximately 13%
The above increases are based on a comparison of AT&T's 2001 and 2002 operator selected rates
("OSR') that are significantly below the maximum permitted rates ("MPR') calculated in each year
pursuant to the Form 1205 formulae. The comparison of MPR's for the 2001 and 2002 rate years
show significantly lower percentage increases. In other words, AT&T has chosen in this filing to
reduce the differential between its calculated MPR under the Form 1205 formulae and its OSR.
The following table provides a comparison of the Cities' adopted 2001 rates, AT&T proposed
maximum permitted 2002 rates and AT&T's operator selected 2002 rates:
UUMYAkUSUN UFEQUIPMRN1 ANDINS I ALLAIIUN RAI ES
*AT&T Cities
' "Former Paragon Cities
city City AT&T AT&T
Ordered Ordered Proposed 2002 Proposed 2002
2001' 2001" MPR OSR
Service Charge $27.99 $32.48 $29.68 $28.49
Ordinance No. 2059-6-02. Page 14
Install - Unwired home
$41.99
$43.16
$45.49
$43.99
Install - Prewired home
$24.99
$43.19
$30.59
$27.99
Install- Additional connect
$13.49
$21.76
$14.76
$13.99
initial
Install- Add. connect separate
$19.99
$32.48
$24.16
$21.99
Move outlet
$18.99
N/A
$20.17
$18.99
Up/downgrade
$1.99
N/A
$1.99
$1.99
Downgrade non -addressable
$9.99
$25.98
$12.94
$10.99
Upgrade non -addressable
$15.99
$25.98
$16.59
$15.99
Changing Tiers
N/A
$2.00
N/A
N/A
Conned VCR Initial
$5.99
N/A
$7.12
$5.99
Conned VCR separate
$12.99
N/A
$14.63
$12.99
Customer Trouble Calls
N/A
$21.76
$17.38
$16.99
Remotes
$0.35
$0.32
$.34
$.30
Basic only converters
$1.85
$.58
$5.66
$2.00
Non -basic only converters
$4.25
$4.41
$7.17
$4.80
Ordinance No. 2059-6-02. Page 14
With the exception of combining systems into "areas" and only choosing twenty samples instead of
forty, the 2002 filing has the following components that are consistent with all previously filed
' aggregated national Foran 1205 filings:
• The computation of the Hourly Service Charge ("HSC'j based on the averaging of
calculations made for the sample "area" systems as applied to the total number of "area"
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 twenty sample "area" 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 "area" 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:
1. The before tax rate of return proposed by the Company does not reflect the actual
corporate information for the fiscal year end in question (December 2001);
2. The Company inappropriately included commissions for the technical, installation and
dispatch staff in calculating labor expense in Schedule B; and
3. The Company has included a rate for Customer Trouble Calls not previously requested.
1. Rate of Return
Based on the FCC regulations, AT&T 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 ("ROW'), 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%.'
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 2001 10Q, and an annualized amount of the interest expense reported in the
same SEC filing.
'Second Report and Order, First Order on Reconsideration, and Further Notice of Proposed Rulemaking, FCC
95-502, released January 26, 1996, paragraph 10.
Ordinance No. 2059-6-02 Page 15
Although not available to the Company at the time of the filing, the Company's IOK filing is now available
and demonstrates slightly different amounts for each of these line items. By incorporating the actual 2001
' yearend amounts, the interest deductibility factor is adjusted from the Company's proposed 20.02% to
20.19%. This change results in an adjusted ROR of 16.340/a as compared to AT&T's proposed rate of
16.35%. The impact is de minimus on the resulting rates but should always be considered by the franchising
authority to reflect those components that can be changed to actual prior to the Cities rendering final
decisions.10
2. Inclusion of Commissions for Technical, Installation and Dispatch Staff
Upon inspection of the supporting documentation provided by AT&T with respect to labor costs, C2 noted
that the amount of labor expense allocated to the equipment basket includes commissions for technical,
installation, and dispatch 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.
In C2's opinion, these commissions should be excluded. This adjustment results in an hourly service charge
of $29.53 compared to the filed HSC of $29.68. However, this change does not affect the operator selected
rates as AT&T is proposing an operator selected HSC of $28.49 (on which all other charges are based.) For
comparison purposes, however, Exhibit A includes the resulting maximum permitted rates using the adjusted
HSC of $29.53.
3. Inclusion of Rate for Customer Trouble Calls
' In the instant filing, AT&T is requesting to establish a rate that has not been in existence before. Usually, the
fust question that is raised is whether the costs related to the activity in question have been previously
"unbundled" from the programming rates." In addition, based on the Company's methodology for
computing equipment basket hours and costs, non-productive trouble calls are removed. Therefore, in C2's
opinion, it does not seem appropriate to establish a rate for activities that (1) have not been definitively shown
to have been `unburu led" and that (2) a portion of which have been removed firm the calculation of the
HSC.
SUMMARY OF RECOMMENDATIONS
Based on the above preliminary findings and conclusions, the Cities should consider taking the
following actions:
1OThe basis for the return factor was established by the FCC in the early 1990s as a presumed after tax return of
11.25%. In today's economy, it is not at all clear that such a return is reasonable because it has not been revisited
by the FCC in many years. Therefore, any of the remaining components that are used to "gross up" this rate
should be scrutinized in the event better data is available. Of course, the Cities always have the right to challenge
' the rate of return, but the burden is on the Cities to show that a more appropriate retum should be used.
" As you recall, during the Form 1200 rate process, the equipment basket costs were "unbundled" from
programming rates in order to stand alone in later analyses of costs. If certain types of costs were not "unbundled"
at that time, there was a possibility of double recovery if such costs were later added to the equipment basket.
Ordinance No. 2059-6-02 Page 16
1. Approve the operator selected rates proposed by AT&T for installation and equipment rates as
being reasonable with the exceptions noted below.
' 2. Require that AT&T make the appropriate adjustments in its next Form 1205 filing related to
technical, installation and dispatch commissions allocated to the equipment basket.
3. Disallow the requested rate for Customer Trouble Calls until the Company can show that all hours
related to these costs have been taken into account in the development of the HSC.
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 a need clarifications as to the recommendations, please contact Ms.
Connie Cannady at (972) 726-7216.
Very truly yours,
C2 Consulting Services, Inc.
Ordinance No. 2059-6-02, Page 17
LI
EXIHBBIT "D"
SERVICE
RATES
Hourly Service Charge
$28.49
Install - Unwired Home
$43.99
Install - Prewired Home
$27.99
Install - Additional
Connection Initial
$13.99
Install - Additional
Connection Separate
$21.99
Move Outlet
$18.99
Up/Downgrade
$1.99
Downgrade Non -
Addressable
$10.99
Upgrade Non -Addressable
$15.99
Connect VCR Initial
$5.99
Comect VCR Separate
$12.99
Customer Trouble Calls
$ 16.99
Monthly Lease Rates:
Remotes
$0.30
Basic Onl Converter
$2.00
Non -Basic Converter
$4.80
Ordinance No. 2059-6-02. Page 18