O-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
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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