O-2345-11-04ORDINANCE NO. 2345-11-04
' AN ORDINANCE OF THE CITY COUNCIL OF THE CITY OF ALLEN, COLLIN
COUNTY, TEXAS, ESTABLISHING MAXIMUM PERMITTED RATES THAT
COMCAST CABLE SERVICES MAY CHARGE ITS ALLEN CABLE TELEVISION
SUBSCRIBERS FOR PROGRAMMING COSTS, EQUIPMENT AND
INSTALLATION RELATED TO BASIC SERVICE; PROVIDING A
SEVERABILITY CLAUSE; PROVIDING A REPEALING CLAUSE; PROVIDING A
SAVINGS CLAUSE; AND PROVIDING FOR AN EFFECTIVE DATE.
WHEREAS, the City of Allen, Texas (the "City'), is the Crrantm of a Franchise Ordinance executed on or
about July 20, 1995, by and between the City of Allen and Comcast Cable Services ("Comcast"); 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's, 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 Comcast to be charged to subscribers of
the basic service tier, and,
WHEREAS, the City has reviewed the proposed rates submitted by Comcast and desires to make a rate
ruling.
'
NOW, THEREFORE, BE IT ORDAINED BY THE CITY COUNCH, 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 Comcast.
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 March 1, 2004, the City received Comcast's FCC Form 1205 and Form
1240.
4.
The City engaged the services of C2 Consulting Services, hrc, to provide assistance
to the City for review of Comcast's FCC Form 1205 to determine reasonableness of
the proposed equipment and installation rates, and Foran 1240 to determine
reasonableness of the proposed basic service tier rates.
5.
On or about May 18, 2004, C2 Consulting submitted a preliminary report regarding a
review of FCC Form 1240.
'
6.
On or about May 20, 2004, C2 Consulting submitted a preliminary report regarding a
review of FCC Form 1205.
7. On or about June 14, 2004, Comcast provide an Operator Selected Rate for Basic
Service on the system serving the City of $13.52. This rate is inclusive of both the
' Form 1240 rate and the Form 1235 rate.
8. On or about June 29, 2004, Comcast provided a written response to C2 Consulting's
preliminary reports.
1
9. C2 Consulting conducted additional analysis based on Comcast's provision of certain
contractual information subsequent to the preliminary findings in the May 18, 2004,
report. Based on such information, C2 Consulting submitted a revised Form 1240
report on July 30, 2004. No changes were made to the Foci 1205 report provided on
May 20, 2004.
10. On or about October 11, 2004, Comcast responded to the revised Form 1240 findings
included in the July 31, 2004, C2 Consulting report.
11. Based upon information received from Comcast and the calculations and
recommendations from C2 Consulting, the City makes the following findings
regarding FCC Form 1205 and FCC Form 1240 filed by Comcast as set forth in the
reports of C2 Consulting. The reports from C2 Consulting are attached hereto as
Exhibit "A" and fully incorporated herein by reference.
12. The City most 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. The City concludes that the Basic Service Form 1240 rate as filed by Comcast of
$13.07 is reasonable.
2. The FCC User Fee should be no greater than $0.06 per subscriber per month.
3. The City concludes that the maximum permitted rate for the current basic service tier
is $14.32. This rate includes a Form 1240 rate of $13.07, plus a maximum $.06 FCC
user fee, and a Form 1235 rate of $1.19. The effective date of this rate was
June 1, 2004.
4. The City concludes that the equipment and installation rates proposed by Comcast
me not reasonable.
5. The City concludes that the equipment and installation rates should be as set forth
below.
6. 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."
Ordinance No. 2345-11-04, Page 2
II
SECTION 3. "ORDER FOR ACTION: Based upon the foregoing findings and conclusions, the
City hereby orders the following:
1. Pursuant to current FCC regulations, and from the effective date of June 1, 2004 or
and until further order of the City, Comcast 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 $14.32.
2. This basic programming rate is comprised of a maximum permitted rate for the basic
service tier (Form 1240) of $13.07, plus a maximum $.06 FCC User Fee with a
maximum permitted rate for system upgrade (Form 1235) of $1.19.
3. The FCC Form 1205 submitted by Comcast and received by the City on
March 1, 2004 is hereby rejected for the reason that some of the proposed rates are
not reasonable.
a. The following rates are found reasonable
Hourly Service Charge:
$31.97
Install — Unwired Home (Aerial within 125 feet)
$47.47
Install — Prewired Home (Aerial within 125 feet)
$28.54
Install additional outlet — connect initial
$15.59
Install additional outlet — connect separate
$23.00
Other install — relocate outlet
$21.45
Other install—upgrade(non-addressable)
$15.56
Other install — downgrade(non-addressable)
$14.14
Other install— upgrade/downgrade(addressable)
$1.99
Connect VCR — connect initial
$7.99
Connect VCR — connect separate
$14.63
Remote control (all units)
$0.32
Converter Box (Basic Service Only)
$1.20
Converter Box (Non -Basic Only
$4.73
Converter Box HDTV
$6.68
Customer Trouble Calls
$21.15
Field Collection Charge
$0.00
The 2003 ordered rate of $0.00 for digital additional outlets is on appeal with the
FCC in the case of DA 04-1703. In the event that the FCC finds that the rate of
$5.95 proposed by Comcast in December 2003 for programming service on
additional digital outlets is unreasonable and the City's ordered rate of $0.00 is
justified, then Comcast will refund customers for any new additional digital
outlet charges charged during the period covered by this rate ordinance. The
refund will consist of the difference between the charges that customers had been
paying for the programming service on additional digital outlets and the
regulated equipment fee that Comcast would have been permitted to charge
customers for additional outlets to the extent that such equipment fees were not
already charged to the subscriber.
4. The effective date for the approved 1205 rates is June 1, 2004.
Comcast shall immediately undertake all necessary steps, in accordance with
applicable FCC regulations to provide refunds to any subscribers who have been
Ordinance No. 2345-11-04. Page 3
overcharged since June 1, 2004, based upon the difference between Comcast's
current equipment and installation cbarges and the permitted equipment and
' installation charges approved herein."
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. An offense committed before the effective date of this Ordinance is governed by prior law
and the provision of the Code of Ordinances of the City of Allen, Texas, as amended, in effect when the
offense was committed and former law is continued in effect for this purpose.
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 THE CITY COUNCIL OF THE CITY OF ALLEN, COLLIN
COUNTY, TEXAS, ON THIS THE 9ra DAY OF NOVEMBER, 2004.
APPROVED:
I
APPROVED AS TO FORM: ATTEST:
Peter G. Smith, CIrY ATTORNEY S elley B. Georg ITY SECRETARY
Ordinance No. 2345-11-04, Page 4
I
E7HIBTT "A"
Reports from C2 Consulting
Ordinance No. 2345-11-04. Page 5
MONSULTING SERVICES, INC.
7881 Pencross (97Y)7Y6-7216
Dallas. Texas 75248 (972) 726-0212 Vex)
May 20, 2004
Ms. Mirenda McQuagge-Walden
Ms. Patricia Royal Nicks
Communications Manager
Cable Services Manager
City of Bedford
City of Irving
2000 Forest Ridge Drive
233 South Rogers Road
Bedford, Texas 76021
Irving, Texas 75060
Ms. Jennifer Fund
Ms. She0i Siemer
Finance Director
Assistant City Manager
City of McKinney
City of Allen
222 N. Tennessee
305 Century Plaza
McKinney, Texas 75069
Allan, Texas 75013
Mr. Steve Williams
Ms. Lynda Humble
Director of Budget and Research
Assistant City Manager
Town of Flower Mound
City of DeSoto
'
2121 Cross Timbers Road
211 E. Pleasant Run Road
Flower Mound, Texas 75028
DeSoto, Texas 75115
Ms. Jennifer Hibbs
Mr. James Kunke
Assistant to the City Manager
City of Lewisville
City of Grapevine
1197 W. Main Street
PO Box 95104
PO Box 299002
Grapevine, Texas 76099
Lewisville, Texas 75029
Ms. Dianne McWethy
Assistant City Manager
City of Colleyville
100 Main Street
Colleyville, Texas 76034
Dear City Representatives:
C2 Consulting Services, Inc. ("C2') provides this preliminary report concerning review of the
FCC Form 1205 submitted to the Cities by their respective Comcast Cable affiliate (collectively
termed "Comcast" or the "Company's on or about March 1, 2004. Contained herein is a summary
of the findings and recommendations.
This study does not constitute an examination of the financial condition of Comcast or its parent
' company. Therefore, C2 cannot and does not express any position with regard to the accuracy or
validity of the financial information provided by Comcast during the course of the analyses.
City Representatives
May 20, 2004
Page 2
OVERVIEW OF THE FILING
In its 2004 Form 1205 filing, Comcast proposes the following major changes:
• Significant increase in the Hourly Service Charge ("HSC") from the current charge
of $28.49 to a Maximum Permitted Rate of $35.17
• Resulting significant increases in unwired and pre -wired installation of 19% and
12%, respectively
• Additional outlet at initial time from installation to increase by approximately 23%
• Additional outlet at separate time from installation to increase by approximately 15%
• Non -addressable downgrade of service to increase by approximately 41%
• Comect VCR to increase by 24% to 46%
• Customer trouble call charge to increase by approximately 37%
• Added charge for Field Collection of $23.23
• Monthly Basic Only converter charge to decrease by approximately 35%
• Monthly Non -Basic Only converter charge and remote charge to increase by only
$0.03
• Separate HDTV converter charge of $8.33 per month
The above increases are based on a comparison of Comcast's 2003 Operator Selected Rates
("OSR") and the Maximum Permitted Rates ("MPR") proposed in this filing.'
Unlike the filing in 2003 which included only the former AT&T Broadband systems, Comcast
has filed a combined Form 1205 for all of its owned and operated systems. The filing is based on
the fiscal year 2003 data for the entire Company.
As with prior AT&T Broadband filings, the Company has used a statistical study to sample 20
systems of various size to determine the following component of the Form 1205:
• Annual customer equipment and installation costs excluding lensed equipment
• Annual hours devoted to equipment basket activities
• Annual hours devoted to leased equipment storage, maintenance and repair
• Time requirements for individual equipment basket activities
Essentially the same procedures were followed in the instant filing as were used by AT&T
Broadband in its prior filings with the exceptions noted below.
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 system and corporate levels,
and Comcast responses in requests for information, C2 has identified the following issues:
• Inappropriate inclusion of costs not previously unbundled during the Form 1200 process for
the Cities
- Property Taxes
' In the past, AT&T Broadband has filed Operator Selected Rates with its filing. Comcast has not included
any OSRs and has stated that it will not do so until 30 days prior to rate implementation. Therefore the
comparisons can only be under the assumption that Comcast will implement the MSR from this filing.
City Representatives
May 20, 2004
' Page 3
Insurance
- Utilities
• Inappropriate inclusion of commissions that are not clearly received only for the sale or
service of basic service
• Inappropriate computation of converter repair hours for one of the 20 sample systems
• Inappropriate computation of basic only converter rates
• Inappropriate inclusion of excessive inventory for HDTV converters
• Inappropriate inclusion of a Field Collection Charge
• Potential inappropriate rate for "Additional Digital Outlets."
1. Inclusion of Costs Not Previously Unbundled
C2 noted that them we three categories of costs included on Schedule B in the instant filing that
have never been included in any of the Form 1205s filed with the Cities: Utilities, Property
Taxes, and Insurance. This issue becomes important in that if costs were not included during the
"unbundling" process with the Form 1200, then it would be inappropriate to include such costs in
' subsequent Form 1205 filings. Based of the methodology used for unbundling, placing costs in
the equipment basket necessarily lowered the costs that were in the calculation of the monthly
service charge for basic service. Without prior unbundling from the computation of the monthly
service rams, inclusion in the computation of the equipment basket rates would now provide
Comcast with a "double recovery" of the costs; once from the monthly service charge, and again
from the installation and equipment rates.
The issue is further compounded by the fact that Comcast provided information that demonstrated
that it had included these costs in prior Form 1205 filings with Comcast only systems. However,
it did not provide information that it had actually "unbundled" these costa in the Form 1200
process, nor did it provide information that would override the fact that, in the case of the Cities,
these costs have never been "unbundled.'a Therefore, even if Comcast could show that its
Comcast -only systems did not have such costs included in the monthly service rates, them would
still be a double recovery in the case of the Cities, where "unbundling" did not occur by the
former system operator.
The FCC was clear on [his issue in its 1999 Memorandum Opinion and Order in DA 99-2227. In
that decision the Commissions found:
... Nothing in the statutes or the Commission's rules, however, suggests that cost
aggregation is permitted so that operators can recover the same costs through both
programming and equipment rates ...We recognize, as TCI argues, that the mix of
systems whose costs are aggregated in making equipment rates at the company level may
' r Comcast responded to a request for information concerning this issue with the following statement: "The
Form 1205 rates as proposed do not include any costs already included in programming rates." It is C2's
opinion that this statement is inaccurate given that Comcast cannot show that these costs were unbundled in
the case of the Cities.
City Representatives
May 20, 2004
' Page 4
include systems that did unbundle the costs disputed here as well as systems that did not.
TCI argues that addressing the unbundling issue now would be administratively
burdensome. Changing accounting practices when changing to company -wide cost
aggregation necessarily involves some burden, but this does not relieve an operator of
either the requirement in the statute and the Commission's rales that rates be based on the
company's actual cost experience... MACC was not unreasonable in concluding that
costs the operator previously chose to leave embedded in programming service rates in
the communities before us and continues to recover in those rates should not be recovered
at the same time through equipment rates in those communities .'
To avoid such a double recovery, C2 recommends that these costs be excluded in the 20 system
computations in order to determine the Annual Customer Maintenance and Installation Costs
found on Step A, Line 5. The impact of excluding these costs reduces Content's proposed
Hourly Service Charge by approximately $2.00 per hour.
2. Inclusion of Commissions for Technical, Installation, Dispatch, and Common Staff
Upon inspection of the supporting documentation provided by Comcast with respect to labor
costs, C2 noted that the amount of labor expense allocated to the equipment basket includes
commissions for technical, installation, dispatch, and warehouse 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.
' C2 requested that the Company provide a commission structure for each of the selected staff
categories. Comcast provided the following response:
The commission structure for different types of employees varies by system. However,
an employee would receive commissions on basic, digital and premium products. The
general types of commissions for dispatchers and CSRs are, but are not limited to, new
sales, upgrades, special products and sales of basic, digital and premium products. The
general types of commissions for technicians and installers are, but are not limited to,
new sales, upgrades, special products and sales of basic, digital and premium products.'
First, the Company did not provide any information that would allow for allocating to the
equipment basket only those commissions related to basic service. Secondly, the Company
confirmed that included within the commissions expense are costs that clearly should not be
allocated to the equipment basket.
In C2's opinion, these commissions should not be included in that they are given as a result of
staff being able to "sell" other levels of service in addition to basic service. The equipment
basket is only to be related to the basic service and not other tiers or individual programming.
The impact of excluding these costs is to reduce Comcast's proposed Hourly Service Charge by
approximately $1.00 per hour
' s TCI Cablevision of Oregon, Inc. Memorandum Opinion and Order, DA 99-2227, released October 21,
1999. Paragraphs 7-8.
° Response to RFI 1205-57 (Farmers Branch, received on or about April 3, 2004.
City Representatives
May 20, 2004
' Page 5
3. Converter Repair Hours
C2 has noted in prior filings that AT&T Broadband developed its contract labor hours by dividing
the total contract labor costs for repair and maintenance by the average hourly rate to repair such
equipment. Based on this methodology, if there existed no hourly rate for certain types of
equipment in the system included in the averaging calculation, the hours may not be correctly
computed.'
Comcast has continued with the same methodology. However, the only significant error
produced by this methodology is in the New England East sample system. Cement's proposed
hours based on the expense would indicate an hourly contractor rate of approximately $124.00.
This is well in excess of any other system. C2 recommends that at a minimum, the hours be
doubled for this system for purposes of determining contract labor hours. Additionally, as stated
in prior reports, the Company should only compute the hours based on the equipment that is
actually repaired by contractors and not based on a ratio of equipment never requiring outside
assistance.
The impact of this adjustment is de minimus in this case
4. Calculation of Basic Only Converter Rates
There we several issues with respect to Comcast's proposed $1.30 monthly charge for Basic Only
converters. To begin with, in the instant filing, Comcast has computed its Basic Only converter
rate by allocating approximately 6% of what it has purported to be standard (non -addressable)
converter costs. The 6% is based on the number of standard converter boxes as a percentage of
total standard and addressable converter boxes. This is a major change from the methodology
used by AT&T Broadband and Comcast in last year's filing with the Cities. In those prior cases,
the standard converter percentage was based on the number of basic only subscribers as a
percentage of the total number of standard converters 6
Second, the Company has included a category of costs that the data does not clearly support as
standard converters. The supporting documentation provided by the Company includes
approximately $26.5 million of'Non-Addressable Converters" and approximately $32.7 million
of "Converter Other." However, there are only 335,153 standard boxes reported. If these are the
total number of boxes that relate to both of these accounts, then the average purchase price of a
standard box is $177.00. Clearly this is not the case. In a follow up request for information, the
Company reported that, in fact, the "Converter Other' costs were capitalized labor costs for
initializing digital converters.' Therefore, it is clear from the evidence that the "Converter Other"
should not be included in the Basic Only category, but rather should be included in the Non -Basic
Only converter category.
' See Form 1205 analysis and report dated 2001.
For example, in the 2003 Form 1205 filing, the percentage of standard converter costs allocated to basic
only was 56.6%. The assumption is that all basic only subscribers have a standard converter (lowest level
of technology and cost) and any remaining standard converters costs are to be recovered by non -basic only
subscribers.
' Response to RFI 4.2, received on or about May 18, 2004
City Representatives
May 20, 2004
' Page 6
Given the various issues m described, it is C2's opinion that the Basic Only converter charge be
computed using only the "Non -Addressable Converters' allocated on the basis of total basic only
subscribers to total non -addressable converter boxes in service.
The impact of this adjustment, along with the recommended adjustments to the Hourly Service
Charge is to decrease the Basic Only converter rate from $1.30 to $1.20 and reduce the Non -
Basic Only converter rate from $4.83 to $4.73.
5. HDTV Converter Inventory
With respect to all of the equipment included on Schedule C of the Form 1205, the Company was
asked to provide supporting documentation from this books demonstrating the gross book and
accumulated depreciation balances for each accounts Within the documentation, all other
accounts were reported based on the line item termed "Comcast Cable Operations." The HDTV
converter account includes "Comcast Cable Operations" and "Cable Division Headquarters."
The additional $32.7 million termed as "Cable Division Headquarters" raises several issues.
First, based on Comcast's response to RFI 1205-33, the additional $32.7 million is all inventory
that had not been shipped out to system operations. This response suggests not only that there are
no in-service units connected with these costs, but also that Comcast response to RFI 1205-52, in
which the Company states that there are no common assets included in this filing, is inaccurate.
'
The issue surrounding the appropriateness of including the additional $32.7 million in HDTV
converter inventory is whether by doing so, the Company will over -recovery its original cost of
these assets. It is C2's understanding that the purchase of these assets was at the end of the fiscal
year 2003. The HDTV service was launched by the Company at about the same time period.
Therefore, one would assume that with the onset of the service availability, there would be a
demand for the converters. That being the possibility, the end of year inventory could well be in
service as of the writing of this report. If the Cities allow the costs of the "inventory" and do not
reflect the likely subsequent in-service of the converters, Comcast will over -recovery its costs.
Comcast provided follow-up information concerning this and other HDTV inventory.9 The total
reported HDTV inventory as of 12/31/04 was at a minimum 150,487. Based on the reported in
service number of 293,125, this inventory equates to 34%. In C2's opinion, such an inventory is
excessive and should not be allowed in setting the HDTV converter rates. The impact of this
adjustment reduces Comcast's proposed HDTV converter rate from $8.33 to $6.68.
6. Proposed "Field Collection Charge"
In the instant filing, Comcast is proposing to use the HSC to charge for activities related to "Field
Collection." This issue was reviewed by cities served by TCI in the 1997 filings and it was
concluded that such a charge was inappropriate. And it was considered inappropriate on the same
basis as the unbundling issue discussed above with respect to certain Schedule B costs. Therefore,
establishing a separate rate for these activities now would result in a double recovery. C2 also
notes that this charge has not been included in any of the prior rate schedules adopted by the
s See response to RFI Form 1205-20A, received on or about April 3, 2004.
9
The inventory provided with respect in the individual systems is understated as Comcast did not have
'
information on many of its system. However, the inventory that was reported for HDTV converters was
50,957.
City Representatives
May 20, 2004
' Page 7
Cities. C2 recommends that the Cities consider disallowing a separate charge for "field
collection."
7. Additional Digital Outlet Charge
In October 2003, the Company proposed an "Additional Digital Outlet" charge of $5.95 per
month. C2 requested that the Company justify this charge. Comcast took the position that the
charge was unregulated, and therefore, no justification was required.
C2 recommended that the charge be $0.0 for additional digital outlets, and the Cities adopted this
position. The issue is on appeal with the FCC, but no stay of the Cities' rate ordinances has been
issues. Therefore, at this time, the only rate that can be charged for "Additional Digital Outlets"
is $0.00 In the event that Comcast proposes an "Additional Digital Oudef' charge for the new
rate period, C2 recommends that the Cities disallow such charge without justification from
Comcast.
SUMMARY OF RECOMMEDATIONS
Based on the above findings and conclusions, the Cities should consider taking the following
actions:
' 1. Establish an Hourly Service Charge of $31.97 to be used in the development of the
installation and equipment rates.
2. Adopt maximum permitted installation and equipment rates as shown on Attachment A.
3. Develop a rate ordinance for review by the City Council only after the Company provides
the OSR in accordance with any effective tolling order and set the effective date
accordingly."
C2 appreciates having this opportunity to work with the Cities in review of the Form 1205 rates.
If you have any questions regarding this report or need clarifications as to the recommendations,
please contact Ms. Connie Cannady at (972) 726-7216.
Very truly yours,
C2 Consulting Services, Inc.
10 For the Cities of DeSoto, Bedford, Colleyville, Grapevine, McKinney, and Flower Mound: To the extent
that the OSR information is received subsequent to November 1, 2004, the effective date should be
' changed frm December 1, 2004 to allow for a thirty (30) day period from the time the OSR is received
(thus satisfying the tolling order) and the effective date ofthe rates. The Cities of Lewisville, Allen, and
Irving will have an effective date of June 1, 2004.
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MONSULTING SERVICES, INC.
7801 Pencross (972)726-7216
Dallas. Texns 75248 (972) 726-0212 [I=)
July 30, 2004
Ms. Shelli Siemer
Assistant City Manager
City of Allen
305 Century Parkway
Allen, Texas 75013
Dear Ms. Siemer:
C2 Consulting Services, Inc. ("C2") provides the following final report concerning a review of
the FCC Form 1240 submitted to the City of Allen, Texas (the "City'? by Comcast of
California/Colorado/Elinois/Texas, Inc. ("Comcast" or the "Company'l on or about March 1,
' 2004. Contained herein is a summary of the findings and recommendations.
This study does not constitute an examination of the financial condition of Comcast or its parent
company. Therefore, C2 cannot and does not express any position with regard to the accuracy or
validity of the financial information provided by Comcast during the course of the analyses.
OVERVIEW OF THE FILING
According to the information provided by Comcast, the number of basic service channels
remained at twenty-eight (28) during the true -up periods. No additional changes are proposed
through May 2005.
Comcast has filed a Maximum Permitted Rate ('WR'j for the Form 1240 of $13.07, which is
not inclusive of the FCC User Fee. In order to make a comparison to the current rate, we most
add to the filed rate Comcast's proposed $0.06 monthly FCC User Fee. The result is an effective
Form 1240 rate of $13.13; $0.43 higher than the current maximum permitted rate for the Form
1240 of $12.73. With the added MPR for the Form 1235 of $1.19, the proposed rate is $1.49
higher than the currently charged rate of $12.83. Comcast originally chose not to provide its
actual Operator Selected Rate ("OSW) and the City issued a tolling order. The City subsequently
dropped its tolling order retaining the effective date of June 1, 2004 for this filing. On June 14,
Comcast provided an OSR of $13.52 for the system that is inclusive of both the Forth 1240 and
the Form 1235.
' Another noted change from prior filings is that Comcast is requesting a second true -up period for
the month of December 2003. This provides for the entire calendar year of 2003 to be true -up so
Ms. Shelli Siemer
July 30, 2004
Page 2
' that future true -up periods will begin with January. The FCC rules allow for such an adjustment
and provide far the computation of a second true -up period in Module G of the Form 1240.
There are three major factors that explain Comcast's proposed change in the MPR for basic
service:'
1. The actual inflation rate was greater than the rate used in the projected period in the 2003
filing along with the added inflation for the projected period in this filing. This results in
an increase to the current rate of approximately $0.25 per subscriber per month.
2. The under -recovery due to the OSR versus the MPR from 2003 results is an additional
$0.09 per subscriber per month.
3. The external costs are projected to increase by approximately $0.05 per subscriber per
month as compared to the 2003 projected costs.
ANALYSIS OF THE FILING
Project Objectives and Activities
The project objectives are three -fold:
1. Assessment of the completeness of the filings with regard to the information and
documentation that must be filed with the City
2. Assessment of the reasonableness of the proposed computations in light of City's
prior rate decisions, FCC regulation, recent FCC rulings, and rate treatment in other
similar jurisdictions
3. Assessment of the reasonableness of the proposed computations in light of the system
specific costs and subscriber data
Given these objectives, C2 conducted the following project activities:
• Review of the filing to assess the completeness based on the FCC Form instructions
• Review of the filing to identify any issues with respect to the data and/or
methodologies employed by Comcast
• Submission of follow-up data requests and subsequent review of Comcast's
responses
• Development of potential alternatives available to the City in establishing maximum
permitted basic service rates
• Review of programming contracts provided by Comcast subsequent to the
preliminary report
Summary of Findings
C2 identified four main issues with respect to Comcast's proposed computation of the basic
service rate. These issues are:
• Comcast incorrectly computed its FCC User fees based on the FCC order;
'Again, these comparisons can only be made if the $0.06 FCC User Fee is added to Comcast's proposed
MPR for the Form 1240.
Ms. Shelli Siemer
July 30, 2004
Page 3
' • Comcast has not supported its requested increases in programming costs;
• Comcast has not explained discrepancies in subscriber counts for certain months
included in the analysis; and
• Given the above changes, the inflation factor should be refreshed in accordance with
FCC rules.
1. Incorrect Computation of FCC User Fees - As originally discussed in the Preliminary
Report
The FCC has found that the FCC User Fee should be one of the components of the external costs
calculated on Worksheet 7. This is evidenced by the Form 1240 Instructions for Worksheet 7 that
requires:
Line 708 Commission Regulatory Fees For the Period. Enter the total Commission
regulatory fees for the period.
Also on point is 47 C.F.R. §76.922(£)(1), which provides:
External costs shall consist of costs in the following categories:... (vi) Commission cable
television system regulatory fees impose pursuant to 47 U.S.C. § 159.
' In the instant filing, Comcast has excluded FCC User Fees in its projected period. Based on
Comcast's response to a request for information asking for the Company's rationale for such
exclusion, the Company stated:
H
The monthly recovery schedule for this fee is determined by the FCC and allows for
adjustment more than one time per 12 -month period, if required... We believe it is
appropriate to remove this fee from the FCC Form 1240 filing. This treatment has been
found acceptable by other regulated LFAs in the Atlantic Division.'
In C2's opinion, if the FCC did not believe that FCC User Fees should be included in the Form
1240 computation, it would have amended the formulae. Therefore, it is inappropriate and not in
compliance with the FCC instructions for the Company to exclude the FCC User Fee in
developing the MPR for basic service.
With respect to the actual computation of the rate, Comcast proposes to collect $0.06 per month
during the Projected Period of June 1, 2004 through May 31, 2005. However, in accordance with
the FCC regulations, this proposal would provide the Company with the potential to overcollect
the actual payment made to the FCC in September 2003. More specifically, the FCC issued the
required payment for 2003 at $0.66 per subscriber based on the level of subscribers as of
December 2002. Given that the subscriber count at that time was 35,375, the total payment to be
recovered during the period October 2003 through September 2004 is $23,347.50. If a $0.06 rate
is implemented as proposed, the Company will overcollxt based on its projected subscriber
counts. Therefore, in order to set the appropriate amount of FCC Use Fees, the rate per month
should be adjusted to reflect the amount paid and that amount should be included in setting the
maximum permitted rate for basic service.
'Response to Allen RFI 1240-11 received on or about April 22, 2004.
Ms. Shelli Siemer
July 30, 2004
Page 4
In the instant filing, the adjustment to the Projected Period to not only include FCC User Fees as
required, but to develop the maximum amount that can be collected results in an increase to
Comcast's rate shown on Line 19 of approximately $0.058. However, with Comcast's proposal to
charge the $0.06 separately from the Line 19 rate, the adjustment is, in reality, a slight decrease to
the total rate that will be charged to the subscriber.
2. Unjustified Programming Expense— As originally discussed in the Preliminary Report
Based on the Form 1240 formulae, programming expenses paid to outside programmers are to be
trued -up and projected for the new rate year. On the Allen basic service tier, there are four
channels that require additional programming costs be included in the rate development.
Comcast proposes to increase the average programming cost per subscriber by approximately
$0.02 over the programming rates included in the 2003 rate decision.
hr order to assess the reasonableness of the programming cost increases, the City submitted the
following request for information:
Provide supporting documentation used for the development of the programming costs
shown on Attachment 4 to the filing and used in the development of costs on Worksheet
7. Include in your response actual contracts, invoices, correspondence, and programmer
notification, which supports the amount directly, or indirectly assigned as well as
programming costs by channel....'
' The Company responded that it would provide such information with the execution of a
confidentiality agreement. However, subsequent to such execution, Comcast provided what it
termed as "Programming Invoice Information," but did not provide any contract supporting
documentation, hr fact, the invoice information only showed the City specific line item, and was
described by Comcast as being internally generated. In an e-mail communication with a Comcast
representative, the following statement was made:
The Corporate Programming Department generates these invoices on a monthly or
quarterly basis depending on programming service. This is a more efficient methodology
than having the MSO provide the appropriate subscriber counts to each programming
vendor to generate an invoice back to the MSO.'
However, without contractual information supporting the development of the invoice costs, the
Company has not provided the necessary information to the City for verification of accuracy. The
FCC has been very clear on the issue of providing supporting documentation, even if such
documentation is considered confidential and proprietary. hi the Third Order on
Reconsideration, the FCC found:
In the Rate Order, we stated that franchising authorities will have the right to collect
additional information -including proprietary information -to make a rate determination in
H
those cases where cable operators have submitted initial rates or have proposed increases
s
' RFI 1240-7, submitted to Comcast on or about March 15, 2004.
' Email from Mr. Craig Schmid to Ms. Connie Candy, dated April 13, 2004
' Third Order on Reconsideration, 9 FCC Red. 43161994), paragraph 74
Ms. Shelli Siemer
July 30, 2004
Page 5
...we find that franchising authorities and the parties to a rate proceeding must have
'
access to the information upon which the rate justification is based. Such access is
essential to permit the franchising authority to make an informed evaluation, based an
complete information, of the reasonableness of the rate in question s
In fact, Comcast's own attorneys petitioned the FCC in 1995 to restrict the access to such
information by proposing to provide an external auditor letter that the proprietary information
concerning programmer contracts was true and correct. In response to that request, the FCC
declined to consider the request without a formal rulemaking procedure and reaffirmed the
findings in the Third Order on Reconsideration!
Without such information, the City may consider disallowing any change in programming costs
over that approved in the tie-up period of the 2003 review. To do so would reduce Comcast's
proposed Form 1240 rate by approximately $0.12.
Alternatively, if the City accepts the "invoice" information provided as support for its rate
computation, C2 notes that there still exists some errors with respect to the monthly costs
reported. These include the reporting of higher rates for two months on the Form 1240 than
supported by the invoices. Correcting only for this error results in a decrease to Comcast's
proposed Form 1240 rate of approximately $0.01.
Update to the Preliminary Report
In its response to the Form 1240 preliminary report, the Company criticized C2 for not
'
acknowledging C2's review of certain contracts provided to the City of Dallas. However, C2
notes that the preliminary report was issued prior to the City of Dallas being able to obtain the
contractual documents. C2 also points out that even if the documents had been provided prior to
the issuance of the preliminary report, C2 was bound by a Comcast required confidentiality
agreement not to use such information for any other city analysis.
Given these circumstances, C2 issued afollow-up request to Comcast that the Company provide
all contracts related to the City of Allen. On July 19 , these contracts were made available with
C2 follow-up questions answered by Comcast on July 29, 2004. Based on the contractual
information and explanatory responses, C2 finds that the proposed programming costs for the
City of Allen are significantly overstated. The proposed costs do not take into account certain
rate issues provided for in the contracts.
Computing the rates based on the new information reduces Comcast's proposed programming
expense by approximately $0.06.
3. Conflict in Subscriber Counts— As originally discussed in the Preliminary Report
During the 2003 rate review, C2 requested the monthly subscriber counts from December 2002
through February 2003. These counts were used to evaluate the reasonableness of the projected
period subscribers and to determine the FCC user fees for the December 2002 year. Of corpse,
these three months are part of the true -up period in this filing, with the subscriber counts used to
Ibid., paragraph 77.
' Letter to Cole, Raywid & Braverman from the FCC, DA 95-1175, released May 26, 1995
Ms. Shelli Siemer
July 30, 2004
Page 6
determine programming expense, FCC user fees, copyright fees and the projected period
subscriber counts.8
A comparison of the December 2002 through February 2003 counts provided last year to those
included in this filing revealed an approximate I% discrepancy. Comcast reported these counts
lower than reported in this filing. When asked to explain, the Company did not provide an
explanation, but merely stated:
There are minor variances between these totals ...these total are the basis for the
Company's annual SEC 10K filing."
hr C2's opinion, the counts should not change from one year to the next for the same monthly
historical periods. Therefore, C2 recomputed the subscriber counts using the originally provided
information. The impact on the rate is less than $0.01.
4. Refreshing the Inflation Factor - As originally discussed in the Preliminary Report
The fourth issue relates to the inflation factor used for both the true -up periods and the projected
period. The Form 1240 methodology allows for an inflation adjustment to be projected for each
rate year. Such projection becomes part of the true -up computation in the next rate filing. Based
on FCC regulations, a cable operator is to use the most recent information published by the FCC
concerning quarterly inflation factors to be applied.10
'
Comcast has recognized this requirement in an amended filing that it recently submitted to the
City of Dallas in which it changed the fourth quarter 2003 inflation factor from 1.66% to 1.50%
and continued to use the 1.50% for the projected period. Making this adjustment changes the
true -up periods to reflect all actual inflation factors and projects inflation based on the 1.50% for
the period June 1, 2004 through May 2005. The impact of this change is to reduce Comcast's
proposed rate by approximately $0.025.
Update to the Preliminary Report
On July 12, 2004, the FCC issued the First Quarter Inflation Factor for Form 1240s of 2.84%. As
this is the most current factor, it must be used for the projected period of this filing in place of the
earlier factor of 1.50%. The change in inflation factors actually increases the Company's request
to a point that the originally filed rate is reasonable when the FCC user fee is added.
SUMMARY OF PRELIMINARY RECOMMENDATIONS
Based on the above discussion, the City should consider the following:
• Adjust the FCC User fees to reflect inclusion in the external cost calculation.
• Adjust the programming expense to disallow those costs that have not been supported
by contractual information
• Reflect subscriber counts as originally provided
° Comcast used the average subscribers for the nue-up period as the monthly projected period subscribers.
Response to RFI 1240.5, received on or about April 22, 2004.
10 FCC Form 1240 Instructions, Part I: Module C [Revised July 1996].
Ms. Shelli Siemer
July 30, 2004
Page 7
Refresh the inflation computation to include the actual fourth quarter inflation factor
in the true -up periods and the first quarter inflation factor for the projected period.
With the changes above, the City should consider adopting a Form 1240 MPR of
$13.13 (Che Company's filed rate of $13.07 with the additional $.06 FCC user fee
included).
C2 greatly appreciates this opportunity to assist the City of Allen in its review of the Form 1240
filing. If you have any questions concerning these findings and recommendations, please contact
Ms. Connie Cannady at 972-726-7216.
Very truly yours,
C2 Consulting Services, Inc.
j