On March 1, 1999, Tele-Communications, Inc. (TCI) submitted the required Federal Communications Commission (FCC) forms 1205/1240 to the City for annual rate adjustments to be implemented on June 1, 1999. FCC rules allow twelve months from the date the forms are submitted for each franchise authority to complete their review and take any action deemed necessary. With the assistance of a consultant, staff completed a review of TCI’s 1999 rate adjustments. A comparison to the 1998 rates indicates an increase in the rate for the Basic Service Tier, decreases for installation charges, minimal increases in equipment charges and an increase in the rate for the Expanded Basic Service Tier. According to FCC regulations, the City as a local franchise authority may regulate only the rates for the Basic Service Tier and associated equipment and installation charges.

Based on consultant and staff review, extensive discussions with TCI, and courses of action allowable under federal regulations, staff recommends Council issue a Rate Order approving the 1999 Basic Service Tier rate of $12.12 (excludes FCC regulatory fees) provided TCI uses $12.03 (excludes FCC regulatory fees) as the maximum permitted Basic Service Tier rate for the March 1, 2000 submittal.

The goals of the "Cable Television Consumer Protection and Competition Act of 1992" (Cable Act of 1992) were to promote competition and to curb excessive rate increases and other customer service abuses by cable operators. Local governments were granted limited authority to regulate basic cable television rates for programming, service and equipment if they chose to become certified to perform such regulation.

The City completed the federal certification process for rate regulation and became a Local Franchise Authority (LFA) in November 1993. Since 1993, FCC rules relating to cable television rate regulation have changed numerous times.

Cable Franchise Agreement (12/14/90-12/13/2005)

City Charter Article XVI Sections 1600-1608

Federal Communications Commission Rules and Regulations

The FCC allows a local franchise authority, such as the City of Sunnyvale, to regulate the Basic Service Tier rates for cable television programming, installation and equipment. The Basic Service Tier consists of the local television broadcast stations and any public, education and government (PEG) access channels, such as KSUN and SE-TV. A cable operator may, and usually does, elect to include additional services on this tier.

Prior to April 1, 1999, the FCC regulated the cable programming services tier, commonly referred to as Expanded Basic; therefore, the City of Sunnyvale had no regulatory authority for this tier. The Expanded Basic Service Tier usually includes all programming services that are not on the Basic Tier and are not Premium Services, such as Home Box Office (HBO), or pay-per-view. Examples of Expanded Basic programming include: Lifetime; Cable News Network (CNN); Music Television (MTV); and Turner Broadcasting System (TBS).

As of March 31, 1999, the FCC's regulatory authority regarding the Expanded Basic Service Tier rates expired. Similar to premium services programming, such as HBO, Cinemax, and pay-per-view programming, Expanded Basic Service Tier rates are now exempt from regulation at any level, local or federal.

On March 1, 1999, TCI submitted to the City the required FCC forms (1205/1240) for rate adjustments to be implemented on June 1, 1999. The timing of this submittal was consistent with FCC rules requiring cable operators to submit forms to the LFA no later than 90 days prior to the rate implementation date.

Under current FCC rules, proposed rate adjustments may go into effect 90 days after submission. However, the LFA may order a refund at any time up to one year from the date the forms for the adjusted rates were filed, if certain conditions were met. For example, at the end of the review period, if the cable operator asks the LFA about its intention to issue a Rate Order (either approving or disapproving the rates), the LFA has 15 days to respond. If no response is provided during that time, the LFA loses the ability to order subsequent refunds. The 1999 TCI rates for Sunnyvale went into effect on June 1, 1999. TCI has not inquired about the City’s intention to issue a Rate Order; therefore, the City has until February 29, 2000, to order a rate reduction or refunds if the rates are found to be unreasonable and/or inconsistent with the FCC rules.

Previously, cable operators could recover costs only after costs had been incurred. Under current rules, operators may also project costs which are "reasonably certain and reasonably quantifiable". Therefore, the rate adjustment for the 1999 annual filing includes:

• costs that were incurred by the operator since the end of the period covered by the last filing;
• a "true-up" process for undercharges and overcharges related to the previous year (12/1/97-11/30/98) and
• estimated costs that will be incurred for the next twelve-month period (6/1/99-5/31/2000).

Due to the complexity of the FCC rules, the City engaged the services of a consultant to assist with reviewing the proposed rate adjustments for compliance with FCC rules. The consultant, Telecommunications Management Corporation (TMC) of Los Angeles has previously provided rate regulation assistance to the City and is familiar with the history of rate regulation in Sunnyvale and other cities in Northern California. TMC prepared a written review of TCI's FCC Forms 1205/1240 (Attachment A).

With limited exceptions, a cable operator who files Form 1240 is allowed only one rate change per year. It is for this reason that the Form 1240 is required to be accompanied by a Form 1205 (equipment and installation rates). When all regulated subscriber rates are changed at the same time, the subscriber experiences only one annual rate change. The City received TCI’s Forms 1205/1240 and supporting materials on March 1, 1999, for a rate adjustment to be implemented June 1, 1999. Documentation submitted by TCI indicated rate increases for the Basic Service Tier and some equipment while installation charges remained the same or decreased (Attachment B).

The consultant noted Forms 1205 and 1240 were completed in a manner consistent with FCC Rules; however, some components merited further discussion with TCI.

Form 1205

• Amortization associated with the unfunded deferred tax balance
• Insurance allocated to each system
• Allocation of security devices

In previous Forms 1205, TCI provided specific references in the "Preparation Documentation" for these items. The 1999 submission was silent on these issues.

When asked about the items, TCI provided a written response dated April 15, 1999 (Attachment C). The City's consultant deemed the response acceptable.

Form1240

The original Form 1240 submitted in March 1999 contained errors related to corrections made by the City on the Form 1240 submitted in 1998. At that time, the City disallowed certain alleged "franchise related costs" and determined the proposed 1998 rate of 11.96 (excludes FCC regulatory fee) to be unreasonable and issued a Rate Order (1/99) identifying a lower maximum permitted rate of $11.81 (excludes FCC regulatory fee)

TCI appealed the City's Rate Order to the FCC. FCC regulations require the cable operator to use the City's Rate Order as the basis for subsequent rate filings until the FCC rules on the outstanding appeal. The March 1999 filing submitted by TCI used $11.96 instead of $11.81 as stated in the City's Rate Order.

In April of this year, TCI offered to withdraw its appeal of the City's Rate Order and use the prescribed rate as the basis for the 1999 calculation. In May the City accepted TCI's proposal to file a Joint Motion to Withdraw Appeal of Local Rate Order. As agreed, TCI then submitted a revised Form 1240 identifying $11.81 as the basis for the 1999 calculation. In the revised form, TCI identified a maximum 1999 permitted rate equal to the $12.12 (excludes FCC regulatory fee) it planned to implement on June 1, 1999

However, the revised Form1240 did not implement the City's rate order to the extent anticipated by the City. The revised Form 1240 included a small amount of disputed franchise-related costs, which were not challenged by the City in 1997. TCI took the position that the costs were already approved by the City and should be included. In contrast, the City and its consultant took the position that the calculations used in determining the 1998 rate order were those that were agreed to be used and should be the basis for the 1999 Form 1240. Based on this approach and the consultant's calculations, the maximum permitted rate was $12.03, instead of $12.12.

After lengthy discussion, TCI conditionally agreed with the City and filed a "Working Copy" of Form 1240 for the City's review. TCI requested that the "Working Copy" of Form 1240 and the maximum permitted rate of $12.03 be used as the basis for the rate filing to be submitted in March 2000 for implementation June 1, 2000.

The consultant recommended to City staff that this proposal be accepted based on the following:

• If the City does not accept the implementation delay and issues a rate order identifying a different maximum permitted rate for 1999, TCI will likely file an appeal with the FCC. There is no specified timeframe for FCC action; therefore, should the FCC rule in favor of the City (which is not a certainty) implementation of the rate change would probably not occur before 2000 at the earliest.
• Administrative time and effort to pursue a new rate order and to respond to the appeal outweigh the potential benefit to subscribers. Even if TCI did not appeal the City's rate order, TCI's expenses for new rate cards and notices to subscribers would likely exceed the amount of any refund. Further, TCI could raise its Expanded Basic Service Tier rate (not regulated by either the FCC or the City) to balance the reduction in the permitted Basic Service Tier rate.
• TCI's earlier agreement, although not entirely consistent with the City's understanding, provided a subscriber benefit of a lower Basic Service Tier maximum permitted rate than otherwise would have been allowed. Further, TCI's agreement to an even lower maximum permitted rate for the Basic Service Tier will result in a smaller increase in the rate for 2000 (a result of the true-up process).

Staff agrees with the consultant's recommendation that the 1999 Basic Service Tier rate of $12.03 is reasonable instead of the $12.12 implemented by TCI. Since FCC rules permit TCI to offset this Basic Service Tier overcharge with equipment and installation undercharges, it is likely refunds would not be due to subscribers. By TCI accepting the maximum permitted rate of $12.03, the rate calculated for the 2000 Basic Service Tier would be less than it would have been otherwise.

Changes in cable rates may increase or decrease gross revenues collected by TCI. The 5% franchise fee paid to the City is based on the cable provider's gross revenues; therefore, any increase or decrease in cable rates may impact the total franchise fees TCI pays to the City.

A copy of the consultant report was provided to TCI and TCI responded to the report in a letter dated September 30, 1999 (Attachment D).

Publication and posting of the City Council Agenda. Copies of this Report to Council were forwarded to TCI. This report is also available in the Sunnyvale Library and on the City's Internet Home Page.

Based on information provided by TCI, the consultant/staff review, and courses of action allowable under federal regulations, three alternative courses of action are identified:

1. Take no action on the 1999 Basic Service Tier selected rate of $12.12. This would allow the Basic Service Tier rate of $12.12 (excludes FCC regulatory fee) implemented on June 1, 1999, to stand.
2. Determine the 1999 Basic Service Tier rate of $12.12 as indicted in Form 1240 "Working Copy" to be reasonable and calculated in a manner consistent with FCC regulations. Direct staff to issue a Rate Order to that effect and requiring TCI to use a maximum permitted rate of $12.03 and the data contained in the "Working Copy" as the basis for the March 1, 2000, filing for implementation June 1, 2000.
3. Determine the 1999 Basic Service Tier rate of $12.12 (excludes FCC regulatory fees) to be unreasonable and direct staff to issue a rate order to that effect indicating a rate of $12.03 (excludes FCC regulatory fees) as reasonable. This action will likely result in an appeal by TCI to the FCC, and a delay in implementing the rate until the FCC rules on the appeal.

Staff recommends Alternative No.2.

Prepared by:

Katherine Bradshaw Chappelear
Executive Assistant to the Director

Reviewed by:

Encarnacion Hernandez, Director
Information Technology Department

Approved by:

Robert S. LaSala
City Manager