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June 25, 2002
SUBJECT: 2002 AT&T Broadband Cable Rates
On
March 1, 2002, AT&T Broadband submitted Federal Communications Commission
(FCC) Forms 1205 and 1240 to the City for the annual rate adjustments to be
implemented on July 1, 2002. Cable
operators who file the Form 1240 for basic service rates are allowed only one
rate change per year for regulated services; therefore, a Form 1205 was also
submitted for equipment and installation rates. As a result, the subscriber experiences only one annual
rate change. With the assistance of
a consultant, staff completed a review of AT&T Broadband’s 2002 rate
adjustments. A comparison of the
2002 rates to the 2001 rates indicates an increase in the rate for the Basic
Service Tier as well as for converters and some installation charges.
There is a decrease in the charge for remote control equipment,
and many installation charges remain unchanged.
The City’s regulatory authority is limited by FCC regulations to the
Basic Service Tier and the equipment and installation services associated with
this tier.
Based
on consultant and staff review, discussions with AT&T Broadband, and courses
of action allowable under Federal regulations, staff recommends that Council
determine that the Maximum Permitted Rate for the Basic Service Tier and related
equipment and installation charges as calculated by AT&T Broadband are
reasonable and consistent with FCC regulations.
The City’s regulatory authority is limited by FCC regulations to the Basic Service Tier and the equipment and installation services associated with this tier. The City’s consultant, Telecommunications Management Corp., has reviewed the Forms 1205 and 1240 filed by AT&T Broadband for the City since 1994. The scope of TMC’s review is to determine whether the projected programming costs are “reasonably certain and reasonably quantifiable” and the costs indicated appear to be within a range of reasonableness accepted by the City in the past. AT&T Broadband’s proposed “selected rate” is less than the “permitted rate” calculated in the Form 1240 and has been less than the permitted rate for the past two years. The rate increase for the Basic Service Tier from 2000 to 2001 was $0.59 or 4.9% (from $11.97 to $12.56 with the maximum permitted rate being $13.48, excluding franchise and FCC regulatory fees). The change in rates for the Basic Service Tier from 1999 to 2000 was a decrease of $0.15 or 1.2% (from $12.12 to $11.97 with the maximum permitted rate being $12.22, excluding franchise and FCC regulatory fees). Council approved the AT&T Broadband Maximum Permitted Rate for the Basic Service Tier and directed staff to issue a Rate Order to that effect in the previous two years.
Cable Franchise Agreement (12/14/90 – 12/13/2005)
City Charter Article XVI, Sections 1600-1608
Federal Communications Commission Rules and Regulations
Limits
of City Authority to Regulate Cable Rates
The
FCC allows a Local Franchise Authority (LFA), such as the City, to regulate only
the Maximum Permitted Rate for the Basic Service Tier for cable television
programming and the equipment and installation services associated with this
tier. The Basic Service Tier
consists of local television broadcast stations and any public, education and
government (PEG) channels such as KSUN, Channel 60, and SE-TV.
Before
April 1, 1999, the FCC regulated the Cable Programming Services Tier, commonly
referred to as the Expanded Basic Service Tier, and the City had no regulatory
authority for this tier. The
Expanded Basic Service Tier includes all programming services that are not on
the Basic Service Tier and that are not Premium Services, such as Home Box
Office (HBO) or pay-per-view. Examples
of Expanded Basic programming are Lifetime, Cable News Network (CNN), Music
Television (MTV), and Turner Broadcasting System (TBS).
On
March 31, 1999, the FCC’s regulatory authority regarding the Expanded Basic
Service Tier expired. Similar to
Premium Services programming and pay-per-view programming, Expanded Basic
Service Tier rates are now exempt from regulation at any level.
Current
Rules for Rate Regulation
On
March 1, 2002, AT&T Broadband submitted the required FCC Forms 1205 and 1240
to the City for rate adjustments to be implemented on July 1, 2002.
The timing of the 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. The 2002 AT&T
Broadband rates are to go into effect on or about July 1, 2002.
However, the LFA has 12 months from the date the Form is filed to order
refunds, if certain conditions are met.
Previously, cable operators could recover costs only after costs had been incurred. Under current rules, operators may project costs which are “reasonably certain and reasonably quantifiable.” The rate adjustments for the 2002 annual filing include:
a “true-up” process for undercharges and overcharges related to the previous year (December 1, 2000 through November 30, 2001); and
estimated costs that will be incurred for the next 12-month period (June 1, 2002 through May 31, 2003).
Analysis
of Current Rates
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 Corp. (TMC) of Los Angeles has provided rate
regulation assistance to the City since 1994 and is familiar with the history of
rate regulation in Sunnyvale and other cities in northern California.
TMC provided a written review of AT&T Broadband’s FCC Forms 1205
and 1240 to the City (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 1205 (for equipment and installation rates) is
required to be filed with the Form 1240. When
all regulated subscriber rates are changed at the same time, the subscriber
experiences only one annual rate change. The
City received AT&T Broadband’s FCC Forms 1205 and 1240 on March 1, 2002
for a rate adjustment to be implemented on July 1, 2002.
Attachment B contains the documentation submitted by AT&T Broadband
for an increase in the rate for the
Basic Service Tier as well as for converters and some installation charges.
There is a decrease in the charge for remote control equipment,
and many installation charges remain unchanged.
A
copy of the consultant report was provided to AT&T Broadband and AT&T
responded to the report in a letter dated June 12, 2002 (Attachment C).
Consultant’s
Comments – FCC Forms 1205 and 1240
Form
1205 computations have been computed accurately. In the opening paragraph of its “Preparation
Documentation”, AT&T Broadband indicates that it has chosen to aggregate
its costs at the company level. A
FCC ruling issued in 1996 permits this. AT&T
Broadband goes on to indicate that “The average hours per installation, costs
and hours of installation and maintenance of customer equipment were based on a
sample of AT&T Broadband cable systems.”
A copy of the “Sampling Plan & Analysis for AT&T Broadband
Rates” was provided that documents the methodology utilized in determining the
averages. Some cities have
challenged whether the sample methodology is an appropriate means of
establishing estimates. Most cities
(including the City of Sunnyvale) have accepted the methodology as one
reasonable attempt to estimate actual costs.
AT&T
Broadband indicates that it has elected to charge less than the maximum
permitted rate for all equipment and installation rates.
Figure 1 in Attachment A summarizes the “permitted” and
“selected” rates. The
regulatory authority of the City is for the “permitted” rate, the only rate
which can be found to be reasonable or unreasonable.
Form 1240 was completed in a manner consistent with the FCC regulations with the following notations:
The rate for Basic Service is increasing from $12.56 to $13.09 (excluding franchise fees and the FCC regulatory fee). This change is $0.53 or 4.2%. This is less than the maximum permitted rate of $14.68.
Calculations for the “Expanded Basic” rate are not provided since this service is no longer submit to rate regulation.
AT&T Broadband will be adjusting its rates on July 1, 2002, one month later than permitted.
AT&T Broadband does not indicate any planned programming changes for the Basic Service Tier through the projected period of June 1, 2002 through May 31, 2003.
In October 2001, the TV Food Network was dropped from the Basic Service Tier and KMTP (an independent broadcast channel) was added.
The number of Sunnyvale Basic Service subscribers increased from 28,268 in 2000 to 29,539 in 2001 representing a 4.5% increase.
Changes in cable rates may increase or decrease gross revenues collected by AT&T Broadband. The 5% franchise fee paid to the City is based on the cable operator’s gross revenues; therefore, any increase or decrease in cable rates may impact the total franchise fees that AT&T Broadband pays to the City.
Public contact was made through posting of the Council agenda on the City’s official notice bulletin board, posting of the agenda and Report on the City’s web page, publication of the Council agenda in the San Jose Mercury News, and the availability of the Report in the Sunnyvale Public Library and City Clerk’s Office. A copy of the Report was also provided to AT&T Broadband.
ALTERNATIVES
Based
on information provided by AT&T Broadband, consultant and staff review, and
courses of action allowable under Federal regulations, two alternative courses
of action are identified:
1.
Council takes no action on the Maximum Permitted Rate for the Basic
Service Tier and associated equipment and installation charges.
This approach will allow the review period to expire and the rates to be
implemented on July 1, 2002. The
2002 rate (excluding franchise fee) is $0.53 more than the 2001 rate.
Approval of the rates by taking no action is permitted by the FCC.
2. Council determines that the Maximum Permitted Rate for the Basic Service Tier and associated equipment and installation charges are reasonable and calculated according to FCC regulations. Council directs staff to issue a Rate Order to that effect which allows the rates to be implemented on July 1, 2002. The 2002 rate (excluding franchise fee) is $0.53 more than the 2001 rate.
RECOMMENDATION
Staff recommends Alternative No. 2.
Prepared by:
Marilyn
Crane
Manager, Information Technology Services
Reviewed by:
Shawn
Hernandez
Director, Information Technology
Approved by:
Robert
S. LaSala
City Manager
Attachments
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