SunnyvaleRTC

January 11, 2005

SUBJECT: 2004 Comcast Cable Rates

REPORT IN BRIEF

On March 1, 2004, Comcast submitted Federal Communications Commission (FCC) Forms 1205 and 1240 to the City for the annual rate adjustment. 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. The forms filed by Comcast stated that the basic service rates as well as installation and equipment rates are “To Be Determined”. Comcast indicated that appropriate notice would be provided prior to any price adjustments.

Although Comcast indicated that there would be no cable rate increase at the time of the FCC forms filing, staff felt it important to have both FCC forms reviewed by a consultant specializing in cable rate increases. Review of the FCC Forms 1205 and 1240 determine that should rates increase in the future, the new maximum permitted rate for the Basic Service Tier could increase to $15.93 (excluding franchise fees and the FCC regulatory fees). Current Basic Service Tier rate is $15.08 so the maximum potential increase would be $.85 or 5.6%. As a result of Comcast’s “To Be Determined” rate change, it was not possible to determine whether rates would increase, decrease, or remain unchanged. Therefore, the City postponed the issuance of a Rate Order until Comcast notified the City of any price adjustments.

Comcast notified the City by letter dated November 22, 2004 indicating that as of February 1, 2005, prices will be adjusted for both analog and digital services. The price for Basic Service Tier is being increased from $15.08 to $15.58, which is within the maximum permitted rate allowed by the FCC. Prices for equipment and installation services are not being adjusted at this time.

Based on consultant and staff review, discussions with Comcast, and courses of action allowable under Federal regulations, staff recommends that Council determine that the Maximum Permitted Rate for the Basic Service Tier as calculated by Comcast is reasonable and consistent with FCC regulations.

BACKGROUND

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. (TMC), has reviewed the Forms 1205 and 1240 filed by Comcast 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.

Comcast’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 three years. The rate increase for the Basic Service Tier for 2002 to 2003 was $1.99 or 15.2% (from $13.09 to $15.08 with the maximum permitted rate being $15.45, excluding franchise and FCC regulatory fees). The rate increase for the Basic Service Tier from 2001 to 2002 was $0.53 or 4.2% (from $12.56 to $13.09 with the maximum permitted rate being $14.68, excluding franchise and FCC regulatory fees). 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). In the past, Council has approved the Comcast Maximum Permitted Rate for the Basic Service Tier and directed staff to issue a Rate Order to that effect.

EXISTING POLICY

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

City Charter Article XVI, Sections 1600-1608

Federal Communications Commission Rules and Regulations

DISCUSSION

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 15, Public Access-channel 26, and SE-TV-channel 28.

The FCC’s regulatory authority regarding the Expanded Basic Service Tier, which includes such channels as Lifetime, Cable News Network (CNN), and Music Television (MTV), expired on March 31, 1999. Similar to Premium Services programming (HBO) 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, 2004, Comcast submitted the required FCC Forms 1205 and 1240 to the City for rate adjustments to be implemented. 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. 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 2004 annual filing include:

costs incurred by the cable 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 (December 1, 2002 through November 30, 2003); and
estimated costs that will be incurred for the next 12-month period (June 1, 2004 through May 31, 2005).

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 Comcast’s FCC Forms 1205 and 1240 to the City (Attachment A). A copy of the consultant report was provided to Comcast and Comcast responded to the report in a letter dated May 18, 2004 (Attachment B).

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 Comcast’s FCC Forms 1205 and 1240 on March 1, 2004 with a “To Be Determined” rate adjustment. Subsequently, Comcast notified the City by letter dated November 22, 2004 of a price increase for analog and digital services to become effective on February 1, 2005. (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”, Comcast indicates that it has chosen to aggregate its costs at the company level. A FCC ruling issued in 1996 permits this. Comcast 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 Comcast cable systems.” A copy of the “Sampling Plan & Analysis for Comcast 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.

Form 1240 was completed in a manner consistent with the FCC regulations with the following notations:

The maximum permitted rate for the Basic Service Tier is $15.93 (excluding franchise fees and the FCC regulatory fee). The current Basic Service Tier rate is $15.08, so the maximum potential increase is $.85 or 5.6%. Per Comcast’s letter dated November 22, 2004, rates will be increased from $15.08 to $15.58 (Attachment D)
Comcast also indicates the following programming changes through the projected period (June 1, 2004 through May 31, 2005) for the Basic Service Tier:

June 1, 2004 – The Weather Channel (TWC) and the Hallmark Channel were dropped. On the same date, the California Channel became a shared channel with Leased Access, and C-SPAN and C-SPAN2 were added.

The number of Sunnyvale Basic Service subscribers decreased from 29,539 in 2001 to 28, 291 in 2003 representing a 4.2% decrease.

FISCAL IMPACT

Changes in cable rates may increase or decrease gross revenues collected by Comcast. 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 Comcast pays to the City.

Conclusion

On March 1, 2004, Comcast submitted Federal Communications Commission (FCC) Forms 1205 and 1240 to the City for the annual rate adjustment. The forms filed by Comcast state that the basic service rates as well as installation and equipment rates are “To Be Determined”. Comcast indicated that appropriate notice would be provided prior to any price adjustments.

Review of the FCC Forms 1205 and 1240 determines that should rates increase in the future, the new maximum permitted rate for the Basic Service Tier could increase to a maximum of $15.93. Comcast notified the City by letter dated November 22, 2004 that as of February 1, 2005, prices will be adjusted for both analog and digital services. Price for Basic Service Tier is being increased from $15.08 to $15.58, which is within the maximum permitted rate allowed by the FCC. Prices for equipment and installation services are not being adjusted at this time.

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 Comcast.

ALTERNATIVES

Based on information provided by Comcast, consultant and staff review, and courses of action allowable under Federal regulations, two alternative courses of action are identified:

1. Council determines that the Maximum Permitted Rate for the Basic Service Tier is 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 February 1, 2005. The 2004 rate (excluding franchise fee) is $.50 more than the 2003 rate.

2. 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 February 1, 2005. The 2004 rate (excluding franchise fee) is $.50 more than the 2003 rate. Approval of the rates by taking no action is permitted by the FCC.

RECOMMENDATION

Staff recommends Alternative No. 1. - Council determines that the Maximum Permitted Rate for the Basic Service Tier is 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 February 1, 2005. The 2004 rate (excluding franchise fee) is $.50 more than the 2003 rate.

Reviewed by:

Shawn Hernandez Director, Information Technology
Prepared by: Ernie De Frenchi, Information Technology Coordinator, Marilyn Crane, Information Technology Services Manager

Approved by:

Amy Chan
City Manager

Attachments

A. Telecommunications Management Corp. Report “Review of FCC Forms 1205 and 1240 submitted by Comcast to the City of Sunnyvale, dated April 28, 2004” (pdf format)

B. Comcast Response dated May 18, 2004 (pdf format)

C. Comcast Cable Rate Increase Letter dated November 22, 2004 (pdf format)

D. 2003/2004 Sunnyvale Cable Rate Comparison