May 30, 2006

SUBJECT: 2006 Comcast Cable Rates

REPORT IN BRIEF

On March 1, 2006, Comcast submitted Federal Communications Commission (FCC) Forms 1205 and 1240 to the City for the annual rate adjustment.  Because cable operators who file Form 1240 for basic service rates are allowed only one rate change per year for regulated services, Comcast also submitted Form 1205 for equipment and installation rate changes.  As a result, the subscriber experiences only one annual rate change. 

This year, Comcast submitted an incomplete Form 1240 in that the March 1, 2006 filing did not include commission regulatory fees pursuant to FCC Order DA 05-3250 released on December 21, 2005.  Comcast subsequently submitted a “working copy” of Form 1240 that incorporated these fees.  The “working copy” will replace the form the City received on March 1, 2006 and represents Comcast’s official 2006 FCC Form 1240, Basic Service Tier filing and will be utilized as the basis for future filings.

Review of FCC Form 1205 and the “working copy” of Form 1240 determine that the new maximum permitted rate for the Basic Service Tier is $15.06.  The Current Basic Service Tier rate is $13.75 so the maximum permitted rate could increase rates by $1.31 or 9.5%.  However, Comcast does not intend to change the Basic Service Tier rate from the current rate of $13.75 until February 2007.  Comcast will provide proper notification to the City and to subscribers in accordance with all applicable franchise requirements and FCC regulations. 

Comcast notified the City in the March 1, 2006 letter that as of June 1, 2006, many of the installation rates will remain the same, with the exception of a $1.00 decrease for outlet relocation and a $3.00 decrease for an additional outlet (separate trip).  In addition, equipment rates will decrease for remote controls, basic only converters, and all non-HD converters by $0.05, $0.15, and $0.90, respectively while HD converter charges will increase by $0.25. 

Although Comcast indicated that there would be no cable rate increase for the Basic Service Tier at the time of the FCC forms filing, staff felt it important to have both FCC forms reviewed by a consultant specializing in cable rates.  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 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 if the costs indicated appear to be within a range of reasonableness accepted by the City in the past.

Should TMC determine that the projected programming costs are not “reasonably certain and reasonably quantifiable”, staff may recalculate a new permitted rate and request Council to issue a rate order to that effect.  If Comcast agrees that the City recalculated the rate correctly, then no action would be necessary.  If Comcast disagrees with the City’s recalculated rate, they may file an appeal with the FCC to determine the correct rate. 

Comcast’s proposed selected rate is usually less than the permitted rate calculated in Form 1240 and has been less than the permitted rate for the past six years.  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 and extended through 12/31/06)

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.

Current Rules for Rate Regulation

With limited exceptions, a cable operator who files Form 1240 is allowed only one rate change per year.  It is for this reason that Form 1205 (for equipment and installation rates) is required to be filed with Form 1240.  When all regulated subscriber rates are changed at the same time, the subscriber experiences only one annual rate change. 

Comcast submitted the required FCC Forms 1205 and 1240 to the City on March 1, 2006 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 2006 annual filing include:

• costs incurred by the cable operator since the end of the period covered by the last filing; and
• a “true-up” process for undercharges and overcharges related to the previous year (December 1, 2004 through November 30, 2005).

Analysis of Current Rates

Due to the complexity of the FCC rules, the City engaged the services of TMC to assist with reviewing the proposed rate adjustments for compliance with FCC rules.  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 on April 17, 2006, to which Comcast responded in a letter dated May 1, 2006 (Attachment B).

Consultant’s Comments – FCC Forms 1205 and 1240

Form 1205 computations are accurate.  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 not completed in a manner consistent with FCC regulations.  On December 21, 2005, the FCC released Order DA 05-3250 which confirmed that “Commission Regulatory Fees for Period” must be included on Worksheet 7 at line 708.  The inclusion of the fee on Worksheet 7 also requires additions to Worksheet 8 and lines Line A1 and Line D2 of the Preliminary Information worksheet.  As a result, Form 1240 for last year would need to be redone and certain carry-forward data inserted into the current Form 1240.  When contacted about this error, Comcast indicated that the ruling came too late for incorporation into the calculation in a way that Comcast would feel comfortable that it was providing an accurate document.    Comcast agreed to submit a “working copy” of the current Form 1240 incorporating the Commission Regulatory Fees.  The “working copy” replaces the form the City received on March 1, 2006 and represents Comcast’s official 2006 FCC Form 1240, Basic Service Tier filing.

Comcast submitted the “working copy” of the current Form 1240 incorporating the commission regulatory fees and since there isn’t an additional charge to Sunnyvale customers, the City has agreed to accept the “working copy” as the basis for future filings. 

The following items are noted from the “working copy” of Form 1240 and Form 1205:

• The new maximum permitted rate for the Basic Service Tier is $15.06.
• The current Basic Service Tier rate is $13.75 so there is a potential rate increase of $1.31 or 9.5%.
• Comcast does not intend to change the Basic Service Tier rate from the current rate of $13.75 until February 2007 when the new Basic Service Rate has been determined
• Many installation rates will remain the same, with the exception of a $1.00 decrease for outlet relocation and a $3.00 decrease for an additional outlet (separate trip). 
• Equipment rates will decrease for remote controls, basic only converters, and all non-HD converters by $0.05, $0.15, and $0.90, respectively. 
• HD converter charges will increase by $0.25. 
• In December 2004, Leased Access was added to a channel shared with the California Channel. 
• The number of Sunnyvale subscribers increased from 28,855 in 2004 to 30,286 in 2005, of which approximately 6,400 are Basic Service Tier only subscribers.

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, 2006, Comcast submitted Federal Communications Commission (FCC) Forms 1205 and 1240 to the City for the annual rate adjustment.  Form 1205 computations were accurate while Form 1240 was not completed in a manner consistent with the FCC regulations.  Comcast subsequently submitted a “working copy” of the current Form 1240 incorporating the commission regulatory fees and since there is no additional charge to Sunnyvale customers, the City has agreed to accept the “working copy” as the basis for future filings. 

Review of the FCC Forms 1205 and the “working copy” of Form 1240 determine that this year’s maximum permitted rate for Basic Service Tier is $15.06.  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.

PUBLIC CONTACT

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 the information provided by Comcast (including the “working copy” of Form 1240), 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 calculated according to FCC regulations.  Council directs staff to issue a Rate Order to that effect, which allows the 2006 Maximum Permitted Rate to be $15.06 (which is $1.31 or 9.5% more than the 2005 rate), effective June 1, 2006.

2. Council takes no action on the Maximum Permitted Rate for the Basic Service Tier and associated equipment and installation charges.  The FCC permits implementation of the new rates by Comcast without Council approval.  This approach will allow the review period to expire and the rates to be implemented by Comcast on June 1, 2006. 

RECOMMENDATION

Staff recommends Alternative No. 1. - Council determines that the Maximum Permitted Rate for the Basic Service Tier is calculated according to FCC regulations.  Council directs staff to issue a Rate Order to that effect which allows the rates to be implemented on June 1, 2006.

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 (.pdf)

A. Telecommunications Management Corp. Report “Review of FCC Forms 1205 and 1240 submitted by Comcast to the City of Sunnyvale, dated April 10, 2006”

B. Comcast Response to Telecommunications Management Corp. Report and Findings, dated May 1, 2006 and “Working Copy” of Form 1240, as submitted by Comcast, dated May 1, 2006.

C. 2005/2006 Sunnyvale Cable Rate Comparison