FROM: W. Calvin Horton, Town Manager
SUBJECT: Consideration of Resolution Finding Time Warner Cable Basic Service Tier Rates Consistent with Federal Regulations
DATE: January 13, 2003
Federal regulations allow the Council to review Time Warner Cable Basic Service Tier rates to determine whether such rates are accurately calculated and consistent with applicable rules. The purpose of this memorandum is to provide information about the increase for 2003.
A resolution is attached, which accepts the cable consultant’s report and finds Time Warner’s proposed rates to be accurately calculated according to FCC rules and regulations.
On October 1, 2002, Time Warner Cable notified us that it intended to set the Basic Service Tier rate at $11.00 a month for Chapel Hill customers and $14.25 a month for Durham customers for the upcoming year. This is an increase from the 2002 monthly rate of $10.10 for Chapel Hill and $13.40 for Durham customers.
Each year, Time Warner furnishes the Town with information about rate changes, which we provide to Mr. Adrian Herbst, the Town’s cablevision consultant, for review. Mr. Herbst has reviewed the data to determine whether Time Warner calculated the updated Basic Service Tier rates in a manner consistent with Federal Communications Commission (FCC) guidelines, the Time Warner Social Contract, and the Telecommunications Act of 1996. It is the consultant’s conclusion that the Basic rates are accurately calculated according to the rules of the FCC (Attachment 1).
Prior to tonight’s meeting, the Manager’s Office received the attached letter from Ms. Darrah Degnan, who expressed concern about the Basic cable rates and increases over the years. We have contacted Ms. Degnan, notified her of tonight’s forum, and requested a response from Time Warner about her concerns. A Time Warner representative is expected to attend tonight’s meeting.
RECOMMENDATION
That the Council adopt the attached resolution, which accepts the consultant’s report and finds Time Warner’s proposed rates to be accurately calculated according to FCC rules and regulations. We also recommend that any comments received tonight be referred to the Manager.
ATTACHMENTS
2. November 29, 2002 Letter from Ms. Darrah Degnan regarding Basic Cable rates (p.14).
A RESOLUTION ACCEPTING THE CABLE CONSULTANT’S REPORT AND FINDING TIME WARNER CABLE’S PROPOSED 2003 BASIC SERVICE TIER RATES TO BE ACCURATELY CALCULATED ACCORDING TO FCC RULES AND REGULATIONS (2003-01-13/R-12)
WHEREAS, Time Warner Cable submitted Federal Communications Commission (FCC) Form 1240 Updating Maximum Permitted Rates for Regulated Cable Services; and
WHEREAS, Time Warner submitted FCC Form 1205, Determining Regulated Equipment and Installation Costs; and
WHEREAS, the Town of Chapel Hill is certified with the FCC to regulate Basic Service Tier rates provided by Time Warner Cable in franchise NC-0234; and
WHEREAS, the Town’s cablevision consultants have reviewed the rates and have determined that they are accurately calculated according to the rules of the FCC;
NOW, THEREFORE, BE IT RESOLVED by the Council of the Town of Chapel Hill that the Council accepts the cable consultant’s report and finds Time Warner Cable’s proposed 2003 Basic Service Tier rates to be accurately calculated according to FCC rules and regulations.
This the 13th day of January, 2003.
REPORT REGARDING REVIEW OF TWO FCC FORMS 1240, WHICH ARE DATED SEPTEMBER 29, 2002,
AND ONE FCC FORM 1205,
WHICH IS DATED SEPTEMBER 30, 2002
AND RELATED FORMS AND WORKSHEETS
SUBMITTED BY TIME WARNER CABLE
TO THE TOWN OF CHAPEL HILL, NORTH CAROLINA
PREPARED FOR:
THE TOWN OF CHAPEL HILL, NORTH CAROLINA
NOVEMBER 2002
Adrian E. Herbst
The Baller Herbst Law Group, p.c.
953E Grain Exchange Building
400 South Fourth Street
Minneapolis, Minnesota 55415
(612) 339-2026
(612) 339-4789 (facsimile)
www.baller.com
REPORT REGARDING REVIEW OF
TWO FCC FORMS 1240, WHICH ARE DATED SEPTEMBER 29, 2002,
AND ONE FCC FORM 1205, WHICH IS DATED SEPTEMBER 30, 2002,
AND RELATED FORMS AND WORKSHEETS
SUBMITTED BY TIME WARNER CABLE
TO THE TOWN OF CHAPEL HILL, NORTH CAROLINA
PREPARED FOR:
THE TOWN OF CHAPEL HILL, NORTH CAROLINA
October 31, 2002
PREPARED BY:
Charles Gramlich
of
CHARLES GRAMLICH & ASSOCIATES
8105 Chardonnay Cove
Austin, Texas 78750
512-342-7848
PAGE
I. FINDINGS………………………………………………………………… 1
II. OVERVIEW OF FCC RATE REGULATIONS…………………………… 1
III. OVERVIEW OF REPORT PREPARATION……………………………… 2
IV. RATE CHANGE CHECKLIST……………………………………………. 4
1. Based upon my review of the information supplied by Time Warner Cable, ("TWC" or the "Cable Operator"), it is my opinion that the rates for Basic Cable Service as computed by on the two Federal Communications Commission (“FCC”) Form 1240’s (dated September 29, 2002) and for regulated equipment and installation cost as computed by TWC on FCC Form 1205 (dated September 30, 2002) are accurately calculated according to FCC rules and regulations.
In 1992, Congress passed the Cable Television Consumer Protection and Competition Act. The 1992 Cable Act included significant provisions regarding the regulation of cable rates, and directed the FCC to adopt rules prescribing rate regulation. Local franchising authorities that desire to regulate rates are permitted to do so by (1) filing FCC Form 328, (2) adopting the FCC’s rate rules and (3) notifying the cable operator of its intent to regulate rates. The FCC has retained the obligation to oversee the regulatory process. A cable operator's basic service tier, certain in-home equipment charges, and certain installation charges are subject to rate regulation by local franchising authorities. Other cable television services are not currently subject to regulation by either local franchising authorities or the FCC.
In implementing its rate regulations, the FCC adopted a uniform rate scheme that is applicable to both the rates for basic cable service and cable programming service tiers in areas where there is no effective competition. The 1992 Cable Act permits local franchising authorities to regulate the rates charged for basic cable service and certain installation and certain in-home equipment rates. The FCC had the sole authority to regulate the rates for cable programming service tiers. Over the last few years the FCC has adopted several modifications to the rules and regulations regarding cable television rates. On September 15, 1995, the FCC adopted rules giving regulated cable operators the option of filing for rate adjustments on an annual basis instead of the then existing quarterly system.
On February 8, 1996 President Clinton signed the Telecommunications Act of 1996 into law. The new law made sweeping changes to federal telecommunications law and policy. Under the new law, regulation of cable programming and some basic service tier rates will be lifted or gradually phased out, depending on the size of the cable system and presence of effective competition. In addition, the new law allows telephone and cable companies to compete in each other's business, and creates a new statutory entity know as an "open video system" to govern certain video programming. Many areas of cable regulation are not affected by the 1996 act. For example, local franchising authorities can continue to regulate rates charged for basic cable service and certain installation and certain in-home equipment rates, unless effective competition exists.
FCC Form 1240
Pursuant to the FCC rules FCC Form 1240 may be used to adjust the maximum permitted rate for the Basic Cable Service (which was determined either by Form 1200, a previously filed Form 1210 or Form 1240, a cost-of-service showing, or election of a streamlined rate reduction for qualified systems) for the following reasons: increases or decreases in external costs; the addition and deletion of channels from regulated tiers; and inflation. The FCC Order establishing the annual system calls for a series of calculations, involving both the projection of future events and an accounting of events that are known to have happened.
FCC Form 1240 is used to adjust rates annually, instead of quarterly, to reflect changes in external costs, inflation, and the number of regulated channels that are projected for the 12 months following the rate change. A cable operator has the burden of proving that projected changes in external costs, inflation or the number of channels are reasonably certain and quantifiable. (The FCC rules recognize seven categories of external costs: retransmission consent fees, copyright fees, programming costs, certain cable specific taxes, franchise-related costs, franchise fees and FCC regulatory fees.) FCC Form 1240 is not used to compute franchise fees or FCC regulatory fees. An operator whose actual cost exceed its projections during a rate year may at the time of its next annual rate filing adjust or "true up" its rates. Generally, the FCC rules require a cable operator opting for annual adjustments to file a basic rate adjustment request with its local franchising authority 90 days prior to the effective date of the proposed change. After the 90 days, the operator may change the rate, unless the local franchising authority has rejected the change as unreasonable. A cable operator may ask whether the local franchising authority intends to issue a rate order after the 90-day review period, and if it does not respond within 15 days, the local franchising authority will lose its ability to order a refund or a prospective rate reduction.
FCC Form 1205
For cable operators using the annual rate method, changes to equipment and installation rates must be filed on FCC Form 1205 concurrently with FCC Form 1240. An operator must base proposed annual adjustments to certain in-home equipment and certain installation rates on past costs. The Hourly Service Charge is used to set all regulated installation rates.
FCC Form 1235
The Form 1235 provides for the recovery of system upgrade costs when the upgrade meets certain minimum technical specifications. The Form 1235 is filed in conjunction with Form 1240 and is an "add-on" to the Form 1240 maximum permitted rate. The Form 1235 "add-on" portion should only be charged to subscribers receiving benefits of the system upgrade.
III. OVERVIEW OF REPORT PREPARATION
With a letter dated October 1, 2002, TWC filed two FCC Form 1240’s, Updating Maximum Permitted Rates For Regulated Cable Services (dated September 29, 2002), and one FCC Form 1205, Determining Regulated Equipment and Installation Costs (dated September 30, 2002), with the Town of Chapel Hill, North Carolina (the “Town”). Apparently, the Town received the letter on or before October 3, 2001. In the letter of October 1, 2002, TWC indicated its intention to implement the new rates on January 1, 2003. TWC sent a letter dated October 22, 2002 to the Town regarding a minor correction to the Form 1205.
One of the FCC Form 1240’s is for the headend that is located in the vicinity of the Town of Chapel Hill and provides cable television service in the Town of Chapel Hill. The other FCC Form 1240 is for the headend that is located in the vicinity of the City of Durham and provides cable television service in the Town of Chapel Hill.
Pursuant to a request from Adrian E. Herbst, representing the Town, Charles Gramlich of Charles Gramlich & Associates reviewed the information provided by the Town and TWC concerning the above mentioned FCC Forms 1240 and 1205 and related forms and worksheets.
The review included:
1. Telephone conversations with Paul Baccellieri, Vice President Finance, Raleigh Division of TWC and Thomas Dies, Financial Manger, Raleigh Division of TWC and related exchanges of information specifically regarding the rate filings for the Town.
2. Mathematical verification of all steps and assumptions necessary to complete the forms, worksheets and accompanying schedules.
Several questions arose during the above-mentioned review. Some of the questions resulted in additional telephone conversations and emails between Charles Gramlich and representatives of TWC.
Please note, however, that Charles Gramlich & Associates has not undertaken an "on-site audit" of the Cable Operator's books and records to determine whether the information included in the Forms and worksheets or the accompanying schedules has been accurately identified. Such an on-site audit would require physical presence by employees of Charles Gramlich & Associates, or a qualified accounting subcontractor, at the premises of the Cable Operator to review the books and records and verify that entries have been accurately recorded and assumptions properly calculated. In completing the worksheets and schedules of the FCC Forms and related worksheets, cable operators are required to make certain assumptions and report information to the best of their ability. In some cases, it may be appropriate for local franchising authorities to verify the accuracy of the information reported by a cable operator by conducting an on-site audit of the operator's books and records. Currently, I do not believe that such an on-site audit is necessary, based on the information I have reviewed in the Cable Operator's FCC Forms and related worksheets and the other relevant information I have reviewed. However, I make no representation with respect to the accuracy of the information reported by the Cable Operator on its FCC Forms and related worksheets but simply base my conclusions and analysis on the information the Cable Operator has provided.
It is my opinion that, based upon the information provided by the Cable Operator, the rates for the Basic Cable Service as computed by the Cable Operator on the above mentioned FCC Form 1240’s and certain installation and certain equipment rates as computed by the Cable Operator on the above mentioned FCC Form 1205 are accurately calculated according to FCC rules and regulations.
The Basic Cable Service is regulated by the Town. The Basic Cable Service includes the lowest level of cable television service offered by TWC in the Town. Tier 2 and the Digital Tier are not currently regulated.
According to TWC:
1. The Basic Cable Service, currently, consists of 20 channels of mainly broadcast stations that are received off the air and public, educational & governmental access channels.
2. Tier 2, currently, consists of 49 channels for the Durham headend and 50 channels for the Chapel Hill headend.
3. The Digital Tier, currently, consists of an additional 55 video channels.
4. TWC last increased the monthly rate for Basic Cable Service on January 1, 2002.
Outlined on the following Rate Change Checklist are the current and the proposed Maximum Permitted Rates ("MPR") and the current and proposed Operator Selected Rates ("OSR"). The MPR is the maximum rate that TWC can charge as calculated by TWC using the FCC's rules and regulations. The OSR is the rate that TWC has indicated that it will charge subscribers. The OSR cannot exceed the MPR.
The new proposed rates for Basic Cable Service, regulated in-home equipment and installation can become effective 90 days after the Town actually received the completed FCC Forms 1240 and 1205.
IV. Chapel Hill - Rate Change Checklist - 2002
TYPE OF SERVICE Proposed Current
Basic Cable Service (Durham headend):
Maximum Permitted Rate $14.31 $13.45 Note 1
Operator Selected Rate $14.25 $13.40
The following table summarizes the changes to the maximum permitted rate for the Basic Cable Service (Durham headend) as per the different elements in the FCC Form 1240:
Prior maximum permitted Basic Cable Service Rate $11.34
Remove Prior Period
External Cost $1.17
Markup Method $
True-up Segment -$0.33
Inflation Segment $0.33
Portion Subject to Inflation 10.17
Inflation True Up Periods $0.09
Projected Periods-
External Cost $2.00
Markup Method $
True-up Segment -$0.18
Inflation Segment $0.12
Proposed Maximum Permitted Rate $12.20 Note 1
Basic Cable Service (Chapel Hill headend):
Maximum Permitted Rate $11.22 $10.30 Note 2
Operator Selected Rate $11.00 $10.10
The following table summarizes the changes to the maximum permitted rate for the Basic Cable Service (Chapel Hill headend) as per the different elements in the FCC Form 1240:
Prior maximum permitted Basic Cable Service Rate $8.49
Remove Prior Period
External Cost $1.13
Markup Method $
True-up Segment $0.17
Inflation Segment $0.23
Portion Subject to Inflation 6.96
Inflation True Up Periods $0.06
Projected Periods-
External Cost $1.97
Markup Method $
True-up Segment $0.33
Inflation Segment $0.09
Proposed Maximum Permitted Rate $9.41 Note 2
Hourly Service Charge:
Maximum Permitted Rate $37.62 $35.83 Note 3
Operator Selected Rate $37.62 $34.95
Remote Control (All Types):
Maximum Permitted Rate $0.35 $0.35
Operator Selected Rate $0.35 $0.35
Converter Box (Addressable):
Maximum Permitted Rate $7.34 $5.80
Operator Selected Rate $6.60 $5.60
Converter Box (Non-Addressable):
Maximum Permitted Rate $0.59 $0.68
Operator Selected Rate $0.59 $0.68
According to the Cable Operator, all rates exclude FCC fee, sales tax, if any, and franchise fee. All rates are monthly, except for the Hourly Service Charge.
Note 1 – Includes $2.11 from an FCC Form 1235 that was filed three years ago upon the completion of the cable system upgrade. CGA has not reviewed the FCC Form 1235.
Note 2 – Includes $1.81 from an FCC Form 1235 that was filed three years ago upon the completion of the cable system upgrade. CGA has not reviewed the FCC Form 1235.
Note 3- Hourly Service Charge is used to calculate certain installation fees, for unwired & prewired homes, additional outlets and other regulated installations.
CGA asked specific questions of Time Warner Cable regarding the inflation segment of the computations. In response, TWC stated: “Our practice is to use the most currently published FCC inflation factors at the time of the filing. At the time of our filing at about 9/29, the last published FCC inflation factor was for the first qtr of 2002. Hence, we assumed that factor for the rest of this year, as well as 2003. We will always make the appropriate adjustment to the inflation factors within the true up mechanisms allowed in the subsequent year's filing.”
Since Time Warner Cable has selected monthly rates for Basic Service, which are less than the MPR, the use of a later inflation factor would not lower the rates paid by subscribers during the next year. In any case, the appropriate adjustment is made during the subsequent year’s true up segment.
The following charts outline the current monthly rates for the Basic Cable Service, Tier 2 and the Digital Tier, and the operator selected monthly rates for each.
Proposed Current (Durham headend)
Basic Cable Service $14.25 $13.40
Tier 2 $27.25 $24.90 – not regulated
Digital Tier (a) $12.50 $10.95 – not regulated
Total $54.00 $49.25
Proposed Current (Chapel Hill headend)
Basic Cable Service $11.00 $10.10
Tier 2 $28.00 $26.10 – not regulated
Digital Tier (a) $12.50 $10.95 – not regulated
Total $51.50 $47.15
2002 2003 Price Reduction
Digital Tier A/O $1.50 $1.00 $(0.50)
Premium Service A/O $3.00 $0.00 $(3.00)
Approximately 35% of the Cable Operator’s subscribers currently
incur these A/O charges.