Res 94-068RESOLUTION NO. 94- 068
A RESOLUTION OF THE CITY OF POWAY, CALIFORNIA
PURSUANT TO SECTIONS 76.933(C), 76.936, 76.940,
76.941, AND 76.942 OF THE RULES AND REGULATIONS
OF THE FEDERAL COMMUNICATIONS COMMISSION (FCC)
DISAPPROVING THE EXISTING AND/OR PROPOSED RATES
AND CHARGES BY COX CABLE SAN DIEGO, INC., FOR
THE BASIC SERVICE TIER AND ASSOCIATED EQUIPMENT,
ORDERING A RATE REDUCTION PRESCRIBING RATES AND
CHARGES FOR THE BASIC SERVICE TIER AND ASSOCIATED
EQUIPMENT AND ORDERING A REFUND TO SUBSCRIBERS
WHEREAS, the City of Poway ("City") was certified by the Federal
Communications Commission {"FCC"} to regulate the Basic Service Tier and
associated equipment on October 7, 1993; and
WHEREAS, the City provided written notice of said certification to Cox
Cable San Diego, Inc. ("Cox") on December 13, 1993, for the new monthly basic
and CPS cable rates effective January 1, 1994 in the City of Poway; and
WHEREAS, the City has adopted regulations with respect to the Basic
Service Tier and associated equipment that are consistent with the regulations
prescribed by the FCC; and
WHEREAS, the City has adopted procedural laws and regulations applicable
to rate regulation proceedings which provide a reasonable opportunity for
consideration of the views of interested parties; and
WHEREAS, the City delivered a written request to Cox to file their
schedule of rates for the Basic Service Tier and associated equipment with the
City on December 13, 1993; and
WHEREAS on December 29, 1993, Cox filed with the City a FCC Form 393
dated January 1, 1994; and
WHEREAS, the City notified Cox on January 21, 1994, pursuant to Section
76.933(b) of the FCC Rules and Regulations that it was unable to determine,
based upon the materials submitted by Cox, that the existing or proposed rates
were within FCCs permitted Basic Service Tier charge or actual cost of
equipment and that the City was tolling the thirty (30) days deadline found in
Section 76.933(a) of FCC Rules and Regulations for an additional ninety (90)
days for the purpose of requesting and/or considering additional information;
and
WHEREAS, the City has reviewed all relevant information including, but
not limited to, the FCC Form 393, the consultant's report, and other relevant
written evidence; and
WHEREAS, on April 19, 1994, Cox was ordered to keep an accurate
accounting of all amounts received for Basic Service Tier charges, and to
provide a Refund Plan prior to May 24, 1994, and to appear on May 24, 1994;
and
WHEREAS, on May 24, 1994, the City continued the Public Hearing to June
28, 1994 to allow both the City and Cox additional time to review the impact
of the new FCC regulations and to respond to the comments received from Cox in
a letter dated April 25, 1994.
Resolution No. 94- 068
Page 2
NOW, THEREFORE, the City Council of the City of Poway does hereby resolve as
follows:
Section 1
The City Council hereby finds and determines that the existing and proposed
rates and charges for the Basic Service Tier and associated equipment as
identified in Cox's FCC Form 393, dated January 1, 1994, are not reasonable
because they are not in compliance with the applicable FCC benchmark standards
for the reasons and on the grounds contained in the consultant's reports dated
March 7 and May 16, 1994, copies of which are incorporated into this
resolution by reference as if fully stated herein.
Section 2
Based upon the findings contained in the consultant's reports, which conclude
that Cox's initial rates for the Basic Service Tier are unreasonable, the City
Council hereby orders the following in accordance with the FCC regulations:
Be
Co
The initial rates for the Basic Service Tier established by Cox Cable
are disapproved.
A reasonable subscriber rate for the Basic Service Tier is $8.27 per
month.
The subscriber rate of $8.27 prescribed by the City Council shall be
made retroactive to September 1, 1993.
The Operator, is hereby directed and ordered to provide a Refund Plan
("Refund Plan"} to the City Manager within fifteen (15) days of the
effective date of this resolution, pursuant to which it proposes to
refund to subscribers rates and charges collected by the Operator in
excess of the rates and charges approved herein since September 1, 1993,
or the earliest date from which the refund period may run pursuant to
the Rules and Regulations of the Commission, along with such written
evidence and documentation demonstrating the reasonableness and
appropriateness of said Refund Plan under the standards set forth in
Section 76.942 of the Rules and Regulations of the Commission. Said
Refund Plan shall reflect appropriate interest due to subscribers for
the refund.
Section 3
On July 25, 1994, the City Clerk is directed to post a copy of this resolution
in such a place or places as City notices are normally posted and to make
copies of this written decision available to the public at the office of the
City Clerk during normal business hours.
Section 4
It is the intent of the City Council that the text of this decision not be
deemed released, within the meaning of Section 76.944(b) of the regulations of
the Commission, until July 25, 1994.
Resolution No. 94-068
Page 3
Section 5
This resolution shall become effective on July 25, 1994, which shall be the
date that the Operator's thirty {30) day appeal period begins under Commission
regulations.
PASSED, APPROVED, AND ADOPTED, by the City Council of the City of Poway,
California at a regular meeting thereof this 28th day of June, 1994.
ATTEST:
Marjori~. Wahlsten, City Clerk
STATE OF CALIFORNIA )
COUNTY OF SAN DIEGO )
I, Marjorie K. Wahlsten, City Clerk of the City of Poway, do hereby
certify that the foregoing Resolution, No. 94-068 , was duly adopted by the
City Council at a meeting of said City Council held on the 28th day of June,
1994, and that it was so adopted by the following vote:
AYES:
CALLERY, EMERY, SNESKO
NOES: NONE
ABSTAIN: NONE
ABSENT:
CAFAGNA, HIGGINSON
Marjor~. Wahlsten, City Clerk
3510 SUNRIDGE DR. S.
SALEM, OR 97302
(503) 581-0878
FAX (503) 581-2026
PUBLIC
KNOWLEDGE®
Resolution No. 94-068
Page 4
2828 N.E. STANTON
PORTLAND, OR 97212
(503) 287-7273
FAX (503) 287-7323
March 7, 1994
Mr. Patrick Foley
City of Poway
13325 Civic Center Drive
Poway, CA 92064
Dear Patrick:
At your request, we have conducted a review of the Federal Communications Commission
(FCC) Form 393 cable television basic service rate fili,g (filing dated January 1, 1994;
transmittal letter dated December 29, 1994) submitted to the City of Poway by Cox Cable San
Diego (Cox). ~ This letter summarizes the results of the review and presents our
recommendations for adjustments to Cox's cable TV rates.
As you are aware, the FCC has developed a complex set of rules and procedures for regulation
of cable TV rates in accordance with the Cable Television Consumer Protection and Competition
Act of 1992. Local franchise authorities are empowered to regulate monthly rates for basic
pregt~amming services and equipment rentals, aa well as insta!latic, r, and related transaction
charg=s. The FCC intends to directly regulate monthly rates for "cable programming services"
(more commonly called "expanded basic" or "tier" services). Cable programming services
(CPS) are packages .of pro~arr, services not included in the "basic" package and for which the
subscriber must pay an additional monthly fee. The rates for still other programming services,
offered on a per channel or per program basis, comznonly called premium or pay services, are
not regulated by either local ~anchise authorities or the FCC under current law..
The purpose of the FCC Form. 393 is to provide a framework for a cable operator to sub,nit
certain data and zalc~:!ations to justify its rates as of the initial date of regulation, in accordance
with FCC rules. Mc, ntfily programming service rates are compared against benchmarks
developed by the FCC, and equipment and installation charges are developed based on an
operator's actual coats, again as determined by FCC guidelines and procedures. The end result is
intended to be a set of maximum permitted rates and charges applicable to the cable operator in
the local franchise area.
Cox also submiued a filing dated September 1, 1993 (transmittal letter dated November
12, 1993). Since the later filing (dated January 1, 1994) reflects the channel capacity currently
provided in Poway and the earlier filing does not, we selected to review the more recer:t filing as
the one most applicable. However, at the time this review was conducted, the FCC's rules on
how to treat changes in chmmel capacity had not been issued. The City should reserve its right
to evaluate the possible =f£ect &:= uaw rules may have on rates, as addr=ssed b=low in this report.
EXHIBIT A
COI*TULITNG AA:D IIVFORMATION SERVICES FOR PUBLIC MANAGF~'I4&VT EXCELLENCE _
Resolution No. 94-068
Page 5
A. Scope and Procedures
Our review included assessing Cox's compliance with FCC rules and guidelines; evaluating the
accuracy~of certain data and calculations; and testing the reasonableness of certain methods and
assumptibns that Cox applied. We perfmmed the following procedures:
· Performed a preliminary review of the completed FCC Form 393; for example:
Spot-checked Cox's compliance with certain form completion instructions
published by the FCC.
Checked the inflation index data that Cox used.
Compared benchmarks used by Cox to the FCC benchmark tables to evaluate
whether the correct benchmarks were used for the number of subscribers, total
regulated channels, and number of satellite channels assumed by Cox.
Identified needs for further information.
· Prepared a data request and forwarded it to Cox.
· Contacted the Cox official responsible for preparation of the Form 393 and through telephone
interviews and facsimile transmissions obtained information related to our data request.
· Conducted a desk review of the information that Cox provided including, for example:
Compared rates, charges, and programming line-ups on the Form 393 with the
actuals as presented on programming line-ups and rate cards provided to
subscribers.
Tested calculations and interrelationships among the parts, worksheets, steps, and
schedules to check whether computations were correct and internally consistent.
Assessed the data sources, methods, and assumptions that Cox applied to develop
equipment and installation costs, to test whether Cox's approach appeared to be
reasonable and consistent with FCC rules, guidelines, and interpretations.
Compared certain information reported by Cox to data submitted by a sample of
cable operators from around the country, to further test the reasonableness of
certain Cox data.
· Visited the Cox facility in San Diego and performed certain additional procedures; for
example:
Checked certain data against sources (billing system reports, service activity
reports, asset records, and general ledger revenue and expense reports).
Reported our preliminary findings to the Cox official responsible for preparing
the Form 393 and identified open issues.
· Received and reviewed certain additional information from Cox pertaining to issues open at
the conclusion of the site visit.
Resolution No. 94-068
Page 6
Summarized findings for review by you and Cox officials.
· Prepared this report.
We perf/grmed the procedures that we believed to be appropriate within the time and budget
limitations established for this review. Had we performed additional procedures, other matters
may have come to our attention and our reported findings may have been different.
B. Summary of Findings
In general, it appears that Cox personnel have attempted to prepare the Form 393 carefully and
in accordance with FCC rules as they interpret them. However, we identified certain problem
areas, including the following:
· Incorrect date and inflation factors
· Incorrect reported installation and equipment revenue
· Inappropriate method to count satellite channels
Inappropriate exclusion of income taxes and return on investment from equipment and
installation costs
· Incorrect allocation of certain equipment and installation costs
Corrections for certain of these problems decrease the maximum initial permitted rate per
channel, while other corrections cause increases. Correction for the problems collectively leads
to a decrease in the initial permitted rate for basic services. Each of these problem areas is
discussed below.
Incorrect date and inflation factors
Cox dated its Form 393 January 1, 1993, but reported rates on Worksheet 1, Line 101 that were
in effect prior to September 1, 1993. Cox should have instead reported rates that conformed to
the date of submission. For basic service, the reported rate should have been $8.34 instead of
$14.85; and for the cable programming service tier the reported rate should have been $16.22
instead of $8.10. This change, in itself, has no impact on the resulting permitted rates, because
the Worksheet 1 rate data mm out not to be a factor in the Cox rate determination.
However, because the Cox filing should have applied rates consistent with the date of the filing,
the applicable inflation factors applied in Worksheet 1 should also differ from those used by
Cox. The foLm requires the use of an inflation index published by the US. Department of
Commerce. This index is updated quarterly, and in January, 1994, when Cox dated its Form 393
filing to the City, the most recent quarter for which an index figure was available was the quarter
ending September 30, 1993. Cox should have used the 126.2 GNP-PI index for that quarter on
Line 122 of Worksheet 1, and should have used a GNP-PI of 122.5 for the quarter ending
September 30, 1992 in the calculation on Line 124. Instead, Cox used outdated indices. Cox
also should have entered 15 months on Line 124 (the number of complete months since
September 30, 1992) and 12 months on Line 125 (the number of months from September 30,
1992 to the most recent GNP-PI quarter). 2
Resolution No. 94-068
Page 7
Correcting the Cox filing for the initial rate and inflation factor problems together yields a
maximum initial permitted rate per channel that is about 0.6¢ lower than in the Cox 393 filing.
The decrease is attributable to using more current inflation indices.
Incorrect reported installation and equipment revenue
Cox incorrectly reported the amount of installation and equipment revenue for September, 1992
at Line 204 of Worksheet 2, which has an effect on the calculation of the maximum permitted
rate. In determining its reported amount, Cox included not only revenue that it actually received
for installations and equipment in the twelve-month period ending September 30, 1992, but also
an imputed amount of revenue for converters used by pay services customers. In fact, during the
applicable period, Cox did not charge pay customers a separate equipment charge for converters.
A Cox representative has stated that the rationale for including revenue for these converters in
Line 204 is based on the theory that the converters had value, and that Cox could have charged
pay customers separately for them had the company so chosen. Yet we are aware of no FCC
role, guideline, our clarification that states that operators can include imputed amounts in the
figures reported for equipment and installation revenue. The amounts that Cox reported for
imputed revenue for these converters are not identified as equipment revenue in the Cox
accounting records for the applicable period, nor, to our knowledge, were pay customers during
this period informed that they were paying a specified amount per month for converter rental.
We therefore believe that the imputed portion of the revenue amount that Cox has reported at
Line 204 should be disallowed.
Cox included $9,058 of imputed converter rental revenue in Line 204. A subtraction of this
amount from the reported figure produces a maximum initial rate per channel that is
approximately 2.4~t per month less than the rate reported by Cox.
Inappropriate method to count satellite channels
The number of satellite channels is a factor helping to determine what benchmark rates should
be selected for the time of the filing (Worksheet l, Line 121) and for September 30, 1992
(Worksheet 2, Line 220). In the Cox filing for Poway, the relationship between these two
benchmark lines determines a "channel adjustment factor" calculated at Worksheet 5, Lines 501
- 503. This channel adjustment factor in turn helps to deter'mine the maximum initial permitted
rate per channel.
Cox counted each satellite service active on its Poway system as "one" in determining the
benchmarks, regardless of whether the service was the only service occupying a channel, or
whether the service shared the channel with other services. For example, a channel shared by
two satellite services was counted as "two" in the satellite channel count by Cox. The Cox
system currently offers several channels that share two or more satellite services, so that by
We applied 15 months to reflect the January 1, 1994 date on the fo~m, although the
transmittal letter was dated December 29, 1993, which would correspond to 14 complete months
since September 30, 1993.
4
Resolution No. 94-068
Page 8
counting multiple services on a channel Cox derived satellite channel counts notably higher than
if no single channel were counted as more than "one."
The Cox method of counting satellite channels does not seem appropriate. The FCC has
clarified ~hat a "channel is a unit of cable service identified and selected by a channel number or
similar designation .... The distribution of several programming services combined on a single
channel does not increase the number of channels on the system." The FCC then proceeds to
define a "satellite" channel as "...any cable program service or 'superstation' delivered on a
communications satellite that is not a premium service...." 3 The most reasonable interpretation
would read the two definitions together, with the second distinguishing satellite services from
others, and the first helping to prescribe how channels (including, by reasonable inference,
satellite channels) are to be counted. Moreover, we could find no discussion in the FCC's
published discussion of the survey and quantitative methodology it used to set the benchmarks
that would indicate that satellite channels were or should be counted in the manner applied by
Cox. The benchmark tables produced by the FCC in fact imply that the FCC did not
contemplate the possibility of counting multiple "satellite channels" on a single regulated
channel, because there are no benchmark entries on the table matrices where the number of
satellite channels could exceed the total number of regulated channels (a condition that would be
at least theoretically possible under the method employed by Cox).
We believe that no single channel should be counted as more than "one" satellite channel.
Applying this approach, we identified 40 satellite channels on the current Poway system, and 20
satellite channels in September, 1992. These revised counts lead to a benchmark of .448
(compared to .454 used by Cox) at Line 121 and of .673 (compared to .698 used by Cox) at Line
220. These benchmarks in turn create a channel adjustment factor of-0.334 at Line 503,
compared to the -0.351 entered by Cox. This change raises the calculated rate, offsetting the
reductions noted above by about 2.0¢ per channel.
Inappropriate exclusion of income taxes and return on investment from equipment and
installation costs
The FCC has provided for a return on investment and income tax expenses as costs to be
included in the rates charged for installations and equipment. 4 Cox did not include these factors
in its filing to the City of Poway. While the exclusions cause the maximum permitted
installation and equipment rates to be lower than they would be if taxes and a return on
investment were included, Cox's approach also causes the maximum permitted monthly rates for
regulated program services to be higher than they would otherwise be. The higher monthly
program service rates result because the total monthly cost of installation and equipment is
Federal Communications Commission, "Cable Television Rate Regulation Questions and
Answers," May 13, 1993; Questions 15 and 16.
4 Schedules A and C of Part III of the Form 393 contain columns for a return on
inveshnent, federal income taxes, and state income taxes. The instructions for determining the
return on investment on the Fort-xi 393 indicate that the FCC will consider up to 11.25% as a not
unreasonable rate of return. Direction on determining the tax rate is included in "FCC Rate
Rules: Questions and Answers," Multichannel News, August 9, 1993; Question 14; and in the
FCC's "Second Report and Order," paragraph 59 and an associated footnote (August 27, 1993).
5
Resolution No. 94-068
Page 9
subtracted from the base rate per channel (at Line 301 of Worksheet 3) to help determine the
maximum initial permitted rate per channel on the Form 393. Cox would have subtracted more
at Line 301 if income taxes and a return on investment had been included in its reported
installation and equipment costs.
A key issue is whether the FCC sought to give operators discretion to apply less than their full
costs in determining installation and equipment costs. The applicable rules suggest that the FCC
did not intend such discretion. For example, 47 CFR 76.923 (c) states that "A cable operator
shall establish an Equipment Basket, which will include all costs of providing customer
equipment and installation under this section" [emphasis added]. Further in the same subsection
the FCC indicates that "The Equipment Basket shall include a reasonable profit" [emphasis
added]. In its "Second Report and Order" (August 27, 1993) the FCC observes that" ...Congress
intended that our regulations establish equipment rates similar to those that would exist in a
competitive environment. Under the 'actual cost' standard, cable operators recover their costs
including a reasonable profit. This will result in rates comparable to those that would exist in a
competitive environment, thus subjecting a reasonable amount of equipment to a standard that
furthers Congress' intention." By excluding certain costs from the Equipment Basket Cox has
not fully complied with the "actual cost" standard. In effect, a portion of the installation and
equipment costs are being subsidized by monthly program service rates.
On a going forward basis, appropriately adding certain costs to the Equipment Basket and
subtracting the costs from monthly program service charges could be "revenue neutral" for Cox.
That is, the amounts Cox gains by higher permitted equipment and installation rates (if Cox in
fact raises these rates by the amount of the increase in permitted levels) should be offset by
lower permitted monthly program service rates. However, for the purpose of dete, mining
potential refund liability on a retroactive basis, an adjustment for the income taxes and return on
investment exclusions would not be revenue neutral, because subscribers would be entitled to a
refund for the amount that Cox actually charged above the maximum permitted rates for
monthly program services, but Cox would not be able to recover the added equipment and
installation charges that would be permitted under the revised rates. The monthly program
service overcharge attributable to the understatement of equipment and installation costs equates
to about 1.5¢ per channel per month for subscribers in Poway. 5
Incorrect allocation of certain installation and equipment costs
The FCC rules and instructions for the Form 393 require that the costs included in the
Equipment Basket be those, and only those, associated with the installation activities and
equipment for which the cable operator is able to charge subscribers on a basis unbundled from
other services. For example, installation personnel may also perform service disconnection
activities, but under the rules the costs of disconnections are to be recovered in monthly program
service charges, not as a separate charge to subscribers (or former subscribers). The costs of
disconnection activities therefore should not be included in the Equipment Basket.
This calculation assumes that Cox would apply the maximum permissible return on
investment and tax percentages allowed by the FCC.
6
Resolution No. 94-068
Page 10
Cox allocated certain costs to the Equipment Basket based on the proportion of time that field
service personnel spend on activities involved in services that may be billed to subscribers as
installation and equipment charges, versus time these personnel spend on activities that are not
separatel~ billable. This is a reasonable approach for several of the objects of expenditure that
Cox inclfided in the Equipment Basket. However, Cox did not allocate certain costs that support
both activities that are separately billable under the rules and activities that are not. Specifically,
Cox included tools and maintenance facility costs in Schedule A of Part III of the Fo~m 393 and
allocated these costs to a pool supporting field services personnel, but did not further allocate the
gross book, accumulated depreciation, and annual depreciation figures to reflect the fact that
these assets also support certain field services activities not appropriately included in the
Equipment Basket (for example, disconnection activity). Cox could have reasonably applied a
labor cost allocation percentage it developed for Schedule B to the items included in Schedule A
as well.
This adjustment, by itself, would slightly lower the maximum permitted rates for installations
and equipment, but would slightly increase the maximum permitted monthly rates for program
services. The effect on monthly rates for program services is less than 0.1¢ per channel.
C. Maximum Permitted Rates and Related Recommendations
We have five principal recommendations, as reported below:
· Order basic service rate reduction
· Order refunds
Notify the FCC of City rate actions
· Issue accounting order for effects of possible installation and equipment cost adjustments
· Evaluate future FCC actions.
Any rate reduction actions or refund decisions the City makes based on these recommendations
should be expressed in written orders directed to Cox.
Order basic service rate reduction
Based on the findings reported above, we recommend that the City order Cox to reduce its rate
for the basic service tier. We recommend that the ordered rate be $8.24, compared to the $8.34
that Cox now charges, a reduction of $0.10. The recommended rate is based on a maximum
initial pemfitted rate per channel of 45.8¢, compared to the 46.8¢ indicated in the Cox Form 393
filing; it assumes 18 channels of basic service. On an annual basis, the reduction equates to
about $12,000 for Poway subscribers.
The 45.8¢ (see Attachment 1) reflects the corrections discussed above in the findings for dates
and inflation factors, reported installation and equipment revenue, and satellite channel counts.
It does not include any adjustments for items affecting the Equipment Basket (income taxes and
return on investment, and cost allocation factors). We have excluded the adjustments for the
Equipment Basket factors in order to not put the City in a position of possibly authorizing future
increases in installation and equipment rates before the City has learned how the FCC will act on
Resolution No. 94-068
Page 11
cable programming service rates related to the current Form 393 filing and before new FCC
rules expected soon have been published (see below). The recommended rate is inclusive of all
basic service fees and charges except the applicable franchise fee, which is addressed below.
Order refunds
We recommend that the City order basic service refunds to subscribers, for the period between
the date Cox implemented the current rates and the date that Cox reduces its basic rate to no
higher than the maximum permitted level indicated in this report. The City has this authority
under the FCC rules. 6 The City must give Cox notice and an opportunity to comment. Cox has
the option of refunding amounts to specific subscribers affected or via a one-time percentage
applicable reduction to the class of subscribers currently subscribing to the system. In addition,
interest (computed at an Internal Revenue Service rate) is to be added to the refund amount.
Once the City has issued and Cox has accepted a rate reduction and refund order, the City should
review Cox's proposed refund methodology and amounts to ensure compliance with the FCC
rules.
Notify_ the FCC of Ci_ty rate action
The City should notify the FCC that it is taking action to reduce Cox's maximum initial
permitted basic service rate, to alert the FCC of a required reduction in the cable programming
service rate. Only the FCC can order a cable programming service rate reduction. If the FCC
adopts the maximum permitted rate of 45.8¢ per channel identified in this report, the rate for the
cable programming service tier would be $16.03, compared to $16.22 currently (assuming 35
channels). The annual reduction for Poway subscribers would be about $23,000.
Issue accounting order for effects of possible installation and equipment cost adjustments
We did not make any adjustments for installation and equipment costs in the recommendations
presented above. Although we have certain findings that suggest that these rates could be
adjusted (see the findings regarding income taxes and return on investment, and certain asset
cost allocations), we believe that it is prudent for the City to not order adjustment of these rates
now. We advise the City to wait until the FCC has acted on the cable programming service rate
and until forthcoming FCC rules have been reviewed (see below) to determine the correct course
of action. If it acts by the end of the 90 day tolling period currently applicable, the City has the
authority to issue a brief written order directing Cox "...to keep an accurate account of all
amounts received by reason of the rate in issue and on behalf such amounts were paid." ? The
accounting order should specify that basic service rates and all equipment and installation rates
are still at issue, even though the City has issued an order (see above) for basic service rate
reductions.
We believe that the FCC rules prevent Cox from establishing new installation or equipment rates
or raising these rates more frequently than annually, unless the City has ordered or specifically
allowed a change as part of a rate proceeding under the FCC rules, g Further, as a cost
47 CFR 76.942
7 47 CFR 76.933 (c).
Resolution No. 94-068
Page 12
accounting matter, because Cox excluded certain installation and equipment costs from Part III
of the Fot-m 393, one effect is for the monthly rates for programming services to be higher than
they would otherwise be. 9 We do not believe that the FCC intended to allow operators to
double recover equipment and installation costs by excluding them from Part III of the From 393
(and the{eby increasing rates for programming services), and then at a later date implementing
an increased charge for equipment or installations that was not properly accounted for in the
Form 393 "Equipment Basket."
We therefore recommend that the City carefully review future installation and equipment rate
filings that Cox submits to evaluate the consistency of the cost finding methods used in the new
filing(s) with those used in the initial filing under review in this report. In the future, basic and
cable programming services rate increases will be detemxined, in part, by a price cap adjustment
that builds on the initial maximum permitted rate per channel. In effect, the higher the initial
established rate per channel, the higher rates will be in the future (if all other factors are equal).
As noted above, if the cable operator has excluded or understated certain equipment or
installation costs in Part III of the Form 393 filing, as Cox apparently has in this case, one' result
will be higher initial program service rates, and the operator would potentially continue to
benefit from these higher rates as future price cap adjustments occur.
Attachment 2 shows what the Cox maximum initial permitted rate per channel would be if
adjustments were applied for the equipment and installation cost finding problems noted in this
report. The per channel rate would be 44.3¢ instead of the 45.8¢ recommended for the rate
.reduction order noted above, but the maximum permitted equipment rates would also be higher,
possibly offsetting the program service rate reduction.
Our specific concern, therefore, is that Cox could gain a higher program service rate now by
excluding costs from the Equipment Basket, and then potentially "catch-up" on any installation
or equipment costs that were understated in the initial filing by applying a more inclusive cost
finding approach in future installation and equipment cost filings. Thus, to the extent that Cox's
cost finding methods or assumptions may differ in future filings, the City should reserve the
right to (1) reject or adjust the cost finding methods or assumptions if they are inconsistent with
those used in this initial filing; or (2) require adjustments to the maximum initial permitted rate
per channel to account for the changes in the cost finding methods or assumptions. The issuance
of an accounting order now should assist the City to require future adjustments, and Cox to make
rebates, should they become necessary because of the equipment and installation cost finding
procedures that Cox applied in this filing.
Evaluate future FCC actions
The FCC has announced that it will be issuing another order of reconsideration and/or further
interpretations of its rules in the next few weeks. The FCC action could have an impact on the
FCC, "Cable Television Rate Regulation Questions and Answers," Question 33: "How
often can rates change for equipment? Answer: As for other rate increases, cable operators may
file for equipment charges annually."
This result occurs because the total cost of the "Equipment Basket" is subtracted at Line
301 of Worksheet 3 in order to help determine the maximum initial pettrdtted rate per channel.
9
Evaluate ~uture ~CC actions
' ~'~01 u~liOnpage No. 94-068:
The FCC has announced that it will be issuing another order of reconsideration
interpretations of its rules in the next few weeks. The }'CC action could have
Fom~ 393 calculations or the City's position in this rate regulation proceeding,.
City can only evaluate the impact once the orders or interpretations have been'
particular, the City should evaluate rules relating to the addition of channels during i ~ pefiod of
regulated rates, since this is the situation that has occurred in Poway.
If you have any questions or comments regarding this report you may col .ct me at
$03-287-7273. Thank you for th~s opportm~ity to serve the City of Poway.
Sincerely,
Jay C. Smith
President, Public Knowledge, Inc.
lO
Resolution No. 94-068
Page 14
SUmmary of Rates for Cox Cable
City of Poway
Table 1
Recommended Basic Rate Reduction - Current City Action
Adjustments for Inflation, Equipment Revenue, and Satellite Channel Counts
(all rates exclude franchise fees)
Current Actual Recommended Rate
Rate (45.8C/channel)
Reduction
Basic Cable Service $8.34 $8.24 $0.10
(18 channels)
Table 2
Rates with Possible
Additional Adjustments for "Equipment Basket" Costs,
Pending Review of FCC Action
(all rates exclude franchise fees)
Current Actual Recommended Rate
Rate (44.3 C/channel)
Reduction
Basic Cable Service
(18 channels)
$8.34 $7.97 $0.37
Cable Programming
Service (35 channels)
$16.22 $15.51 $0.71
ATTACHMENT 1
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Resolution No. 94-068
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Resolution No. 94-068
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Resolution No. 94-068
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3510 SUNRIDGE DR. S.
SALEM, OR 97302
(503) 581-0878
FAX(503) 581-2026
PUBLIC
KNOWLEDGE®
Resolution No. 94-068
Page 23
2828 N.E. STANTON
PORTLAND, OR 97212
(503) 287-7273
FAX(503) 287-7323
May 16, 1994
Mr. Patrick Foley
Principal Management Analyst
City of Poway
P.O. Box 789
Poway, CA 92064
DearMr. Foiey:
I have reviewed the letter to you dated April 25, 1994 from Robert McRann, President of Cox
Cable San Diego, regarding my review of the Cox FCC Form 393 rate filing. I have outlined
below the points where I agree with the Cox position in that letter and its attachment, and the
points where I disagree.
First, I agree that FCC guidelines would allow Cox to use the full 1992 fiscal year (ending
December 31, 1992) to calculate its installation and equipment revenue to apply to Line 204 of
the Form 393. In completin~ the Form 393 that I reviewed, Cox had not used the last three .
months of that Year; ! accepted the period Cox had used. If the company now wishes to change
the period it used, it should submit a revised Form 393 to the City with the appropriate change on
Line 204.
Second, I agree that it is reasonable that Cox should not incur refund liability from the potential
basic service rate reduction that would result from adjusting the "Equipment Basket" costs to
include taxes and return on investment. It is important, however, that Cox treat these items
appropriately in its forthcoming Form 1205 filing.
On other matters I disagree ¥/ttt~ Cox, as summarized below:
Cox defends its inclusion (on Line 204) of imputed equipment revenue for decoder (converter)
rentals to pay subscribers. I repeat what I had stated in my report: "The amounts that Cox
reported for imputed revenue for these converters are not identified as equipment revenue in
the Cox accounting records for the applicable period, nor, to our knowledge, were pay
customers during this period informed that they were paying a specified amount per month for
converter rental." Cox has presented no new information that would cause me to conclude that
the imputed revenue should be allowed: '
Cox argues that it C~'unted ~atellite channels correctly. As part of its argument, Cox points out
that the FCC uses the term satellite signals in part of its order. However, the FCC also uses
EXHIBIT A
COA, TUL T1NG AND 1NFOI~14A TION SERVICES I:OR PUBLIC MANAGEMEArT EXCELLENCE .
Resolution No. 94-068
Page 24
the term satellite channels, and indeed satellite channels is the term used on the benchmark rate
tables themselves. As I stated in my report, I do not think that the FCC intended that any
channel carrying a satellite signal could count as more than one satellite channel; for example,
the benchmark charts themselves do not provide for the possibility that there could be more
satelh'~e channels than there are total regulated channels. Cox further argues that cable
operators should not be penalized for adding value to subscribers by including two or more
satellite services on a channel. Yet under the Cox interpretation, all subscribers' basic and
cable programming service rates would increase for each partial offering of a satellite service,
no matter what small percentage of time the service might actually occupy a channel. I do not
believe that the FCC intended this outcome, nor do I believe that it is reasonable. In the Third
Order on Reconsideration, the FCC has stated that, "... a single channel provided to a customer
that may consist of two or more programming services may be counted as only one channel of
service provided for rate setting purposes" (Paragraph 135).
In summary, i believe'that Cox still has refund liability to Poway subscribers, with the amount of
the refund dependent on changes Cox may make to Line 204 using fiscal year 1992 equipment
and installation revenue, if acceptable, and on the date that Cox implements new rates in full
compliance with the FCC rules. Contrary to what Cox states in its letter, I do not believe that
Cox can offset basic rate refunds with retroactive equipment rate increases when none of the basic
rate refund would be attributable to adjustments in the equipment basket costs (I interpret
Paragraph 104 of the Third Order on Reconsideration differently than Cox).
As I have discussed with you previously, Cox has a forum if the company disagrees with action
the City may take on basic service rates; the company can appeal to the FCC. However, the
burden of over-turning the City's position will be on Cox.
If you have any questions you may contact me at 503-287-7273.
Sincerely,
Jay C. Smith