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Res 94-069RESOLUTION NO. 94-069 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 SOUTHWESTERN CABLE TV FOR THE BASIC SERVICE TIER AND ASSOCIATED EQUIPMENT, ORDERING A RATE REDUCTION, PRESCRIBING P~ATES AND CHARGES FOR THE BASIC SERVICE TIER AND ASSOCIATED EQUIPMENT, ORDERING A REFUND TO SUBSCRIBERS, AND DIRECTING STAFF TO PETITION THE FCC TO DETERMINE WHETHER PLUS PACI~AGE CHANNELS SHOULD BE TREATED AS REGULATED OR UNREGULATED SERVICES 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 Southwestern Cable TV, ("Southwestern") on November 10, 1993, 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 Southwestern to file their schedule of rates for the Basic Service Tier and associated equipment with the City on November 10, 1993; and WHEREAS, the operator has filed with the City a FCC Form 393 on December 1, 1993; and WHEREAS, On December 27, 1993, the City issued an order pursuant to Section 76.933(b) of the FCC Rules and Regulations that it was unable to determine based upon the materials submitted by Southwestern 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) day 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 26, 1994, Southwestern 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 Resolution No. 94- 069 Page 2 WHEREAS, on May 24, 1994, the City continued the Public Hearing to June 28, 1994, to allow both the City and Southwestern additional time to review the impact of the new FCC regulations and to respond to the comments received from Southwestern in letters dated May 17, 18, and 22, and May 12, 1994. 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 Southwestern's FCC Form 393, dated December 1, 1993, 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 10 and June 6, 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 Southwestern's initial rates for the Basic Service Tier are unreasonable, the City Council hereby orders the following in accordance with the FCC regulations: Ao Co Do Eo The initial rates for the Basic Service Tier established by Southwestern Cable TV are disapproved. A reasonable subscriber rate for the Basic Service Tier is $10.91 per month. The subscriber rate of $10.91 prescribed by the City Council shall be made retroactive to September 1, 1993. Pursuant to an approved Refund Plan, Southwestern Cable is hereby directed to refund all subscriber charges since September 1, 1993 in excess of those prescribed by this resolution to the affected subscribers within the City of Poway with interest in accordance with the FCC regulations. The City staff is hereby directed to petition the FCC for a declaratory ruling on whether Southwestern's Plus Package of channels is a regulated or unregulated service. SECTION 3 The City Clerk is hereby directed to publish notice of this resolution and mail a copy of the resolution to Southwestern Cable TV. Further, the City Clerk shall make available a copy of this resolution to any person upon request. Resolution No. 94-069 Page 3 PASSED, APPROVED, AND ADOPTED by the City Council of the City of Poway, California at a regular meeting the~~~, 1994. w . ' - -~M~ Robert C. Emer ayor ATTEST: Marjori~ Wahlsten, City Clerk STATE OF CALIFORNIA ) ) SS. COUNTY OF SAN DIEGO ) I, Marjorie K. Wahlsten, City Clerk of the City of Poway, do hereby certify that the foregoing Resolution, No. 94-069 , was duly adopted by the City Council at a meeting of said City Counci-l~[-~61-~ 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 Marjori/eK. Wahlsten, City Clerk 3510 SUNRIDGE DR. S. SALEM, OR 97302 (503) 581-0878 FAX (503) 581-2026 PUBLIC KNOWLEDGE® Resolution No. 94-069 Page 4 2828 N.E. STANTON PORTLAND, OR 97212 (503) 287-7273 FAX(503) 287-7323 March 10, 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 filing (filing dated December 1, 1993) submitted to the City of Poway by Southwestern Cable (Southwestern). This letter summarizes the results of the review and presents our recommendations for adjustments to Southwestern'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 programming services and equipment rentals, as well as installation and related transaction charges. The FCC intends to directly regulate monthly rates for "cable program~ming services" (more commonly called "expanded basic" or "tier" services). Cable programming services (CPS) are packages of program 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, commonly called premium or pay services, are not regulated by either local franchise authorities or the FCC under current law. The purpose of the FCC Form 393 is to provide a framework for a cable operator to submit certain data and calculations to justify its rates as of the initial date of regulation, in accordance with FCC rules. Monthly programming service rates are compared against benchmarks developed by the FCC, and equipment and installation charges are developed based on an operator's actual costs, again as determined by FCC guidelines and procedures. The end result is intended to be a set of maximum pemfitted rates and charges applicable to the cable operator in the local franchise area,. A. Scope and Procedures Our review included assessing Southwestern's compliance with FCC rules and guidelines; evaluating the accuracy of certain data and calculations; and testing the reasonableness of certain methods and assumptions that Southwestern. applied. We performed the following procedures: EXHIBIT A COA, SUI. 77NG A~'~D INFORMATION SER I, TCES FOR PUB/dC MANA GEME~VT 1L¥C[:ZZE3/CE Resolution No. 94-069 Page 5 Performed a preliminary review of the completed FCC Form 393; for example: Spot-checked Southwestern's compliance with certain form completion instructions published by the FCC. Checked the inflation index data that Southwestern used. Compared benchmarks used by Southwestern 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 Southwestern. Identified needs for further infmmation. Prepared a data request and forwarded it to Southwestern. Contacted the Southwestern official responsible for preparation of the Form 393 and through facsimile transmissions obtained information related to our data request. Conducted a desk review example: of the information that Southwestern provided including, for 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 Southwestern applied to develop equipment and installation costs, to test whether Southwestern's approach appeared to be reasonable and consistent with FCC rules, guidelines, and interpretations. Compared certain information reported by Southwestern to data submitted by a sample of cable operators from around the country, to further test the reasonableness of certain Southwestern data. Visited the Southwestern facility in San Diego and performed certain additional procedures; for example: Obtained and reviewed certain workpapers supporting the Southwestern filing, and interviewed Southwestern personnel regarding procedures applied to complete the Form 393.. 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. 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 Southwestern personnel responsible for preparing the Form 393 and identified open issues. Received and reviewed certain additional information from Southwestern pertaining to issues open at the conclusion of the site visit. Resolution No. 94-069 Page 6 Summarized findings for review by you and Southwestern officials. Prepared this report. We performed 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 Southwestern 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 inflation index Improper exclusion of copyright fees from rates listed on the form Incorrect count of a shared channel Exclusion of the "Plus Package" Incorrect report of installation and equipment revenue Installation and equipment cost finding issues 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 inflation index Southwestern applied an incorrect inflation index at Line 123 of Worksheet 1. On November 10, 1993, before the date of the Southwestern filing with the City of Poway, the FCC indicated that the correct index is 122.5, instead of the 121.8 used by Southwestern. ~ Correction of this index lowers the maximum initial permitted rate per channel by about 0.6¢. Improper exclusion of copyright fees from rates listed on form Currently, Southwestern subscribers are billed 22¢ per month for copyright fees (23¢ if they take the optional "Plus Package"). In September, 1992, the added copyright fee was 27¢. Southwestern excluded these copyright fees from the rates listed on Line 101 (current rates) and Line 201 (September 30, 1992 rates) of the Form 393. These rates should have been included, and the "Maximum Initial Permitted Rate per Channel" derived through the form should be inclusive of the copyright fee (not e~xclusive of it, with the fee then added, as Southwestern treats it currently). The form instructions indicate only that franchise fees may be excluded at Lines 101 Federal Communications Commission, Question 9, "Questions and Answers Completion of FCC Form 393 and Associated Filing Requirements," November 10, 1993. 3 on Resolution No. 94-069 Page 7 and 201, and we are aware of no FCC rules or notices that support the exclusion of the copyright fees? When the FCC surveyed cable rates to set the benchmarks, copyright fees were not excluded, but instead were included in the benchmark rates; only franchise fees were taken out of the survey rates. 3 Including the copyright fee on the Southwestern Form 393 would raise the maximu~ permitted rate per channel calculated on the form, but would reduce the actual rate that subscribers pay (which now includes addition of the copyright fee on Southwestern's bills) by about 13¢ per month for basic service (see Table 1 at the conclusion of this report). Incorrect count of a shared channel Channel counts affect the rates that subscribers are charged because the maximum permitted rate per channel determined on the Form 393 is multiplied by the number of channels on a tier to determine the tier rate. The channel counts also affect the selection of "benchmark" rates from tables published by the FCC. The benchmark rates are determined by three factors: (1) the number of subscribers on the system; (2) the number of regulated channels; and (3) the number of satellite channels. We do not believe that the channel counts that Southwestern used are in full compliance with the FCC rules, guidelines, and instructions. First, Southwestern counted a channel shared between Playboy and the Fashion Channel as one full regulated channel (for the purposes of determining the benchmark rate and monthly subscriber bills) and as one full satellite channel (for the purpose of determining the benchmark rate). 4 Southwestern has indicated that the channel is occupied 10 hours per day by Playboy (an unregulated pay service), and 14 hours per day by the Fashion Channel (a cable programming service regulated by the FCC). 5 Based on Southwestern's approach, subscribers to the "standard" regulated tier .are now paying for the Fashion Channel service as if it occupied all of Channel 44, not just the 58.3% that it actually occupies. While, to the best of our knowledge, the FCC has not yet directly addressed the issue of a channel shared between a regulated and an unregulated service in the context of the Form 393 calculations, it has addressed it in the context of cost of service showings: Part-time channels. In situations where a single channel is divided on a part-time basis and is used to deliver services associated with different tiers or with pay per channel or pay per view service, a reasonable and documented allocation of that channel between services shall be required along with the associated revenues and costs. 6 Southwestern may itemize the copyright fee as a component of the permitted rate, but not pass it through as an additional charge above the maximum permitted rate. See Appendix E, "Survey Results: Technical Issues," of the FCC Report and Order (MM Docket 92-266) released May 3, 1993. 4 These channels are shared currently, but apparently were not shared in September, 1992. 5 Even though this shared channel is partly on a cable programming service tier, how it is counted also affects basic service rates because of the impact that the count has on the benchmark figures that are entered on the Form 393. 6 47 CFR 76.924 (h). 4 Resolution No. 94-069 Page 8 Thus, it appears inequitable and inconsistent with FCC policy to calculate basic or cable programming service rates based on the assumption that a particular channel always provides services to subscribers on a regulated tier when, in fact, it does not. In this case, we believe that a more appropriate approach would be to count only the percentage occupied by the Fashion Channel '(58%) in computing regulated rates, allocating to pay services that portion that is occupied by Playboy. 7 Counting only the prorated portion of the Fashion Channel as "regulated" actually increases the maximum permitted rate per channel because it lowers the channel count applied to determine the current benchmark rate, leading to a higher benchmark at Line 121 and a higher "channel adjustment factor" at Line 503. However, the amount paid by subscribers for the "Standard Cable Service" tier would slightly decrease, because their rate per channel would be multiplied by a lower number of channels on the tier. Because there would be no direct reduction in rates on the basic service tier, the City may wish to defer any action related to this channel until the FCC has acted on the cable programming service rate. Exclusion of the "Plus Package" A second channel count issue arises because the company did not count as "regulated" four services that it presents to subscribers as the "Plus Package" (Discovery Channel, TBS, WGN, and American Movie Classics). Apparently these services were not counted because ostensibly subscribers may purchase the services individually, or "a la carte." However, certain facts suggest that this service is marketed as, and is perceived by subscribers as, a package service on a tier: Nearly all subscribers who take these services take all four as a package: Southwestern reported that only about 0.7 percent of the subscribers who take at least one of these services take the service on an "a la carte" basis. The other 99.3 percent who take any of these services take the entire package of all four services. The "Plus Package" appears with "Basic Cable Service" and "Standard Cable Service" under a category labeled "Cable Service," not under the "Optional Services" category where "Premium Channels" appear in a subscriber brochure. 8 The services are significantly discounted if a subscriber takes the entire package: the individual service rate is 50¢ and the package rate for all four is $1.50. The most favorable facts in support of Southwestern's position that these services are "a la carte" are that the individual channel rate of 50¢ is advertised in information available to subscribers, and this rate is below the maximum initial permitted rate per channel that Southwestern determined on its Form 393 filing. 7 Another possible alternative would be to consider the times of day that particular services occupy the channel, and to give more weight to prime time in the allocation. "Rates: An Information Guide for Southwestern Cable TV Customers," which shows residential service rates effective September 1, 1993. 5 Resolution No. 94-069 Page 9 How these channels are treated has an impact because Southwestern's exclusion of the four alleged "a la carte" channels affects the Line 121 benchmark figure applicable to the current channel line-up. The company did not count these services either as regulated channels or as satellite channels for the purpose of determining this benchmark. The Line 121 benchmark figure, in turn, tfffects a "channel adjustment factor" at Line 503 on the Form 393. The effect of Southwestern's exclusion of the four channels is to raise the benchmark figure at Line 121, and to therefore increase the channel adjustment factor at Line 503, thereby leading to a higher maximum pemdtted rate per channel than would be the case if the four channels were counted as "regulated." We tested the effects of adjusting for channel counts (including an adjustment for the shared channel and for including the "Plus Package" as regulated). The calculations appear in Exhibit 2, and the results are summarized in Table 2. The City may wish to defer action based on these adjustments until the FCC has provided further clarification on how it will treat "a la cartes." Further FCC rulings on this matter are expected this month. Incorrect installation and equipment revenue The amount of installation and equipment revenue that Southwestern reported for the date of initial regulation at Line 104 does not conform to a clarifying instruction issued by the FCC. Southwestern reported an amount based on historical figures, before the initial date of regulation. The FCC has clarified that for the figure reported on this line "..operators must use equipment revenues that will be representative of the equipment rates that were in effect as of the initial date of regulation. Where available, actual revenues should be used. Where operators have restructured equipment rates as of September 1, 1993, in accordance with our regulations, we would anticipate that in most cases, absent special circumstances, operators will enter on Line 104 the same, or nearly the same, number as on Line 301. Line 301 is the anticipated revenues based on equipment rates derived in accordance with FCC rate regulations." 9 Southwestern reported $4,960 at Line 104 and $2,909 at Line 301. Since the company did not provide data on its actual installation and equipment revenue after September 1, 1993, one method to estimate the effect of correcting this line is to substitute the Line 301 figure into Line 104. However, this adjustment has no effect on the "Maximum Initial Permitted Rate per Channel" because Southwestern's rates are determined by the rates and installation and equipment revenue from September, 1992, not those at the initial date of regulation. Installation and equipment cost finding issues Part III of the Form 393 requires a determination of installation and equipment costs. The aggregate cost determined in this part of the form in turn affects monthly rates for program services, because the cost is subtracted from the per channel rate (at Line 301 of Part II of the form) to "unbundle" equipment and installations from charges for program services. We identified Federal Communications Commission, Question 7, "Questions and Answers Completion of FCC Form 393 and Associated Filing Requirements," November 10, 1993. 6 on Resolution No. 94-069 Page 10 several issues in how Southwestern determined its equipment and installation costs, including the following (these were each "open items" at the time this draf~ report was prepared): There appear to be problems in how the hours were calculated for Step A, Line 4. Contract labor hours may have been excluded, but other hours may have been over-counted because 2080 hours per employee per year was used (actual productive time for most employees is less). Convener repair personnel salary and benefit dollars appear on Schedule B and are allocated at Line 2 of Step A, but the hours for these personnel appear to have been included 100 percent in Line 4 of Step A, creating an inconsistency. The FCC has also issued a clarification that suggests that the convener repair cost should have been entered on Schedule C rather than Schedule B. One warehouse position was excluded on Schedule B. It is not clear whether the allocation at Step A, Line 2 then constitutes a "double allocation" for the warehouse cost. Drop material is included in Schedule B. Southwestern needs to clarify that this material is within the category that the FCC considers allowable. The Step A, Line 2 allocation method requires further explanation. Southwestern needs to explain the activity count repons that were applied to make the allocation. In addition, Southwestern appears to be charging for certain items whose costs do not seem to have been included in Part III of the Form 393. We found no information on "Video Switchers" on the Foim 393, for example. Nor did Southwestern develop a cost justification that the installation of additional outlets costs more when a premium service is carried on the outlet than when it is not. Southwestern needs to provide an explanation for these and other equipment and installation items that appear on the subscriber rate card, but are not delineated in the Form 393 cost calculations. We believe that the FCC rules prevent Southwestern 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 pan of a rate proceeding under the FCC rules. ~0 We believe that the Form 393 is the mechanism that the FCC has established for the annual rate setting, and that whatever rates the company intends to charge for installations and equipment should be specified on the Form 393. Further, as a cost accounting matter, because Southwestern excluded from Part III of the Form 393 certain of the installation and equipment costs, as our findings in this review suggest, one effect is for the monthly rates for programming services to be higher than they would otherwise be. n We do not believe that the FCC intended to allow operators to double recover equipment 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." 7 Resolution No. 94-069 Page 11 and installation costs by excluding them from Part IH of the Form 393 (and thereby 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." Currently, we have made no adjustments related to these issues, but adjustments could be made once Southwestern provides further information. 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 further reductions 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 Southwestern. Order basic service rate reduction Based on the findings reported above, we recommend that the City order Southwestern to reduce its rate for the basic service tier. We recommend that the ordered rate be $10.91 including the copyright fee (see Table 1), compared to the $11.06 that Southwestern now charges, a reduction of $0.13. The recommended rate is based on a maximum initial permitted rate per channel of 60.6¢ with the copyright fee included, compared to the 60.5¢ (excluding the copyright fee) indicated in the Southwestern Form 393 filing; it assumes 18 channels of basic service. The 60.6¢ per channel (see Exhibit 1) reflects adjustments for inflation and the copyright fee. It does not include any adjustments for channel counts. We have excluded the adjustments for the channel counts in order to provide the City an opportunity to see how the FCC will act the channel count issues and on cable programming service rates related to the current Form 393 filing. In particular, new FCC rules pertaining to "a la carte" channels are expected soon. Order refunds We recommend that the City order basic service refunds to subscribers, for the period between September 1, 1993 and the date that Southwestern 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. ~2 The City must give Southwestern notice and an opportunity to comment. Southwestern 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 permitted rate per channel. 47 CFR 76.942 8 Resolution No. 94-069 Page 12 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 Southwestern has accepted a rate reduction and refund order, the City sho"uld review Southwestern's proposed refund methodology and amounts to ensure compliance with the FCC rules. Noti _fy the FCC of City rate action The City should notify the FCC that it is taking action to reduce Southwestern'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. Issue accounting order for effects of possible further reductions We did not make any adjustments for treatment of the "Plus Package" channels in the maximum permitted rate per channel recommended above. We believe that there are grounds in the current FCC pronouncements to consider these channels to be "regulated," but that forthcoming rules may be more explicit about the criteria to apply. If we had counted the four channels to be regulated (and also adjusted the count for the shared channel), the maximum permitted rate per channel would be 55.3¢ (see Exhibit 2), compared to the 60.6¢ recommended above. Overall subscriber rates for regulated services would be significantly reduced, as shown in Table 2. 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 whether to order further reductions below that recommended above. 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 Southwestern "...to keep an accurate account of all amounts received by reason of the rate in issue and on behalf such amounts were paid." ~3 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. 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 Form 393 calculations or the City's position in this rate regulation proceeding, and we and the City can only evaluate the impact once the orders or interpretations have been promulgated. 47 CFR 76.933 (c). Resolution No. 94-069 Page 13 Southwestern personnel were very cooperative in assisting our review. We appreciate their responsiveness to our requests. If you have any questions or comments regarding this report you may contact me at 503-287-7273. Thank you for this opportunity to serve the City of Poway. Sincerely, Jay C. Smith President, Public Knowledge, Inc. 10 Resolution No. 94-069 Page 14 Table 1 Recommended Basic Rate Reduction - Current City Action Adjustments for Inflation and Copyright Fee (Exhibit 1) (ali rates exclude franchise fees) Current Actual Recommended Rate Rate. (60.6C/channel) Reduction Basic Cable Service (18 channels) $10.84 $10.91 ($0.07) Copyright Fee $0.22 $0.00 $0.22 Total $11.06 $10.91 $0.15 Table 2 Rates Recommended for FCC Action Additional Adjustments for Shared Channel and "A La Cartes" (Exhibit 2) (all rates exclude franchise fees) Current Actual Recommended Rate Rate (55.3C/channel) Reduction Basic Cable Service $10.84 $9.95 $0.89 (18 channels) Standard Cable Service $11.98 $10.83 $1.15 (19.58 channels) Plus Package $1.50 $2.21 ($0.71) (4 channels) Copyright Fee $0.23 $0.00 $0.23 Total $24.55 $22.99 $1.56 11 *r- LLI .9¸ Resolution No. 94-069 ~~Page ~ Resolution No, 94-069 Page 16 o c3 c o u.I ~ '- Resolution No. 94-069 Page 17 0 Resolution No. 94-069 Page 18 O0 3510 SUNRIDGE DR. SALEM, OR 97302 (503) 581-0878 FAX (503) 581-2026 PUBLIC KNOWLEDGE® Resolution No. 94-069 Page 19 2828 N.E. STANTON PORTLAND, OR 97212 (503) 287-7273 FAX (503) 287-7323 June 6, 1994 Mr. Patrick Foley Principal Management Analyst City of Poway P.O. Box 789 Poway, CA 92064 Dear lVlr. Foley: This letter responds to Southwestern Cable's letter of May 12, 1994 regarding the Federal Communications Commission (FCC) Form 393 filing that Southwestern submitted to the City of Poway. I found no new information in that letter that would cause me to change the principal findings included in the March 10 report. A summary of the significant issues appears below: Incorrect inflation adjustment. I still believe that an adjustment should be made for the outdated inflation factor that Southwestern applied, as identified in my March 10 report. In a recent order, the FCC stated that if the current rates were not justified by using the old data -- in other words, if anything else was wrong with the filing -- "cable operators will be required to correct their rates pursuant to current data" ~aragraph 94, Third Order on Reconsideration). In this case, there are other problems in the Southwestern filing in addition to the outdated inflation factor, and the Southwestern rates would not have been justified even if the old inflation data were accepted. Improper addition of copyright fees to subscriber bills. Southwestern points out that increases [my emphasis] in copyright fees may be treated as "external costs" jn the future [my emphasis], but acknowledges that "external treatment" is not permitted at this point. I agree. Southwestern's addition of copyright fees to the rates d~ermined on the Forn~ 393 should be disallowed, as I stated in my March 10 report. Incorrect count of a shared channel. I still believe that the channel that is shared between Playboy (unregulated service) and the Fashion Channel (regulated service) should be prorated in the channel count of regulated channels. However, because an adjustment for this channel would reduce cable programming service rates but not basic rates, I recommend that the City not include any adjustment for this factor until after the FCC has had the opportunity to act on cable.programming service rates. Ekclusion of the "Plus Package" from regulated services. The FCC recently identified further guidelines on how to detenfiine whether certain so-called "a la carte" services should be treated EXHIBIT A CO&TUL ThYG AND INFOtL~L4 TION SER I~TCES FOR PUBLIC MANA GEME3/T EXCELLEiVCE ' Resolution No. 94-069 Page 20 as regulated or unregulated. The City may wish to seek an FCC ruling regarding these channels; a recent FCC order provides that franchise authorities may petition the FCC to make this determination. A City Council resolution authorizing staffto petition the FCC for a decla[atory ruling, followed up with a letter to the FCC should be sufficient. In summary, I believe that Southwestern still has refund liability to Poway subscribers. I recommend that the City separate the inflation and copyright fee issues from the shared channel and "a la carte" channel issues. The City can act on the first two of these issues, and defer to the FCC for rulings on the latter two. The City may order refunds to reflect the recommended adjustments. As I have discussed with you previously, Southwestern 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 Southwestern. Southwestern indicates that they disagree with the refund liability, but indicates that if the refund liability is upheld, that they will issue a one-time credit to all basic subscribers. That approach appears reasonable. If you have any questions you may contact me at 503-287-7273. Sincerely, Jay C. Smith