HomeMy WebLinkAboutAgenda - 02-06-1995 - IX-C 1
ORANGE COUNTY
BOARD OF COMMISSIONERS
Action Agenda
Item No. Z -C-
ACTION AGENDA ITEM ABSTRACT
Meeting Date: February 6, 1995
SUBJECT: Cablevision Industries Cost of Service Rate Approval
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DEPARTMENT: County Manager PUBLIC HEARING YES: NO: X
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ATTACHMENT(S) : INFORMATION CONTACT: Albert Kittrell
Rate Review TELEPHONE NUMBER-
Hillsborough -732-8181
Chapel Hill -968-4501
Mebane -227-2031
Durham -688-7331
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PURPOSE:
To consider approving basic cable TV rates for Cablevision
Industries.
BACKGROUND:
In August, 1994 the two cable TV operators in the unincorporated
areas of the County, Time Warner (Cablevision) and Cablevision
Industries (CVI) submitted cable rate information for review as
required by the Federal Communications Commission (FCC) . TJCOG
Consultant, Bob Sepe, reviewed the rate information on behalf of the
County. On December 20, 1994, the Board approved the basic cable
rates for Time Warner as recommended by the consultant. The basic
rates were consistent with the FCC benchmark rates. Time Warner has
approximately 5,489 cable subscribers in the unincorporated areas of
the county.
The consultant has completed the review of the other cable operator,
CVI. CVI filed their basic cable rate review under the cost of
service approach rather than the benchmark filing Time Warner
selected. The cost of service approach is used by cable operators
when they believe the maximum permitted rate under the benchmark
formula will not enable the operator to recover costs reasonably
incurred for providing cable services. The cost of service filing
enables the cable operator to justify charges for regulated cable
service based on actual costs of providing such services. It
provides for: 1) the recovery of all expenses necessary to deliver
the services, including operating expense and the depreciation on
property, plant and equipment; and 2) a return on investment for
property, plant, and equipment used to deliver the services. CVI has
629 subscribers in the unincorporated area of the County.
2 . , .
The consultant has submitted a review summary which includes
findings and recommendations. The consultant will present the
report. Bob Gwyn, Chair of the Cable Committee and staff will be
prepared to answer questions.
RECOMMENDATION(S) :
The Manager recommends that the Board approve CVI cable TV rates and
authorize chair to sign Order approving cost of service rate.
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SUMMARY
Attached is the review of CV1's FCC-1220 Cost of Service filing. It was accompanied by
FCC-120011205/1215 submittals. The Cost of Service information and attached documents
are substantial and in accordance with the format required by the federal Office of
Management and Budget[OMB]for an FCC-1220 series filing.
The Cost of Service[COS] approach was intended by the FCC for operators to use when they
believed that the maximum permitted rate under the benchmark formula would not enable the
operator to recover costs reasonably incurred in the provision of rate regulated cable services.
CV1's Cost of Service filing for Orane County seeks to justify a basic service rate of$21.62
and CPS [tier 21 service rate of$32.34 based upon the company's cost of providing cable
television service,
At a December 2, 1994 meeting between CV1's corporate staff and counsel, and the
consultants for Change County, the company argued that it should be allowed to roll prior year
losses into subsequent years. This is not allowed under the FCC benchmark rules but permitter)
under Cost of Service rules. The company asserted it was not the intent of the U.S. Congress
to prohibit the recovery of prior year start up losses nor to ignore continuing capital
investments in its cable television systems.
Based upon the review of CV1's Cost of Service filing, the accompanying supporting
documents, and the information exchanged during conferences with CV1's corporate staff and
counsel, it was observed that:
a. CV1's filing was supported by balance sheets reflecting activities at the franchise
level only; and,
b, a group of investment bankers supports the company's position that it likely
warrants a rate of return greater than 11.25 S.
Additional detailed information about CV1's capital strueturre is not being sought at this time
because the company crated it could meet its financial and business obligations while
preserving its cwrr+eut rates for installation,equipment and basic services. CV1 agreed to
sustain these rates for two years, excluding adjustments for external expenses, such as:
program costs and inflation. The company agreed to maintain installation and equipment costs
at or below the FCC-1205 benchmark rates.
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Table A
CATY Program Services
s� ^ '+.,,'���•.>'�7�e�: �,y��.s``,�.w"Y.'� ""w,',,>'<.'1.:Vii;e�<••::..«,.,'�. �p
Basic $21.62 $8.58 $7.78
Tier U- FCC Regulated $32.84 $12.27 $10.90
Table B
CATV Equipment Rates
Remote Control $4.24
Converter $1,54
Table C
CATY Installation Rates
>
} M
Hourly Service x32.05
Charge
Unwired House $48.50
Prewircd House $19.44
i
A/Outld at Initial $9.70
installation
Addict d Outlet $19.40
Separate Installation
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REPORT
FCC-1220 Series Benchmark Rate Review
Cablevision industries, Inc. - Orange County, NC-0256
BACKGROUND:
Commensurate with the Cable Act of 1992, the Federal Communication Commission
promulgated a set of rate determination rules for cable operators to apply in the absence of a
competitive environment. The rules established a first year rate structure (FCC-393] and
second year[FCC-1200/1220 series]to determine the maximum permitted rates for regulated
programming services and equipment and certain aspects of a is carte program costs. The
Commission also allows operators to"update" maximum permitted benchmark rates and
recover inflationary and external costs through FCC-2210 form.
The Cost of Service[COS] filing enables cable operators to justify charges for regulated cable
service based on actual costs to providing,such services. Provided for are: 1) the recovery of
all expanses necessary to deliver services, including operating expense and the depreciation on
property,plant and equipment; and, 2)a return on investment[ROI] for property, plant, and
equipment used to deliver the services. The ROI is to assure a fair return out equity, recovery
of interest expense, and income taxes associated with the equity portion of the return.
i
METHODOLOGY:
CVI's submission to Orange County was evaluated by the consultants to determine whether
the operator calculated benchmark rafts consistent with the procedures prescribed by the
Federal Communication Commission. Data provided by CV1 in the form of FCC-1220
worksheets were entered into a computer program prepared by the FCC for this purpose.
Original computations were performed by the consultants and compared against those filed by
the company.
OBSERVATIONS:
CV1 chose to use a rate of return on investment which exceeds the current 11.25% benchmark
rate. The program service rates proposed by the company incorporate a higher rate of return:
15.0%, which reflects CVI's cost of capital.
Cablevisiom.Industries, Inc. is organized as a C-corporation; its federal and state income tax
rates are 35% and 7.82% respectively.
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L
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CVI is not a small operator under FCC rules. It has 174 cable television systems representing
numerous franchises. The operator reports that three franchises are served by the cable
television distribution system in this filing. The system passes 7,784 households and serves
4,941 subscribers. The operator reported a penetration of 63.596, as of December 31, 1993;
62.8% the previous year; and 60.2% the year before that.
In September, 1992, the operator reported.174 subscribers to the basic tier of service. Fifteen
months later, on December 31, 1993, CVI reported 228 basic subscribers to the basic tier, an
increase of 54. On March 3, 1994, the operator reported 629 basic subscribers, an increase of
401 subscribers from the previous year[See Increase in Subscriber Base, Table A].
Table A
Increase in Subscriber Base
Sept. 30, 1992 FCC-1200 174 Initial Corset
Dec. 31, 1993 FCC-1200 228 +74 su6,t In IS moruhs
March 31, 1994 COS 629 +4111 subs In 3 months
According to CV1 representatives,the drastic increase [from 228 to 629] in subscribers in the
first quarter of 1994 was due to a franchise coding adjustment by CVI staff; 401 subscribers
were transferred from the Town of Hillsborough to the Orange County franchise after a
system-wide audit confirmed that these subscribers ware incorrectly coded as being part of the
Town of Hillsborough franchise.The adjustment was performed by the bill'mg department at
CVI, as stated by Marla Dorrel, CVI vice-president of government:relations.
Change County was duly informed by CVI representatives regarding this matter, according to
Albert KittmU, assistant county manager Orange County officials indicate that the County
realized an increase in the collection of franchise fees[3%]as a result of the increase in
subscriber base.
The channel capacity of the cable system.is 60. The"regulated" program service group is
composed of basic service, 13 channels;and tier service, 21 charnels. There am 34 satellite
delivered program services[ie. C-SPAN, FSPN, Weather Channel, CNN, etc.], one pay-per-
view service, five[5]pay per-channel services fie. Disney, HBO, TMC, etc.], and no active
leased access channels.
7
Though CVI reports three channels are used for Public, Education, and Government [PEG]
access programming in their Cost of Service documents, only two are indicated to be in use
within the franchise,according to additional information supplied by the company [Channel
Line Up sheet]. Channel 4 is used as a "Bulletin Board," and channel 11 is used for"Local
Government Access."
The following is a summary of the company's umber 31, 1993 year-end adjusted account
balances.
Table B
Account Balance Summary
Net Working Capital-computed as current assets minus current $0.00
liabilities. The requiremont for regulated cable services is assumed to be
zero.
Eleadend - the total investment in headend, including land, buildings, $5,000.00
antennas, satellite earth stations, signal processors, modulators, character
generators, automated insertion equipmait, addressability ewlectranim,
monitoring equipment,hub facilities, interconnection facilities,local
origination facilities and other equipment.
Trunk and Distribution Facilities-investment in trunk and distribution $97,000.00
cable and fiber optic nd works.
Drops-investment in drop wire, connectors, ground blocks, and $0.00
security cages.
Customer Premises Equipment-investment in converters, remote $4,000.00
control devices, inside wiring, splitun and other equipment installed in
the homy [Does not include AM switches]
ConAructloaMbintsoame Facilities and Equipment- investment in $6,000.00
land, buildings, vehicles and equipment used for the installation and
repair of cable facilities and the maintumm of said buildings, vehicles
and equipment.
Programming Production Facilities and Equipment-investment in $0.00
land, buildings, vehicles, equipment, studios, connecting links, cameras
and other such equipment used for public access programs as well as for
internally generated local origination programs.
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Business Offices Facilities and Equipment- investment in land, $4,000.00
buildings, vehicles, furniture dt equipment used for general business
operations [marketing] administrative activities.
Other Tangible Assets $0.00
Accumulated Depreciation-depreciation on all tangible assets (540,000,00)
Punt Linder Construction- includes balance of construction work in 50.00
progress.
w� ♦v � :f�iw
Organizatlonal and Franchise Costs-includes capitalized=xpenditures $232,000.00
associated with the organization of the business and with the acquisition
of franchise rights.
Subscriber Lists-the capitalized casts associated with the development $41,000.00
of Subscribership records.
Capitalized Start Up Uses $0.00
Goodwill. $0.00
Other Intangibles $128,000.00
Accumubded an-depreciation on all intangible assets. ($120,000.00)
MI- E-wo
Deferred Taxes-deferred state and federal income tastes. $0.04
Net Rate Rm- sum of the rate base items,plus the sum of the 5357,000.00
intangible assets, less accumulated depreciation and deferred taxes.
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FINDINGS:
To support a rate of return greater than that permitted under the benchmark rules, CPI's
submittal included a Cost of Capital Analyses report which used information from three
investment banking firms: First Boston, Morgan-Stanley and Lazard Freres. This report
identified the cost of equity for the cable television business, a risk enterprise, as being
between 20.3% and 30%. This differs markedly from the 11.25% allowed by the Federal
Communication Commission in the benchmark rate calculation; however, the report makes the
case for a rate greater than the benchmark.
Whether or not a 15% overall return on capital is fully justifiable is uncertain at this time.
Such a determination requires full knowledge of CPI's capital structure. While their data may
support a rate of return than greater than 11.25%, it is not possible to make such a
determination from the information provided in the FCC-1220 filing, Howcver, since the
company is seeking approval to support the current rates for regulated service, their data will
likely support an overall return on capital greater than the 11.25% FCC benchmark rate.
In accordance with the FCC's rules, the company did not include the uncapitalized investment
in distribution facilities construction in the value of the net rate base. Current subscribers are
not subsidizing the company's investment in new facilities and equipment prior to their actual
use. [see Table B: Plant Under Construction].
The com deducted in accordance with the FCC's rules unam goodwill. Inclusion
Many orttzed g
of goodwill in the net rate base artificially increases the cost to subscribers for regulated cable
television services. The FCC rules disallow the inclusion of goodwill expense from the rate
calculation. [sex Table B: Goodwill].
The net rate base was adjusted to include the value of other intangible assets. Included are
unidentified accumulated book losses, yet loan costs have been removed from the rate base
[see Table B: Other Intangibles).
Nearly three quarters of tho net rate base consists of intangible asses, as opposed to a little
over one quarter of the rate base for tangible assets [see Table C below.]
Table C
Tan ble Net Rate Base Allocation
Tangibles 21.29% $76,000.00
Intangibles 78.71% $281,000.00
Total Rate Base 100,00% $357,000.40
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Table D
Basic Service Tier
Op
$21.62 $18.36 $8.58 $7.78
Table E
Charges for Regulated Services Computations
Basic $21.62 $21.62
Tier- FCC Regulated $32.84 $32.84
FCC-1205;Determining Regulated F,4ulpment and Imtaliation Costs
OBSERVATIONS:
Cablevision Industries prepared and submitted a completed form FCC-1205 along with the
FCC-1220. The operator rmlculated the equipment basket[converters and remote control
devices and installation]rates.
CVI did elect to vse the maximum permitted rate of return [ROl] under the current benchmark
rules of 11.25 percent to c;alculats the equipment.lease rates. System wide, Cvl reported I,503
remote control units with a gross book value of 59,706,or$6.46 each; and 1,615 "Converter
2* units, with a gross book value of$83,173,or an average cost of$51.SQ each.
Iz
FINDINGS:
The operator's benchmark calculation for installation Vaborl and equipment services are
consistent with the benchmark requirements established under the 1994 FCC-1200 benchmark
rate. Following are figures presented by CVI and recalculations by the consultant:
Table F
CATV Equipment Rates
.w.
Remote Control $0.24 $0.24
Converter 1 $1,50 $1.50
Table G
CATV Equipment Rates
Hourly Service Charge $32.45 $32.05
Unwired House{ $48.54 $48.50
Prewired ]Mouse $19.40 $19.40
A/Outlet at Initial Installation $9.70 $9.70
Additional Outlet-Separate Installation $19.40 $19.40
The rates progoscd by CVI conform with the benchmark rate.rules and as such are valid. CVI
reported a$1.40 per subscriber `Adjusted Monthly Equipment and Installation' cost
[FCC-1205, p6, 14], which was consistent with Lalculations performed by the consultant.
The operator's benchmark calculation for installation [iaborj and equipment services are
consistent with the benchmark requirements were established under the 1994 FCC-1200
benchmark rate.
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STATE OF NORTH CAROLINA
ORANGE COUNTY
BEFORE ORANGE COUNTY
IN THE MATTER OF: }
Review of Basic Cable Service,Equipment and ) ORDER APPROVING
Installation Rates and A La Carte Offerings } COST OF SERVICE RATE
Filed by Cablevision Industries, }
Inc., d/b/a CVL NC-0256 j
BY ORANGE COUNTY
WHEREAS,Orange County has been duly certified to regulate basic cable rates for CV1
within the municipal limits of Orange County;and,
WHEREAS, on August 23, 1944, CVI filed its form FCC-1220/1205/1215 request for
cable service,equipment and installation rate approval;and,
WHEREAS,the current FCC benchmark rate for basic service for CV1 applicable in
Orange County is$7.78,and CVrs current rate in effect in Orange County is$8.58; and,
WHEREAS, CVrs Cost of Service rate Sling,if,in accordance with FCC rules,sound
Cost of Service principles, and fully supported by appropriate underlying data.would justify a
basic rate of$21.62; and,
WHEREAS,Change County has retained the Triangle J Council of Governments,and the
City of Rawsh, not itx rate,c,Qnsuhantt, and Naugle I Council of Governments and City of
Raleigh filed a report which has evaluated CVrs,Cost of Service rate filing. Mthough CV1 has
requested a rate of return of 15%, the FCC's current rules for Cast of Service rate filings create a
presumption that only a 11.25%rate of return on the rate base is reasonable. CVrs intangible
assets conaititute 78.71%of its Orange County rate base and may not be appropriately
amoritiznd. TlwefoM CWs Ming nay not be justified for the III amount of its Cost of Service
rate. However,after adjusd%for discr%xwcies,there appears to be adequate justification for a
Cost of Service rate equal to CVrs current basic rate,and,
WHEREAS,CV1 has indicated that it is only requesting a Cost of Service rate for its
basic service at the same level as the current rate in eftct,and will retain said rate in effect for a
minimum of two(2)years,except for adjustments for external expenses, such as program costs
and inflation.
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NOW THLREFORE,Orange County malcas the following:
FINDINGS OF FACT
1. CVI has justified an$8.58 rate per month for basic service under the FCC Cost of
Service rules.
2. CVrs equipment and installation rates conform to FCC reporting and computation
requirements and arc reasonable.
3. CVFs a la carte submittal conforms with FCC reporting requirements and is
reasonable.
Based upon the foregoing, Orange County adopts the rate review report of its consultants
and CONCLUDES AS A MATTER OF LAW that CVI's current basic service, equipment and
installation rates should be approved to remain in effect for two(2)years,excluding adjustment
for external expenses, such as:program costs and inflation,and that no refund liability should be
imposed. CVTs a la carte submittal should also be approved.
IT IS THEREFORE ORDERED that CVI's service,equipment and installation rates are
approved as follows:
IMMM Service Chsr4e
Banc S8.58
Crsrr+eat&j111Rm1gt Rates
Remote Co sod 5024
CasMW S1.50
cuueni, 611AIIJus "
Howdy Sarvice Charge $32.05
Unwired House U&SO
Pre-Wind Howse $19.44
AKX t at bwtdlstlon $9.70
AtCkAlct wlrruclr Ralf $14.40
other 3arrim at Mc $32.05
ISSUED BY ORDER OF ORANGE COUNTY
This the 5th day of February, 1995
ATTEST: CNAII IN;
County Clerk