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HomeMy WebLinkAboutAgenda - 05-03-2005-5jORANGE COUNTY BOARD OF COMMISSIONERS ACTION AGENDA ITEM ABSTRACT Meeting Date: May 3, 2005 Action Agenda Item No. -~` SUBJECT: Acceptance of Report by Action Audits, LLC and Adoption of 2005 Rate Order Resolution for Cable Services in Unincorporated Orange County DEPARTMENT: PUBLIC HEARING: (Y/N) No ATTACHMENT(S): Review of Time Warner Cable's FCC1240, 1235 and 1205 Rate Filings, Prepared by Action Audits, LLC 2005 Rate Order Resolution TWC Response to AA, LLC Review INFORMATION CONTACT: Robert Sepe, Action Audits, LLC Gwen Harvey, Assistant County Manager, Ext 2307 Durham 688-7331 Mebane 336-227-2031 TELEPHONE NUMBERS: Hillsborough 732-8181 Chapel Hill 968-4501 PURPOSE: To receive the report and adopt the recommendations from Bob Sepe of Action Audits, LLC, Triangle J COG Cable Consortium consultant, regarding Time Warner Cable's FCC Forms 1240, 1235, and 1205 for 2005, BACKGROUND: In October 2004, Time Warner Cable (TWC) filed rate farms seeking approval to increase the rates charged to unincorporated Orange County cable subscribers far basic cable television service, installation and equipment rental for the 2005 calendar year, Action Audits evaluated the information provided by TWC in accordance with the Federal Communications Commission (FCC) rate rules and regulation, and issued a report in December finding that their request to increase the basic service, equipment and installation rates to be in compliance with FCC's rate rules while the proposed form 1235 'add-on' rate was not in compliance, County staff had recommended postponing placement of the possibly contentious 1235 rate denial on the BOCC agenda this winter and spring in deference to the on-going facilitated franchise negotiations with TWC, Bab Sepe appeared at the BOCC meeting on April 19, at the Board's request, to present an update on cable regulation in the Triangle area, as previously presented to the Triangle J COG Board, Mr, Sepe's presentation highlighted aspects of the "Social Contract", a 1995 agreement under which the FCC agreed to dismiss rate complaints against TWC in exchange for a promise by the cable operator to upgrade its systems by deploying fiber-optic cable and to implement advanced telecommunication services, TWC was given authority by the FCG to pre-capitalize the upgrade by collecting funds in advance of the work with a cap of $180 per customer. In 2000, TWC implemented FCC farm 1235, the monthly surcharge levied to recover the balance of its upgrade investment, As noted earlier, it is the 1235 rate filing that is under challenge by Action Audits, To date, TWC has refused to provide local franchise authorities the financial information by which verification could be made. Action Audits believes that TWC may have recovered more money from its customers than way invested and that conceivably Triangle J customers have been over-charged and are entitled to a refund, Without financial disclosure from TWC, the magnitude of any recavery is unknown, but Action Audits estimates that the overage per subscriber in unincorporated Orange County may be around $126 (est, 7000 subscribers @$126= $882,000), As a result of the presentation and discussion, the BOCC directed staff to bring forward the attached report and related resolution for action at a future meeting. Adoption of the rate resolution denying the 1235 rate filing would align Orange County with other Triangle J municipalities seeking relief through an appeal before the FCC. Attached is a copy of the Review conducted by Action Audits, Ll_C, and their drafted Resolution. Also attached as additional background is the Response to the Review prepared by TWC, FINANCIAL IMPACT: There is no financial impact to the County in the approval of the report and adoption of the proposed rate order resolution. RECOMMENDATION(S): The Manager recommends that the Board accept the report by Action Audits, LLC and adopt the proposed 2005 Rate Order approving the basic cable service rate, the proposed equipment and installation rates, and denying the 'add-on' charge in unincorporated Orange County, 3 ~~~~o~~ Action Audits, Z,LC (~ DEC - 9 ZOOh Orange Caunty Review of Time Warner Cable's FCC Farms 1240,1235 and 1205 Rate Filing December 6, 2004 REPORT TO: John M. Link, County ager FROM: Robert Sepe, President ~ ~_ RE: Review of Time Warner Cable's FCC1240 and 1 OS rate filings We have reviewed Time Warner Cable's FCC1240 and FCC1205 filings, documents gathered by the County and consulted related FCC rules, regulations and publications. The values stated in the Company's FCC rate requests is the responsibility of the cable operator. Supplied data were reviewed to determine whether the cable operator calculated "updated" rates consistent with the procedures prescribed by the FCC in accordance with the FCC's 13th Report and Order, and the FCC's Cable Rate Regulation rules §76.900 - §76.990 and the Telecommunications Act of 1996, Original computations were performed and cornpared with data provided by Time Warner Cable, The accompanying report provides a reasonable basis for the opinions expressed herein.. Action Audits, LLC Cable Rate, Franchise Fee, Utility Iax Auditing & Ielecommunication Admuustration 101 Pocono Lane, Cary, North Carolina 27513-5316 Voice # 919,467,5392 Fax # 919.460.6868 0 Time Warner Cable - RlD Division Cable Television Rate Report A Review of Time Warner Cable's 200.5 FCC1240, FCC1235 & FCC1205 Rate Filing Seeking Approval to Set New Rates for Regulated Cable Services in Orange County Federal Community Unit Identification Numbers: NC-0276a, NC-2076b and NC-0256 December 6, 2004 Action Audits, LLC Cable Rate, Franchise Fee, Utility Tax Auditing & Telecommunication Administration 101 Pocono Lane, Cary, North Carolina 27513-51316 Voice # 919.467.539? Fax # 919 460,6868 -2- FINDINGS Time Wazner Cable's FCC Cable Rate Filing: On September .30, 2004, Time Wamer Cable (TWC) submitted a form FCC1240-Basic Cable Service Tier to set a new regulated rate for basic cable service. It requested to continue the rate set in its initial Federal Communications Coaunission (FCC) form 1.2.35-Abbreviated Cost of Service Network Upgrade Charge filed five yeazs ago. TWC also submitted a form 1205-Equipment and Installafion Chazges to set new regulated rates for equipment rental and installation services. These documents were submitted to the County for approval. TWC's proposed Maximum permitted rate for the Basic Service Tier (BST) of NC-0.276a in 2005 is $10.26. Cnstomers pay the BST plus the "Add-nn" Cost of Service Network Upgrade Charge of $1.81. TWC's proposed monthly combined rate is $12.07 (see Table 2). The "selected"combined rate is $11..55; that is $0.521ess than the maximum permitted rate. The next table chronicles changes in the regulated Basic Service Tier (BST) rate. Table 1 Year BSI Rate +/- Delta 2000 $8.75 2001 $9.91 $1.16 13,26% 2002 $9.62 ($0.29) -2.93% 2003 $10,40 $0.78 8.11% 2004 $10.76 $0..36 3 46% 2005 $10.26 ($0.50) -4.65% Table Z BST - MPR Up Grade Chazge Combined MPR $lOZ6 $1.81 $12.07 _3_ TWC's proposed Maximum permitted rate for the Basic Service Tier (BST) for NC-0276b in 2005 is $1:3.61, Customers pay the BST plus the "Add-on" Cost of Service Network Upgrade Chazge of $2,11, TWC's proposed monthly combined rate is $15.72 (see Table 4), The "selected"combined rate is $14.95; that is $0.77 less than the maximum permitted rate. The next table chronicles changes in the regulated Basic Service Tier (BST) rate.. Table 3 Yeaz BST Rate +/- De]ta 2000 $10.57 2001 $11..92 $1.35 12.77% 2002 $11.70 ($0.22) -1.8J% 2003 $12,53 $0.83 7..09% 2004 $13.42 $0.89 7.10% 2005 $13.61 $0.19 1.42% Table 4 BST - MPR Up Grade Charge Combined MPIZ $13.61 $2.11 $15.72 -4- TWC'sproposed Maximum permitted rate for the Basic Service Tier (BST) for NC-0256 in 2005 is $11..30. Customers pay the BST plus the "Add-on" Cost of Service Network Upgrade Chazge of $1.45.. TWC's proposed monthly combined rate is $12.75 (see Table 6). The "selected"combined rate is $12.75; that is equal to the maximum permitted rate. The next table chronicles changes in the regulated Basic Service Tier (BST) rate. Table 5 Yeaz BST Rate +/- Delta 2001 $10.95 2002 $11.74 $0.79 7.21% 2003 $11..74 $0.00 0.00% 2004 $11.74 $0,00 0.00% 2005 $11..30 ($0.44) -3.75% Table 6 BSI' - MPR Up Grade Charge Combined NII'R $11.30 $1.45 $12.75 TWC reported 6,453 current customers and is expected to increase its customer base by year end to 6,550 households'. 'Form 1240, Module B 8 -5- The following table shows the proposed selected or `discounted' Basic Service Tier rate inclusive of the "Add-on" upgrade recovery charge for various communities served by TWC in North Cazolina, Table .3 BST Combiiaed Selected Rates Community Price Apex $12 75 Carzboro $11.30 Chatham County $]040 Chatham C,ounry $13.10 Clayton $10 60 Durham County $13.50 Durham County $10 40 Fuquay-Varina $11 20 Gamer $10.50 Hillsborough $104D Holly Springs $ll 20 ICnightdale $1060 Lumberton $8.27 Momsville $11.10 New Hanover County= $6BI Orange County $13.60 Omnge County $13 30 oxrord $l0 7D Pinsboro $13.50 Raleigh $Sr65 Smithfield $11.20 Wake County: Apex $11.ID Wake County: Cery $ll20 Wake County: Fuquay-Varina $II IO Wake County: Gamer $10.60 Wake County: Holly springs $11 10 Wake County: I:nightdale $10.60 Wake County: Morrisville $ll.IO ' NHC is served by Time Warner Cable and Charter Communications. Each has a county wide franchise and a requirement to compete for customers in situations where communities want service from the other operator. -6- Wake County: Raleigh $1020 Wake County: Rolesville $1I 00 Wake County $1260 Wake County: Wake Forest $11.00 Wake County: Wendell $11.10 Wake County: Zebulon $10.30 Wake Forest $11..00 Wendell $11.10 Wilson $12 40 Zebulon $10.50 Average Selected Rate ~ $11.47 Rationale: The guiding principle of the Cable Act of 1992,3 is to protect subscribers from unreasonable rates by ensuring that cable rate levels aze equivalent to rates that would be charged in the presence of effective competition." Anecdotal evidence of rates examined in six matched pair markets by the GAOS where Cable Operators face true effective wireline competiton reveals that rates in these communities are between I S% and 41 % lowerb than in communities where single providers offer service "at-the-curb.." The GAO reported offered that cable operators tend to lower their rates when they face competition from another wireline provider.' The FCC's rate-making process (forms1240, 1235 & 1205) was originally designed to adjust for defacto monopoly conditions and yield a rate that would be found in the competitive wireline marketplace. 3Specifically, the 1992 Cable Act requues the Commission's regulations "shall be designed to achieve the goal of protecting subscribers of any cable system that is not subject to effective competition from rates for the basic service tier that exceed the rates that would be chazged for the basic service tier if such cable system were subject to effective competition." Communications Act, § 623(b)(I), 47 U.S.C. § 543(b)(1) 4As the FCC stated in its first rate rulemaking order: "The priority established in the Act is clearly to protect the interests of subscribers. An important focus for both basic tier and cable programming service rates, consistent udth providing system operators a fair return, is the establishment of rate levels equivalent to rates that would be charged in the presence of effective competition. The criteria to be applied in setting both basic tier and cable programming service rates include a comparison a~th `the rates for cable systems, if any, that aze subject to effective competition."'See Implementation of Sections of the Cable Television Consumer Protection and Competition Act of 1992, 8 FCC Rcd 5631 at para Sand footnote 10 [April 1993 Report and Order]. SWire-Based Competition Benefefitted Consumers in Selected Mazkets, United States General Accounting Office, Febmary 2004.. 6GA0 Report Highlights, February 2004 at page I . ~G.0.0 Report, February 2004 at page30. io -~- As a local government authority certified to regulate rates, it is The County's responsibility to enforce the fundamental guiding principles of the Cable Act of 1992 and the FCC's rate regulation rules: "to protect the interests of subscribers from unreasonable rates by ensuring that cable rate is equivalent to rates that would be charged in the presence of effective competition." It is flee responsibility of file County to make certain that the rates aze promulgated in accordance with the FCC's rate rules. Analysis of the Proposed Rate Adjustments TWC's form 1240 rate adjushnents reflect the following external post elements: external costs for true-up and projected periods, inflation from true-up and projected periods; franchise related (PEG} expenses, any program expense adjustrnents, Generally FCC regulatory fees, franchise fees and sales taxes aze external to the calculation of the subscriber monthly bill. External Cost: TWC's form 1240 rate adjustments reflect multiple external cost elements. An external cost is an expense a cable operator incurs during the normal course of business and may be included in rate calculations. External cost categories aze state and local taxes; franchise fees; costs of complying with franchise requirements, including costs of providing public, educational, and governmental access channels; retransmission consent fees and copyright fees incurred for' the carriage of broadcast signals; other programming costs; FCC regulatory fees, and costs associated with channel additions. The form 1.240 Form must be filed with the local franchise authority ninety (90) days before the rates are scheduled to take effect and maybe filed no more frequently than annually, The form 1240 rate filing method represents a departure from the quarterly method of updating cable rates, in that it allows cable operators to estimate their furirre costs fora 12 to 24-month period: this is referred to as the projected period,e The form1240 allows operators to recover prior period expenses, referred to as the true-up period. If a cable operator incorrectly estimates its costs for a projected period, it must correct those estimates by using thetrue-up process in the next rate filing. Inflation Adjusrinent: In its form 1240 rate filing, TWC applied an inflation factor of 2.84% for the last 9-months of the 2004 true-up period, because that was the official rate prrblished by the FCC, Franchise Related Expenses(Public Access or I-Nett: TWC reported no franchise related expenses for 2005. Franchise related costs incuned by the operator may include such expenses as public, government and education access facilities and equipment, signal transportation, headend accormnodations as well as Institutional Network related expenses,. sFCC Fomr ] 210 Forms allow for the recovery of past costs, only, not future costs. Future costs aze recoverable throueh the use of the FCC Form 1240 Form only -8- Proerazmnine Cost Adjustment: TWC will collect for the projected period ~ $1.19 monthly for NC-0276a, ~ $1,21 monthly for NC-276b, and ~ $1, 31 monthly for NC-0256 per subscriber, during 2005 for anticipated BST external costs, most of which aze attributable to programming costs. Various cable operators have advised that program service providers customarily increase service fees annually. TWC attributes its programming cost changes to what it must pay for each service offered, However, this amount is relatively low compared to upper cable tier service progratruning costs, Some of the BST program services included in the BST service group offered by TWC aze obtained at little cost because they aze either "must-carry" broadcast television stations, public, government or education access channels or "shop-at-home" services. The exceptions aze WGN and News 14 Cazolina FCC Reaulator5 Fees: The Federal Communications Commission collects a "Regulatory Fee" from cable operators to fund the FCC's regulatory oversight of cable tele~rision matters, Although, remitted to the FCC by the cable operator, the regulatory fee is paid by cable television subscribers. The FCC permits cable operators to internalize or externalize the regulatory fee. The fee has risen to 70-cents and is collected incrementally (--$..06/month) from cable television subscribers, These revenues are not subject to franchise fees or other taxes and must be remitted to the federal government to compensate the FCC for the cost of operating the Media Bureau,9 An examination of the monthly bills sent to cable customers determined the fee is external to the monthly BST rate, hence it is excluded from the rate treatment process, If TWC collects the full 6-cents10 monthly, cable television subscribers will contribute around $4,517 " in regulatory fees to the Federal government during the projected period. There are 67 nullion cable television subscribers in the United States which pay the annual 70-cent regulatory fee to the Federal Government. This amounts to $46..9 million annually to fund the FCC's cable television regulatory enforcement activities. Franchise Fees: The County levies a 5% franchise fee which is "grossed up" to 5.25% on cable program services. Government Accounting Office Report: Nationally, rate hikes across most viewed cable tiers averaged 6%. However, in mazkets where there ishead-to-head wireline competition, rates are 15% to 41 % less than in those markets without competition.. GAO reportt2 noted that the cost of programming increased 34% during the past three yeazs, 9The Cabe Service Bureau was folded into the Media Buueau in a recent FCC reorganization.. 10TWC collects 5-cents monthly as observed on subscriber statements ~ ~-6453 cable customers * $ 70= $4517 ~-'GAO Report Highliehts, February 2004 at page ] is -9- FCC Form 1235 Cable System Upgrade Costs In 1999, TWC submitted a form 12.35 Cost of Service (COS) for the Cable Network Upgrade to justify the $1.81 fee for NC-0276a, $2.11 for NC-0276b, and $1..45 for NC-0256 that is added to the BST MPR, the BST Cost of Service rates.'' FCC rules permit cable operators to recover system bandwidth upgrade capital investments for fiber optic cable and related equipment by distributing the costs among the cable tiers, e.g,, BST, cable program service tier (CPST), new product tiers (NPT), Other Services, etc. The FCC's rules allowed the original allocation'4 to be calculated by program service tier: Under this scheme, a 20-channel BST group would occupy 120 MHz of bandwidth, a 35-channel CPST group would occupy 210 MHz of bandwidth and so forth. The original allocation convention did anticipate other uses for the cable spectnnn.ts A fundamental principle of the FCC's rate regulation rules is to ensure that the rates far regulated services do not include the costs attributed to unregulated services. For example, under the abbreviated Cost of Service rules for system upgrades, cable operators aze required to comply with four conditions before they can chazge an additional fee for capital improvements. One such condition is that the operator must comply with the FCC's cost allocation rules which bar of allocation of costs of unregulated service to regulated services. This principle is particularly obvious in the Commission's Cost of Service Report and Orders as indicated below,. 13 May 3Q 2003:FCC Form 1235 Cost of Service Filing for Cable Network Upgrades, 14 Form FCC1235 dated October 1, 200.3.. ~SSee FCC Rule §76.924 Allocation to service cost categories (e) Allocation to service cost categories (1) For cable operators electing cost-of-service regulation, investments, expenses, and revenues contained in the summary accounts identified in pazagraph (d) of this section shall be allocated among the Equipment Basket, as specified in §76,923, and the following service cost categories: (I) Basic service cost category. The basic service category, shall include the cost of providing basic service as defined by §76,901(a) The basic service cost category may only include allowable costs as defined by §§76.922(8) through 76 922(k). (ii) Cable programming services cost category. The cable progranuning services category shall include the cost of providing cab]e programming services as defined by §76.901(b). This service cost category shall contain subcategories that represent each programming tier that is offered as a part of the operator's cable programming services. All costs that are allocated to the cable programming service cost category shall be further allocated among the programming tiers in this category. The cable programming service cost category may include only allowable costs as defined in §76.922(8) through 76.922(k) (iii) Alt other services cost category The all other services cost category shall include the costs ofproviding all other services that are not included the basic service or a cable progranuning services cost categories as defined in paragraphs (e)(1)(I) and (ii) of this section 13 -10- Irr its original 1993 Cost of Service Notice of Proposed Rulemaking, the Commission stated: We also solicit comment on whether we could establish an abbreviated cost of service showing for significant prospective capital expenditures [upgrades] used to improve the quality of service or to provide additional services..,.'I'he recovery of these costs would also need to comply with our cost allocation requirements, particulazly to ensure that only the costs allocable to regulated services are imposed on subscribers ~~ In its 1994 Cost of Service Report and Order, the Commission repeats this standard: Our cost of service requirements seek to exclude from rates any costs that exceed what would have been incurred in a competitive environment or that are not related to regulated services.17 ,..In the Notice, we sought comment on establishing an abbreviated cost ofservice alternative for [upgrades]....Westated that any cost recovery must comply with our cost allocation requirements, to ensure that only the costs allocated to regulated services are imposed on subscribers to those services.'s In its 1994 Report and Order, the FCC then established cost allocation categories which separated regulated and unregulated services: .,we aze requiring that....cable operators shall allocate costs among the equipment basket and the following service cost categories: basic service, cable programing service, non-regulated cable programming services, other cable activities and non-cable activities.t9 16In re: Implementation of Sections of the Cable Television Consumer Protection and Competition Act of 1992: Rate Regulation ,Notice of Proposed R.ulemaking, MM Docket 92-215, Released .Tuly 16, 1993 at ¶75. [1993 Cost of Service NPRNT] 171994 Cost of Service Order at ¶18 1 eId at ¶280 19Id at ¶36 (During the time of this Rulemaldng, all services except basic and CPST were considered nonregulated services) I~' -11- (In its 1996 Final Cost of Service Report and Order, the FCC reduced these categories to basic service, cable programrning service and "all other" services.'0 Basic and cable progamming service tiers were the regulated service tiers at that time.) in its 1994 Cost of Service Report and Order, as part of its specific discussion of'upgrade cost of service filings, the FCC reiterated the separation of regulated from unregulated cost principle: To ,justify an increase in the rates for regulated services, the operator will be required to demonstrate that the capital investment actually will benefit subscribers tlrrough improvements in the regulated services subject to the rate increase. This requirement will help assure that operators do not abuse the abbreviated filing option by requiring regulated service customers to pay higher rates to fund upgrades that actually only benefit other services?' And fifth, as we said in the Notice, the operator must also allocate the net increase in costs in conformance with the cost allocation rules for cost of service showing, to assure that only costs allocable to regulated services are imposed on subscribers of those services.-= In its 1996 Final Cost of Service Order, the Cornmission reiterated this principle: As noted, the interim rules also allow the operator to recover all operating expenses normally incurred by cable operators in the provision of regulated cable service, An operator may not recover through regulated rates other expenses, such as costs associated with non-regulated service, lobbying expenses or club memberships." In this same Order, the Comrnission specifically clarified the requirement that costs attributed to cable plant in service must be allocated between current regulated and unregulated services. '0In r e Implementation of Sections of the Cable Television Consumer Protection and Competition Act of 1992: Rate Regulation and Adoption of a Uniform Accounting System for Provision of Regulated Cable Service, D~IIvI Doc]<et 93-215, Second Report and Order, First Order on Reconsideration, and Further Notice of Proposed Ru]emalting, Released .January 26, 1996 at ¶121. [ 1996 Fina] Cost of Service Order] '`~ 1994 Cost of Service Order at ¶ZS 7. ''ZId at ¶290. '`31996 Final Cost of Service Report and Order at ¶1 I -5 -12- The Commission also clarifies that plant in service must be allocated beriveen regulated and unregulated services based on a reasonable measure of the current usage of that plant,24 ... Accordingly, for our final rules, we will make this point explicit and will amend the interim rule to specify that tangible plant must be used and useful in the provision of regulated cable services in order to be included in the rate base. This will ensure that the rate base for regulated cable service only includes plant used for such regulated cable service, and that subscribers to regulated tiers are not forced to subsidize plant that is used solely for premium services.'S In addition, we recognize that what constitutes a reasonable measure of current usage of the tangible plant depends on the circumstances, We believe that in many cases a reasonable measure would be a straight channel ratio, In other words, if any operator provides programming over a total of 40 channels, 32 of which aze BST and CPST channels and eight of which are premium and pay-per-view channels, the operator must allocate 80% of its plant to regulated cable service and 20% to unregulated service.'-6 TWC proposes to continue to charge the same $1.81 for NC-0276a, $2.,11 for NC-0276b, and $1.45 for NC-0256 monthly fee set five yeazs earlier on form 12.35 to recover Network Upgrade costs, The "upgrade" chazge is added to the BST-MPR to create the combined Maximum Permitted BST regulated rate (See Table 2). Cable operators, such as TWC, believe that once the initial rate is set, it never changes nor is ever adjusted, for example, to reflect customer growth during the intervening 5-years.. There is nothing in the FCC's cost of service rules, rulemakings, or the 1235 instructions, which state that the form 1235 is filed "only once" and that the "add-on" rate calculated at that point in time continues in perpetuity. In fact, such action conttadicts the FCC's general cost of service rules which proceed on the basis of annualized revenues and expenses and require revaluations for accumulated depreciation, The "only" item which is filed once is the final cost of the upgrade. The FCC's cost of service rules require that this capital expense become the starting point for the recovery of these costs, and that going forwazd the factors which vary include the proportion of cable system bandwidth used for regulated and unregulated services, and the customer count, The principle underlying the cost of service rules is to ensure that regulated cable service zald at ¶37. zs~d '-bld a! ¶38 I(v -13- subscribers are not paying for unregulated service costs- The rules are designed to "exclude from [regulated] rates, any costs that exceed what would have been incurred in a competitive environment or that are not related to regulated services.."" Costs are therefore allocated between regulated and unregulated services, so that regulated subscribers are not charged for benefits they do not receive.'SCosts aze divided into three categories "basic service (BST)," "cable programming service (CPST)," and "all other,"''-9 the latter two which now represent unregulated services. Because the lazgest portion of an operator's rate base is its plant in service, the FCC developed a "used and useful" standard to ensure that regulated subscribers pay for only those portions of plant that are used and useful in the provision ofregulated cable services.30 If a cable operator chooses to recover its investment in such used and useful plant, it must remove from the rate base any accumulated depreciation,31 in addition to which the FCC provided depreciation schedules.32 Plant determined not "used and useful" is deemed "excess" capacity, and operators are only permitted to include excess capacity in the ratebase "if it is fatty constructed plant that will be used to provide regulated services within 12 months." 33 TWC was not required to file a form 12.35, but it chose to do so to overcome the capital recovery ceiling imposed by federal government pursuant to the "Social Contract."" Because TWC included upgrade capital expense recovery (the fonn12:35 "Add-on" charge) as '-See 1994 Report and Order at ~~18, page I D '$"As noted, the interim rules also allow the operator to recover all operating expenses normally incurred by cable operators in the provision of regulated cable service. An operator may not recover through regulated rates other expenses, such as costs associated with non-regulated service, lobbying expenses, or club memberships. 1996 Cost of Service Final Report and Order at ¶I I . '-9See 1996 Cost of Service Final Report and Order at ¶121, page 50. This is a reduction from the 5 categories created in the 1994 Report and Order: "BST", "CPST" "non-regulated cable programming service", "other cable acti~~ties" and "non-cable activities." 30See 1994 Report and Order at ¶26 3t See 47 CFR 76.922 (6)(n 32See 1994 Cost of Service Report and Order, Attachment B, 1996 Cost of Service Fina] Report and Order, Attachment C. 33See 1996 Cost of Service Final Report and Order at ¶26. 3a See Time Warner Social Contract, FCC 95-478 at ¶I-5. The FCC adopted the Social Contract on November 30, 1995 to provide rate stability, improve the quality of cable service, and provide TW C incentive to upgrade its cable systems and make other improvements. Under its terms, Time Warner was to invest $4 billion to upgrade its domestic cable systems over the life of the Social Contract and any such investment recovery was capped at $1 per year (cumulative to $1 SO/customer) over its 5-yeaz term. In addition, the Socia] Contract was to resolve over 900 rate cases against TWC and approximately $4 7 million plus interest to TWC customers. I7 -14- part of its 2005 rate filing, TWC must file this form consistent with the FCC's cost of service rules. These rules assume the cable plant will be properly revalued for accumulated depreciation, and that projected operational costs, bandwidth allocations, and number of regulated service subscribers reflect the operator's most recently completed fiscal yeaz. For this reason, the consultant has concluded that the upgrade capita] expense recovery chazge proposed by TWC does not comply with the FCC's cost of service rules and the ratemaking process for regulated rates. FCC1205 Equipment & Installation Rates Time Warner calculated the form1205 maximum permitted equipment35 and installation36 rates by aggregating its costs across all TWC systems in the USA; this type national filing is permitted by the FCC. The 2001 year costs were aggregated on a regional basis. 37 Table 4 Year HSG +/- 2001 $28.39 2002 $35.8338 $7.44 26.21% 2003 $37.62 $1.79 5,00% 2004 $37.50 $-0.12 -0..32% 2005 $37.81 $0..31 0.83% 3e§76..923 (c)(I) Costs of customer equipment may be aggregated, on a franchise, system, regional, or company level. When submitting its equipment costs based on average chazges, the cable operator must provide a general description of the averaging methodology employed and a,justification that its averaging methodology produces reasonable equipment rates.. 3e§76.923 (c)(3) Installation costs maybe aggregated, on a franchise, system, regional, or company level. When submitting its installation costs based on average chazges, the cable operator must provide a genera] description of the averaging methodology employed and a justification that its averaging methodology produces reasonable equipment rates. 37Zime Warner is treated as a single company for FCC 1205 rate-making purposes. TWC files a single FCC 1205 throughout the United States with over 30001ocal franchise authorities, LFAs, to establish uniform rates for equipment and installation chazges.. 3BCompany-wide national USA aggregation _ 3000 franchises ~g _15_ Time Wazner calculated the form1205 maximum permitted equiprnent39 and installation40 rates by aggregating its costs across the USA. Time Warner has not aggregated on a regional basis since 2001.41 The following table chronicles changes in form1205 equipment and installation rates since 2001. Table 5 FCC1205 2001 NC 2002 USA 2003 USA 2004 USA 2004 USA Delta Remote Control $0.28 $0.35 $0.35 $0..34 $0..33 ($0.01) Addressable 1 $4.26 $8.49 $7.34 $7.99 $8.82 $0..83 Non-addressable 2 $0..93 $0.68 $0.59 $0.68 $0.76 $0.08 39§76.923 (c)(1) Costs of customer equipment maybe aggregated, on a franchise, system, regional, or company IeveL Wben submitting its equipment costs based on average charges, the cable operator must provide a general description of the averaging methodology employed and a justification that its averaging methodology produces reasonable equipment rates. 4°§76.923 (c)(3) Installation costs maybe aggregated, on a franchise, system, regional, or company level.. When submitting its installation costs based on average charges, the cable operator must provide a general description of the averaging methodology employed and a,justification that its averaging methodology produces reasonable equipment rates. 4tlhne Warner is treated as a single company for FCC 1205 rate-making purposes. TWC files a single FCC 1205 throughout the United States with over 30001ocal franchise authorities, LFAs, to establish uniform rates for equipment and installation charges. i~ -16- Tirne Wazner aggregated its equipment and installation expenses on a national basis to establish a uniform rate structure in its 3000 franchises.. Tn addition to equipment rentals, a variety of installation services are tied to the HSC rate. The next table lists the differences in the amount of time required to install cable service since 2001. The 2001 installation average installation times represent North Carolina "regional" values where as the later years reflect consolidated balance sheets for all its USA cable properties. Table 6 Average Hows* per 2001 2002 2003 2004 2005 Delta Installation NC USA USA USA USA Un-wired Home 0..96 1,20 1.22 1.26 1,16 -0.10 -10.42% Installation Pre-wired Home 0.84 0.85 0,85 0..88 0.77 -011 -13.10% Installation Additional 0.55 0.54 0.53 0..50 0.50 0.00 0.00% Connection at Time of Installation Additional 0.73 0.85 0.84 0.88 0.80 -0.08 -10.96% Connection Requiring Separate Installation *time in bows is expressed as decimal equivalents Time Wazner did not provide documentation to support the basis for Total Maintenance Hours (Schedule C(B)), the average time required to wire a home (Schedule D(A)), time required to complete a "pre-wue" (Schedule D(B)), extra average time required to install an additional outlet simultaneously with a primary installation (Schedule D(C)), average time required to install an additional outlet subsequent to the primary installation (Schedule D(D)), average time to perform a hazd disconnection (Schedule D(E)), average time to perform a tier change, and the average time to perform an "apartment" installation (Schedule D(F)). Time Warner Cable should provide this information to be complaint with the FCC's form 1205 rate roles. A Local Franchising Authority (LFA) is authorized to review the operator's rate forms to determine whether the operator's proposed rate increase for installation and lease of equipment comports with those rules. If the proposed rate is accurately calculated pursuant to the Commission's regulations, using accurate information, the rate is deemed reasonable and lawful under the 1992 Cable Act,Qz 4'47 U.S.C. § 543(b). an _l,_ Upper Tier CPST Rate Regulation Expiration A sunset provision within the Telecommunications Act of 1996 terminated upper cable service tier regulation on Mazch .31, 1999. Since then, the cable operator is allowed to change upper service tier rates at will upon thirty (:30) days notice to the franchise authority and subscribers. Subscriber Trends Time Warner believes its customer base will gow to 6,550 customers next yeaz. 2005 2004 2003 2002 2001 2000 Recommendation The Consultant reconunends that The County: Find that Time Wazner Cable's proposed form 1240 maximum permitted Basic Service Tier rate compliant because it was calculated in accordance with the FCC's rules. Find that Time Warner Cable's proposed continued reliance on its initial form1235 to set the maximum permitted Network Upgrade charge for the current period non-compliant because it is not calculated in accordance with the FCC's cost of service rules.. Find that Time Warner Cable's proposed form1205 maximum permitted Equipment and Installation charges compliant because they were calculated in accordance with the FCC's rules. 0 1000 2000 3000 4000 5000 6000 7000 ai -18- Proceeding The franchise authority must either approve or deny the operator's FCC form 1240, form 12.35 and form 1205 on the basis of whether the requested rates aze reasonable. This determination must be based upon a finding of fact, The franchise authority should adopt the Consultant's report as its own, and the public must be granted an opportunity to offer comment on the matter. It is suggested that a public comment period on the matter coincide with a regular public meeting, To be valid, the Rate Order must be: Executed following the conclusion of a public meeting where the County Board grants interested parties an opportiurity to comment; 2, Adopt the report as its own -required by FCC rules (this requires a motion to adopt, and a vote); and Approve and execute the Rate Order, 4. Serve the Rate Order and a copy of the Report upon Time Warner Cable.. It is appropriate for public comment to be heard, as related to the various rate issues, at the next scheduled County Board meeting to deliberate this matter. Although a statutory public hearing is not required, it is customary and good public policy to call for public comment in these matters. The comment period maybe publicized by issuing a press release to the print and electronic media or announced in other appropriate ways, Time Warner Cable must be notified of the public meeting and advised to have a representative present to respond to the findings contained in this Report and any questions elected and appointed County officials and the public may pose, as ORANGE COUNTY NORTH CAROLINA Accepting the Rates Contained in the FCC Form 1240 and Form 1205 Filed by Time Warner Cable for 2005 and Rejecting the Form 12:35 Rate Requested by Time Warner Cable Because the Form FCC1235 "Add-on" Rate No Longer Complies with the FCC's Cost of Service Rate Rules and Ordering That a Revised Form 12.35 and Financial Upgrade Cost Recovery Summary Statement Be Presented to Orange County within 30-days from the Date of This Rate Order. Further, Orange County Adopts the Report Prepared by Action Audits, LLC., as its Own. WHEREAS, Orange County, North Carolina ("County') has initiated the regulation of rates and chazges for the provision ofbasic service, equipment and installation of cable television pursuant to the Cable Television Consumer Protection and Competition Act of 1992; V{~REAS, the County is certified by the FCC to regulate basic service tier rates and permitted to regulate rates for basic cable service, equipment and installation; WHEREAS, Time Warner Cable is a duly franchised cable operator for the County and whose rates for basic service, equipment and installation aze regulated by the County; WHEREAS, on September 30, 20D4 the County received the following forms: 1240, 1235; and 1205 fi'om Time Warner Cable; WHEREAS, the County has received and carefully considered a report from Action Audits, LL.C (hereinafter referred to as "Report") which reviewed the forms 1240, 1235, and 1205; WHEREAS, the Report states that the form 1240 sets the regulated rate for the Basic Service Tier; WHEREAS, the Report states that the form 1240 rate calculations properly calculate inflation, programming, copyright fees; WHEREAS, the form 1235 sets the regulated rate for the MonthlyNetworkUpgrade Add-on chazge; ViT~REAS, the Report states that continued reliance on the initial form 1235 rate calculation to properly recover upgrade costs is no longer valid; ~~4'FIEREAS, the Report states that the form 1205 properly sets the regulated rate for Installation and Equipment rates; wFIEREAS, after appropriate public notice, a public hearing was held for the purpose of allowing the public and interested parties to comment on the rates; V{~REAS, Time Warner Cable was given the opportunity to provide written and oral comments to the County urith respect to the rates and the draft form of this Rate Order; and V1'HEREAS, the County has carefully considered the materials, forms and statements submitted by Time Warner Cable. a~ Now, Therefore, Orange Coun13~, North Carolina Malces the Follov\ing Findings of Fact and Conclusions of Law with Respect to the Proposed Rate to be Charged lime Warner Cable Customers: The County incorporates by reference all of the preamble set forth above; The County has reviewed the Report and incorporates by reference the Report, which is attached hereto; The County finds that Lime Warner Cable's Maximum Permitted Rate for Basic Tier Service ($10.26 for NC-0276a, $13 61 forNC-0276b, and $11.30 forNC-0256) asset forth in the form 1240 does comply with the FCC's rate regulations; The County fords that the initial "Add-on"Rate for Basic Tier Service contained in the form] 235 does not comply with the FCC's Abbreviated Cost-of-Service Rules for system upgrades. Said rules require [he upgrade cost allocation recovery fee based on channeUservice/bandwidth allocation which set an original "Add- on"rate of $1.81 forNC-0276a, $2.11 for NC-0276b, and $1.45 forNC-0256. Going forward, the FCC's Cost of Sendce rules require the operator to ensure that regulated service subscribers do not pay for unregulated service costs, and that the Company does not over recover the cost of its upgrade, byperiodically recalculating its "Add-on" rate to accommodate such changes as the proportion ofregulated band~nridth, the current customer count and capital cost recovery reductions attributed to accumulated depreciation; The continued reliance on the form 1235 rate approved 5-yeazs eazlier does not comply with the FCC's Abbreviated Cost of Service Rules for system upgrades capital investment recovery; and The County finds that the InstaAation and Equipment rates set forth in the form 1205 comply with the FCC's rate regulations, Now, Therefore, Be it Ordered by Orange County, North Carolina, That: Time Warner Cable's Maximum Permitted Rate for Basic Tier Service rate contained in the form FCC1240 does comply with the FCC's rate regulations and is hereby accepted; Time Warner Cable is permitted to implement its form 1240 ($10.26 for NC-0276a, $13.61 for NC- 02766, and $11.30 for NC-0256) rate beginning ,Tamary I , 2005; Time Warner Cable's form 1235 $1.81 for NC-0276a, $2_.11 for NC-0276b, and $1.45 for NC-0256 "Add-on" rate no longer complies with the FCC's Cost of Service rotes and is rejected; Thne Warner Cable is notpermitted nor authorized to recover its form1235 $1.81 forNC-0276a, $Z. I 1 for NC-0276b, and $1,45 for NC-0256 "Add-on" rate beginning .January I, 2005; Time Warner Cable must submit to the County within 30-days from the date of this Rate Order for approval a revised form 1235 that properly calculates the current Add-on rate using the FCC's Cost of Service Rules', Lime Warner Cable is requued to submit to the County within 30-days from the date of this Rate Order a financial statementshowing the original upgrade investment (cost), accumulated depreciationby yeaz,current residual value by yeaz, the amount recovered to date by year, an estimate of'dre remaining cost recovery period and the customer count for each year since the Add-on rate has been in effect; Time Warner Cable's Installation and Equipment rates contained in the form 1205 comply u~th the FCC's rate regulations and are accepted; The County adopts the Report as its own; aq- The County reserves its rights to review and consider any new information and issue a revised Rate Order based on that evidence; Phis Rate Order will be effective immediate]y and provided to Time blamer Cable via US Certified Mail; and A copy of this Rate Order s6a11 be released to the public, Read, Adopted and Approved by Orange County this the _ Day of By: County Chair Attest: Clerk Deliver via Certified U.S Mail lo: Paul Baccetlicri, VP Finance @ Time blamer Cable 701 Innovation AV, Suite 100, Mortisville, NC 27560. File copy to: Robert F Sepe. Action Audits, CLC @ 101 Pocono Lane, Cary, NC 27513 290 Harbor Dri,~e :Stamford. CT 0690? Pe1203-338-?86S Faz 203-351-?2.54 ga p~.-mar @ nocabl e. com CABLE December 15, 2004 Mr, John M. Link County Manager Orange County 200 South Cameron Street Hillsborough NG 27278 Dear Mr, Link: Gnq' R. 7/nlz SBce President and Qiief Coansel, Regularoq~ as D L~C~C~~IA[~ ~EC 2 ~ 2~0+ Via: First Class Mail We are in receipt of a copy of a report prepared by the County's rate consultant, Action Audits, LLC, ("AA") recommending that the County reject Time Warner Cable's ("TWC") inclusion of its previously approved Form 1235 network upgrade add-on charge to the Basic Service tier ("BST") rate beginning January 1, 2005, Unfortunately, this is the latest instance in which AA has recommended a course of action that is plainly at odds with the rules and regulations of the Federal Communications Commission, We strongly urge the County to ignore the unsupported recommendation of AA and instead approve the proposed BST rates for 2005. Any rate order adopted by the County, and based upon the recommendation of AA, will result in an appeal to the FCG. Such an appeal is an unfortunate diversion of the time and resources for all of us. Perhaps more importantly, such a rate order will be reversed by the FCG just as all previous TWC rate orders recommended by AA have been reversed. Background On or around October 1, 2004, vde filed with the County a set of FCC forms justifying our BST, equipment, and installation rates to become effective January 1, 2005. Specifically, we submitted a Form 1240 ("annual update form") and a copy of the Form 1235 network upgrade add-on calculation that the County had approved in 1999, Under the FCC's rules, the maximum rate that we are permitted to charge for the BST is the sum of the Form 1240 rate and the previously approved Form 1235 rate, In its report and associated draft rate order, AA finds that our Form 1240 calculation complies with the FCC's rules, but recommends that the County deny TWC the right to include the previously approved Form 1235 network upgrade charge, According to AA, our Form 1235 does not comply with FCC rules because it has not been updated to reflect certain operational changes occurring since the form's initial filing and approval in 1999, AA cites changes such as changes in the number of subscribers and/or the proportion of the system's bandwidth used for regulated and unregulated services. acs Discussion The County is legally obligated to fallow the FCC's rules and decisions governing the calculation of these rates. Here, there is no question that if the County rejects our previously approved Form 1235 add-on charge and requires the calculation of an "updated" Form 1235 rate, it will be faking an action that is simply inconsistent with the FCC's rules and decisions. Form 1235 allows TWC to recover costs incurred in connection with "significant" upgrades of our cable television system over the life of the upgrade. The network upgrade add-on charge calculated under Form 1235 is intended to supplement the Form 1240 "annual update form" calculation, The Form 1240 does not account for upgrade costs, but rather is used by TWC to make yearly adjustments to our rates to reflect the addition, deietian, or movement of regulated chanriels, and increases or decreases in certain "external" costs such as inflation, programming costs and FCG regulatory fees. The Form 1240 is typically prepared, filed and reviewed every year. AA would similarly require the Form 1235 to be updated and reviewed annually. But the FCC has made it quite clear that the preparation, filing and review of Form 1235 is a one-time event based on a "snapshot" of the system at the time the upgrade was completed. In this regard, we direct your attention to the following: • The recent decision in Time Warner Cable (Durham, lVC), 19 FCC Rcd 14851 (MB, 2004), where the Commission expressly noted that the Form 1235 network upgrade add-on charge "is not recomputed or re-approved each year that it is available," ~ • FCC decisions in which the FCC itself relied on previously ap~roved Form 1235 filings in resolving cable programming service tier complaints • FCC decisions holding that "only one FCC Farm 1235 is to be filed following the completion of the upgrade project"3 • FCC decisions referring to that filing as the "final" Farm 1235"" • FCC decisions rejectin~ a cable operator's use of updated ctastomer data in its Form 1235 calculation. This clear directive by itself illustrates that AA is simply wrong. We don't know how the FCC could be anymore clear. z See, e.g., Bresnan Communicafions Company (Riceboro, GA), 16 FCC Rcd 16460, 16462 (CSB, 2001).. s Marcus Cable Associates, L,P. (Fort Worth, 7X), 14 FCC Rcd 7124, 7126 n.15 (CSB, 1999). Marcus Cable Associates, L.P. Glendale, CA), 13 FCC Rcd 22314, 22316 n,15 (CSB, 1996). 2, a~ Perhaps most tellingly, even NATOA (of which Mr. Sepe is a member) itself has recently acknowledged that the FCC rules do not require cable operators to refile Form 1235 each year. See "White Paper on FCC Form 1235" prepared for NATOA by Front Range Consulting, Inc. and filed with the Commission in MB Docket No. 02-144 (Oct. 7, 2004). AA fails to cite even a single statement; instruction, or ruling by the FCC that would support its contention that we must recalculate our Form 1235 filings on an annual basis. This silence speaks volumes: if the FCC rules required annual Form 1235 updates, one would expect there to be at least one instance in which the FCC had referred to that requirement. In short, there is not a single statement to support the AA position. There is overwhelming authority illustrating that AA is simply wrong -once again. In conclusion, the FCC's rules and decisions absolutely preclude the County from rejecting our previously-approved Form 1235 network upgrade charge. The FCC has not hesitated to reverse other rate orders where AA has pursued other unsupported positions, including the order at issue in the Durham case cited above.s Experience clearly demonstrates that, if the County follows AA's recommendation, it will be the County's taxpayers and TWC's customers that will bear the cost of the appeal and remand that inevitably will follow. We strongly urge the County to follow the FCC rules and approve our proposed maximum permitted rate calculation for 2005, including the previously-approved Form 1235 charge. If there are any questions regarding this matter, please do not hesitate to contact me directly. Very truly yours, Gary R. Matz GRM/ja cc: Brad Phillips -Time Warner Cable, Raleigh Division Paul Baccellieri -Time Warner Cable, Raleigh Division $ Id. e See also Time Warner Cable (Smithfield, NC), 18 FCC Rcd 738 (MB, 2003).. 3.