HomeMy WebLinkAboutAgenda - 02-14-2000 - 9dORANGE COUNTY
BOARD OF COMMISSIONERS
ACTION AGENDA ITEM ABSTRACT
Meeting Date: February 14, 2000
Action Agenda
Item No. 9-d
SUBJECT: Adoption of Resolution/Rate Order Concerning Time Warner's Basic Cable
Service Rates
DEPARTMENT: County Commissioners PUBLIC HEARING: (Y/N) No
ATTACHMENT(S):
Cable Rate Analysis
Resolution/Order
INFORMATION CONTACT:
Corintha Barber, ext 2301
TELEPHONE NUMBERS:
Hillsborough 732-8181
Chapel Hill 968-4501
Durham 688-7331
Mebane 336-227-2031
PURPOSE: To adopt aResolution/Order to set the rate for Time Warner's Basic Cable Service.
BACKGROUND: In September, 1999, Time Warner Cable submitted FCC forms 1205, 1235, and 1240
requesting adjustments in a) the basic rate for cable television service, b) an "add-on" charge to recover
system upgrade expenses, and c) slight adjustments for installation and equipment rates.
Triangle J Council of Government's cable television consultant, Bob Sepe, has reviewed the rate filings
submitted by Time Warner Cable on behalf of Orange County. He has determined that certain rate
reductions were in order. The Board must either approve or deny Time Warner's rate request, finding the
rate reasonable or unreasonable. This determination is based upon a finding of fact. The Consultant's
report is attached.
Michael Patrick, Chair of the Orange County Cable TV Citizen Advisory Committee has reviewed the
consultant report and will present the resolution/order to the Boazd.
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FINANCIAL IMPACT: Increase in cable rates for TimeWarner Cable customers in
unincorporated areas of the county.
Customers 1'999 Rate 2000 Kate
(TWC Proposed) 2000
Approved Rate
Carrboro System:. 1115 $8.47 $8.75 $8.60
Carrboro Add=on Charge $0.00 $0.00
Chapel Hill System 5972 $7.98 $8.76 $8.74
Chapel Hill Add~on
Charge $1.81 $1.81
Durham System 29 $10.44 $10.57 $10.18
Durham Add-on:Charge:: $2.11 $2.11
Installation (Hourly- ' .: $26.09
Service Charge $26.51 $26.51
FINANCIAL IMPACT: Increase in cable rates for Time Warner Cable customers in
unincorporated areas of the county.
RECOMMENDATION(S): The Manager recommends that the Board adopt the following
Resolution/Order: Time Warner's FCC1240 Basic Service Tier Maximum Permitted Rate shall
not exceed $8.60 monthly for Carrboro System served customers, $8.74 monthly for Chapel Hill
System served customers, and $10.18 monthly for Durham System served customers and Time
Warner's FCC1235 Addwon Network Upgrade Charge cannot exceed $1.81 monthly for Chapel
Hill system served customers and $2.11 for Durham System served customers during the 2000
calendar year, subject to subsequent findings by the County to the contrary, during the 2000
calendar year.
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Time Warner Cable
Orange County, NC-0256 & NC-0276
FCC 1240 Rate Analysis
January 20, 2000
REPORT
TO: Albert Kittrell, ACM, Orange County
r
FROM: Robert Sepe, TJCOG Cable Consultant ~
RE: Review of Annual Updating Maximum Permitted Rates FCC 1240 for 2000
The consultant has reviewed Time Warner Cable's FCC 1240 filing and supporting
documentation fiunished by the cable operator, and have conducted fact-finding discussions with
the cable operator and Federal Communications Commission representatives and documents. _
The values stated in the filing are the responsibility of the cable operator's management.
Supplied data were reviewed to determine whether the operator calculated "updated" rates
consistent with the procedures prescribed by the FCC in accordance with the 13th Order on
Reconsideration, the Time Warner Social Contract, and the Telecommunications Act of 1996.
Original computations were performed and compazed with information provided by Time
Warner Cable. The consultant believes that the data submitted by the cable operator is free of
material misstatements, and the accompanying report provides a reasonable basis far the
following recommendation.
C:\Docs\TJ-COG\ORANGE\ 1240-20\OR1240-OORpt.wpd
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Summary
On October 2, 1999, Time Warner Cable notified the County that it intended to set the rate for
basic service at $8.75, up from $8.47, a month for the 1115 Basic Tier Service customers on the
Carrboro System, $$10.57, up from 10.44, a month for the 29 Basic Tier Service customers on
the Durham System and $ 8.76, up from $7.98, a month for the 5972 Basic Service customers on
the Chapel Hill System. The total number of cable customers served by Time Warner Cable in
the unincorporated county number is 7116.
Slight irregularities in the manner in which TWC calculated the Maximum Permitted Rate for
Basic Cable Service contributed to a 15 cent error for Carrboro System subscribers, 40 cents for
Durham system Subscribers, and 2 cents for Chapel Hill System customers. If uncorrected, the
error would net TWC $3759.48' from its cable customers in extra revenues.
Equipment & Installation Rates
Pursuant to the Social Contract, Time Warner is allowed to aggregate equipment and installation
casts on a regional basisZ. Time Warner will adjust rates for leased customer equipment by a
modest amount. The maximum installation service charge will increase 1.6%, from $26.09 to
$26.51 hourly. TWC currently discounts its installation fees for promotional and competitive
reasons.
Background
In September 1995, the FCC adopted the 13th Report and Order, which, among other things,
allowed cable operators to adjust their rates on an annual basis using the FCC 1240, taking into
consideration past and anticipated future external costs.
In November 1995, the FCC adopted the Time Warner Social Contract, which resolved hundreds
of cable complaints against Time Warner Cable. Provisions of the Social Contract permit Time
Warner to aggregate its leased subscriber equipment costs on a regional basis (using regional
FCC 1205 filings) and assess uniform equipment rates based on these data. Also, Time Warner
is allowed to include in its annual programming service rate filing (FCC 1240) past and future
(estimated) costs, along with future costs attributable to cable system upgrades.
The 13th Order requires Time Warner and other cable operators to submit their FCC 1240 filings
ninety (90) days before the date of rate implementation. During this period, the franchise
terror x # customers subscribers x 12 months for each system
ZNorth Carolina is treated as a single region, TWC files a single FCC 1205 for North Carolina to establish
uniform state wide rates for equipment and installation. The FCC has sole authority for the review of FCC 1205
rates.
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authority may review the reasonableness of the basic service tier rates and issue an order to either
approve or deny the rates. After ninety (90) days, the franchise authority retains refund authority
as long as it responds within 15 days to any inquiries from the cable operator regazding its review
of the company's FCC 1240 documents.
Time Warner's FCC 1240 rate adjustments reflect the following external cost elements:
1) External costs for True-up Period
2) External casts for Projected Period
3) Projected cable system upgrade costs (applied to upper cable tier only) -per Social Contract
4) Inflation from True-up Period
5) Inflation for Projected Period
6) Franchise related costs (PEG) from True-up Period
7) Franchise related costs (PEG) for Projected Period
Analysis of Rate Increases
External Costs
The rate adjustments reflect multiple external cost elements. An external cost is an expense a
cable operator incurs during the normal course of business and maybe included in rate
calculations. External cost categories include: 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.
True Up and Projected Periods
The FCC 1240 Form must be filed with the local franchise authority ninety (90) days before the
rates are scheduled to take effect, and may be filed no more frequently than annually. The FCC
1240 represents a departure from the quarterly method of updating cable rates, in that it allows
cable operators to estimate their future costs over a 12-month period: this is referred to as the
projected period.3 The FCC 1240 also allows operators to recover expenses that occurred during
a specified prior period of time, referred to as the true up period. If a cable operator incorrectly
estimates its costs far a projected period, it must correct those estimates by using the true up
segment of the next FCC 1240 rate filing.
Time Warner's projected period covers the 15 months from October 1999 to December 2000.
The operator's true up period covers the 12 months from October 1998 to September 1999.
3FCC 1210 Forms allow for the recovery of past costs, only, not future costs. Future costs are recoverable
through the use of the FCC 1240 Farm, only.
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CPST Rate Regulation Expiration
A sunset provision within the Telecommunications Act of 1996 established March 31, 1999 as
the date which rate regulation for the upper cable service tiers ended. Thereafter, the cable
operator is allowed to change upper service tier rates at will upon 30 days notice to the franchise
authority and subscribers..
Franchise Related Costs
Public Access Television
Time Warner Cable reported no franchise related expenses fox 1999. Franchise related expenses
are related to public, government and education access activities and may include direct costs,
such as grants, and indirect costs, such as signal transportation and headend accommodations.
Programming Costs
Time Warner will recover approximately $.56 monthly, per subscriber, during 2000 for
anticipated BST programming costs during the projected period. Time Warner representatives
state that program service providers customarily increase service fees annually. Time Warner
attributes its programming cost increase for increased program fees.
Inflation
Time Warner is claiming inflation adjustments in it's true up and projected period segments of its
FCC 1240 rate filing. Time Warner used the FCC true up period inflation figure of .7$% for the
period October-December, 1998; 1.60% for January-September, 1999. However, on October 1,
1999 the FCC announced that the true-up inflation rate far April -June, 1998 was 1.35%.
Pursuant to the FCC's rate rules, the company must use the "current" inflation figure when
calculating its true-up and projected rate increase due to inflation.
Staff recalculated Time Warner Cable's charges attributed to inflation using currently available
infonnation4. This resulted in a reduction of the overall inflation for 1999 from 1.0140%° to
1.0127% and set the projected period (2000) inflation index to 1.35%. The projected period
inflation figure is subject to correction in the operator's subsequent FCC 1240 rate filing.
Time Warner's FCC 1240 rate filing did not reflect the true up inflation factor for the second
quarter of 1999 released by the Commission on October 1, 1999. Had the operator used the
1.35% value to calculate the true-up period inflation rate instead to the previous quarter's value
(1.60%), the Maximum Permitted BST rates would have been $0.15 lower for Carrboro system
customers, $0.401ower for Durham system customers, and $0.2 lower far Chapel Hill system
4See FCC Form 1240 Instructions for Line C3.
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customers.
Time Warner did not have the latest inflation data available at the time it completed its FCC
Form 1240 for 2000. Therefore, TWC should file an amended FCC 1240 for 2001 at the time
the FCC 1240 for 2001 is submitted to compensate for the over collection (~$.O1/month) and
adjust its 2001 rates accordingly.
In recalculating the maximum permitted rates for BST service, staffused the current inflation
values. In the interest of consumer protection, currently available information was applied to the
rate recalculation to eliminate overchazges which otherwise would be carried forwazd into 2001.
A similaz problem last yeaz resulted in TWC calculating a MPR greater than that permissible
under the FCC's rules. Staff used the corrected MPR values as the going forward "Current
maximum Permitted Rate" in the FCC1240 cell Al which resulted lower Ma$imum Permitted_
Rates.
Cable System Upgrade Costs
Time Warner Cable submitted an abbreviated Cost of Service Filing for Cable Network
Upgrades. Under the FCC's rules, the cable operator is allowed to recover its investment from
subscribers on a tier by tier basis. The rules require upgrade capital expenditures to be
apportioned among each of the cable service tiers, basic, standazd, new product, premium and
other program tier. The "Add-on" chazge ranges from $1.81 to $2.11 monthly.
System Upgrade .Expense Allacation/tier Add -on chazge
Carrboro Customers $0 0.00% $0.00
Chapel Hi11 Customers $426,045 21.95% $1.81
Durham Customers $2,471 25.64% $2.11
Recommendation
The consultant staff recommends that the maximum permitted BST rate adjustment contained
within the three (3) FCC 1240 filing submitted by Time Warner Cable be found reasonable, and
be approved conditioned upon the understanding that any over/underage in the BST rate due to
the fourth quarter 1998 inflation factor be adjusted commensurate with the FCC 1240 filing for
2000. This treatment of any BST rate adjustment attributable to changing fourth quarter inflation
statistics is consistent with the FCC's ruling in such matters.
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S
Effects of Competition
One of Wall Street's top cable analysts, Morgan Stanley Dean Witter analyst Richard Bilotti,
recently said the nation's top MSO's may face stiff competition in selling Internet, phone and
digital video services due to robust DBS offerings and stranger services by telephone companies.
He believes that cable operators will not be able to raise prices far non-cable services by more
than about 3 percent a year because of strong competition. Tough competition for cable
customers by traditional telephone and satellite providers will cause cable operators, like TWC,
to bundle telephone and high speed Internet services together with cable television packages at
modest incremental prices.
Proceeding
The franchise authority must either approve or deny the operator's BST FCC 1240 rate request,
finding the rate to be either reasonable, or not reasonable. This determination must be based
upon a finding of fact. The franchise authority should adopt the staff report as its own and the
public must be granted an opportunity to offer comment on the matter; it is suggested that the
public comment period coincide with a regular public meeting.
A rate order, conveying conditional approval is attached. To be valid, the order must be executed
following the conclusion of:
a. a public meeting where the commission grants interested parties an opportunity
to comment; and
b. adoption by the commission of the report as its own - required by FCC rules
(requires a motion to adopt and a vote).
It is appropriate for public comment to be heard, as related to BST rate issues, at the time the
Commission meets to deliberate upon this matter. A statutory public hearing is not required. It
is customary to call for a public comment in these matters; the comment period maybe
publicized by issuing a press release to the print and electronic media, and otherwise announce
the call for public comment in other ways. The company must be notified of the public meeting
and advised to have a representative present to offer comment.
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STATE OF NORTH CAROLINA
ORANGE COUNTY
BEFORE THE BOARD OF COUNTY COMMISSIONERS
IN THE MATTER OF: )ORDER FINDING TWC's 2000
Review of FCC 1205, 1235 & 1240 )CABLE SERVICE FCC1240/1235
Annual Rate Adjustment Requests filed by )RATE METHODOLOGY AS
Time Warner Cable far NC-0256 and )REASONABLE AND ORDERING
NC-0276
A RATE TRUE-UP FOR 2001.
BY THE BOARD OF COUNTY COMMISSIONERS:
WHEREAS, Time Warner Cable submitted three FCC 1240 Updating Annual Maximum
Permitted Rates filings for Regulated Cable Services with the County. Time Warner's filing covers
external costs, inflation, and cable system upgrade costs for the true up period of October 1998 thmugh
September 1999 and the projected period of January through December 2000;
WHEREAS, Tirne Warner Cable submitted an FCC 1235 Abbreviated cyst of Service For
Cable Network Upgrades with the County. Time Warner's filing covers capital expenses dixectly
related to system infrastructure improvements prior to January 1, 2000;
WHEREAS, the County received a report stating that Time Warner's FCC 1205, 1235 and
FCC1240 rate calculations comply with Federal Communications Commission rate making rules and
that the requested maximum permitted Basic Service Tier rate is reasonable;
WHEREAS, the County received a report stating that Time Warner's FCC 1240 BST rate
calculations comply with Federal Communications Commission rate making rules, and that the
requested monthly maximum permitted Basic Service Tier rate is excessive by 15 cents for Carrboro
System served customers, 2 cents for Chapel Hill system served customers and 40 cents for
Darham System served customers;
WHEREAS, FCC rules grant local franchise authorities an initial ninety (90) day review
period, measured from the date of receipt of said filing by the franchise authority, with which to review
the cable operator's FCC 1240 rate filing. If said ninety (90)-day review period expires before the rates
go into effect, the franchise authority retains review and refund authority past the initial ninety (90) day
review period as long as all inquiries from the cable operator regazding said review aze responded to in
writing within fifteen (15) days of said inquiry;
WHEREAS, Time Warner's rate filing includes cost estimates for the calendaz yeaz of 2000,
and said estimates shall require adjustment (true up), due to changes in to the 2000 projected period's
lb
inflation factor effects the 2001 BST MPR in TWC's subsequent FCC 1240 rate filing far 2001; and
WHEREAS, the County is certified with the FCC to regulate basic service tier rates provided
by Time Warner Cable in franchise NC-0256 and NC 0276.
IT IS A FINDING:
THAT Time Warner Cable's Basic Service Tier rate assessed subscribers within the County
shall not exceed the maximum permitted rate, subject to modifications in subsequent findings by the
cable operator or franchise authority, and Time Warner's FCC 1240 BST MPR shall not exceed $8.60
monthly for Carrboro System served customers, $8.74 monthly for Chapel Hill System served
customers, and $10.18 monthly for Durham System served customers and Time Warner's
FCC1235 Add-on Network Upgrade Charge cannot exceed $1.81 monthly for Chapel Hill system
served customers and $2.11 for Durham System served customers during the 2000 calendar year;
THAT Time Warner Cable may chazge a Basic Service Tier rate below the approved
Maximum Permitted Rate, but not above it;
THAT Time Warner may chazge a Network Upgrade Chazge rate below the approved
Maximum Permitted Rate, but not above it;
THAT Time Warner Cable has by in lazge substantiated the other adjustments to its Cable
Service rates based on past and estimated cost elements; and
THAT Time Warner has complied with FCC rate making rules, and its requested Maximum
Permitted BST and COS "Add-on" rates aze found to be reasonable and subject to any refund liability
due to far the projected period's inflation factor adjustment at the time the FCC 1240 BST filing for
2001 is submitted.
IT IS THEREFORE ORDERED:
THAT Time Warner's FCC1240 BST MPR shall not exceed $8.60 monthly for Carrboro
System served customers, $8.74 monthly for Chapel Hill System served customers, and $10.18
monthly for Durham System served customers and Time Warner's FCC1235 Add-on Network
Upgrade Chazge cannot exceed $1.81 monthly for Chapel Hill system served customers and $2.11
for Durham System served customers during the 2000 calendaz year, subject to subsequent findings
by the County to the contrary, during the 2000 calendar yeaz;
THAT Time Warner may charge a Basic Service Tier rate below the approved Maximum
Permitted Rate, but not above it;
THAT the County retains its authority to issue refunds or rate roll backs after the initial ninety
(90) day review period with respect to the restructured rate set out in the FCC 1240 or FCC1235
filings; and
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THAT Time Warner must keep a full and accurate account of all revenues and costs associated
with the aforementioned cable rate adjustment.
ISSUED BY ORDER OF THE BOARD OF COUNTY COMMISSIONERS
This the 16`~ day of February, 2000
ATTEST:
Beverly Blythe
Send Report and Order via Certified U.S. Mail to:
Copy to:
CHAIRMAN:
Moses Carey, Jr.
Time Warner Cable
R.F.Sepe@ the City of Raleigh