HomeMy WebLinkAbout01/17/1995, 2 - CABLE TELEVISION RATE REGULATION��I�INW�I�IIIII��I III " J 1" _ MEETIN_6 DATE:
� �l� Cl O San WIS OBISPO
COUNCIL AGENDA REPORT ITEM NUMBER:
FROM: Ken Hampian, Assistant City -Administrative Officer
Prepared By: Deb Hossli, Administration;*
SUBJECT: Cable Television Rate Regulation
CAO RECOMMENDATION:
Adopt a resolution prescribing Sonic Cable Television's rates for the basic service tier and
related equipment and service charges, and ordering refunds to subscribers.
DISCUSSION:
In October of 1992, Congress enacted the Cable Television Consumer Protection and
Competition Act which, among other things, re- established rate regulation in the cable television
industry. Under the 1992 Act, rate regulation authority has been divided between the local
franchising authority and the Federal Communications Commission (FCC). Generally, the local
franchising authority is responsible for regulating basic cable tier rates (which includes rates for
equipment and installation services associated with the basic tier). The "basic cable tier" is
defined as the lowest level of cable service that is offered by the cable operator. The FCC, in
turn, is responsible for regulating the cable programming services tier, which includes program
channels not included in the basic tier -and not offered separately as "pay- per - channel"
programming. Sonic does not currently offer a cable programming services tier. "Pay -per-
channel" programming (e.g., HBO, Showtime, etc.) is not regulated.
The purpose of this report is to provide the Council with an overview of the City's role in the
rate regulation process (including an update on the rate regulation actions taken to date) and to
recommend a course of action for implementing the most recent series of FCC rate regulations.
FCC Rate Regulation Process
Immediately following the passage of the 1992 Act, the FCC began developing the rules and
procedures necessary to implement the rate regulation process. The initial regulations were
subsequently issued in June 1993. Cable operators were then given an opportunity to restructure
their rates prior to the formal implementation of cable rate regulation (September 1, 1993). It
was the FCC's thought that if the cable operators were given a chance to review the impending
regulations prior to implementation, they might voluntarily "roll back" rates to comply with the
new regulations (thus eliminating the need for the local franchising authority to take action).
In actual practice, however, cable operators across the nation used this period as an opportunity
to creatively circumvent the process. Therefore, in many cases, the FCC's anticipated rate
reductions of 10% did not materialize.
In the case of San Luis Obispo, Sonic did choose to restructure their rates prior to the September
1, 1993 deadline. The following chart provides an overview of how the restructuring process
��n� ►�H►�Illll��pn���� city of San -LUIS osIspo
COUNCIL AGENDA REPORT
impacted our local cable rates. As you can see, at the overall level, the restructuring resulted
in very little change to local cable rates (as was the national trend). While some rates did go
down appreciably (e.g., equipment rental and installation charges), the basic cable service rate
remained the same. In addition, the least costly tier of service was eliminated. This caused
some consumers cable rates to actually increase as a result of the restructuring. In short, Sonic's
approach to restructuring fell far short of the "spirit" of the 1992 Act and did not produce the
cable rate savings anticipated by the FCC.
Sonic cable sonic Cabe
rates rotes filer
pro-mlWati"u reotmcturin (9193)
Basic service (12 channels)
$ 22.91/Mo
Basic service (38 channels)
$ 24.46/Mo.
$ 24.46/Mo.
Additional outlets with basic service
$ 4.25/Mo.
$ 0.00
Remote controls
$ 2.95/Mo.
$ 0.00
Converter for basic service
$ 1.00 /Mo.
$ .29 /Mo.
Service calls
$ 0.00
$ 28.65/Hr.
New installations
$ 45.00
$ 39.95
Service reconnections
$ 45.00
$ 25.60
8 Eliminated
First Round of FCC Rate Regulation
Based on the outcome of the restructuring process, the City chose to exercise rate regulation
authority over Sonic Cable. The City subsequently obtained FCC rate regulation certification
(which required the City to formally acknowledge that we will regulate cable rates in accordance
with federal law) and requested Sonic to submit FCC Form 393. Form 393 provides the
franchising authority with the calculations the cable operator used to develop their rate schedule
and serves as the basis for the franchising authority to determine if the cable operator's rate
structure complies with FCC rules. The rate structure submitted by Sonic as part of the Form
393 review was the same as the rate structure implemented as part of the restructuring process
(shown above).
The City worked cooperatively with the County to review Sonic's Form 393. The County was
pursuing the process simultaneously so they agreed to share the results of their consultant's
review with the City free of charge. The County's consultant, Municon, completed their review
44Va
city of San LUIS OBISpo
MoGe COUNCIL AGENDA REPORT
of Sonic's rate structure in March of 1994. Municon found that Sonic's rate structure was
permissible under the FCC's regulations and, as such, the rate structure established by Sonic
during the restructuring process remained in effect. This conclusion was not surprising since,
by this point in time, staff was well aware of inadequacies in the FCC regulations (which
ultimately allowed cable operators to evade the regulations).
In early 1994, it became clear to the FCC that the first round of regulations did not generate the
rate savings to consumers that they had expected, and as such, they began work on a second set
of regulations. These new regulations were put in place in July 1994 and projected to generate
up to 17% in rate reductions to cable consumers.
Consistent with the FCC rules for the second round of regulations, Sonic submitted the
appropriate FCC forms (Forms 1200; 1205, and 1215) to the City in August of 1994. With
assistance from the City's cable advisor, TMC, staff has reviewed the forms and reached the
following conclusions:
■ Rate Schedule
The new rate structure proposed by Sonic as part of the second round of regulations
complies with FCC rules. The following chart shows cable rates after the first round of
regulation and proposed rates for the second round of regulation:
Soak cable
sonic prapoaed
rates after
Gbh: rate, after
In round of
2nd round of
regulation (9/93)
regulation (1194)
Basic service (12 channels)
Basic service (38 channels)
$ 24.46/Mo.
$ 23.63/Mo.
Additional outlets with basic service
$ 0.00
$ 0.00
Remote controls
$ 0.00
$ 0.00
Converter for basic service
$ .29 /Mo.
$ .29 /Mo.
Service calls
$ 28.65/Hr.
$ 28.65/Hr.
New installations
$ 39.95
$ 39.95
Service reconnections
$ 25.60
$ 25.60
® Eliminated
49-43
����n��►►�NIO�III�n�gl�llyl city of san Luis oBispo
11iijS COUNCIL AGENDA REPORT
As you can see, the second round of rate regulation will result in a net reduction of .83
cents (or a 3.5%) per subscriber, per month for basic cable service. All other rates
subject to regulation will remain the same, with one minor exception. The service
charge for installing a second cable outlet will be reduced from $11.30 to $11.23 (this
charge is not shown on preceding chart).
Sonic will be directed by the City to reduce the rates to the new level within sixty days
of Council action.
■ Refund Liability
Sonic will be responsible for refunding to subscribers any charges to consumers that
exceeded FCC permitted rates between July of 1994 and the date that the new rate
structure is implemented. Consistent with FCC rules, refunds will be spread equally
among Sonic Cable subscribers in the City.
■ Advertising of Service Rates
Sonic will have to correct their practice of improperly advertising their service rates.
Currently, Sonic's rate card states that "prices do not include applicable taxes and fees ".
FCC rules require cable operators to advertise their total cost (including taxes and fees)
so that subscribers can make informed choices on the costs of service taken.
■ "Bundling" of Rates
Sonic will have to establish separate charges for remote control units and addressable
converters. Currently, Sonic combines or "bundles" these rates into package prices.
Under FCC rules, this practice is not allowed. Cable operators must establish individual
rates for remote control units, converter boxes, and other customer equipment to
facilitate the rate regulation calculation process.
■ Collapsing of Service Tiers
The FCC recently issued an order that appears to clarify the issue of collapsing of
service tiers. The FCC recently determined that "collapsing multiple tiers of service into
the basic service tier, which ultimately eliminates the service choice previously available
to customers and raises the price of cable service for all basic tier service subscribers,
may be an evasion of the rules ". When Sonic restructured their rates (to evade greater
rate reductions), they did just this. Staff intends to send a letter to the FCC requesting
appropriate action on this issue as soon as possible.
Implementation
In order to implement the findings of the rate review, the Council must "provide interested
parties" with an opportunity to participate in the review process. This requirement will be
��un�►►��Illll���l��u ►����ll City of San LUIS OBISpo
i COUNCIL AGENDA REPORT
satisfied through the public hearing being held on January 17. In addition, the Council must
adopt the attached resolution that will:
■ Establish new rates for the basic cable tier and related equipment and service charges.
This will result in the lowering of the basic cable tier to $23.63 per month. Sonic will
have sixty days from the effective date of this resolution to implement the new rate
schedule.
■ Order refunds to subscribers retroactive to July 15, 1994 (the effective date of
regulation). Sonic will have sixty days from the effective date of this resolution to carry
out this order.
■ Require Sonic to establish separate charges for remote control units and addressable
converters and correct their rates cards to reflect total costs for services (including taxes
and fees). Sonic will have sixty days from the effective date of this resolution to carry
out this order.
■ Require Sonic to provide the City with written evidence that they have complied with this
resolution. Sonic will have ninety days from the effective date of this resolution to carry
out this order.
Staff will also immediately send off a letter to the FCC requesting appropriate action on the
"collapsing the service tier" issue and, upon resolution, advise the Council of the outcome.
It is also important to note that the rates generated through the second round of rate regulation
will serve as the base for all future requests for rate increases by the cable operator. Sonic has
already submitted FCC Form 1210 requesting to increase basic service rates to $24.23 per
month. Staff is in the process of reviewing the request (with assistance from TMC) and will
return to Council when the review is complete. However, if the City finds through the review
process that the requested rate increase is legally permitted under FCC rules, the rate "roll back"
implemented as part of this report will be "short lived ".
FISCAL EWPACT:
Approval of this recommendation will not result in any additional costs to the City. It should
be noted, however, that the City has spent approximately $5,000 to date on consultant services
(TMC) for assistance with the rate regulation process.
ATTACHIMENT:
Resolution
RESOLUTION NO.
•
A RESOLUTION OF THE COUNCIL OF THE CITY OF SAN
LUIS OBISPO PRESCRIBING SONIC CABLE TELEVISION'S
RATES FOR THE BASIC SERVICE TIER AND RELATED-
EQUIPMENT AND SERVICE CHARGES AND ORDERING
REFUNDS TO SUBSCRIBERS. . .
WHEREAS, the City of San Luis Obispo was certified by the Federal Communications
Commission (the "FCC ") to regulate rates charged by Sonic Cable TeleWsion ( "Sonic ") fot':the
basic service tier and associated equipment and service charges on October 26, 1993;
WHEREAS, consistent with the initial FCC cable rate regulation rules, the City received
FCC Form 393 from Sonic on November 23, 1993. The City reviewed this form and found that
Sonic's rate structure complied with -FCC rules; •
WHEREAS, on February 22, 1994, the FCC adopted new wgulations which contained
significant changes to its previous regulations. The material portions of the new regulations,
released by the FCC on March 30, 1994, became operative on July 15, 1994. This second set
of rate regulations required Sonic to submit FCC Forms 1200, 1205) and 1215 to the City by
August 15, 1994;
WHEREAS, the City received Sonic's FCC Forms 1200, 1205, and 1215 on August 15,
1994. These forms were supplemented by additional information contained in letters to the City.
On September 7, 1994, the City sent Sonic notice that the City was taking the additional ninety
days permitted by the FCC regulations to review Sonic's forms and rates;
WHEREAS, on October 5, 1994, the City made a finding pursuant to Section 76.937 (e)
of the FCC regulations that Forms 1200, 1205, and 1215 submittedrhy Sonic were facially
incomplete and tolled the review process pending receipt of requested information.
. WHEREAS, the City received a letter from Sonic dated October 27, 1994 that provided
the requested information (from the City's October 5, 1994 letter), along with an amended Form
1200;
WHEREAS, the City retained Telecommunications Management- Corp. ( "TMC "� to
review FCC Forms 1200, 1205, and 1215 and any additional information submitted by Sonic
related to rates. On November 17, 1994 TMC provided written evaluations of Sonic's FCC
Forms 1200, 1205, and 1215 and the additional information provided. This report is hereby
incorporated into this Resolution as.Exhibit B; •
WHEREAS, the City sent Sonic a copy of the TMC report and provided Sonic with an
opportunity to. comment on the report. Sonic advised the City, via correspondence dated
December 14, 1994, that they had reviewed the report; : ; A
Page 2 1 1. _ ..
RESOLUTION NO. (1995 SERIES)
WHEREAS, on January 17, 1995, the Council held a duly noticed public hearing to
determine if Sonic's rates were in accordance with the second round of FCC rate regulations.
The Council considered TMC's reports, Sonic's responses, and all of the evidence and testimony
presented at the January 17, 1995 meeting and all other written and oral evidence received in
connection with this matter;
WHEREAS, based upon -the evidence submitted,. including but not limited to the FCC
Forms 1200, 1205, and 1215- submitted by Sonic, the staff and consultant reports and all other
written and oral evidence received in connection with this matter the Council hereby finds that
the permitted rates for the basic service tier, the hourly service charge and the rates for
equipment related to basic service shall be those rates set forth as the ordered rates in Exhibit
A to this resolution, attached hereto and incorporated herein;
WHEREAS, the ordered rates in Exhibit A result from Sonic's own calculations pursuant
to the new FCC regulations.
NOW, THEREFORE, BE IT RESOLVED By THE COUNCIL OF THE CITY OF SAN
LUIS OBISPO THAT:
1. The Council hereby resolves that pursuant to the FCC regulations effective on July
15, 1994, the rates listed as ordered rates in Exhibit A are the maximum rates that Sonic may
charge and orders that the. rates set forth in Exhibit A shall be the established rates for basic
service and related service and equipment gharges. The Council orders Sonic to establish and
implement, within sixty days of the date of this Resolution, a new rate schedule conforming to
the rates contained in Exhibit A. The Council orders Sonic to maintain the ordered rates, with
any future increases to be in accordance with the provisions of the FCC rate regulations.
2. The Council orders Sonic to refund all service and equipment charges since July 15,
1994 in excess of those prescribed by this Resolution to the affected subscribers within the City
of San Luis Obispo, with interest in accordance with FCC regulations, within sixty days of the
date of this Resolution.
3. The Council orders Sonic to provide.the City with written evidence of compliance
with the orders contained in this Resolution within ninety days of the effective date of this
Resolution.
4. The Council orders Sonic to•establish separate charges for remote control units and
addressable converters within sixty days of the effective date of this Resolution.
5. The;.Council..grdgrs Sonic to. correct their advertising practices so that their
advertisements reflect total cable rates in accordance with FCC rules within sixty days of the
effective. date of this Resolution.
a-7
Page 3
RESOLUTION N0. (1995 SERIES)
6. The City Clerk is hereby directed to publish notice of this resolution and mail a copy
of the resolution to Sonic. Further, the City Clerk shall make available a copy of this resolution
to any person upon request.
Upon motion of , seconded by
on the following roll call vote:
AYES:
NOES:
ABSENT:
the foregoing resolution was adopted this day of , 1995.
Mayor Allen Settle
ATTEST:
Diane Gladwell, City Clerk
wlk, - I.Folf"j, P, W.,
FrOM0,42
and
xwwi
:►
NV
Ordered Rates, Service Charges, and Equipment Charges
Basic Service
Remote Control
Converter for Basic Service
Addressable Converter.
Service Rate
Installation Charges
• unwired home
• prewired home
• add'l outlet w /installation
• add'l outlet after installation
Relocate Outlet
Tier Change
$23.63 per month
$ 0:03 per month
$ 0.30 per month
$ 0.30 per month
$28.79 per hour
$40.02
$25.62
$11.23
$25.62
$25.62
$ 2.00
1) The "ordered rates" listed above do not include franchise fees or City user tax
2) The "ordered mtes" listed above represent the rates that the cable operator is permitted to
charge under current FCC rate regulation rules. In some cases, however, the cable operator has
chosen to charge .rates lower than the permitted rate.
GASOMCAM
TELECOMMUNICATIONS MANAGEMENT CORP.
5757 Wilshire Blvd. • Suite 635 • Los Angeles, CA 90036 • (213) 931 -2600 • Fax (213) 931.7355
Ms. Deb Hossli
Admin.'Analyst
City of San Luis
P.O. Box 8100
San Luis Obispo,
Dear Deb:
Obispo
CA 93403 -8100
November 17, 1994
Telecommunications Management Corp. (TMC) has received
the FCC Forms 1200, 1205 and 12151 submitted by Sonic Cable
Television of San Luis Obispo (Sonic) to the City of San
Luis Obispo (the City).
The following history of the submission of the
documents is noted:
• On August 15, 1994, the City received a copy
of FCC Forms 1200, 1205 and 1215.
• On September 7, 1994, the City provided Sonic
with written notice "tolling" the permitted
30-day review period for an additional 90
days. Also in this letter, the City
requested written clarification of certain
issues contained in the Forms be provided to
the City by not later than September 23,
1994.
• On September 19, 1994, the City received a
letter (dated September 15) from Sonic which
1 Form 1200 is entitled, "Setting Maximum Initial Permitted Rates for
Regulated Cable Services Pursuant to Rules adopted February 22, 1994'.
Form 1205 is entitled, "Determining Regulated Equipment and Installation
Costs ". Form 1215 is entitled, "A La Carte Offerings ". Form 1200 will
be filed only once, while future rate modifications for programming
services will be justified by information contained on Form 1210
("Updating Maximum Permitted Rates for Regulated Cable Services "). Form
1205 can be updated annually for changes in equipment rates. Form 1215
is not a form which is evaluated, but rather is a listing of information
to supplement the data contained in the other forms.
2 Section 76.933 of the FCC regulations permits a franchising authority
to "toll" the 30 day review period for an additional 90 days if notice
is given to the cable operator within the initial 30 days.
EXHIBIT "B" - ✓ .04®
Ms. Deb Hossli
City of San Luis Obispo
November 17, 1994
Page 2
indicated that Sonic would be unable to
provide the requested clarifications by
September 23, 1994.
• On October 5, 1994, the City made a finding
pursuant to Section 76.937(e) of the FCC
regulations that the Forms submitted by Sonic
were facially incomplete and tolled the
review process pending official City receipt
of the requested clarifications. Sonic was
given until October 31, 1994 to comply with
the City's request.
• On October 28, 1994, the City received a
letter (dated October 27) from Sonic
responding to the requested clarifications,
along with an amended Form 1200.3 The Form
had been amended to reflect corrections in
programming costs.
• On November 16, 1994, the City provided Sonic
with a letter which:
Notified Sonic that the 120 -day review period
for Form 1200 would commence on October 28,
1994, the date the modified Form was
received.
Notified Sonic that the review of .Form 1205
had been tolled for at least 51 days, the
time it took Sonic to respond to the City's
letter of September 7.
Notified Sonic that this time frame was
contingent upon the City determining that the
Forms were completed in accordance with FCC
regulations.
Assuming the Forms 1200 and 1205 are accepted by the
City, the 120 - review period would be as follows:
• Form 1200 -- 120 days from October 28, 1994, or
February 27, 1995.
• Form 1205 -- 120 days from August 15, 1994 plus
the 51 days tolled, or February 2, 1995.
3 Also received on this date was an FCC Form 1210 ( "Updating Maximum
Permitted Rates for Regulated Services ") which will be reviewed
separately.
A..011
Ms. Deb Hossli
City of San Luis Obispo
November 17, 1994
Page 3
While TMC has found some errors in the information
submitted by Sonic, the material is considered sufficient
for the purposes of review.
The following caveats should be noted:
• Sonic's financial information has not been
audited for accuracy. However, the numbers
have been examined for consistency with
industry standards. It is noted that the
Forms are submitted with a signature under a
provision that states that willful false
statements are punishable by fine and /or
imprisonment.
• The rules established by the FCC are subject
to revision and modification. The evaluation
is based on the rules established and
available as of the date of this report.
TMC has determined that there are a number of issues
either within Sonic's Forms, or related to the City's review
of rates, which require comment. These include:
• The adjustments made to Form 1200
• Number of regulated channels
• Census income level
• Equipment costs and calculations
• Equipment repair hours
• Advertising of service rates
• Calculation of the franchise fee and other
items on subscriber bills
• Collapsing of tiers
These items are discussed below.
"/ r1A
Ms. Deb Hossli
City of San Luis Obispo
November 17, 1994
Page 4
ADJUSTMENTS TO FCC FORM 1200
The only change between the original and revised Form
1200 submitted by Sonic involves the programming costs per
tier. On line B2 (and also on line I10), Sonic indicates
that its costs as of 10/27/93 (the initial date of
regulation) were slightly greater than previously reported
($31,576.39 vs. $31,313.46).
Sonic also indicates that its costs for programming on
3/31/94 (the comparison date for all cable operators) were
less than previously stated ($45,020.38 vs. $52,857.46).
This is indicated on line B8.
Since the calculations involved in Form 1200 deal with
changes in costs, this one modification by Sonic has a
significant impact on.the permitted rates. From this one
change, the permitted rate for Basic Service drops from
$24.25 to $23.63.4
NUMBER OF REGULATED CHANNELS
Sonic indicates that on 3/31/94, there were a total of
36 regulated channels of which 28 were non - broadcast. on
9/30/92, Sonic indicates that there were a total of 29
regulated channels of which 17 were satellite - delivered.
Contained in the 1994 total are channels which were
shared -use (e.g., satellite and broadcast). This includes
Channels 2 (KCBS and Prevue Guide) and 7 (KABC and Food
Network).
The initial FCC rules were silent on how channels were
to be carried which were shared in use. On June 1, 1994,
the FCC issued a "Question and Answer" which attempted to
clarify this issue. In item number 1, the FCC stated:
"Q1: If a channel is split between satellite and
non - satellite programming or between broadcast and
non - broadcast programming, how is that channel
treated for purposes of completing FCC Form 1200
and Form 393?
4 sonic currently charges $24.21, which is $0.58 more than the permitted
rate. The Form 1210, which will be reviewed separately, shows that
Sonic wishes to increase its rates to $24.23, which is $0.02 more than
the current rate.
a��
Ms. Deb Hossli
City of San Luis Obispo
November 17, 1994
Page 5
Al: Channels should be classified according to
their preponderance of use. Thus, a channel that
carried satellite programming more than half the
time would be considered to carry satellite
programming. Similarly, a channel carrying non-
broadcast signals more than half the time would be
considered to carry non - broadcast signals. See
Form 1200, lines C2, H3; Form 393, page 22."
In its October 27, 1994 letter, Sonic indicates that
the hours of carriage on these channel vary depending upon
coverage of certain types of events and Sonic's ability to
preempt programming. Hours of "general carriage" were
indicated on a supplemental page. In a follow -up telephone
call with Karen Cole, Sonic's Director of Administration, it
was indicated that the hours of carriage indicated in its
letter were for the satellite programming carried. Ms. Cole
also indicated that the two broadcast stations carried were
for duplicates of ABC and CBS, and that Sonic was not
required to carry these channels in their entirety.
The Conclusions to this report accept the Sonic
position, although it is noted that if the hours or
conditions of carriage are not correctly represented, the
permitted rate per channel would be influenced.
CENSUS INCOME LEVEL
In the City's letter of September 7, 1994, Sonic was
requested to provide documentation of the median household
income figure utilized.5 Sonic's letter of October 27
stated, "Copy of source document attached ".
Sonic's provision of the "Income and Poverty Status in
1988" is not the source document for the figure utilized.
However, TMC has confirmed (by filing a FCC Form 1201
with the FCC) that the figure utilized by Sonic is correct.
EQUIPMENT COSTS AND CALCULATIONS
Form 1205 contains a procedure for determining the
capital costs for installing and maintaining equipment,
capital costs for leased equipment, and annual operating
5 The letter stated, "For the census income level utilized in Line C5,
please identify the source of this figure as well as a photocopy from
the source utilized (if available) verifying this number."
zp W/4T-
Ms. Deb Hossli
City of San Luis Obispo
November 17, 1994
Page 6
expenses on the equipment. This information is then
combined with other data to compute the Hourly Service
Charge (HSC) for installations and the monthly charges for
equipment such as converters and remote controls.
One of the schedules utilized in computing this data is
- Schedule C, "Capital Costs of Leased Customer Equipment."
Sonic lists "costs" for three items: An addressable remote
control, an addressable converter, and a basic converter.
-For two of the three items listed in this schedule, there is
-a gross book value of $1.00 indicated, while the third has
-no gross book value associated.
When asked to explain this data, Sonic indicated that
"The equipment is fully depreciated.i6 From a procedural
perspective, if the equipment is fully depreciated, the
gross book value should have been indicated on Row D with an
equivalent amount indicated in Row E for accumulated
depreciation. In fact, the form, as completed by Sonic,
does not indicate that the equipment has been fully
depreciated, but rather that it had no gross book value (or
only $1.00 in value), and was never depreciated.
. It is noted that if the equipment is,actually fully
depreciated, the net result indicated on Form 1205 would be
the same as indicated by Sonic.
Another area deserving discussion involves the
inclusion of certain pieces of equipment as being "leased ".
In the City's letter of October 7, 1994, question 9 asked
Sonic:
"Form 1205, Steps C and D
Please document the charges for the remote control
and converters as of March 31, 1994. If there was
no charge for these items, please justify the
inclusion of equipment "leased" on Lines 15 and
23."
Sonic's response was:
"The charges for remote controls and converters as
of March 31, 1994 is documented on the Summary
Schedule, page 7 of Form 1205 under the column
labeled "Actual ". Lines 15 and 23, Steps C and D
ask for number of units in service. This module
is_the worksheet for calculating permitted
equipment and installation charges based on the
6 Sonic letter of October 27, 1994.
a-0&�
Ms. Deb Hossli
City of San Luis Obispo
November 17, 1994
Page 7
cost of maintenance and capital costs, not what is
currently being charged."
Sonic has not answered the question as to how the FCC
regulations permit equipment which is being provided at no
cost to the subscriber can be included as being "leased ".
The instructions for Schedule C, line C direct the cable
operator to:
"Enter the total number of units in service for
leased remotes and converter boxes. For other
leased equipment, list the total number of units
in service or the total number of subscribers
using this equipment, whichever is appropriate."
The instructions for lines 15 and 23 direct the cable
operator to insert the number of units in service "from the
corresponding column of line C on Schedule C ".
Sonic indicates that it charges $0.29 per month for its
basic converter (converter box type 1), but does not charge
for the remote control or the addressable converter
(converter box type 2). However, Sonic includes the units
for which it doesn't charge as being "leased ". In other
words, Sonic claims that it is "leasing" equipment for which
it does not charge.?
An inquiry wa's placed with the FCC to determine whether
this is appropriate. In a conversation with, Aaron
Goldschmidt, a staff attorney with the FCC's Cable Service
Bureau, it was indicated that the FCC had not specifically
addressed this issue. Although he could not speak with
certainty, it was his thinking that the rate regulations
primarily make a distinction between equipment provided by
the cable operator and that provided by the subscriber.
Using this logic, he thought that since Sonic provides the
equipment, that it might be considered "leased" even though
there is no charge. However, he did caution that his was
not the final opinion on the matter (i.e., the Commission
may eventually have to make a ruling). He did indicate the
fact that the equipment.is fully depreciated may weigh
against considering the equipment as "leased ".
This item is important because it could result in a
higher rate for equipment, as well as potentially reduce the
refund liability due.to subscribers (this is discussed in
the Conclusions to this report).
7 It is also noted that, by Sonic's own admission, this equipment is
fully depreciated and has no net book value.
i
Ms. Deb Hossli
City of San Luis Obispo
November 17, 1994
Page 8
In a related area, it is noted that Section 76.923 of
the FCC's regulations reads:
"(b) Unbundling. A cable operator shall establish
rates for remote control units, converter boxes,
other customer equipment, installation, and
additional connections separate from rates for
basic tier service. In addition, the rates for
such equipment and installations shall be
unbundled one from the other."
On its rate card, Sonic combines the rate for the
remote control and addressable converter into package prices
with other items, rather than separating one from the other.
Since the addressable converter and remote control can, and
are, also utilized to receive Basic Cable Service, the cost
.of these items should be unbundled. This should be
corrected to be consistent with the FCC's regulations (this
will not impact the rate charged, but rather more clearly
indicate the charges for each piece of equipment).
EQUIPMENT REPAIR HOURS
In justifying its hours for remote control and
converter repair, Sonic indicates that it utilized actual
customer repair records (from payroll) and allocated 5% or
the repair hours to remote controls and the remainder to
converters. It is noted that many operators do not spend
any time repairing remote controls, instead opting only to
replace defective units. However, an allocation of a
minimal amount of hours for maintenance and service is not
unreasonable.
OP SERVICE RATES
Sonic's rate card states that "Prices do not include
applicable taxes and fees."
The FCC Orders have consistently required that cable
operators advertise total costs so that subscribers can make
informed choices on the costs for services taken. This was
codified as Section 76.946 of the FCC rules (effective May
15, 1994) which reads:
"Cable operators that advertise rates for basic
service and cable programming service tiers shall
bo required to advertise rates that include all
costs and fees. Cable systems that cover multiple
tQ-/7
Ms. Deb Hossli
City of San Luis Obispo
November 17, 1994
Page 9
franchise areas having differing franchise fees
or other franchise costs, different channel line-
ups, or different rate structures may advertise a
complete range of fees without specific
identification of the rate for each individual
area. In such circumstances, the operator may
advertise a "fee plus" rate.that indicates the
core rate plus the range of possible additions,
depending on the particular location of the
subscriber."
The FCC's Third Order on Reconsideration (MM Dockets
92 -266 and 92 -262, FCC File 94 -40, released March 30, 1994)
further clarified how rates should be advertised. In
footnote 99, the FCC indicated:
"For instance, an advertisement might declare that
basic service is $14.00 per month plus a franchise
fee of 284: to 701 depending on location, or that
it is $14.28 to $14.70 depending on location."
In its October 27 letter, Sonic quotes FCC 76.946 as
permitting their method of advertising. However, Sonic does
not comply with the example utilized by the FCC in
demonstrating how a "range of fees" should be represented.
Sonic should be directed to correct its advertisements
to comply with this requirement.
Additionally, as noted above, Sonic should be directed
to unbundle its rates for remote controls and addressable
converters.
COLLAPSING OF TIERS
In the FCC's Third Order on Reconsideration the issue
of how certain "evasions" of the regulations would be
prevented is discussed. In paragraph 134, the Order
indicates,
"134. Collapsing multiple tiers of service into
the basic tier of service, which ultimately
eliminates the service choice previously available
to customers and that raises the price of cable
service for all basic tier subscribers may also be
considered an evasion by circumventing the rules
intended to reduce the cost of cable service and
to provide for the buy- through of only desired
services. Upon receipt of a complaint on any
potential evasion, we will consider, inter alia,
49--./9
Ms. Deb Hossli
City of San Luis Obispo
November 17, 1994
Page 10
such circumstances as the timing of the cable
operator's actions (e.g., whether they occurred on
the eve of regulation or in response to the filing
of a complaint), the price to subscribers before
and after the actions, a comparison of the level
of service received by the subscriber before and
after the cable operator's actions, and whether
the action resulted in the avoidance of the tier
buy - through prohibition. Practices that have. the
effect of increasing subscriber choice and /or
reducing rates generally will not be found evasive
of our rules."
On September 1, 1993, Sonic "collapsed" two tiers of
service into one, in what may be considered a possible
evasion of the FCC's regulations. The City may wish to
notify the FCC of Sonic's actions and request appropriate
_action.
CONCLUSIONS
A summary of the rates indicated by this analysis,
comparing them to the current Sonic rates, is listed below.
W
8 As discussed above, if these units are not considered "leased" because
the operator does not charge for them, these amounts would decrease to
zero.
a-1R
Actual Rate
Permitted Rate
Basic Service
$24.21
$23.63
Remote Control
-0-
0.03
Converter $1
0.29
0.30
Converter #2
-0-
0.308
Hourly Rate
28.65
28.79
Installation
Unwired Home
39.95
40.02
Prewired Home
25.60
25.62
Add' 1. Outlet
(with install)
11
110 141j
Add'l. Outlet
(after install)
25.60
25.62
Relocate Outlet
25.60
25.62
Tier Change
2.00
2.00
W
8 As discussed above, if these units are not considered "leased" because
the operator does not charge for them, these amounts would decrease to
zero.
a-1R
Ms. Deb Hossli
City of San Luis Obispo
November 17, 1994
Page 11
As can be seen, the actual rates are greater than the
permitted levels for Basic Service and installation of
additional outlets (at the same time as the initial
installation). The rates for all other items are less than
the permitted rate.
It is noted that relatively few subscribers typically
pay the posted rates for installations, since special
promotions are frequently offered in the industry.
The City has the authority to order rates which are in
excess of the maximum to be reduced and refunds paid to
subscribers who were overcharged. Recent FCC rulings appear
to permit the operator to offset any refund liability by the
amount that other rates are below the maximum permitted.
The FCC regulations appear to provide that the gross amount
of overcharges to all subscribers be reduced by the gross
amount of undercharges. The net result is then divided
equally among all subscribers.
This is one of the reasons that the issue of leased
remote converters is key. In addition to being able to
justify a higher rate (or, in fact, any rate) for the remote
control and addressable converter, permitting the free units
to be counted as "leased" would allow Sonic to offset a
portion of its refund liability.
Assuming for the moment that there is no refund
liability based on the installation charges (thinking that
few subscribers pay the posted rates), counting the free
equipment as leased would reduce the net refund liability
from approximately $0.58 per subscriber per month to
approximately $0.20 per subscriber per month.9
Pursuant to the FCC's regulations, the City may order
rate reductions and rebates (or credits) to affected
subscribers dating back to July 14, 1994.10
If the City disallows the inclusion of the remote
controls and converters in the category of leased units in
9 Based on 13,135•subscribers, 11,300 remote controls,•40150 basic
converters and 15,494 addressable converters. The net refund is based
on the total of each category multiplied by the total over or
undercharge which are then added together and divided by the total
number of subscribers.
10 Section 76.942(x) requires a franchising authority to give the cable
operator notice and the opportunity to comment prior to ordering
refunds. Administratively, this may be considered as part of the
participation of interested parties (possibly a public hearing).
a -�o
Ms. Deb Hossli
City of San Luis Obispo
November 17, 1994
Page 12
service, it is likely that Sonic would appeal the .City's
decision to the FCC. FCC 76.944 states that the Commission
is the sole forum for appeals by cable operators in cases
where the franchising authority has followed the FCC rules.
Appeals may be made in court if the operator contends that
the franchising authority has not followed the rules. All
conclusions described above are believed to be based upon
the current FCC rules for regulation of cable rates.
The operator has 30 days from the release of the
:franchising authority's written order to appeal to the FCC.
_:The franchising authority then has 15 days to submit its
opposition to this appeal. Many cities feel that legal
counsel is appropriate for the opposition of any appeal.
A possible alternative to the appeal process could
involve the issuance of an "accounting order" pursuant to
FCC 76.933(c).11 This would permit the City to protect
subscriber rights for potential refunds while requesting FCC
clarification on this issue. Since FCC rules permit refunds
:to be ordered for a maximum of 12 months12 (but not earlier
than the effective date of the rules), so long as an FCC
decision and appropriate City rate order were made prior to
.July 14, 1995, subscriber refund rights (including interest)
would be preserved.
Finally, it is noted that if refunds are ordered, the
franchising authority will have to reimburse (or credit on
future payments) any franchise fees which may have been paid
on the refunded amount.
The following actions are recommended (based upon City
agreement with the preceding report):
1. , Sonic should be provided a copy of this
report and given the opportunity to comment.
11 Section 76.933(c) of the FCC regulations reads, in part, "Provided,
however, that in order to order refunds, a franchising authority must
have issued a brief written order to the cable operator by the end of
the 90 or 150 -day period permitted in paragraph (b) of this section
directing the operator to keep an accurate account of all amounts
received by reason of the rate in issue and on whose behalf such amounts
were paid." The reference to "accurate account" is generally referred
to as an "accounting order".
12 FCC 76.942.
Ms. Deb Hossli
City of San Luis Obispo
November 17, 1994
Page 13
2. The City should provide "interested parties"
the opportunity to participate in the review
process. This most likely will take the form
of a public hearing.
3. The City should confirm that the shared hours
of use on Channels 2 and 7 provide satellite -
delivered programming a preponderance of.the
time.
4. Sonic should be directed to reduce its rates
to the level indicated as permitted in Form
1200.
5. The City should consider contacting the FCC
for a preliminary indication of how the
leased converter units which Sonic provides
for free should be included.
6. The City should make a determination whether
Sonic has correctly calculated the permitted
equipment charges.
7. Based on the findings above, Sonic should be
directed to provide refunds to subscribers,
including interest, as prescribed by FCC
Section 76.942.
8. The City should direct Sonic to comply with
FCC regulations concerning the advertising of
rates and itemization on subscriber bills.
This includes having rates which accurately
reflect all charges, and properly "unbundle"
charges.
9. The City should consider notifying the FCC of
the possible "evasion" of the regulations as
a result of the collapsing of tiers.
10. Sonic should be directed to show compliance
with any City orders.
The City is reminded that it must act prior to the
expiration of the time permitted by FCC regulations for
review. These deadlines are indicated on page 2 of this
report (February 27, 1995 for Form 1200 and February 2, 1995
for Form 1205). In general, the City may find it advisable
to act significantly prior to these deadlines, so that Sonic
will be unable to dispute whether the City has followed FCC
requirements.
Ms. Deb Hossli
City of San Luis Obispo
November 17, 1994
Page 14
The City may wish to have legal counsel examine any
conclusions before the City acts in any official capacity.
Please feel free to contact us if you have any
questions or require any additional information.
Sincerely,
Michael Friedman
vice President
4,; � -a3
WARREN A. SINSHEIMER III SINSHEIMER, SCHIEBELHUT & BAGGETT
ROBERT K. SCHIEBELHUT
A PROFESSIONAL CORPORATION
IL ROBIN BAGGETT
MARTIN J. TANGEMAN
ATTORNEYS AT LAW
THOMAS M. DUGGAN
MARTIN P. MOROSKI
POST OFFICE BOX 31
DAVID A. IUHNKE
SAN LUIS OBISPO. CALIFORNIA 93406.0031
STEVEN J. ADAMSKI
THOMAS D GREEN
805 -541 -2800
M. SUZANNE FRYER
CYNTHIA CALDEIRA
SUSAN S. WAAG
ROY E. OGDEN
MARUALIHUTKIINEN III
January 13, 1995
Mr. Ken Hampian
Assistant City Administrative Officer
City of San Luis Obispo
City Hall
990 Palm Street
San Luis Obispo, California 93401
Re: Sonic Cable Television Franchise
Dear Mr. Hampian:
CLIENT
STREET ADDRESS
1010 PEACH STREET
FACSIMILE
805.541 -2802
133222
HAND- DELIVERED
MOUIVED
JAN 13 1995
- nq
On behalf of Sonic Communications, we object to the hearing scheduled for January 17,
1994 and request a continuance of that hearing to the next Council meeting. The basis for this
objection and request is that neither Sonic nor its representatives were aware that anything would
be at issue in the meeting other than a refund of subscriber fees covering a one -month period. In
fact, the issues raised in the staff report and the resolution are far broader. The inadequate notice
does not allow Sonic an opportunity to review the report and the resolution and to comment on the
claim of the report that Sonic must take action to comply with FCC rules. If the hearing proceeds
as scheduled, Sonic's right to due process will be violated and the City will be liable for all damages
incurred.
The facts supporting this objection and request are that the notice of the meeting and the staff
report was mailed to Sonic on January 10, 1994, four business days before the scheduled hearing.
The notice and report were not received until late afternoon on January 12, 1994 thereby giving
Sonic only one and one half business days to review the contents of the report, prepare a response
to the report, and submit a "written communication prior" to the hearing as suggested by the letter.
The inadequate notice also makes it impossible for Sonic to have anyone at the hearing to make
meaningful comments to the report.
We are extremely disappointed that the City is proceeding in this manner. Sonic is faced
with a report which inaccurately contends that Sonic is in violation of FCC rules and regulations and
directs subscriber refunds beyond anything previously contemplated or discussed. This report was
given to the public and the press before it was received by Sonic. Sonic has no time to provide an
adequate response with time td adequately respond. It would have been a simple matter to timely
provide Sonic with a copy of the report and resolution. That effort yeas not made. The City has
given the public- and the press a one -sided and disparaging view of Sonic without providing any
U
Mr. Ken Hampian
January 13, 1995
Page 2
opportunity for a meaningful response. We have been requested to review the potential liability for
misusing the process to disparage Sonic's reputation.
Sonic is committed to working through all outstanding issues with the City in a cooperative
and businesslike manner. If the issues between the parties are forced to a different forum, everyone
will lose. Sonic wants to avoid such an escalation but it cannot be placed in a situation of
jeopardizing its rights by allowing actions such as the late delivery of a one -sided and inaccurate
report to take the place of cooperative and courteous business relations:
Very truly yours,
SINSHEIMER, SCHIEBELHUT & BAGGETT
THOMAS D. GREEN
TDG:tlg
g:\Itr \Sonic \C ityslo\ 12H=pi2.113
cc: Karen Cole
Greg Blume
Jeffrey C. Jorgensen
[CILL II1W 9�`au1un
�aTc ! =ITEM #—
MEMORANDUM
January 17, 1995
To:
City Council
Via: John Dunn, CAO
From: Ken Hampian, Assistant CAO pet
Deb-Hossli, Assistant to the CAO
Subject: PUBLIC HEARING #2: SONIC CABLE RATES
Attached is a correspondence from Mr. Thomas Green, an attorney representing Sonic
Cable Television, objecting to Council consideration of public hearing report #2 on the
January 17, 1995 Council meeting agenda. Mr. Thomas indicates that Sonic was given "only
one and one half business days to review the contents of the report..." and implies that the
company wants more review time prior to Council taking up this matter ".
While staff does not object to a one -week continuance to the meeting of January 24th, a
couple of added points are in order: (1) While Sonic did not receive a copy of the agenda
report until it was distributed to the City Council last week (consistent with existing policy),
in November they were provided with the TMC report evaluating their proposed rates. The
agenda report primarily summarizes the key findings of the TMC report (including the
recommended refund process), and organizes the information into our agenda report format.
(2) The City's evaluation is based entirely on the rates (past, present and future) that Sonic
itself set forth in its submission of the required FCC forms. The refund process
recommended in the staff report is based on the information provided on these forms, and
begins by giving Sonic 60 days to evaluate and establish an approach to the refund.
These issues can be further discussed during the public hearing. And, again, staff has no
objection to continuing this hearing to January 24, 1995 in order to provide Sonic with an
addition week of review time. However, the Council must hold the hearing and act on the
resolution during the month of January in order to meet FCC deadlines.
RECEIVED
JAN 17 1995
CITY COUNCIL
C4N 1_I11� OBISPO. CA
❑ C D1R
IF�CIL
DIR
A01�0
❑ FIRE CHIEF
EY
❑ PIN Dik
CYCLUKKNO
❑ POLICE;DHF
❑ MGW
❑ REC DIR
❑ C ILE
❑ UTIL DIR
❑ PERS DIR
RECEIVED
JAN 17 1995
CITY COUNCIL
C4N 1_I11� OBISPO. CA