OR 2000-914 Cable RatesAN ORDINANCE OF THE CITY OF COPPEL, TEXAS
ORDINANCE NO. 2000914
AN ORDINANCE OF THE CITY OF COPPELL, TEXAS,
ESTABLISHING FINDINGS AND THE MAXIMUM PERMITTED
BASIC SERVICE TIER RATES CHARGED BY PARAGON
CABLE; PROVIDING A REPEALING CLAUSE; PROVIDING A
SEVERABILITY CLAUSE; AND PROVIDING AN EFFECTIVE
DATE.
WHEREAS, the City of Coppell, Texas franchises cable television service for the
benefit of its citizens; and
WHEREAS, the City is the Grantor of a franchise ordinance by and between the
City of Coppell and Paragon Cable ("Paragon"); and
WHEREAS, in accordance with applicable provisions of the
Telecommunications Act of 1996 (the "Act") and rules adopted by the Federal
Communications Commission CFCC') and all other applicable federal and state laws
and regulations, the City has undertaken all appropriate procedural steps to regulate the
equipment and installation rates; and
WHEREAS, in accordance with applicable FCC regulations the City adopted an
ordinance providing for the regulation of rates charged by cable television operators
within the City for the equipment and installation rates are related equipment and
installation charges and providing for a reasonable opportunity for interested parties to
express their views concerning basic cable regulations;
WHEREAS, on or about October 1, 1999 the City reviewed what is commonly
known as FCC Form 1240; and
WHEREAS, the City has caused to be audited and has concluded that said
proposed basic service tier rate in Form 1240 is inappropriate;
NOW, THEREFORE, BE IT ORDAINED BY THE CITY COUNCIL OF
THE CITY OF COPPELL, TEXAS:
SECTION 1. That after review the following are ordained findings of this City
Council:
That on or about October 1, 1999, the City of Coppell received Paragon's
FCC form 1240 filing.
B. That the City reviewed Paragon's FCC Form 1240 to determine the
reasonableness of the proposed basic service tier rate.
C. That the findings of the C2 Consulting audit, which is attached hereto and
incorporated herein by reference as Exhibit "A", are hereby established as
findings.
D. That based upon the information received from Paragon, the City
concludes that the rate proposed by Paragon for maximum permitted
service is reasonable.
SECTION 2. That the City has an obligation to timely act upon the pending rate
application consistent with current FCC rules and regulations and that Paragon's
submittal of the FCC form 1240 received on or about October 1, 1999, is hereby rejected
for the reason that the proposed rate is not reasonable.
SECTION 3. That the City hereby further ordains:
A. That Paragon's request for maximum permitted basic service rate of $9.82
included in its Form 1240 filing is hereby denied.
B. That based on the information received from Paragon and
recommendations from C2 Consulting Services, Inc., which is attached
hereto and incorporated herein by reference as Exhibit "A", the maximum
permitted rate for the basic service tier established at $9.71 effective July
1, 2000.
SECTION 4. All provisions of the ordinances of the City of Coppell in conflict
with the provisions of this ordinance be, and the same are hereby, repealed, and all other
provisions of the ordinances of the City of Coppell not in conflict with the provisions of
this ordinance shall remain in full force and effect.
SECTION 5. Should any sentence, paragraph, subdivision, clause, phrase or
section of this ordinance be adjudged or held to be unconstitutional, illegal or invalid, the
same shall not affect the validity of this ordinance as a whole, or any part or provision
thereof other than the part so decided to be invalid, illegal or unconstitutional, and shall
not effect the validity of the Code of Ordinances of the City of Coppell, Texas.
SECTION 6. That this ordinance shall take effect immediately from and after its
passage and publication, as the law and charter in such cases provide.
DULY PASSED by the City Council of the City of Coppell, Texas, this 7~ day
of~, 2000.
'CXNrD'~ SHEEHAN, MAYOR
ATTEST:
~LIIJBY BA~E,~I~Y'SECt~ARY
APPROVED FORM:
(REH/cdb 06/22/00)
;ULTING SERVICES, INC.
7801 Pencross (972) 726-7216
Dallas, Texas 75248 (972) 726-021 2 (fax)
I
January 28, 2000
Mr. Rick Moore
City of Coppell
PO Box 478
Coppell, Texas 76019
Dear Mr. Moore:
C2 Consulling Services, Inc. C'C2") has completed its review of the FCC Form 1240 and the
FCC Form 1235 submitted to the City of Coppell, Texas (the "City") by Paragon Cable
("Paragon" or the "Company") on or about September 30, 1999. Paragon is proposing to
combine the results of these two filings to justify its proposed basic service rates. The following
report provides a brief discussion of the issues noted during the review and C2's
recommendations regarding potential City Council actions in response to Paragon's proposed
basic service rates.
This study does not constitute an examination of the financial condition of Paragon or its parent
company. Therefore, C2 cannot and does not express any position with regard to the accuracy or
validity of the financial information provided by Paragon during the course of the analyses.
OVERVIEW OF THE FILING
According to the information provided by Paragon, the basic service tier includes twenty-two (22)
channels. Prior to the January 3ra implementation of the filed rate, ~ Paragon was charging $9.42
for basic service programming based on its Form 1240 computation for the 1999 rate year.
However, this year, the Company has filed a FCC Form 1235 in an effort to collect costs related
to the cable system upgrade. Pursuant to FCC regulation, the restfits of a Form 1235 computation
can be added to the Form 1240 computation to develop the total basic service charge. Based on
Paragon's proposed Form 1240 filing of $9.82 and proposed Form 1235 filing of $1.45, the
Company has increased the basic service rate by $1.49 to a proposed rate of $10.91.2 The rate
year is January 1, 2000 through December 31, 2000.
There are three major factors that explain Paragon' s proposed increase in the basic service rate:
t Based on paragraph 92 of the Thirteenth Order on Reconsideration, FCC 95-397, released September 22,
1995, a cable operator may implement a proposed rate ninety (90) days after it has filed for the rate change
with the franchising authority. However, the fi'anchising authority has one year from the date oFthe filing
in which to render a final decision. Such decision is retroactive to the beginning date on which the
proposed rate was charged. Because the Form 1235 rate is added as a component to the benchmarkForm
1240 rate, the City has the same period ofreview for the Form 1235 as it does the Form 1240. For either
form, a decision is retroactive to the date of rate implementation.
2 The maximum permitted rate as proposed would be the combination of the $9.82 and the $1.45 for a total
basic service rate orS11.27. However, the $10.91 is Paragon's operator selected rate for the rate year.
NIx. Rick Moore
January, 28, 2000
Page 2
1. Paragon proposes to use a higher inflation factor in its current Form 1240 true-up
period than what was estimated in the projected period for the priorI998 filing;
2. Paragon proposes an additional projected year of inflation in itscurrent Form 1240
that will be trued-up next year pursuant to FCC regulations; and
3. As stated above, Paragon proposes to add an additional $1.45 based on its FCC Form
1235 computation.
ANALYSES OF THE FILINGS
Project Objectives and Activities
The project objectives are three-fold:
1. Assessment of the completeness of the filings with regard to the information and
documentation that must be filed with the City.
2. Assessment of the reasonableness of the proposed computations in light of FCC
regulations, and FCC rulings.
3. Assessment of the reasonableness of the proposed computations in light of the
Company' s election to opt out of certain provisions in the Social Contract?
Given these objectives, C2 conducted the following project activities:
1. Review of the filings to assess the completeness based on the FCC Form instructions.
2. Review of the filings to identify any issues with respect to the data and/or
methodologies employed by Paragon.
3. Submission of follow-up data requests and subsequent review of Paragon's
responses.
4. Review of FCC decisions that clearly have an impact on Paragon's proposed
methedologies.
5. Development of potential alternatives available to the City in establishing maximum
permined basic service rates.
3 Social Contract for TimeWarner Cable ("Social Contract"), as approved by the FCC in Social Contract
for Time Warher, Memoranchtm Opinion cmd Order, FCC 95-478, releasedNovember 30, 1995 ("Social
Contract Order").
Mr. Rick Moore
January 28, 2000
Page 3
Summary of Findings
Form 1240:
C2 identified two main issues with respect to Paragon's proposed Form 1240 computation. These
issues are:
1. Paragon inappropriately included estimated costs in its true-up period computations.
2. In conjunction with correcting the true-up period, the inflation factors to be applied
during both the true-up period and the projected period need to reflect the most recent
information available.
Form 1235:
The overriding issue related to the Form 1235:
1. Paragon's proposal to recover the upgrade costs that were the primary basis for CPST
increases under application of Social Contract provisions in the last four years should
not be considered now in the development of rate year 2000 basic service rates.4
Discussion - Form 1240
1. Use of Actual Costs Only For True-Up Period
The Form 1240 methodology in~rporates a series of calculations that involve an accounting of
the actual costs previously projected for the prior rate year and an allowance for projecting
certain cost increases/decreases for the upcoming rate year. In each annual Form 1240 filing the
projections from the prior computation are to be "trued-up" to actual costs, and any over/under-
collections are taken into account in the development of the new rates.
In the Thirteenth Onter on Reconsideration. the FCC noted:
Because the true-up will examine what costs were actually incurred, it can only examine
costs as of the date the Form 1240 is filed. As a result, and because the Form 1240 must
be filed at least 90 days before the proposed increase is scheduled to take effect... and
the projections are made for the year beginning with the proposed implementation date,
the period applicable for the true up will not exactly coincide with the previous year's
projections. For example, if an operator files annually on October I for rates to take
effect on January 1, the true-up will cover the period from the previous October through
September, but the projections will apply to the period January to December. s
Paragon's filing was submitted on September 30, 1999, for a rate year beginning January 1, 2000
(like the example above). However, Paragon's proposed true-up period is from January 1, 1999,
through December 31, 1999, even though the information available to Paragon at the time of the
filing was only through September 30, 1999. Therefore, the last three months of the true-up
See Social Contract at III.F.4.
See paragraph 79, footnote 151, FCC 95-397, released September 22, 1995.
Mr. Rick Moore
January. 28, 2000
Page 4
period as calculated by Paragon is based on estimated data and not on the actual dam that
must be used.
The FCC has issued a number of decisions concerning this issue, many of which have been
related to filings submitted by Paragon in other jurisdictions. For example:
Upon review of the Operator's FCC Form 1240.. . we fmd that Operator has not
correctly calculated its MPR. In particular, Operator made true-up adjusmaents through
to the effective date of the rate increase. This is incorrect... The true-up dam is intended
to indicate real, not projected data. This policy is reflected in insreactions accompanying
FCC Form 1240.6
In C2's opinion and based on these FCC decisions, Paragon should not be authorized to include
October 1999 through December 1999 in its Form 1240 true-up period. The true-up period
should be only for the nine months ended September 1999.7 Actual data for the October through
December 1999 period should be trued-up in Paragon's next rate filing.
The impact of allowing only a nine month true-up period is to reduce the rate year 2000 Form
1240 proposed basic service calculation by approximately $.02.
2. Adjustment to Inflation Rates
The Form 1240 methodology allows for an inflation adjustment to be projected for each rate year.
Such projection becomes part of the true-up computation in the next rate filing. Based on FCC
regulations, a cable operator is to use the most recent information published by the FCC
concerning quarterly inflation factors to be applied.s At the time of Paragon'scurrent Form 1240
filing the latest published inflation factor for any of the true-up period in question was for the
first quarter of 1999. Paragon used this factor of 1.60% not only to true-up the entire true-up
period, but also to project for the twelve months ended December 2000.
On October 4, 1999, which is shortly after Paragon filed its current Form 1240, the FCC
published the second quarter inflation factor at 1.35%. In December 1999, the FCC published the
third quarter inflation factor at 1.04%.
Typically, if the inflation factor used is the only issue found in a franchising authority's review of
a Form 1240 filing, the FCC has found in favor of the cable operator using what was the most
recent data available at the time the filing was made. This policy was detailed by the FCC in the_
Third Order on Reconsideration as follows:
We share National Cable Television Association's concern that rates adopted in an effort
to comply with our rules as quickly as possible may become unreasonable solely as a
6 See Order, DA 97-1852, released August 29, 1997, paragraph 9 (Paragon Cable operations in Portland,
Oregon); Order, DA 97-1936, released September 9, 1997, paragraph 9 (Paragon Cable operations in
Multnomah County); and Order, DA 97-1936, released September 9, 1997, paragraph 9 (Paragon Cable
operations in Gresham et. al.).
7 Typically, a true-up period would be for twelve months. In this case, Paragon already trued-up October
1998 through December 1998, albeit inappropriately, in its prior rate filing.
g FCC Form 1240 Instructions, Part I: Module C [Revised July 1996].
Mr. Rick Moore
January 28, 2000
Page 5
result of using later data to refresh the calculations. Operators should not be penalized
for making good faith attempts to comply with our rules in a timely manner.
When current rates are accurately justified by analysis using the old data (and that data
was accurate at the time), cable operators will not be required to change their rates.. .
When current rates are not justified by analysis using the old data (so that a rate
adjustment would be necessary, in any event), cable operators will be required to correct
their rates pursuant to current data. In these circumstances, the resulting rates must be
based on current data? [emphasis added]
Clearly, if the franchising authority finds adjustments need to be made other than those
attributable to the inflation factors, the FCC has found that the inflation factors can be adjusted
with data that became available subsequent to the date of the filing. The FCC's position on this
issue is evidenced in the above cited Portland Order (DA 97-1852). In that decision, the FCC
found error with Paragon's use of estimated data in its true-up computation for CPST rates and
also made an adjustment to reflect current inflation factor data:
This adjustment required that we refresh Operator's inflation factors ~0
Therefore, because Paragon's rate year 2000 Form 1240 true-up period should be reduced from
twelve months to nine months to reflect actual data, the inflation factors for both the true-up
period and the projected period need to be adjusted to include those published inflation factors
through the most current data available (third quarter 1999). The impact of making such
adjustment is to reduce the current Form 1240 proposed basic service rate calculation by
approximately $.09.
Discussion - Form 1235
The FCC developed the Form 1235 in order to allow cable operators an opportunity to justify rate
increases for recovery of investment in cable system upgrades. It was intended to provide an
abbreviated means of filing a "cost-of-service" showing, but only with respect to costs of upgrade
and not general operations of the system. For general operations, a cable operator could continue
to use the "benchmark" approach to developing rates reflected in the Form 1240. However, the
results of a Form 1235 analysis could be added to the development of rates under the benchmark
method for a total tier rate.
In C2's opinion, the Form 1235 should not be available to Paragon under the Social Contract.
The major components of the Social Contract that apply include:
1. CPST rates can be increased by $1.00 in each rate year over a five year period to
fund an investment of $4 billion dollars to upgrade all Time Warner's systems
(Social Contract, Section Ill. F.4.)
2. Basic service rates only shall be increased for changes in extemal programming costs
and inflation (Social Contract, Section III.A.2.)
In the Form 1235, Paragon proposes to recover its investment in the City's upgrade even though
it akeady has collected from subscribers during the period 1996 through 1999 based on the
~ See Third Order on Reconsideration, FCC 9440, released March 30, 1994, paragraphs 93 and 94.
~0 See Order, DA 97-1852, released August 29, 1997, paragraph 10.
Mr. Rick Moore
January 28, 2000
Page 6
provision of the Social Contract as outlined in ~ 1 above. However, Paragon clearly already has
been compensated for this upgrade. By proposing now to spread the recovery between basic
service and CPST rate tiers, Paragon's proposal, in C2's opinion, is not only a "double dip" into
the pockets of subscribers, but also is in direct violation of the Social Contract to which Time
Warner a~eed. The intent of the Social Contract is unequivocally stated in the following:
At the core of the Social Contract is the upgrade incentive plan whereby Time Wamer
will rebuild and upgrade all of its domestic cable systems and in turn will be allowed to
recover the costs of the upgrade over time by adding a charge to the highest penetrated
CPST during the years of the Social Contract. ~
Clearly, the $1.00 per year increase to the CPST tier was intended to cover all the upgrade costs
to both the basic service and other regulated tiers.': The Social Contract provided that Time
Warner would not seek to pass any capital costs, in addition to the already received $1 .00annual
increase to subscribers. ~3 Paragon should be prohibited from recovering costs already recovered
and from proposing to place some of that burden on the basic service subscriber.
Paragon takes a different position arguing that it is no longer bound by the provisions of the
Social Contract as it opted out pursuant to Section III.I.l.c:
In the event of any changes to the Act or any material changes to the FCC rules
hereunder relating to rates (BST, CPST or equipment) that are favorable to TWC, any
TWC system may elect to be relieved from the relevant rate provisions (Sections III. A.2.,
[II.A.3., III.B, III.D., III.F.4., and III.G.) of this Contract accordingly, but shall remain
bound by all other pro~sions of this Contract.~4
The Company further states that, as a result of exercising this option, it is no longer subject to the
10% reduction to the basic service rate, the prohibition against adding satellite channels to the
basic service rate, FCC regulation of equipment rates, and the prohibition against filing cost-of-
service showings for the basic service tier.
In an August 1999 letter to the City. Paragon indicates that the event to which it attributes its
decision to opt out of theSocial Contract rate provisions was the passage of the
Telecommunications Act of 1996 and the total deregulation of the CPST tier of service. It
appears that Paragon desires the freedom to increase its CPST rate beyond the limits provided for
in the Social Contract. Indeed, it is interesting to note that the provisions of the
Telecommunications Act related to the 1999 aleregulation of the CPST tier have been known
since 1996, but Paragon continued to collect the $1.00 per year increase on CPST until such time
that this tier no longer was regulated by the FCC.
In C2 's opinion,under the Social Contract there are only two circumstances under which Paragon
should be able to charge additional amounts for upgrade costs outside of what it has already
collected:
~ SeeSocial Contract Order, FCC 95-478, paragraph 19.
~2 SeeSocial Contract Order, FCC 95-478, paragraph 25-26.
~3 Subject to the provisions discussed below concerning ffanchising authorities' requirements for upgrades
that exceed the requirements of the Social Contract.
~4 Paragon's response to Third Request for Information for the City of Grapevine, question 2, dated January
4, 2000.
NIx. Rick Moore
January. 28, 2000
Page 7
l. In the event that the City had negotiated an upgrade that exceeded the scope of the
upgrade in the Social Contract (Section III. F.2.);and/or
2. Implementation of the favorable regulatory treatment on which the Company based
its decision provides for a incremental increase in the amounts already recovered
under the Social Contract (Section IIl. I.l.c.).
Based on C2's understanding the City did not request any additional upgrade requirements. With
respect to an allowance for the incremental increase in amounts to be recovered from the
favorable regulatory provisions (i.e. the deregulation of CPST under the Telecommunications
Act), Paragon has every right to increase the CPST more than the $1.00 that would have been
added in 2000 under the final year of the Social Contract.
In C2 's opinion, Paragon has no basis to now seek total recovery of its upgrade costs pursuant to
the Form 1235 methodology. The Telecommunications Act did not establish this methodology,
nor did it provide for any new upgrade increment not already available to cable operators. It
merely provided for the deregulation of the CPST tier rates, through which Paragon could
justifiably recover the incremental amount that results under such favorable
regulatory provisions on this tier of service.
SUMMARY OF RECOMMENDATIONS
Based on the above fmdings, C2 recommends the following adjustments be considered by the
City in determining the maximum permitted monthly basic service rate:
1. The Tree-up Periods should only reflect the nine months ended September 30, 1999.
2. The inflation factors should be adjusted to reflect the published factors for the fast
through the third quarters of 1999.
3. The City should consider ordering a maximum permitted rate for the Form 1240
°x computation of $9.71 rather than the $9.82 proposed by Paragon.
4. The City should consider completely disallowing Paragon's proposed Form 1235
basic service rate increase of $1.45.
5. The City should order Paragon to issue re~mds to subscribers within ninety (90) days
of a rate order based on the difference between the ordered rote and the January 3,
2000, implemented rate. Interest on the refund amount should accrue to the time the
refund is issued.
C2 greatly appreciates having this oppommity to work with the City of Coppell. If you have any
questions regarding this report, the project activities, or any of the recommendations, please
contact Ms. Conhie Cannady at (972) 726-72 16.
Very truly yours,
C2 Consulting Services, Inc.
PARAGON
C A B L E
May 11, 2000
Mr. Rick Moore
City of Coppell
255 Parkway Blvd
Coppell, Texas 75019
RE: Rates for Basic Cable and Equipment Rates
Dear Mr. Moore:
This letter is to officially notify you that Paragon Cable is implementing rates for Basic Service
and for Addressable and Non-Addressable Converter Rental recommended by C2 Consulting,
effective no later than July 1, 2000. Refunds for overpayment plus interest, where applicable,
will be accomplished via one-time credits to affected customers' accounts.
Customers who will experience an effective rate change resulting in a refund will be notified
directly on their billing statements at the time the refund and rate change is reflected on the
statement. Customers who will not experience an effective rate change or refund will be notified
via legal advertising in local newspapers. Digital package customers, whose services and
equipment rates already are discounted, are not affected.
If we can provide additional information, please call me at 972-501-7144, or Dennis Moore at
972-501-7001. Thank you.
Sincerely,
Vice President of Government and Public Affairs
Time Warner Cable, Southwest Division
CC: Dennis Moore, General Manager
295] Kinwest Parkway, Irving, Texas 75063-3498
972/501-7000 Fax 972/501-7070
A Time Warnet Company