Purpose of Request

This memorandum recommends that the City Council, by resolution, issue a rate order directing Charter Communications to refund or credit to its cable television subscribers an amount equal to the rate increase for basic cable service charged in March, April and May 2003.  The recommended action is based on the fact that the rate increase was implemented three months before Charter could do so legally under FCC regulations.

Background

The City of Burbank is certified under regulations of the Federal Communications Commission (�FCC�) as a local franchising authority with power to regulate certain cable television subscriber rates and related fees charged by the local cable television service provider, Charter Communications (�Charter�).  The City�s regulatory authority is limited to determining whether rates for the �basic service tier� (�BST� or �basic service�) and associated equipment and installation charges are reasonable.  Charter bears the burden of demonstrating that its rates are reasonable.

FCC regulations establish a process in which a cable provider must submit information on prescribed forms at least 90 days before implementing a rate increase.  FCC Form 1240 is used to adjust rates for basic service. Form 1205 is used to modify charges for equipment and installation services.  (Charges for equipment and installation services are not involved in this proceeding.  Hence, there is no need to further mention or discuss Form 1205.)   

�Reasonableness� of rates for basic service is determined by a combination of factors, including the cost incurred by a cable operator to obtain service, costs imposed by franchise requirements and a reasonable rate of return.  Information on the form is used to determine a �maximum permitted rate� (or �MPR�) � essentially the maximum rate the cable operator can justify on the basis of its incurred costs and a reasonable rate of return.  Form 1240 also requires the cable operator to indicate an �operator selected rate� (or �OSR�), that being the rate the operator intends to charge its customers for basic service. 

FCC regulations permit a cable operator to adjust rates on a quarterly or annual basis.  Charter has elected the annual rate adjustment option.  Historically, Charter (and Marcus Cable before it) has filed its Form 1240 on or about March 1 in contemplation of an effective date of June 1 for a rate increase.  The regulations also provide, in the case of an operator electing the annual rate adjustment method, that rates may only be adjusted annually.

There is a provision in the regulations that allows a cable operator to select a new filing date, but this requires that notice be given to the local franchising authority prior to filing a Form 1240.  The local franchising authority can object to the date selected by the cable operator, and if the parties are unable to agree, the local franchising authority can select a different date up to 60 days later that the date selected by the cable operator.   This prevents the operator from unilaterally selecting a filing date that may be unworkable for the local franchising authority.

Charter�s Form 1240 Filings

Charter filed a Form 1240 on or about March 1, 2001, in which it calculated the MPR as $13.14 and set the OSR at $12.84.   The new OSR took effect June 1 and reflected an increase from the old rate of $12.21.  A year later, on or about March 1, 2002, a Form 1240 was filed with the MPR shown as $13.53, but the OSR was not increased and thus remained at $12.84.  Nine months later, on or about December 1, 2002, Charter submitted another Form 1240 in which the MPR dropped a penny to $13.52 and the OSR was shown as $13.52, an increase of $.68 per month.[1] 

A summary of these filings is as follows:

As mentioned, Charter was required to give the City prior notice before changing the annual March 1 filing date for its Form 1240.  Charter violated this rule when it made the December 2002 filing, which provides the City with grounds for voiding the rate increase on grounds that it is not supported by a properly filed Form 1240.  However, rather than nullify the rate increase in its entirety, a fair resolution is to require that the December 2002 Form 1240 be amended to reflect a filing date of March 1, 2003, and further amended so that the effective date of the rate increase becomes June 1, 2003.   That will require that Charter refund to its subscribers an amount equal to the rate increase for the months of March, April and May. 

The Cities of Burbank and Glendale jointly retained Mr. Dick Treich of Front Range Consulting to advise them in certain matters related to the renewal of Charter�s cable television franchise.  Mr. Treich is a noted expert in the cable field who formerly held executive positions with companies such as AT&T Broadband and TCI Communications.  It was Mr. Treich who brought the issue of Charter�s premature implementation of the rate increase to our attention.  We each requested that he submit a report to us setting forth his findings and recommending a course of action, and a copy of Mr. Treich�s report to Burbank is attached to this memorandum as Exhibit A.  Mr. Treich indicates that the potential cost to Charter of this refund will be approximately $58,000.  This is based upon a total refund or credit of $1.95 to 29,732 subscribers.  The precise amount of the refund cannot be calculated, though, until we know the number of subscribers Charter had for the months of March, April and May, 2003.

Mr. Treich�s report includes proposed revisions to Charter�s December 2002 Form 1240.[2]  The principal revision would change the effective date of the rate increase from March 1, 2002 to June 1, 2002.  Other revisions would implement three additional issues Mr. Treich addresses in his report � correcting Charter�s  Form 1240 to include FCC User fees, use of the most current �inflation factor,� and misstatement of the �true-up� period.  Correction of these defects results in a slight increase in Charter�s MPR, but has no immediate monetary consequence in Burbank.   Nevertheless, they should be ordered as they will impact the �true-up� process in the future.

FCC regulations give Charter sole discretion to decide whether to issue a refund to those subscribers who paid the rate increase or credit current subscribers in the same rate-paying class on future billings.  The regulations also require that any refund or credit include interest at the rate set by the IRS for tax refunds.

Our office has prepared a proposed resolution that would constitute the council�s rate order, should the council adopt it.  A copy of the resolution is attached hereto as Exhibit B.  The proposed findings and orders are consistent with the above discussion and the report prepared by Front Range Consulting.

Charter�s March 2001, March 2002 and December 2002 Form 1240�s are on file in the office of the City Attorney should the Council or members of the public wish to view them.

Notice to Charter and Charter�s Response

Notice of this proposed action was given to Charter on November 14, 2003, along with a copy of Mr. Treich�s report.  Charter submitted a written response in the form of a letter dated November 18, 2003, from Steven J. Horvitz of Cole, Raywid & Braverman, L.L.P., its outside counsel.  A copy of that letter is attached hereto as Exhibit C.  Mr. Horvitz claims Charter believed the premature filing was agreed to by Michael Freidman of Telecommunications Management Corp. (�TMC�), a consultant utilized by the City to review Charter�s rate filings.  He argues that even if the City has the right to order a refund, Charter would have the right to recapture the lost revenue through a future rate increase with interest at 11.25% (an FCC-prescribed rate).  Finally, Mr. Horvitz criticizes Mr. Treich�s treatment of the FCC User Fees, claiming that requiring Charter to include it on the Form 1240 is a departure from past practice.

In reply to the foregoing, we note the following:

1.         The claim that the City agreed to the early filing of the Form 1240 is contradicted by the transmittal letter by which TMC�s rate review report was sent to Charter.  That letter stated,

�The TMC Report concludes that the Basic Tier rates appear to be consistent with FCC Regulations.  However, the Cities [of Glendale and Burbank] reserve the right to conduct further reviews of said rates and, if appropriate, issue rate orders thereon.�   (Emphasis added.)

A copy of that letter is attached hereto as Exhibit D.  Normally, the purpose of �accepting� a Form 1240 filing merely means the form has been accepted as �facially complete� for purposes of review.  Once accepted, FCC Regulations provide that a local franchising authority has up to one year from the date of filing to issue a rate order.  Hence, Charter cannot claim that the City somehow waived its authority to issue a rate order by �accepting� the Form 1240 when it was filed.   Further, accepting the form as complete does not mean that the City agreed to waive procedural irregularities in the way it was submitted � particularly the attempt to change the filing date unilaterally and without the required prior notice.  Mr. Horvitz makes no attempt in his letter suggest that Charter in fact did follow the rule requiring advanced notice to the City   

2.         The claim that Charter simply can recover the refund with interest at a later time is a little bit misleading.  Under the complex accounting scheme established in the FCC Regulations, even if Charter had not raised rates prematurely it would still be allowed to incorporate an increase for the March-May period (called the �true-up period�) into its next Form 1240 filing, with interest at the FCC-prescribed rate of 11.25%.  Hence, with or without a rate order, Charter�s customers might still have to bear the interest expense of a rate increase for that period.

3.         Lastly, with respect to the FCC User Fees, the FCC Regulations are clear that such fees must be shown �on-form� (to use Mr. Horvitz�s term), and so notwithstanding past practice it is proper to order Charter to follow the law.  Enforcing this requirement ensures that a cable operator does not �overcollect� these fees from its customers, regardless of whether they are embedded in the rate for basic service or charged separately on the monthly cable bill.

For these reasons, we do not believe that Charter has made a persuasive case against issuance of the proposed rate order.

Recommendation

We recommend that the Council order Charter Communications (1) to refund or credit to its subscribers the rate increase for basic cable service charged in the months of March, April and May 2003, and (2) make the modifications to its December 2002 FCC Form 1240 submitted to the City and implement the other corrective actions indicated in the report to the City from Front Range Consulting dated November 14, 2003.

If the Council concurs, the necessary action is a motion to adopt the resolution entitled �A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF BURBANK

FINDING A REGULATED CABLE RATE OF CHARTER COMMUNICATIONS TO BE UNREASONABLE, PRESCRIBING A REASONABLE RATE AND ORDERING REFUNDS TO SUBSCRIBERS�

cc:       Mary J. Alvord, City Manager

            Mike Flad, Assistant City Manager

            Dave Newsham, Interim Assistant City Manager

            Michael McManus, PIO

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