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HomeMy WebLinkAbout2002-03-25 City Council (2)City of Palo Alto City Manager’s Report TO: FROM: HONORABLE CITY COUNCIL CITY MANAGER DEPARTMENT: 5 ADMINISTRATIVE SERVICES DATE: SUBJECT: MARCH 25, 2002 CMR:183:02 CONFIRMATION OF STAFF STRATEGY REGARDING AT&T/COMCAST TRANSFER OF OWNERSHIP PROCESS AND CABLE RATE REGULATION RECOMMENDATION Staff recommends that Council review and AT&T/Comcast transfer of ownership process. approve staff’s approach to the BACKGROUND In 1983, a Joint Powers Agreement (JPA) was entered into by Palo Alto, ’ Menlo Park, East Palo Alto, Atherton, and portions of San Mateo and Santa Clara counties for the purpose of obtaining cable television services for residents, businesses, and institutions within these jurisdictions. The JPA gives Palo Alto the sole authority to grant and administer a cable television franchise on behalf of the member communities. In 1986, a cable television franchise agreement was executed with Cable Co-op. In 2000, the City Council approved a transfer of the cable system from Cable Co-op to AT&T and a new franchise agreement with AT&T. On December 19, 2001, the Board of Directors of AT&T and Comcast Corporation agreed to a merger of the two companies. As a result of the merger, the City’s Franchise Agreement will need to be transferred from AT&T to the new company, to be named AT&T Comcast Corporation. DISCUSSION Transfer Process The City received the official franchise transfer request from AT&T and Comcast Corporation on February 27, 2002. This was accomplished through the submission of a transfer application on Federal Communications Commission (FCC) Form 394, along with supporting documentation. Under FCC rules, the City has 30 days to notify AT&T concerning any questions related to the transfer application and supporting documentation, including questions regarding the accuracy and completeness of the CMR: 183:02 Page 1 of 5 information provided. After the City determines that the transfer application is complete, it has 120 days .to approve or deny the transfer request. Under federal law, if no action has been taken, and no extension granted, the transfer request is deemed approved 120 days after receipt. Staff is currently in the process of reviewing the request to determine if it includes sufficient ’detail to enable the City to review and evaluate the transfer. Staff plans to bring forward a recommendation to the Council regarding the transfer within 120 days of receipt of a completed transfer application. A public hearing will be held at that time in order to give the community and other JPA agencies an opportunity to provide feedback to the Council regarding the transfer. Staff plans to utilize the JPA Working Group to update the JPA member communities on the progress Of the transfer, and will notice the public hearing in all of the JPA communities. When staff returns to Council with a recommendation regarding the transfer request, it will follow one of the three approaches discussed below: Unconditional Approval of the Transfer: With this approach, staff would recommend approval of the transfer, as presented, without any conditions and AT&T Comcast would assume all of the terms, conditions, and responsibilities of the current franchise agreement. This approach would be selected if the City believes that, with the transfer, the community will receive the same quality and type of services provided by AT&T. This approach is viable if the City has no concerns regarding the transfer. Approve the. Transfer with Conditions: Another approach would be to recommend approval of the transfer with conditions. In this case, AT&T Comcast would assume all of the terms, conditions, and responsibilities of the current franchise agreement, in addition to other conditions. These conditions could include requiring AT&T Comcast to accept responsibility for any past non-compliance, both known and unknown. The City is currently examining potential non-compliance issues including, but not limited to, possible issues with the cable system rebuild deadline, payment of outstanding invoices, and possible customer service standard violation issues. The advantage of this approach to the transfer is that it allows the City to address its concerns related to compliance with franchise agreement obligations. The disadvantage is that, depending on the conditions imposed by the City, AT&T Comcast could refuse to accept them. Denial of the transfer request: The final option would be to recommend rejection of the transfer request. A transfer can only be denied under certain circumstances. Applicable law provides a basis for denial of transfer requests. A franchising authority may deny a transfer request based upon a buyer’s unique financial, legal, technical, and character qualifications, and its .ability to provide the required cable services. A transfer may also be denied if the proposed transfer would eliminate or reduce competition in the delivery of cable service, if the buyer refuses to accept the terms of the existing franchise CMR: 183:02 Page 2 of 5 agreement, and/or if the buyer refused to cure any past contract non-compliance issues by the seller. These three options represent different approaches to the transfer process. The approach that will be selected will hinge on the specifics of the transfer request and ensuing discussions with AT&T and Comcast. Rate Regulation The transfer process provides the City with a unique opportunity to consider the issue of cable rate regulation, an undertaking that has been recommended by members of the ¯ community. The 1992 Cable Act gave local franchise authorities the ability to regulate basic tier cable service and equipment rates, in those areas where effective competition was absent. For regulatory purposes, the basic tier includes all local television broadcast channels; public, educational, and government (PEG) access channels; and other video programming a cable operator chooses to place on the basic tier. The FCC regulated rates on all other levels of service until 1999, when all rates except for basic service rates were deregulated. In order to regulate basic service rates, the City must obtain FCC certification. This requires a written filing with the FCC indicating that the City: 1) has the legal authority and personnel necessary to regulate rates; 2) will adopt rules consistent with. FCC rules governing the basic service tier; and 3) will adopt procedural rules providing for notice and comment in rate regulation proceedings. Once the City submits the required FCC filing, approval is typically granted within 30 days. There is, however, a possibility that AT&T could oppose the City’s certification on the basis that it is subject to effective competition. After the City becomes certified to regulate rates, the first step in the process would be to establish benchmark rates, derived from basic cable rates in competitive environments. AT&T would then be required to file the appropriate forms with the City justifying all proposed basic rate increases compared to the benchmark rates. Since this process and the associated FCC rules are complex, the City would need to obtain subject matter expertise. It is estimated that these contractual services would cost the City approximately $25,000 in the first year (to establish the benchmark rate .and analyze rate changes) and $10,000 on an annual basis thereafter. It would also be necessary to dedicate staff resources to this effort. In addition to the cost, there are a number of important issues to consider before the City undertakes rate regulation. 1)In March 2002, AT&T introduced a new basic tier at a cost of $12.20 and an expanded basic tier at a cost of $27.27. Although the City can regulate the basic tier of service, the expanded basic tier would be immune from rate regulation. As CMR: 183:02 Page 3 of 5 a result, AT&T would be free to offset any reductions in basic rates or equipment resulting from regulation with higher expanded basic rates. Thus, the benefit, if any, of rate regulation would only be realized by those subscribers who subscribe to the basic tier, and not to the expanded basic tier. Typically, that number only represents 5 percent of the subscriber base. 2) 3) It is general knowledge that the FCC rules are generous to cable operators. The FCC formula permits rate increases equal to the Consumer Price Index (CPI) plus a host of other costs over and above CPI. Throughout the period 1994-2000, when both basic and expanded basic were subject to regulation, cable rates rose at a rate far in excess of CPI. Those rate increases were repeatedly found by the FCC to be perfectly consistent with the FCC rate regulation formulas. FCC rules allow AT&T to averageits equipment rates across franchise areas. Thus, AT&T can calculate equipment rates based on its average costs across an area far larger than Palo Alto. The current AT&T rate for converters of $1.85 per month is the same across its systems in the Bay Area. Since this rate is regulated by other, cities in the Bay Area, it has already been determined that it is below the FCC maximum amount. Because of the issues surrounding cable rate regulation, most local franchising authorities no longer participate. Those that have participated have found that the process for regulating rates ig tedious and difficult and there is little assurance the rate reviews will result in rate reductions. From everything staff has learned, the cable rate regulation process gives subscribers a false hope of rate protection. Therefore, in the past, staff has not recommended that the Council pursue cable rate regulation. Unless Council directs otherwise, staff does not intend to pursue rate regulation at this time. RESOURCE IMPACT The City’s franchise fee revenues totaled $375,640 in calendar year 2001. As part of the review of the transfer request, the City will evaluate any impacts on this revenue source. The City has contracted with a law firm for legal support during the transfer. Also, staff support is being provided by the Administrative Service Department and the City Attorney’s Office. The total cost of the franchise transfer proceedings will be shared among the members of the JPA. POLICY IMPLICATIONS During the transfer process the City will require that AT&T Comcast assume all of the terms, conditions, and responsibilities of the current franchise agreement, including all the requirements related to the rebuild the cable system and the provisions related to public, educational, and government access and programming. As such, it is expected that the transfer will not represent a. change to existing Council policy or practice. CMR: 183:02 Page 4 of 5 ENVIRONMENTAL REVIEW This is not a project under the California Environmental Quality Act. PREPARED BY: DAVID RAMBERG IT Manager, Extemal Services DEPARTMENTAL HEAD APPROVAL: ~~,, " k~ /~..--~, EMILY HARRISON Assistant City Manager cc:JPA Members ClvlR: 183:02 Page 5 of 5