R-9986
City Council Meeting: October 12, 2004
Santa Monica, CA
Resolution No. 9986
(City Council Series)
A RESOLUTION OF THE CITY COUNCIL
OF THE CITY OF SANTA MONICA
ADOPTING A RATE ORDER REGARDING
THE BASIC CABLE SERVICE TIER AND
THE EQUIPMENT AND INSTALLATION RATES FOR
CENTURY-TCI CALIFORNIA, L.P.
dba ADELPHIA COMMUNICATIONS CORPORATION ("ADELPHIA")
WHEREAS, the City of Santa Monica (the "City") was certified to regulate basic
cable service rates and associated charges as of October 7, 1993, and has followed
regulations prescribed by the Federal Communications Commission (the "Commission")
for the regulation of the Basic Service Tier ("BST") and associated equipment,
installation, services and charges (the "Regulations"); and
WHEREAS, the City has adopted regulations with respect to the BST and
associated equipment that are consistent with the Regulations prescribed by the
Commission. Furthermore, the City has adopted procedural laws and regulations
applicable to rate regulation proceedings which provide a reasonable opportunity for
consideration of the views of interested parties; and
WHEREAS, by letter dated June 12,2003, from Kathryn Vernez to Thomas E.
Carlock, the City formally notified Adelphia that its 2002 Rate Filing was subject to
1
further review in light of the extensive allegations of fraud in relation to Adelphia's
financial practices (Exhibit A); and
WHEREAS, by letter dated July 10, 2003 from Thomas E. Carlock, to Kathryn
Vernez, Adelphia declined to recertify its 2002 Rate Filings (Exhibit B); and
WHEREAS, by letter dated November 13, 2003, from Kathryn S. Vernez to
Thomas E. Carlock, the City notified Adelphia that it had "determined that it cannot rely
on rate forms filed prior to 2002 based upon allegations that the 'massive fraud'
allegedly perpetrated by Adelphia and/or its prior officials, significantly preceded its
2002 rate filings and potentially occurred as early as Adelphia's acquisition of the City's
franchise and franchisee. . ." (Exhibit C); and
WHEREAS, on November 6, 2003, Adelphia filed FCC Forms 1240 and 1205
dated November 24,2003 (collectively, the "Initial FCC Forms") with the City for a
proposed rate increase to go into effect March 1, 2004; and
WHEREAS, through Rutan & Tucker, LLP, Special Counsel to the City, the City
retained the services of Communications Support Group, Inc. ("CSG") and Front Range
Consulting, Inc. ("FRC") (collectively, the "Consultants") to review the filed Rate Forms;
and
2
WHEREAS, on January 5, 2004 the City received revised Forms 1240 and 1205
(the "Restated FCC Forms") (the Initial FCC Forms and the Restated FCC Forms shall
hereinafter be referred to as the "FCC Forms") along with a commitment by Adelphia to
not raise Basic Television Service Tier ("BST") rates until at the earliest November
2004; and
WHEREAS, by letter dated May 12, 2004 from Richard D. Treich, CEO, Front
Range Consulting, Inc. to Andrew C. Elson, III, the City, through the Consultants, issued
its first request for information ("RFI No.1") (Exhibit D); and
WHEREAS, by letter dated May 19, 2004 from Andrew C. Elson, III to Richard
Treich, AdeJphia responded to RFI No.1 but failed to provide the bulk of the requested
information (Exhibit E); and
WHEREAS, by letter dated May 25, 2004, from Richard E. Treich to Andrew C.
Elson, III, the City issued its second request for information ("RFI No.2") (RFI NO.1 and
RFI NO.2 shall hereinafter collectively be referred to as the "RFI's") (Exhibit F); and
WHEREAS, by letter dated May 28, 2004, from Andrew C. Elson, III to Richard
E. Treich, Adelphia further responded to the RFI's but failed to provide the bulk of the
requested information (Exhibit G); and
3
WHEREAS, by letter dated June 4,2004, from Andrew C. Elson, III to Richard E.
Treich, Adelphia further responded to the RFI's but continued to fail to provide the bulk
of the requested information; and
WHEREAS, by letter dated June 11,2004 from Andrew C. Elson, III to Richard
E. Treich, Adelphia further responded to the RFI's but continued to fail to provide the
bulk of the requested information; and
WHEREAS, the Consultants produced a written report attached hereto as Exhibit
H (the "Consultant's Report") to the City; and
WHEREAS, the Consultant's Report concluded that the Maximum Permitted
Rates set forth in the FCC Forms should be disapproved and the changes denied as
unreasonable due to the inherent unreliability of the financial information relied upon by
Adelphia in determining the Maximum Permitted Rates ("MPR") for the BST and related
equipment and installation fees. The Consultant's Report recommended that the
current rates remain in effect, without validation, until such time as Adelphia can provide
the necessary supporting documentation and the City has the opportunity to review all
of the revised filings submitted; and
WHEREAS, the City issued a public notice seeking written comments from
interested parties on the FCC Forms. The FCC Forms were made available for pUblic
inspection in order to obtain comment from any interested party; and
4
WHEREAS, a duly noticed public hearing was held on October 12, 2004, (the
"Public Hearing"); and
WHEREAS, the City Staff has made a recommendation to the City Council
("Council") regarding Adelphia's rates based on: (a) information contained in the FCC
Forms; (b) comments, evidence and information from interested parties; (c) the
Consultant's Report; (d) the RFI's; (e) Adelphia's comments on the Consultant's Report
(Exhibit I) and its responses to the RFI's; and (f) publicly available information; and
WHEREAS, Adelphia has the burden of proving by a preponderance of evidence
that its rates for the BST, equipment and installations are reasonable under 47 C.F.R. 9
76.937(a); and
WHEREAS, the City has given proper notice of the Public Hearing pursuant to
Section 76.935 of the Rules and Regulations of the Commission, has provided a
reasonable opportunity for the consideration of the views of interested parties, and has
considered the views of interested parties as expressed at the Public Hearing; and
WHEREAS, the Public Hearing was closed and the City is now legally entitled to
take final action on the FCC Forms; and
5
WHEREAS the Council has considered the City Staff's recommendations and the
reasons therefore; has received and considered comments from the public; has
reviewed and hereby adopts (and by this referenced incorporates herein) as appropriate
and to the extent not inconsistent with this Rate Order, the findings, assumptions and
other information set forth in the Consultant's Report,
NOW THEREFORE, THE CITY COUNCil OF SANTA MONICA DOES HEREBY
RESOLVE AS FOllOWS:
SECTION 1. The City Council finds that Adelphia has not met its burden of
proof in supporting and justifying its proposed Maximum Permitted Rates on the FCC
Forms, and therefore said rates, and each of them, are unreasonable, in light of all the
information provided and not provided by Adelphia, as well as various errors,
exclusions, omissions, lack of documentation, and other problems with Adelphia's
methodology as described in the Consultant's Report.
SECTION 2. The City Council accepts and adopts the descriptions,
methodologies, calculations, conclusions and recommendations in the Consultant's
Report.
SECTION 3. Adelphia to comply with this Rate Order within sixty (60) days from
its issuance.
6
SECTION 4. Adelphia shall not charge any rate for the BST, equipment,
installations, or any other products or services subject to regulation by the City higher
than the rates actually charged on November 23, 2003, nor increase those rates, nor
impose on subscribers any other charge for BST, equipment, installations, or other
regulated rates beyond those rates in effect on November 23, 2003, including but not
limited to, bulk and commercial rates (to the extent such limitation is permitted by
applicable law), unless and until an appropriate form relating to said rates or charge is
first filed with and approved by the City, in accordance with applicable law and
regulations.
SECTION 5. Adelphia shall refund any amounts charged to subscribers for all
services, equipment, installations, and other products which are subject to regulation by
the City that exceeds the rates actually charged on November 23, 2003. Refunds shall
be made in accordance with 47 C.F.R. 9 76.942(d) and shall include interest computed
at applicable rates published by the Internal Revenue Service for tax refunds and
additional tax payments pursuant to 47 C.F.R. 976.942(e).
SECTION 6. Adelphia shall file with the City within thirty (30) days of the date of
this Rate Order materials sufficient to demonstrate its proposed methodology for making
any refunds required herein. Such materials shall include, without limitation, a narrative
explanation in detail of the methods used to calculate all refunds, including how the
refund amount was determined and how interest was calculated on a per-subscriber
basis, both for any refunds previously made and for any refunds required by this Rate
7
Order; the aggregate amounts of any refunds to be made for each affected rate,
including separate itemization of the amounts attributable to interest; and specific
examples (from which any individual identifying information may be redacted) of sample
calculations of all refunds for representative classes of subscribers. If Adelphia claims
that no refunds are due, Adelphia shall provide a complete explanation including sample
calculations as described above. The materials provided shall be sufficient to permit the
City to verify whether Adelphia's refunds comply with the requirements of this Rate
Order and applicable law.
SECTION 7. The City reserves its right to apply any applicable sanctions to
Adelphia for past and future violations.
SECTION 8. The City reserves its rights to require further supporting
information, reductions and refunds for the rates submitted by Adelphia on the FCC
Forms and any Rate Forms previously filed by Adelphia.
SECTION 9. The rates set herein are subject to further reduction and refund to
the extent permitted under applicable law and regulations, as the same may be
amended from time to time.
SECTION 10. Adelphia shall comply with the following requirements in relation
to the FCC Forms, and any FCC Forms filed for any period from 1999 to the present:
8
(A) Adelphia shall refile and recertify each FCC Form 1240 and 1205 filed by
Adelphia covering any period from 1999 to the present with the City after
Adelphia has publicly released audited financial data for the same period
and shall utilize said audited financial data for the purposes of the refiled
and recertified FCC Forms 1240 and 1205;
(B) Each such filing shall include a certification by the Chief Accounting
Officer stating that Adelphia has completed all of the restatements with
regard to any and all accounting irregularities and that no further
investigations are underway or anticipated with respect to the financial
data used in completing the refilings;
(C) Adelphia shall maintain all accounting records necessary to allow refunds
to be calculated for any periods covered by the refiled and recertified
filings;
(D) All regulated rates for BST, equipment, installations, and other regulated
products and services shall be maintained at those levels in effect as of
November 23,2003 until ninety (90) days after the refiled and recertified
forms, and each of them, are filed with the City; and
9
(E) As to each of the refiled and recertified FCC Forms 1240 and 1205 for
each filing period, the City shall be allowed twelve (12) months from the
date of delivery to complete a review of said refiled and recertified forms
and issue an appropriate Rate Order.
SECTION 11. The findings herein are based on the representations of Adelphia.
Should information come to the City's attention that these representations were
inaccurate in any material way, the City reserves the right to take appropriate action.
This Rate Order is not to be construed as a finding that the City has accepted as correct
any specific entry, explanation or argument made by Adelphia not specifically
addressed herein.
SECTION 12. The City reserves all of its rights with respect to rate regulation,
including but not limited to, any right it may have to reopen this rate proceeding based
on new information or rulings by any governing authority, if it appears that such new
information or rulings could alter the reasonable rates prescribed by Regulations, and
any rights to "true up" overcharges or undercharges in connection with future rate filings
pursuant to 47 C.F.R. 976.922(e)(3).
SECTION 13. This Rate Order constitutes a written decision as required by 47
C.F.R. 976.936(a).
10
SECTION 14. This Rate Order shall be effective immediately upon its approval
by the Santa Monica City Council.
SECTION 15. This Rate Order does not approve or prescribe any rate
requested and or charged by Adelphia prior to November 24, 2003. Given the inherent
unreliability of financial information in prior rate filings, the City Council expressly
reserves the right to reopen and/or further review rates which were the subject of prior
rate orders and order refunds, if deemed appropriate, upon the provision of final,
accurate and reliable information relating to prior rate orders by Adelphia.
SECTION 16. This Rate Order shall be released to the public and to Adelphia,
and a public notice shall be published stating that this Rate Order has been issued and
is available for review, pursuant to 47 C.F.R. 976.936(b).
SECTION 17. The Staff Report and the Consultant's Report and the
attachments and documents referenced therein are by this reference incorporated
herein as if fully set forth and shall be on file for viewing in the Office of the City
Manager.
SECTION 18. The recitals stated herein are declared to be true, correct,
accurate and made a formal part of this Rate Order.
11
SECTION 19. The City Clerk shall certify to the adoption of this Resolution,
and Thenceforth and Thereafter the same shall be in full force and effect.
APPROVED AS TO FORM:
12
Adopted and approved this 1 ih day of October, 2004.
I, Maria Stewart, City Clerk of the City of Santa Monica, do hereby certify
that the foregoing Resolution No. 9986 (CCS) was duly adopted at a meeting of
the Santa Monica City Council held on the 1ih day of October, 2004, by the
following vote:
Ayes:
Council members: Mayor Bloom, Mayor Pro Tern McKeown,
Feinstein, Genser, Holbrook, Katz
Noes:
Council members: None
Abstain:
Councilmembeffi: None
Absent:
Council members: O'Connor
ATTEST:
~~~.,~
Maria M. Stewart, ity Clerk
13
II
e ."
~
~
Office of the City Manager
1685 Main Street
PO Box 2200
Santa Monica. California 90407-2200
EXHIBIT A
City of
San..a Monlea"
Jun~ 12, 2003
FAXED AND MAILED
Thomas E. Carlock
Regional Vice President of
Law and Public Policy
Adelphia
6320 Canoga Ave., Suite 1300
Woodland Hills, CA 91367
Dear Mr. Carlock:
The City of Santa Monica is aware of the cable franchise rate order adopted by the Los Angeles
City Council on May 29, 2003, which questions the basis for Adelphia's Los Angeles' rate
increases since 200 I. Weare also aware that questions have been raised concerning the accuracy
of Adelphia's certifications of information contained in its Los Angeles' rate filings. Apparently,
Adelphia's officials have argued that appropriate certification could not be made until Adelphia's
corporate accounting is complete.
e.
As you know, the Santa Monica City Council adopted its own rate order for Adelphia on April
22,2003. The rate order relied upon information contained in Adelphia's rate filings as well as
Adelphia's certification that the information it supplied to the City was complete and accurate. In
adopting the rate order, the Santa Monica City Council reserved its rights to modify its order at
any time if it later determined that information supplied by Adelphia was incorrect in any
material manner. Further, Adelphia was required to submit a plan to the City Manager five days
after adoption of the order for any rate refunds required pursuant to the order. To date Adelphia
has not complied with this requirement.
By this letter the City of Santa Monica serves notice that both the accuracy of Adelphia's rate
filings is subject to further review and a rate refund plan is overdue. In light of the developments
in Los Angeles, the City requests that Adelphia certify that the information provided by Adelphia
is complete and accurate under penalty of peIjury.
Sincerely,
~J~
Asst. to the City Manager-Government Relations
e
KV:ckl
cc:
Susan E. McCarthy, City Manager
Joseph Lawrence, Assistant City Attorney
tel: 310458-8301 . fax: 310 917-6640
EXHIBIT B
-Adelphia
.-. \ ~
I,:; I
-
July 10, 2't9-f ,JUl 14 P:,:3 3
VIA HAND DELIVERY
& FIRST CLASS MAIL
Ms. Kathryn Vemez
Assistant to the City Manager
City of Santa Monica
I 685 Main Street
Santa Monica, CA 90407
Re: Adelphia Cable Communications- Rate Filings
Dear Ms. Vernez:
I am writing in response to your letter, dated June 12,2003. I appreciate the City's concern
regarding the accuracy of Adelphia's earlier rate filings, but respectfully ask that you reconsider
your current request for recertification.
a From a practical, common sense apm-~Tacho recertification seems particularly inappropriate in this
.. case, as there is substantial "headroOfrlolI-Ytt{1e~ the "maximum permitted rates" ("MPR")"
calculated on the official FCC rate fon~Jje '~perator selected rates"("OSR") actually
implemented by Adelphia. As the City's Order acknowledges, the MPR reported for basic
service is $34.19, but Adelphia's rate card rate is just $26.24. It is inconceivable that any
accounting adjustments that might be identified in the recertification process would reduce the
MPR to a level remotely approaching the OSR. Even on the equipment and installation side,
there is substantial headroom. The MPR for converters, for example, is $3.82, and Adelphia's
rate card rate is just $3.25. Again, it is not credible that any accounting adjustments would
imperil the rates actually in place.
You have doubtlessly heard that the City of Los Angeles adopted rate orders that do impose
substantial rate reductions on Adelphia. The truth is those orders are flawed and do not represent
a reasonable approach to the recertification issue. Adelphia is seeking review by the Federal
Communications Commission ("FCC") ofthe City's decision. We remain optimistic that the
FCC will reject the rates adopted by the City of Los Angeles. We do not believe it makes sense
for the City of Santa Monica to embark down a similar path. At a minimum, the City should
wait to see how the FCC handles the Los Angeles adjudication.
Adelphia ultimately will submit new rate filings to establish new rates (and will be certifying to
the accuracy of those filings). We suggest that the best course of action would be for both parties
to focus attention on the accuracy of the new filings, rather than being distracted by a backward
looking exercise that is extremely unlikely to have any actual rate consequence.
tit The City's Order already claims the right to reopen rate matters ifnew information comes to
light. In the extraordinarily unlikely event that new rate filings or other developments lend
credence to the possibility that Adelphia is overcharging local customers, the City presumably
e-
e
"
,
.-..,.
~.
..
I
Ms. Kathryn Vemez
July 10, 2003
_Page Two
could exercise the same right to reopen closed rate matters that it is c1aimins heR. ~"'y
is no compelling justification for taking this step at the current time. "
1 am sure you appreciate that recertifiCation to every franchise-authOiit5,-wOU!CiposelMiiiiiUlr-----.----
burden on Adelphia' s new management. I hope you will agree that, in the case ofs... Moaita,
recertification would impose a cost"on both Adelphia and the City withoutaDyoffsettina pubIit
benefit. If you have any further questions regarding this matter, please do not beaitatetOeaIl.
Very truly yours,
~"~.~
Thomas E. Carlock
-Vice-President-Law-&-P--ubIie-Pelioy---,--":---
Cc: Lee Perron, Adelphia
Maria Arias, Adelphia
Andy Elson, Adelphia
Nigellves, Adelphia
Bernard Hahn, Adelphia
6320 CIllo,. Avenue, Suite 1300
Woodlancl Hills. CA 91367
(']') 1&7-3129 DiNI:t
(1.1) "7-311. FlClimile
.
f) ...
=>
EXHIBIT C
Office of the City Manager
1685 Main Street
PO Box 2200
Santa Monica. California 90407-2200
City of
Santa Monieaw
Direct Dial: (714) 641-3416
November 13, 2003
Thomas E. Carlock
Vice President, Law and Public Policy
Adelphia Cable Communications
6320 Canoga Ave., Suite 1300
Woodland Hills, CA 91367
Re: City of Santa Monica, California (the "City"); FCC Rate Regulation
Dear Mr. Carlock:
t
This letter constitutes a response to your letter to me dated July 10, 2003 and our recent
conversations regarding recertification of Adelphia's rate forms to the City. As you know, the
City has requested that Adelphia recertify its 2002 FCC Forms 1205 and 1240 based upon
revelations regarding potential irregularities and necessary restatements in Adelphia's accounting
practices. By letter dated June 12,2003 to you, I, on behalf of the City, requested that Adelphia
recertify its 2002 Rate Filings in light of these revelations as well as the actions taken by the
Securities and Exchange Commission and the United States Department of Justice against
Adelphia and several of its high-ranking officials. Based upon further review of the charges
leveled against Adelphia ("Adelphia"), as well as several of its high-ranking officials, (see, e.g.,
Securities and Exchange Commission, SEC Charges Adelphia and Regis Family with Massive
Financial Fraud (July 24, 2002) available at htto:/twww.sec.gov/news/press/2002-10.htm;
Christopher Stem, "Looking for a Cable Industry Rebound," Washington Post, July 25,2002 at
E-l, E-6; Associated Press, "Ex-Adelphia Accountant Pleads Guilty To Fraud," (January 13,
2003), available at http://www.smartpros.com/x36671.xml).. the City has now determined that it
cannot rely on rate forms filed prior to 2002 based upon allegations that the "massive fraud"
allegedly perpetrated by Adelphia, and/or its prior officials, significantly preceded its 2002 Rate
Filings and potentially occurred as early as Adelphia's acquisition of the City's Franchise and
Franchisee.
e
Each FCC rate fonn "requires a signed certification statement that the information on the
FCC form is true and correct." (Time Warner Cable: Complaint Regarding Cable Programming
Services Tier Rate Increase, DA 98-714, 13 FCC Rcd. 7336 @7 (1998); see, also, Marcus Cable
Associates: Petition for Reconsideration and Refund Plan, DA 02-1380, 17 FCC Rcd. 11020 @5
(2002)." At this point in time, the City has detennined it necessary that Adelphia recertify, under
penalty of peIjury, that all of the rate fonns filed with the City since Adelphia assumed
tel: 310 458.8301 . fax: 310 917-6640
1241078333-0006
4448$8.01 al 1113103
~
t
e
Thomas E. Carlock
November 13, 2003
Page 2
ownership and/or control of the FranchiseIFranchisee are true and correct, under penalty of
peIjury, to allow the City to continue relying upon any regulatory rate filing in tenns of past,
present, and future regulatory decisions.
Unless Adelphia delivers recertified rate forms to the City for the period commencing
upon Adelphia' s acquisition of the Franchise/Franchisee and/or control thereof, and concluding
with its most recent rate filing within thirty (30) days of this letter, Staff intends to recommend
that the City Council exercise its authority pursuant to Section 7 of the Resolution adopted April
22,2003 conditionally approving Adelphia's current regulated rates and order rate decreases, and
accompanying refunds, back to the time that the last reliable and accurate rate fonus were filed
with the City. Adelphia can prevent such a result by simply recertifying prior filed rate fonus,
under penalty of peljury, as to their truthfulness and accuracy so that they can be relied upon by
the City in its regulatory decisions.
If you have any questions, do not hesitate to contact me.
Sincerely,
~QF SANTA MO~ICA
~~~-
J Kathryn S. Vernez
Assistant to the City Manager - Government
Relations
WMM:vb
cc: Susan E. McCarthy, City Manager
Joseph Lawrence, Esq., Assistant City Attorney
William M. Marticorena, Esq., Rutan & Tucker, LLP
I 241078333..()()06
+M858.01.11113103
-
e
e
'"
-<:
EXHIBIT D
.
,
'.1.
Front Range Consulting, Inc.
4152 Bell Mountain Drive
Castle Rock, CO 80 I 04
May 12, 2004
I'
Via email C .__,~U~_!:-__-__ :~ ...,..,..'), Fax (303-268-6483) and US Mail
Mr. Andrew C. Elson, III
Vice ~ident
kegulatory Compliance
Adelphia Communications Corporation
5619 DTC Parkway
Greenwood Village,. CO 80 III
Re: Initi81 Request for Information Retarding Rate Filings In Fullerton and Santa Monjea CA
Dear Mr. Elson:
Front Range Consulting, Inc. (FRC) and Communications Support Group, Inc. (CSG) (collectively
"Consultant") have been retained by the cities of Fullerton and Santa Monica. CA (collectively "Cities") to
review the rate filings made by Adelphia Communications Corporation ("Adelphia"). In order for the
Consultant to prepare a detailed analysis of the rate filings submitted to the Cities, the Consultant needs
additional infonoation supporting these filings.
The infonnation requested is:
I. Please provide copies of final, restated, and audited official financial statements (SEC Fonn Io-K)
for the years 1999 through 2003 and the quarterly report (SEC Form IO-Q) for the fllSt quarter of
2004. These responsive statements must be copies of the signed original filings made with the
SEC.
2. To the extent final audited official financial statements requested in number 1 do not exist, please
provide the basis of your statement in your letter to Mr. Chris Meyer dated February 19.2004
where you state: "The information utilized to complete the filings is based upon the Company's
restated books and records." Please provide the "restated books and records" used in preparing the
filings as referenced in the February 19, 2004 letter.
As this initial request is very limited and is requesting information that should be readily available. please
deliver the information to the parties listed on Attachment A within 7 calendar days from the date of this
letter.
Pronl Range Consvl1ina. Inc. .
e
Mr. Andrew C. Elson, III
May 12, 2004
Page 2
Jfyou have any questions regarding this request, please call me at 303-814-0350.
Sincerely,
A;p
Richard D. Treich
CEO
Front Range Consulting. Inc.
ce. Ms. Jennifer Phillips -- City of Fullerton
Ms. Kate Vemez - City of Santa Monica
William M Marticorena, Esq. - Rutan & Tucker
Mr. John Risk - CSG
e
e
....
Front Range Consulling. l~.
-
Mr. Andrew C. Elson, III
May 12. 2004
Page 3
Please deliver the responses to the Requests for Information to:
Attachment A
Ms. Jennifer Phillips
City of Fullerton
303 West Commonwealth Ave.
Fullerton, CA 92632
Ms. Kate Vemez
City of Santa Monica
1685 Main St., Room 310
Santa Mon ica, CA 9040 I
William M Marticorena, Esq.
Rutan & Tucker
Fourteenth Floor
611 Anton Blvd.
Costa Mesa, CA 92626
e
Mr. John Risk
President
Communications Support Group, Inc.
505 Scenic Ave.
Piedmont. CA 94611
Mr. Richard D. Treich
CEO
Front Range Consulting, Inc.
4152 l3eJl Mountain Drive
Castle Rock, CO 80 I 04
e
~
.
... .
I
~
EXHIBIT E
-Adelphia
'04 11/:'( 24
;' --' :(jEl
Via EmaD aDd FacsimBe
May 19,2004
Mr. Richard Treich
Front Range Consulting, Inc.
4152 Bell Mountain Drive
Castle Rock. CO 80104
Dear Mr. Treich:
This letter is in response to your request for information regarding the February 19,2004
rate filings submitted for Fullerton and Santa Monica CA ("Cities").
1. The SEe Form IO-K and 10-Q for years 1999 through 2003 is not currently
available. The Company is currently preparing these filings for SEC review and
approval. Please note that the Fullerton franchise area was acquired on January
1, 2001 and the Santa Monica franchise was acquired on October 1, 1999.
Therefore, certain financial information will be limited to the period of Adelphia's
ownership.
2. Where accounting information was required to complete portions of the filings,
primarily in the case of the Form 1205, such information was based upon the
internally restated general ledger acCOWlts and subsidiary accounts. The additional
support attached to the rate filing for each community includes reports taken
directly from the intema11y restated books and records. However, since the filings
also require information from source documents that have no relationship to the
restated books and records (i.e. copyright fee filings, channel line-ups, inflation
rates, etc.), we are unable to determine the additional types of information
necessary to further your review.
,.
-~..
"
,
I
Mr. Richard Treich
May 19,2004
Page 2
Additionally, some of the information that may be requested could be . deemed
confidential. In order to provide confidential information, the reviewing parties
will need to sign a Non-Disclosure agreement Without knowing the specific type
of information needed we are unable to determine whethtl' such an agreement is .
currently necessary.
For these reasons, please specify the type of information needed to. facilitate YOlD.' .
review.
The Company wderstands the importance of the Cities right to review and app.rove the
information and support used to prepare the filings. Please do not hesitate to contact me
regarding the review process and any associated information that you need to faciiitate
this process. I can be reached at (303) 268-6303.
Sincerelr,
~
f
I
~C~
Andrew C. Elson
Vice President, Regulatory Accounting and Compliance
Cc; Mr. Tom Carlock (email)
JeoniferPhillips (email and US Mail)
Ms. Kate Verne2: (email and US Mail)
Mr. William MPIticorena, Esq. (email and US Mail)
Mr. John Risk (email and US Mail)
,
-
e
e
#
EXHIBIT F
Front Range Consulting, Inc.
4152 Bell Mountain Drive
Castle Rock, CO 80 I 04
May 25, 2004
Via email (andv,elson@adelohia.com) and Fax (303-268-6483)
Mr. Andrew C. Elson, III
Vice President
Regulatory Accounting and Compliance
Adelphia Communications Corporation
5619 DTC Parkway ,
Greenwood Village, CO 80 III
Re: Request for Additional Information (RFI #2) Regarding Rate Filings in Fullerton and Santa
Monica CA
Dear Mr. Elson:
Front Range Consulting, Inc. received your response to our first Request for Infonnation date May 12,
2004 on May 19,2004. We do not believe the infonnation requested was completely responded to by
Adelphia. Therefore, please respond to the following additional questions.
I. In response to RFI # I, question I, Adelphia states "The Company is currently preparing these
filings for SEC review and approval." Please state/identify:
a. Has a final audit by Adelphia's outside certified public accountant been completed and
accepted by the Board of Directors of Adelphia for the fiscal years 1999 through 2003
and the first quarter of2004?
b. Ifno to (a), piease identify the anticipated schedule for those items in (a).
c. When does Adelphia anticipate filing the infonnation requested in RFI # I, question I
with the SEC?
2. Can Adelphia's Chief Financial Officer and Chief Accounting Officer provide unqualified
declarations stating that the "internally restated general ledger accounts and subsidiary accounts"
will not be subject to any further adjustments (either by internal or external sources) with respect
to infonnation used by you and your subordinates in preparing the Fonns 1240 and 12051 If yes,
please provide such signed unqualified declarations.
3. Adelphia re-filed its Fonn 1240 and 1205 submitted to the Cities in November 2003 in January
2004 for Santa Monica and February 2004 for Fullerton. Please state what "financial
restatements" where prepared and identified to you and your subordinates between the November
filings and the re-filings made in 2004. To the extent these "financial restatements" were prepared
~
Front Rangc Consulting. Inc:.
e
Mr. Andrcw C. Elson, III
May 2S, 2004
Pagc 2
and made available to you and your subordinates prior to the November filings; please state why
they were not included in the original filings.
4. Please identify each "financial restatement" that has caused either the current year's Form 1240
and 1205 to be restated. Please provide for each restatement a narrative summary of the
restatement and the detailed accounting entries made to the "internally restated general ledger and
subsidiary accounts."
5. Please provide the same information for the re-submitted Forms J 240 and 1205 for prior years as
requested in #4 above.
6. RFI # I, question 2 requested the "restated books and records" to be provided that were used to
prepare the re-fiIed Forms 1240 and 1205. Adelphia's responses stated "we are unable to
determine the additional types of information necessary to further your review," The request was
clear - any financial information used by you and your subordinates that relied on "restated books
and records" were to be provided. Please provide the requested information. Adelphia also
suggest that some of the information "could be deemed confidential." To the extent Adelphia
wishes to invoke "confidentiality" with regards to certain information requested in this question,
please identify the type of information where confidentiality is being requested, a detailed reason
for the "confidential" treatment and the "Non-Disclosure" agreement.
e
Please deliver the information to the parties listed on Attachment A within 7 calendar days from the date of
this letter. If the information cannot be compiled and deliyered within 7 days, please identify by noon
MDT on May 28, 2004 which information will take longer than 7 calendar days to compile including a
detailed explanation as to why the requested information used to prepare the rate filings in unavailable.
If you have any questions regarding this request, please call me at 303-814-0350.
Sincerely,
~;P
Richard D. Treich
CEO
Front Range Consulting, Inc.
ce. Ms. Jennifer Phillips - City of Fullerton
Ms. Kate Vemez - City of Santa Monica
William M Marticorena, Esq. - Rutan & Tucker
Mr. John Risk - CSG
e
~
~
Front Range Consulting, Inc.
I
.
e
Mr. Andrew C. Elson, III
May 25, 2004
Page 3
Please deliver the responses to the Requests for Infonnation to:
Attachment A
Ms. Jennifer Phillips
City of Fullerton
303 West Commonwealth Ave.
Fullerton, CA 92632
Ms. Kate Vemez
City of Santa Monica
1685 Main St., Room 310
Santa Monica, CA 9040 I
William M Marticorena, Esq.
Rutan & Tucker
Fourteenth Floor
611 Anton Blvd. .
Costa Mesa, CA 92626
Mr. John Risk
President
Communications Support Group, Inc.
50S Scenic Ave.
Piedmont, CA 94611
Mr. Richard D. Treich
CEO
Front Range Consulting, Inc.
4152 Bell Mountain Drive
Castle Rock, CO 80104
.
e
e
_,I:"
-AdeIphia
EXHIBIT G
un .,
"'.: .-'.
i..,
'04 JUN -2 ~ 7 :3l,
May 2S, 2004
VUJ Email and FacsimUe 303-814-0350
Mr. Richard Treich
Front Range Consulting, Inc.
4152 B,ell Mountain Drive
Castle R~k, CO SO 1 04
Dear Mr. Treich:
This letter is in response to your Second Request for Information, dated May 25, 2004.
Adelphia is committed to cooperating with this review and providing useful and accurate
information as promptly as possible. As I am sure you understand, however, there are
practical constraints on our operations. The request seeks potentially voluminous
fmancial information in just seven days (four business days). Yet the current review
encompasses two different franchise areas and almost four years of rate information. Due
to the nwnber of records and historical nature of the information being requested,'
Adelphia respectfully requests 20 days from May 25, 2004 to complete its response. The
Company, however, will begin providing the data as it becomes available and will begin
submitting certain information next week.
We continue to seek clarification regarding the broad request for all financial information
used to prepare the filings. Your letter suggests that you are interested in the financial
reports we directly relied upon in preparing the rate filings (as opposed to all the
underlying support that fed into those financial reports.) We will proceed on that basis,
but want to raise the issue now to ensure that we can meet the City's expectations under
the pending review.
If we misunderstand your request, and you are enVISIOning the production of all
underlying support (such as actual programming invoices) then the Company may require
additional time to respond beyond the requested 20 days. Retrieving four years of
monthly programming cost invoices, for example, would amount to over SOO historical
invoices. Of course, those individual invoices would not have been directly relied upon
by Adelphia's rate team in preparing the rate filings. Assuming our current
understanding is correct and aggregate programming costs from our internal invoice
payment system is sufficient, then we would should be able to meet the 20 day
timeframe.
e
e
e
Mr. Richard Treich
May 28, 2004
Page 2
Please contact me at 303268-6303 if you have any questions.
Sincerely,
1~~,~
cc: Ms. Jennifer Phillips
Ms. Kate Vemez
Mr. William Marticorena, Esq,
Mr. John Risk
EXHIBIT H
Final Report
On
The Rates
For
Basic Service
And
Equipment and Installation Charges
In
The City of Santa Monica, CA
By
AdelphiaComm unications, Inc.
, ,
,
Communications Support Group, Inc. ("CSG")and Front Range Consulting, Inc.
("FRC") (collectively "Consultants") are pleased to provide the City of Santa Monica,
CA ("City") this fmal report on the Form 1240 and 1205 filings submitted by Adelphia
Communications, Inc. ("Adelphia") to the City on or about November 25,2003.
I. Report Synopsis
The Consultants recommend that the City of Santa Monica adopt a Rate Order that rejects
the filings and amendments made by Adelphia to those filings. The Consultants base'
their reconuuendations on their conclusion that the forms as filed are unreasonable basis
on which to set rates and that Adelphia maintain their current rates until 90 days after the
re-filed rate forms are provided to the City as detailed below. This recommendation is
the result of an examination of the rate filings submitted by Adelphia and the responses
by Adelphia to the City's two Requests for Information ("RFI").
Adelphia has the burden of proof to support its proposed rates as reasonable. Adelphia
has failed to provide credible financial data to support the reasonableness of its proposed
rates. Further, the Consultants do not believe any reasonable basis exists to revise these
Communications Support Group, Inc.
~~
Front Range Consulting, Inc.
Adelphia filings because at this time Adelphia cannot support the underlying accounting
information used in completing these Forms with official audited financial information
. and the Consultant's have no ability to create the necessary underlying accounting
information based on the best available information. Furthermore, the Consultants
recommend that the City's Rate Order also require Adelphia to resubmit revised Fonns
1240 and 1205 for each year where a financial restatement has been prepared by
Adelphia and to refund to customers any overcharges based on these restated Forms after
final review by the City.
The Consultants believe this reconunendation is compelled by the unique set of problems
caused by Adelphia's widely known and widespread past accounting abuses. Adelphia's
accounting abuses have led to various investigations and even to federal prosecutions and
convictions. Consequently, in reviewing the current filings a local franchising authority,
such as the City, has no reliable set of properly audited financial statements from
Adelphia that can be used as benclullarks to evaluate the reasonableness of the qurrent
filings. Unfortunately in this setting the FCC's rate regulation rules fall short of
providing appropriate guidance. The rules do not address how a local franchising
authority is to determine the reasonableness of a rate filing when the franchisee has an
admitted history of repeatedly supplying unreliable accounting information and when it
cannot yet provide properly audited financial statements.. When faced with such an
unusual situation, conunon sense dictates that the City must act cautiously, particularly if
the public interest is to be served and protected.
II. Scope of Report
The Consultant's were engaged by the City's telecommunications counsel, Rutan & .
Tucker, LLP ("Rutan"), to assist with technical and financial aspects of the City's review
of Adelphia's Form 1240 and 1205 filings. The Consultant's were asked to review this
filing, to prepare RFls regarding the underlying data used by Adelphia in preparing these
filings, to analyze the Adelphia's responses to the RFls, and to prepare a final report on
the appropriateness of the filed rates. The City, through Rutan, has asked that the
Consultants base their report on the information gathered from Adelphia as of the date of
this report. The Consultants believe these conclusions are reasonable in light of the
information provided by Adelphia but these conclusions may be subject to modification
to the extent further information is received from Adelphia.
III. Historical Rate Filine:s
III (A). Background
Adelphia submitted to the City their annual rate filing in November of 2003. This filing
included the required FCC Form 1240 (alU1ual update of the maximum permitted rated
Page 2 of9
August 19,2004
Communications Support Group, Inc.
r
Front Range Consulting, Ine.
for Basic Service) and was accompanied by FCC Form 1205 (determination of the
maximum permitted rates for equipment and installation charges). These forms use
financial infom1ation contained in Adelphia's financial accounting system to create the
Maximum Permitted Rates ("MPR") for the basic service tier and the equipment and
installation charges. The Form 1240 builds the current MPR based on the prior Form
1240 MPR and changes for inflation and programming costs anticipated in the current
rate year. FCC Form 1205 does not build on the prior MPR computed but rather is a
separate analysis of the costs associated with the equipment and installation charges.
Adelphia's bankruptcy filing has complicated.the review of these filings as current
company management has disclosed that they believe significant and material financial
misrepresentations have occurred prior to the bankruptcy filing. It has been reported that
the underlying subscriber infom1ation and equipment purchases may have been .
manipulated by prior company management. For example, the City of Los Angeles has
required Adelphia to refund a significant amount based on these potential finan~ial
misrepresentations.
The City of Santa Monica sent Adelphia a letter dated June 12,2003 requesting that
Adelphia "certify that the information provided by Adelphia is complete and accurate
under penalty of perjury." Adelphia responded to Santa Monica's request by a letter
dated July 10,2003. In Adelphia's response, Adelphia stated:
"As the City's Order acknowledges, the MPR reported for basic service is $34.19,
but Adelphia's rate card is just $26.24. It is inconceivable that any accounting
adjustment that might be identified in the recertification process would reduce the
MPR to a level remotely approaching the OSR."
Further Adelphia stated: .
"The City's Order already claims the right to reopen rate matter ifnew
information comes to light. In the extraordinarily unlikely event that new rate
filings or other developments lend credence to the possibility that Adelphia is
overcharging local customers, the City presumably could exercise the same right
to reopen closed rate matters that it is claiming here. There simply is no
compelling justification for taking this step at the current time."
As described in detail below (see section III (E)), Adelphia has qualified all of their
public filings with the SEC in which Adelphia describes the problems with the financial
data and the potential need to restate several years of financial data. It is this underlying
financial data that serves as the basis for the rate filings made by Adelphia subject to this
revIew.
III (B). Data Analyzed
Page 3 of9
August 19, 20()4
Communications Support Group. Inc.
~~
Front Ranee Consultine, Inc.
The Consultants were provided with infomlation from the City consisting primarily of
submissions prepared ,by Adelphia. They included:
· Adelphia filings (fCC Forms 1240 and 1205) submitted November 25, 2004;
· Revised filings for Santa Monica submitted on January 2, 2004;
· RFI # 1 submitted to Adelphia on May 12,2004;
. Adelphia's response to RFI # 1 on May 19,2004;
· RFI # 2 submitted to Adelphia on May 25, 2004; and
. Adelphia's response to RFI # 2 on June 4,2004 and June 11,2004.
FRC also reviewed other publicly available information including:
. SEC 8K filings of Adelphia; and
. FCC Forms and Instructions.
III (C). RFI Responses
FRC, on behalf of the City, submitted a RFI to Adelphia on May 12, 2004 in which FRC
asked Adelphia to respond to two questions. The first question asked:
"Please provide copies of final, restated, and audited official financial statements
(SEC Form 10-K) for the years 1999 through 2003 and the quarterly report (SEC
Form 10-Q) for the first quarter of 2004. These r~sponsive statements must be
copies of the signed original filings made with the SEC."
Adelphia responded:
"The SEC Form 10-K and 10-Q for the years 1999 through 2003 is not currently
available. The Company is currently preparing these filings for SEC review and
approva1. "
FRC followed up on that response with another series of questions in RFI # 2 submitted
to Adelphia on May 25, 2004 requesting:
"In response to RFI # 1, question 1, Adelphia states "The Company is currently
preparing these filings for SEe review and approva1." Please state/identify':
a. Has a final audit by Adelphia's outside certified public accountant been
completed and accepted by the Board of Directors of Adelphia for the
fiscal years 1999 through 2003 and the first quarter of2004?
b. Ifno to (a), please identify the anticipated schedule for those items in (a).
Page 4 of9
August 19,2004
Communications Support Group. Inc.
/>~~
f '
Front Range Consulting, Inc.
c. When does Adelphia anticipate filing the information requested in RFI # I,
question 1 with the SECT'
and
"Can Adelphia's Chief Financial Officer and Chief Accounting Officer provide
unqualified declarations stating that the "internally restated general ledger
accounts and subsidiary accounts" will not be subject to any further adjustments
(either by internal or external sources) with respect to information used by you
and your subordinates in preparing the Forms 1240 and 1205? If yes, please
provide such signed unqualified declarations."
Adelphia responded:
"PricewaterhouseCoopers, LLP ("PWC") has not yet completed its audit. The I
information used to prepare the rate forms is based upon the Company's internally I
restated books and records prepared in confonnance with Generally Accepted '\
Accounting Principles ("GAAP"). This data represents the best information 1
available at the time of filing was prepared. The FCC's rules do not require cable I
operators to release their annual financial sta~ements prior to submitting rate
filings. "
Additionally they stated:
"Adelphia's audited financial statements may not be released until PWC issues its
audit opinion. The Company's audited financial will also be provided to the SEC
prior to their public release. At this time, we are unable to determine when the
audit will be completed and the audit opinion issued."
_ Adelphia also stated in response to the second question:
"Adelphia, like any other public company, is unable to provide the type of
unqualified declaration that you seek. Adelphia will provide the requested
audited financial statements as soon as they become publicly available. The rate
forms already include a Certification Statement that a Company representative
signed."
III (D). Restatements
On November 13,2003, the City of Santa Monica sent Adelphia a request for "Adelphia
[to] recertify its 2002 FCC FOlms 1205 and 1240 based upon revelations regarding
potential irregularities and necessary restatements in Adelphi's accounting practices." By
Adelphia's Jetter dated November 24,2003 Adelphia delivered in 2003 rate filings
Page 5 of9
August 19, 2004
Communications Support Group. Inc.
/ r
Front Ranee Consultine, Ine.
including FCC Forms 1240 and 1205. On January 8,2004, Adelphia delivered to the
City of Santa Monica restated filings for FCC Form 1240 and 1205.
The results of the restatements were:
--- Original Restated Difference
Form 1240
2001 Filing
BST MPR $29.02 $24.00 -$5.02
2002 Filing
BST MPR $34.19 $26.70 -$7.49
2003 Filing
BST MPR $34.18 $31.07 .$3:09
Form 1205
2001 Filing)
HSC $44.66 Not Restated Not Applicable
Converter $4.65 Not Restated Not Applicable
2002 Filing
HSC $47.20 $45.73 .$1.47
Converter $3.82 $4.89 $1.07
2003 Filing
HSC $44.79 Not Applicable Not Applicable
Converter $7.22 Not Applicable Not AODlicable
It must be noted that the revised rate for the 2002 filing was reduced by almost $7.50 and
in direct conflict with the statement made by Adelphia where the "recertification process
would reduce the MPR to a level remotely approaching the OSR" as stated in their July
1 0, 2003 letter identified in III(A) above. The revised filing is only $0.46 above the
current rate.
III (E). Identified Issues
The Consultants have identified several issues with the procedures used by Adelphia and
the validity of the restated financial infonnation used by Adelphia in preparing the
restated filings. In the Consultant's opinion, these identified issues makes the basis upon
which Adelphia computed the required MPRs for the Forms 1240 and 1205 an infinitely
J The original 2001 filing made by Adelphia used a 1999 test year that Adelphia at this point has not
restated
Page 6 of9
August 19,2004
Communications Support Group. Inc.
,-
/ f'
Front Ranle Consultinl, Ine.
unreliable and unreasonable basis on which to set rates.
The identified issues are:
· Adelphia cannot provide any assurances that the financial infonrtation used to
develop the current and restated forms are not subject to further significant and
material revisions by Adelphia's outside auditor and the SEC. This financial
information does not meet Adelphia' s burden in establishing the reasonableness
of its proposed rates;
. Adelphia should have been well aware of the need to revise it filings before the
filings were submitted to the City in November 2003;
. Adelphia's certification to these forms cannot be viewed as any substantial
assurance to the City that the accounting information is reliable;
. The FCC rule, regarding the 12 month review period, was not intended to prevent
potentially significant rate modification from being reviewed by the local
authorities in order to eliminate its refund liability on improper forms or forms
that contain significant accounting irregularities; and
. The restatements are significant and material, as shown in the above charts, and
are not limited to a single area of the restated forms.
III (E) (1). Discussion of the Issues
The Consultants understand the root cause of the financial restatements were accounting
irregularities by Adelphia.prior to its bankruptcy filing in 2002. The 8-K filed by
Adelphia on June 17, 2004 contained the following statement:
As a result of actions taken by management of the Company during the time that members of the
Rigas family held senior executive positions: (a) the Company has not yet completed its fmancial
statements as of and for the years ended December 31, 2003, 2002 and 200 I, or received its
independent public accountants' report thereon or filed with the Securities and Exchange
Commission (the "Commission") its Annual Report on Fonn 10-K for the years ended December
31,2003,2002 and 2001; (b) the Company's fonner independent public accountants,Deloitte &
Touche LLP, suspended their auditing work on the Company's financial statements as of and for
the year ended December 31, 200 I and withdrew the audit reports it had issued with respect to the
financial statements of the Company; (c) the Company has not yet completed its financial
statements or filed with the Commission its Qua11erly Reports on Fonn 10-Q as of and for the
quarterly periods ended March 31, 2004, September 30,2003, June 30, 2003 and March 31, 2003;
(d) the Company has not yet completed its financial statements or filed with the Commission its
Quarterly Reports on Fonn 10-Q as of and for the quarterly periods ended September 30, 2002,
June 30, 2002 and March 31,2002; and (e) the Company expects to restate its financial statements
for the years ended December 31, 2000 arid 1999, and its interim financial statements for 2001 and
Page 7 of9
August 19,2004
Communications Support Group. Inc.
/')~'~~.'
/// , ". ~ ',-
f '
FroDt RaDge COD5UIHDg, IDC.
possibly other periods. New management took control of the Company in May 2002, retained new
independent auditors and began the preparation of financial statements for the periods in question.
Current management believes that the public infonllation provided by certain members of the
Rigas family on other matters of interest to investors, such as the' percentage of the Company's
cable television systems that the Company believes have been upgraded to current standards, was
unreliable. Until the completion of the restatement and the disclosure of restated financial results,
previously reported financial infonnation and other public infonnation provided by the Rigas,
family should not be relied upon and infonnation contained in this Report may have to be updated
or supplemented. The Company is working to complete the restatement as promptly as possible
and to obtain the opinion of its independent auditors on such restated financial statements. Receipt
of an audit opiniq,n"with respect to the restated financial statements is a condition to consummation
of the Company's proposed plan of reorganization and to consummation of the Company's
proposed exit financing facilities.
Given these repeated pronouncements by Adelphia in its SECfilings and the refusal by or
inability of Adelphia to provide certification by their current internal financial executives, I
the Consultants cannot assure the City that the underlying data used by Adelphia is \
correct or reasonable. I
Yet, given these significant SEC pronouncements, Adelphia still filed its forms 1240 and \'
1205 on or about November 25, 2003. Adelphia signed the forms certifying to the I
accuracy of the information presented even with the.City of Santa Monica's request for I
re-certification outstanding. Not surprisingly, less then 45 day.s after these certified \
filings were made, Adelphia completely changed the Form 1240 as submitted in
November and the prior two 1240 filings for Santa Monica. Adelphia has failed to
provide any reasonable basis for the City to conclude that Adelphia possessed the
required information available to it to prepare the revised filings at the time of the
November 25, 2003 filing or could have reasonably anticipated that such restatements of
the filings should have been completed before it chose to file the November filings.
The Consultants are unaware of any similar potential financial fraud by a cable operator
that has affected its Form 1240 and 1205 so significantly like that of Adelphia. As for
Adelphia's attempt to justify its behavior by referring to the FCC rules, Adelphia cannot
find support for its failure to provide reliable information to the City in any FCC rules.
The FCC on appeal ofthe City's rate order would have to condone a practice of using
constantly changing internal financial statements and unaudited data for the preparation
of rate filings in the face of a well documented history of potential and actual financial
fraud in order to sustain Adelphia's position. The FCC's rules were not intended to allow
subscribers to pay regulated rates based on what have been at least historically unreliable
financial statements, especially when the City has no reasonable and reliable way to
determine whether the current information still contains falsely inflated accounting
information. Adelphia's past accounting irregularities only underscore the need for these
rate filings to be based on financial statements that can be independently verified as being
free from any accounting irregularities. As the operator Adelphia either has to wait until
these accounting irregularities are resolved before filing, or it has to recognize that rates
Page 80f9
August 19,2004
Communications Support Group, Inc.
~\
, .
/'). "
/f'~ ,~
Front Range Consulting, Inc.
based on such unreliable infonnation cannot go into effect until the issues have been
resolved.2 . .
In reviewing the differences between the original and restated filings, Adelphia has not
limited the changes to one particular area. For example, in the Santa Monica filing,
Adelphia revised the Channel Movement factor and the Programming costs. . In the true-
up segment of the original filing, Adelphia showed a loss of two channels on basis (which
is supposed to be "actual") but eliminated those channel deletion in the revised filing.
Such revisions suggest that the restated filings contain revisions for more than the
accounting irregularities that have been identified in Adelphia's public statements.
IV. Recommendations
The Consultants reconunend that the City issue a rate order that requires:
.
A re-fil~nf and r~-certificati.on of each FCC Form 1240 and 1205 file~ by
Adelphla covenng any penod from 1999 to the present after Adelphla has
publicly released audited financial data for the same period;
. A certification by the Chief Accounting Officer be included with the re-filings
stating that Adelphia has completed all of the restatements with regards to the
accounting irregularities and that no further investigations are underway or
anticipated with respect to the financial data used in completing these re-filings;
. Maintenance of all accounting records necessary to allow refunds to be calculated
for any periods covered by the re-filed and re-certified filings; and
. All regulated rates to be maintained and prohibit Adelphia from raising any
regulated rates (Basic Service and Equipment and Installation charges) above the
current levels until 90 days after the re- filed and re-certified forms are delivered
to the City.
The City should also be allowed 12 months from the date of delivery of these re-filed and
re-certified filings to complete a review Qf all of the revised forms
2 Adelphia, in their July 10, 2003 letter to Santa Monica, appears to agree with the ability of the City to
reopen the past rate proceedings to the extent new infomlation comes to light.
3 The Consultants understand that Adelphia recently acquired this system; therefore, the re-filings should
only cover those fomls filed by Adelphia after Adelphia's acquisition of the system.
Page 9 of9
August 19,2004
I
\
I
\
-AdeIphia
wrttar's Direct
Fax:
ll\t8met
E-mail:
(310) 314-8922
(310) 314-8979
www.adelphia.com
tom.carlock@adelphia.com
CI fY
('IT\' 1
EXHIBIT I
r,: \N' (: ~~O~~\Ci
. '~;: '-" I i
3100 Ocean Part< Blvd., Suite 300
Santa Monica, CA 90405
'04 AUG 30 Al0:59
27 August 2004
VIA UPS OVERNIGHT
Ms. Kathryn Vernez
Assistant to the City Manager
City of Santa Monica
1685 Main Street
Santa Monica, CA 90407
Dear Ms. Vemez:
I am writing in response to your letter, dated August 19, 2004. The purpose of this letter
is to comment upon the MFinal Report on the Rates for Basic Service and Equipment and
Installation Charges in the City of Santa Monica, CN (the MReportD). Adelphia appreciates the
opportunity to comment on the Report in advance of City Council consideration.
I must begin by stating the Company disagrees with, and objects to, certain of the
allegations advanced in the Report by the City's consultants, Communications Support Group,
Inc. and Front Range Consulting, Inc. (together, the MConsultants"). We certainly understand
the concern regarding the accuracy of the Company's financial data, but we believe that the
Report overstates the alleged problem.
It should be noted, for example, that the reference in the Report to Adelphia's rate
dispute last year with the City of Los Angeles is easily distinguished from the current case.
When the City of Los Angeles adopted its adverse rate order last summer, current management
had not yet restated any of Adelphia's financial records. In contrast, the City of Santa Monica
has now been presented with rate forms based on restated financials.
On a practical level, the Report exaggerates the consequences of Adelphia's
restatements. It does so by emphasizing that the restated financials produced a substantial
reduction in the Mmaximum permitted rateD previously calculated in the 2002 rate filing. The truth
is that the restated rate for basic service was deliberately calculated in a conservative fashion
and still exceeded the rate Adelphia actually charged local subscribers. Furthermore, the
restated financials had a significantly smaller effect on the 2003 rate calculation. The Report
itself acknowledges that new Mmaximum permitted rateD still exceeds Ade/phia's current rate by
$0.46.
Adelphia believes that the Consultants are now holding Adelphia to an unreasonable
evidentiary standard. The problem is manifest in the insistence that "Adelphia's Chief Financial
Officer and Chief Accounting Officer provide unqualified declarations stating that the 'internally
restated general ledger accounts and subsidiary accounts' will not be subject to any further
adjustments. . . . D This sort of supporting declaration is not required by the FCC. Moreover, the
requested support realistically could not be provided, regardless of a particular cable operator's
financial history.
Letter to Kathryn Vemez
27 August 2004
Page 2 of 2
Cable operators routinely submit rate forms prior to external audits being completed.
The officers for these companies cannot guarantee against a future change in the underlying
financials, as doing so would prejudge an ongoing independent audit. Even atter an outside
audit is complete, the officers still cannot provide an "unqualified" assurance against any further
adjustments. Subsequent developments sometimes require financial statements to be
reopened and restated. In short, the Consultants, based on a purported concern regarding the
accuracy of Adelphia's financial statements, have recommended an inappropriate level of
support.
With that said, Adelphia would appreciate the opportunity to meet with City
representatives to detennine whether the parties can reach an amicable solution. Even if the
rate review period were suspended for the time being, we see it as critical that a greater degree
of procedural flexibility be provided than is proposed in the Report.
Adelphia would like, for example, to devise a means of moving forward with the rate
review process even without the benefit of "audited" financials. Adelphia believes it is in both
parties best interest to create an alternative to the City establishing the submission of audited
financials as an unwaivable prerequisite to completing the pending rate review. We are also
particularly concerned with the suggestion that an Adelphia Officer would be required to certify
to the absence of any possible future financial investigations. The latter assertion goes beyond
that which the City can reasonably expect, as it would be a difficult, if not impossible, statement
for the Chief Accounting Officer of any company to provide. Requiring that statement as a
prerequisite to completing the rate review process would, therefore, be both at odds with FCC
expectations and unfair to Adelphia.
I trust that the City will consider these comments, and I remain optimistic that the parties
can resolve this matter amicably. I am, of course, available to provide any additional
information the City might request.
z~y~
~.caoo}u/fM--
Vice President
Law and Public Policy