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SR-501-002-02 (3) 12/27/~001 14:57 FAX 202 331 8342 K.S.S., PLLC 141 001 KAISER, SCHERER & SCHLEGEL 1899 L STREET, NW #1100 WASHINGTON, D.C. 20036 TEL. (202) 466-4656 FAX. (202) 331-8342 RUSH TELEFAX TRANSMISSION SHEET CONTACT NAME: BILL COOK. ESQUIRE COMPANY: ARNOLD & PORTER TELECOPIER TELEPHONE NUMBER: 202 942 5999 FROM: ANNM. BRYAN DATE: December 27, 2001 SANT A MONIC REVISED FINAL 12/27/2001 14;57 FAX 202 331 8342 K.S.S., PLLC 141 002 KAISER SCHERER & SCHLEGEL, PLLC Certified Public Accountants 1899 L Street, N.W. Suite 1100 Washington, D.C. 20036 Tel: 202-466-4656 Fax: 202-331-8342 E-mail: kss@kssacct.com December 27, 2001 Mr. William Cook, Esquire Arnold & Porter 555 12th Street, N.W. Washington, D.C. 20004 Re: FCC Forms 1240 and 1205 filed with the City of Santa Monica Information Technology Agency by Adelphia Communications Corporation Dear Mr. Cook: Independent Accountants' Report on APplyinq Aqreed-Upon Procedures You have asked us to analyze the FCC Form 1240, dated February 6, 2001 setting basic service rates for the period May 1, 2001 through April 30, 2002 and FCC Form 1205, dated April 23, 2001 using data from the fiscal year ending December 3l, 2000. These forms were filed with the City of Santa Monica, California ("Santa Monica") by Ade1phia Communications Corporation ("Adelphia") regarding Franchise Community Unit Identification Number CA0456. The purpose of our analysis was to assist Santa Monica in its determination of whether the rates proposed by Adelphia for basic service and equipment for its Santa Monica system are reasonable under the regulations adopted by the Federal Communications Commission ("FCC"), as such rate regulations have been amended from time to time. We have performed the procedures enumerated at Exhibi t I, which were agreed to by Santa Monica, solely to assist Santa Monica with respect to the determination of whether the basic service rates and equipment rates proposed by Adelphia are reasonable. 12/27/2001 14:57 FAX 202 331 8342 K.S.S., PLLC 141 003 This engagement to apply agreed-upon procedures was performed in accordance with standards established by the American Institute of Certified Public Accountants. The sufficiency of the procedures is solely the responsibility of the specified users of the report. Consequently, we make no representation regarding the sufficiency of the procedures described at Exhibit I either for the purpose for which this report has been requested or for any other purpose. While our efforts involved the analysis of accounting records and other information supplied by Adelphia, we did not perform an audit of Adelphia's financial statements in accordance with generally accepted auditing standards. Had we performed additional procedures or had we made an examination in accordance with generally accepted auditing standards, other matters might have come to our attention that would have been reported to you. Furthermore, our report assumes that the information provided and representations made by Adelphia are true and accurate. Our analysis and this report are intended solely for use by Santa Monica for the purpose described above. This report is based on work performed to date and the regulations adopted by the FCC. Copies of the FCC Forms 1240 and 1205 and responses to supplemental requests for information submitted by Adelphia have been submitted under separate cover and are incorporated by reference. -2- 12/27/2001 14:58 FAX 202 331 8342 K.S.S., PLLC ADELPHIA COMMUNICATIONS CORPORATION FORMS 1240 AND 1205 SUMMARY OF RATES Maximum Basic Service Rate, exclusive of Franchise Fees and FCC regulatory fees Equipment and Installation Rates Hourly Service Charge Unwired Homes prewired Homes Underground Burial Relocate Service Trip Charge Downgrade to Basic Addt'l Connections (initial) Addt'l Connections (separate) Charge for Changing Tiers Transfer Non-Pay reconnect Lease of Remote Controls Addressable and Digital Universal Lease of Converter Boxes Addressable and Digital Non-Addressable Lease of additional outlets Adelphia Computed Rates $29.02 44.66 44.66 33.50 78.16 33.50 29.92 44.66 22.33 33.50 2.00 .35 4.65 .97 .90 -3- Adelphia Rate Card $25.24 44.00 33.00 75.00 33.00 29.00 29.00 22.00 33.00 2.00 33.00 28.00 .25 .79 3.25 .95 nla 141 004 12/27/2001 14:58 FAX 202 331 8342 K.S.S., PLLC 141 005 SUMMARY OF FINDINGS This section presents a summary of the results of our analysis for those items that, based on a review of the information provided and procedures performed, we believe should be considered by the City of Santa Monica in its review of the FCC Forms 1240 and 1205 submitted by Adelphia and the rates proposed therein. BASIC RATE Based on the work performed at Exhibit I, we do not propose any adjustments to the Adelphia computed maximum permitted rate of $29.02 for basic service. We noted, however, that the Operator Selected Rate stated on Line 119 of Part II, of the Form 1240 stated $24.24, whereas, the rate card stated a rate of $25.24. EQUIPMENT AND INSTALLATION RATES Form 1205 is used to develop equipment and installation rates based on an operator's actual costs, as determined according to FCC guidelines and procedures. Pursuant to the Telecommunications Act of 1996, the FCC has modified the rules to allow a cable operator to prepare the Form 1205 based on the level at which it aggregates its costs. This leads to average rates applicable throughout a region or throughout the country, rather than rates that may differ from system to system. Adelphia chose to file the Form 1205 setting rates as of August 1, 2001 using data from its Los Angeles Region. Furthermore, Adelphia has chosen to aggregate its converter and remote equipment costs under broad categories. Ade1phia has computed one converter rate for addressable and digital converters and one rate for remotes and digital remotes. Adelphia has computed a separate rate for non addressable converters that could be used by basic-only subscribers. -4- 12/27/2001 14:58 FAX 202 331 8342 K.S.S., PLLC 141 006 Based on the work performed at Exhibit I, we do not propose any adjustments to the Adelphia computed Maximum Permitted Rates outlined in the Summary of Rates above except as set forth below: We do not recommend approving a rate for the monthly additional outlet charge of $.90. Adelphia did not establish the reasonableness of this rate. However, based on discussions with Adelphia representatives and review of the rate cards, we conclude that Adelphia is not charging subscribers for this monthly additional outlet charge, and therefore, no further work or discussion is necessary relating to the additional outlet charge computed on the regional Form 1205. Adelphia's Form 1205 also establishes a $44.66 rate for "Downgrade to Basic." Adelphia bears the burden of establishing the reasonableness of this rate, and Santa Monica has the right to establish a rate based on the "best information available" where a cable operator fails to meet its burden of proving that its proposed rate is reasonable. The FCC rate regulations state that "[dlowngrade charges that are the same as, or lower than, upgrade charges are evidence of the reasonableness of such downgrade charges," 47C.F.R. Ii 76.980. Adelphia does not have a specific charge for the upgrade to a service, but states in its Form 1205 that it charges a "Trip Charge" for among other things, converter installation and removal of pay service traps. (We do not propose any adjustments to the $29.92 trip charge rate calculated on Adelphia's Form 1205.) Based on the best information available, it would not be unreasonable for Santa Monica to conclude that the $29.92 is a reasonable rate for a downgrade to basic that requires a trip. Additionally, we note that Adelphia states on its rate card that it charges subscribers $29.00 for both the trip charge and the downgrade to basic charge. We also noted that Adelphia's rate card listed two installation rates that were not computed on the Form 1205: charges for Transfer of $33.00 and Non-Pay Reconnect of $28.00. The FCC rules require that all rates for installations charged to basic subscribers be computed on the Form 1205. Adelphia did not provide time studies or other documentation demonstrating the actual average time it takes to complete such installations with its Form 1205. However, Adelphia did state in subsequent documentation the following: -5- 12/27/2001 14:59 FAX 202 331 8342 K.S.S., PLLC 141 007 You are correct that Adelphia does not identify the 'Transfer' and 'Non-Pay Reconnect' as separate installation types on FCC Form 1205. However, it has been Adelphia's practice to include these installation types in the calculation for the installation of a prewired home. .. As noted on this schedule, the transfer and non-pay reconnect installations are included in the prewired home calculation. These installations are aggregated in this manner because the average hours per installation for each of these services is the same .75 hours. Based on further review of the aforementioned schedule and Adelphia's explanation, we recommend a maximum permitted rate of $33.50 for the transfer and non-pay reconnect installations. We were also unable to determine the reasonableness of the universal remote rate of $.79 as Adelphia did not compute the rate on the Form 1205 and did not provide any supporting documentation for this equipment rate. As stated above, the FCC rules allow a franchising authority to establish rates based on the best available information. Since Adelphia prepared its Form 1205 filing combining all remotes in one computed rate of $.35, we recommend that the rate for the universal remote should also be $.35. Adelphia representatives and subsequent supporting documentation provided by Adelphia illustrated that Adelphia had made an error on the rate card, and instead, Adelphia was charging $.25 for this universal remote, We recommend that Santa Monica determine the accuracy of Adelphia's representations. We have no responsibility to update this report for events and circumstances occurring after the date of this report. Very truly yours, ~/1{~ Ann M. Bryan \J SDl1202. rpt -6- 12/27/2001 14:59 FAX 202 331 8342 K.S.S., PLLC 141 008 ADELPHIA COMMUNICATIONS CORPORATION FORMS 1240 AND 1205 EXHIBIT I PROCEDURES The procedures we performed included, but were not limited to, the following: 1. We received a copy of the FCC Form 1240, setting rates as of May I, 2001, dated February 6, 2001 filed with the City of Santa Monica by Adelphia. We also received the Form 1205, dated April 23, 2001. 2. We assisted Santa Monica in preparing a supplemental request for information in June 2001. 3. We reviewed Adelphia's response to the supplemental request for information received in July 2001. We received further information in December 2001. 4. We recomputed the FCC Forms 1240 and 1205. 5. We developed an understanding of the assumptions and computations used by Adelphia in completing the FCC Forms 1240 and 1205 and analyzed the proposed rate in relation to the explanations and information provided by Adelphia. 6. We developed an understanding of the computations required in the Form 1240 as stated briefly below: The Form 1240 is used to evaluate regulated cable rates on or after September 15, 1995 by giving regulated cable operators the option of filing for rate adjustments on an annual basis instead of on the existing quarterly system. The maximum permitted rates for this period are computed by using seven segments: Headend Upgrade Segment; -7 - 12/27/2001 14:59 FAX 202 331 8342 K.S.S., PLLC 141 009 External Costs segment--six external costs are allowed to be passed through directly to subscribers: programming fees associated with channels added prior to May 15, 1994 or added after May 15, 1994 using the Markup Method, retransmission consent fees, copyright fees, cable specific taxes, franchise related costs, and FCC regulatory fees; Caps Method Segment; Markup Method Segment; Channel Residual Segment; True-Up Segment--contains the compensation for overcharges and undercharges which have occurred during the True-Up periods; and Inflation Segment--allowances for the effects of inflation on the operator's costs of doing business. PART I: PRELIMINARY INFORMATION Module A: Maximum Permitted Rate From Previous Filing Al. We agreed the current maximum permitted rate input by Adelphia to the previous FCC Form 1240. Module C: Inflation Information C3-C5.We recomputed the inflation percentage after agreeing the monthly rates to the appropriate FCC Public Notices. Module D: Calculating the Base Rate D2. We compared the the previously discrepancies. current external costs stated on Line D2 to submitted FCC Form 1240, noting any D8. We recalculated the base rate on Line D8 and agreed this amount to Line I4 from the previously adjusted Form 1240. -8- 12/27/2001 15:00 FAX 202 331 8342 K.S.S., PLLC 141 010 PART II: TRUE-UP PERIOD Module F: Maximum Permitted Rate for True-Up period 1 F4. We recalculated the True-Up period rate eligible for inflation on Line F4. F5. We recalculated the inflation segment for True-Up period on Line F5. Module H: True-Up Adjustment H14. We recomputed the True-Up adjustment. PART III: PROJECTED PERIOD 14. We recalculated the projected period rate eligible for inflation on Line 14. IS. We recalculated the inflation segment for projected period on Line IS. I7. We agreed the external costs segment for projected period to the amount on Worksheet 7. I9. We recalculated the maximum permitted rate for the Projected period. WORKSHEET 7: EXTERNAL COSTS TRUE-UP AND PROJECTED PERIODS Ql-3.We agreed the information in Questions 1 through 3 to the applicable information on the front page of the filing. 701. We compared the amount stated for current cost of programming to amounts stated in prior FCC 1240 for reasonableness. We agreed the cost per subscriber to the attached documentation. 703. We compared the amount stated for copyright fees to supporting documentation. 707. We agreed the calculations for Franchise Related Costs For Period relating to Franchise Fee computation adjustment to the supporting documentation. 710. We recomputed the monthly per-sub external costs on Line 710. -9- 12/27/2001 15:00 FAX 202 331 8342 K.S.S., PLLC 141 0 11 FORM 1205 1. We agreed the amounts for the assets listed on Schedule A: Capital Costs of Service Installation and Maintenance of Equipment and Plant to various supporting documents provided by Adelphia. 2. We recomputed the depreciation expense percentage for reasonableness. 3. We agreed the amounts for Schedule B: Annual Expenses for Service Installation and Maintenance of to supporting documentation provided by Adelphia. Operating Equipment 4. We agreed the amounts for the assets listed on Capital Costs of Leased Customer Equipment supporting documents provided by Adelphia. Schedule C: to various 5. We compared the computed rates to the published rate card and noted that two charges for Transfer of $33.00 and Non-Pay reconnect of $28.00 were not computed on the form. We also noted that a Universal remote charge of $.79 was not computed on the Form 1205 We noted that a monthly charge of $.90 for addi tional outlets was computed, but this amount is not charged to subscribers. -10- 12/27/2001 15:00 FAX 202 331 8342 K.S.S., PLLC 141 012 -11-