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HomeMy WebLinkAboutFebruary 18, 1997ROLL CALL: Council Members Chang, Harbicht, Kovacic, Young and Kuhn All present 1. Report and request for direction regarding expansion /renovation or Staff to provide additional infor- mation.. remodel vs. new facility and estimated 7:00 p.m. costs. Joint Meeting of the Arcadia City Council and Redevelopment Agency Council Chamber INVOCATION Gary Clark, Christian Center of Arcadia PLEDGE OF ALLEGIANCE Kent Ross, City Librarian ROLL CALL: Council Members /Agency Members Chang, Harbicht, Kovacic All present Young and Kuhn 2. PRESENTATION by the Library Department - Kent Ross, City Librarian 3. SUPPLEMENTAL INFORMATION FROM STAFF REGARDING AGENDA ITEMS None construction of a police facility 4. QUESTIONS FROM CITY COUNCIL /REDEVELOPMENT AGENCY None REGARDING AGENDA ITEMS reading in full. ANNOTATED A G E N D A Arcadia City Council and Redevelopment Agency Meeting February 18, 1997 6:00 p.m. Council Chamber Conference Room ACTION MOTION: Read all Ordinances and Resolutions by title only and waive Adopted 5 -0 5. PUBLIC HEARING a. Report and recommendation to adopt Resolution No. 5981 - A Resolution of the City Council of the City of Arcadia, California, responding to the remand directed by the FCC (DA96 -1497) and affirming the reasonableness of the City's June 20, 1995 rate determination (Resolution No. 5862) and upholding the finding that rates charged by TCI Cablevision of Los Angeles County for equipment proposed in a Form 1205 dated February 28, 1995 are unreasonable. Report and recommendation to adopt Resolution No. 5982 - A Resolution of the City Council of the City of Arcadia, California disapproving the rates charged by TCI Cablevision of Los Angeles County for equipment during the period June 1, 1996, to present, ordering a prescribed rate, and ordering a refund to subscribers and making findings in connection to a Form 1205 dated March 1, 1996. c. Report and recommendation to consider proposed abatement of weeds, brush, rubbish, refuse and dirt upon and in front of certain private property within the City. d. Report and recommendation to introduce Ordinance No. 2066: INTRODUCTION - Ordinance No. 2066 - An Ordinance of the City Council of the City of Arcadia, California amending various sections of Article VII, Division 3, Chapter 5 of the Arcadia Municipal Code relating to water service fees. e. Report and recommendation to adopt Resolution No. 5978 -A Resolution of the City Council of the City of Arcadia, California, setting forth fees relating to Maintenance Service /Water Service. Report and recommendation to approve Resolution No. 5979 - A Resolution of the City Council of the City of Arcadia, California, setting forth service fees for the Arcadia Police Department. ACTION Hearing Closed ResT5981 adopted 5 -0 Hearing Closed Res. 5982 adopted 5 -0 as amended Hearing Closed Approved 5 -0 Hearing Closed Ord. 2066 intro- duced 5 -0 w /changes Hearing Closed Res 5978 adopted 5 -0 Hearing Closed Res.5979 adopted 5 -0 g. Report and recommendation regarding the sale of Redevelopment Hearing Closed Agency owned property located at 233 North First Avenue to the City of Arcadia for inclusion as part of a mass transit station development.. • Resolution No. 5980, A Resolution of the City Council of the City of Arcadia approving a certain sale of land by the Arcadia Redevelopment Agency to the City of Arcadia. • Resolution No. ARA -179, A Resolution of the Arcadia Redevelopment Agency approving a certain sale of land by the Arcadia Redevelopment Agency to the City of Arcadia. Res. 5980 adopted 5 -0 Res ARA 179 adopted 5 -0 6. TIME RESERVED FOR THOSE IN THE AUDIENCE WHO WISH TO ADDRESS THE CITY COUNCIL /REDEVELOPMENT AGENCY (NON - PUBLIC HEARING/ FIVE MINUTE TIME LIMIT PER PERSON) 7. MATTERS FROM ELECTED OFFICIALS 8. MEETING OF THE ARCADIA REDEVELOPMENT AGENCY ADJOURN Redevelopment Agency to March 4, 1997 at 7:00 p.m. 9. CONSENT City Council Reports /Announcements /Statements /Future Agenda Items a. Report and recommendation to approve a Negative Declaration for the proposed Extended Stay America Hotel Development on the 2.6 acre property located at the northwest corner of Santa Clara and Fifth Avenue; to approve revised site and architectural plans; and to approve an amended and restated disposition and Development Agreement among the Arcadia Redevelopment Agency, Emkay Development Company, Inc., and Extended Stay America Management, Inc. a. 10. CITY MANAGER Minutes of the January 29, 1997 Special and Joint Arcadia /Sierra Madre City Council meetings, and February 4, 1997 Adjourned and Regular meetings. a. Recommendation to authorize staff to fill the position of secretary in the City Manager's Office. b. Report and recommendation to adopt Resolution No. 5983 - A Resolution of the City Council of the City of Arcadia, California, opposing the California Casino Gambling, Regulation and Taxation Amendment. c. Report and recommendation to appropriate $27,500.00 from the General Fund for unbilled energy costs associated with lighting at the Arcadia High School baseball field and tennis courts. 3 Harvey Lozar Bob Moore See Minutes ACTION Approved 5 -0 Approved 1/29, 5 -0 Approved 2/4, 4 -0 w/ 1 abstention Approved 5 -0 Adopted 5 -0 as amended Continued to 3/4/97 11. CITY ATTORNEY a. INTRODUCTION - Ordinance No. 2067 - An Ordinance of the City Council of the City of Arcadia, California, amending Sections 9240. 9401, 9402.3, 9405 and adding a new Section 9407.3 prohibiting the placement of signs, banners and posters on private property that are not permitted uses and declaring a public nuisance subject to abatem civil penalties and cost assessment. 12. CLOSED SESSION a. Pursuant to Government Code Section 54957.6 to confer with City labor negotiators, Dan Cassidy and /or Gary Rogers, regarding negotiations with all represented and unrepresented employees. 13. ADJOURN to March 4, 1997at 7:00 p.m. Adjourned at 11:40 p.m. 4 ACTION ent, Ord. 2067 Introduced 5 -0 Closed Session 10:15 p.m. E-- 04 W: ktfla STAFF REPORT OFFICE OF THE CITY MANAGER Date: February'1 1997 TO: HONORABLE MAYOR AND CITY COUNCIL FROM: WILLIAM R. KELLY, CITY MANAGER SUBJECT: REPORT AND RECOMMENDATION RATE DETERMINATION REGARDING MARCH 1, 1996 - FCC FORM 1205 PERIOD UNDER REVIEW JUNE 1, 1996 - MAY 30, 1997 The following information has been provided by.the City's Consultant, John Risk of Communications Support Group, who will be present at the February 18th City Council meeting to answer any questions you may have with regard to this issue. INTRODUCTION An FCC Form 1205 was submitted by TCI Cablevision of Los Angeles County ("TCI") to the City of Arcadia on March 1, 1996 to justify equipment rates which took effect on June 1, 1996. The FCC requires cable operators to file a Form 1205 on an annual basis to update regulated equipment and installation charges. The operator must file a Form 1205 with the local franchising authority within 60 days after the end of the fiscal year or at the time its submits it annual rate system filing. SUMMARY OF 1205 FINDINGS TCI's March 1, 1996 Form 1205 proposed a significant increase in TCI's equipment and installation rates. The most significant increases are listed below: $0.07 increase for remote control from $0.05 to $0.12 (140%) $1.26 increase for addressable converter from $0.75 to $2.01 (168%) $0.39 increase for non-addressable converter from $0.41 to $0.80 (95%) Under the FCC rate rules, the City has a full year from the date of receipt of the Form 1205 to accept the rates as proposed or amended, or make a rate determination to prescribe new rates and order refunds where necessary. The rules allow the cable operator sixty days to implement the any rates prescribed by the franchising authority. The rates that TCI implemented on June 1, 1996 are subject to refund liability for a period of twelve months provided the City makes a rate determination within twelve months from the date of the Form 1205 (up until March 1, 1997). 1 SER IMAGED EFFECTS OF FCC REMAND AND OTHER FCC CABLE BUREAU DECISIONS ON REVIEW OF TCI'S EQUIPMENT RATES On September 12, 1996 the Federal Communications Commission released order DA96- 1497 pertaining to TCI's appeal regarding the City's rate determination on June 20, 1995 as it pertains to converter costs identified in form 1205 submitted by TCI Cablevision of Los Angeles County on February 28, 1995. Thus,the FCC said TCI should be permitted to recalculate its Form 1205 to include the labor costs of installing and retrieving converters in Schedule B, and the operating costs of managing inventory in Schedule C. Since TCI's March 1, 1996 Form 1205 capitalizes overhead in the same manner as TCI's February 28, 1995 Form 1205, DA96-1497 would also require the City to consider these facts in their review of TCI's March 1, 1996 Form 1205. On September 11, 1996 the FCC released an order pertaining to Des Moines, Iowa (DA96- 1488)and on October 23 released an order addressing Washoe County, City of Reno, Carson City,Nevada City and the City of Sparks,Nevada(DA96-1753). In these cases related to TCI's equipment rates as proposed in Form 1205 dated February 28, 1995: The Cities disallowed TCI's capitalization of converter costs in TCI's Form 1205 stating that the proposed rates would be tantamount to a double recovery of these costs, first in the monthly programming rates and again in the converter charges themselves. In addition to this "double recovery" concern, the costs were disallowed because: (1) the costs are inconsistent with the Commission's definition of"annual purchase costs;" (2) the proposed capital costs for converters are not based on a local system; (3) capitalization of the costs is inconsistent with generally accepted accounting principles ("GAAP"); (4) TCI has not substantiated that the material costs it seeks to capitalize are not already in the converter lease charge as an hourly service charge; and. (5) labor or other operating costs associated with converter disconnects and converter inventory management are already incorporated in programming service rates. The Cities excluded the $20 per unit capital cost from Form 1205, thereby reducing TCI's lease rates to the Cities' maximum permitted converter rates in all cases. 2 CITY'S FACT-FINDING RELATED TO REVIEWING THE REASONABLENESS OF EQUIPMENT COSTS AS PROPOSED IN FORM 1205 DATED MARCH 1. 1996: On January 7, 1997 the Arcadia City Council discussed a number of policy options with the City Manager, the City Attorney and the City's Cable Television Consultant. The Council directed staff to pursue the lines of thinking reviewed by the FCC in Des Moines, Iowa and subsequent Nevada decisions which disallows the $20.00 overhead all together and directed staff to seek additional information from TCI, prepare a resolution, take public input, and make a rate determination in February accordingly. In considering the reasonableness of the TCI's equipment rates pursuant to the remand by the FCC, and in considering the reasonableness of TCI's March 1, 1996 Form 1205, City staff requested that TCI provide replies to the following questions: 1) Does TCI account for the same costs twice by having already included inventory management costs in Schedule B? 2) Have equipment costs the type TCI moved into schedule C in its February 28, 1995 Form 1205 and March 1, 1996 Form 1205 already been included in the initial monthly programming rates which were implemented when the initial equipment basket rates were factored in the Form 393 rate setting process? Please provide us with a complete break out these specific costs as included in Schedule C and included in Schedule B. 3) Are the costs inconsistent with the Commission's definition of "annual purchase costs? 4) Are the proposed capital costs for converters based on the local system, if not please submit revised Form 1205's showing what are TCI's capital costs based on the local system for calendar years 1994 and 1995? 5) Is the capitalization of the costs is consistent with generally accepted accounting principles ("GAAP")? 6) Are labor or other operating costs associated with converter disconnects and converter inventory management are already incorporated in programming service rates? 3 REVIEW OF INFORMATION SUBSEQUENTLY PROVIDED BY TCI REGARDING THIS MATTER TCI responded to the City's request on February 1, 1997.. However, all supporting records pertained to expenses incurred in calendar year 1994 vs 1995. First, TCI argues that its material costs for converters should be capitalized because these costs have always been reflected in its capital accounts. TCI maintains that it recently reassigned "certain direct, in- home converter-related costs, i.e., the material costs at issue, to a converter capital account so they will now be recovered through its converter rental charges. Second, TCI claims that the actual cost of installing and retrieving converters and managing converter inventory cannot be recouped through one-time charges. Third, TCI states that the contested figure for inventory control costs includes a panoply of expenses that are directly linked to the deployment of converters that have not been tallied elsewhere in the equipment basket calculation. Finally, TCI claims that the converter installation costs cover those costs not covered by existing installation charges. Additionally, TCI argues that (1) the contested costs are incidental costs allowed under existing benchmark rules;. (2) rigid adherence to generally accepted accounting principles is not required; (3)TCI's use of nation-wide system information rather than local system information does not justify rejecting the $20 figure in its entirety; and (4) there was no double recovery. Throughout the past three months, TCI has provided the City with a "Working Form 1205" which attempts to address the effects of the FCC's remand in DA96-1497. In each revision TCI's numbers changes. The following chart illustrates these changes and make comparisons to previous rates. 4 . . , • . . Table 1 - Installation & Equipment Rates 1 1 Former I Former Originalylbricin IVIbrking1 Warking1 Fbvised 1 1 1 Rates 1 Rates 1 Form Form 1 Form 1 Form 1 Form - 1 I 1 In Effect 1 In Effect 1 1205 1205 1 1205 1 1206 1205 1 1 1994 110/15- 1 NM 11/M11/13/97 11/3097 CEGs Racalc . Installation Rates I 1 • 1th-wired $ 46.10 $ 31.79 $34.26 $82ffi 1 $79.03 1 $ 75.31 $ 34.26 Re-wired $ 23.05 1 $ 15.89 $17.13 $41.28 1 $39.52 1 $ 37.86 $ 17.13 1 Adticnd cutlet $ 15.37 $ 10.60 $11.42 $27.52 1 $89.34 1 $ 25.10 $ 11.42 time of installation) • i . lActificnd cutlet $ 23.05 $ 14.20 1 $15.30 $35.88 1 $35.30 $ 33.64 $ 17.13 1 , I(sTiaratetrilo) I- I 1 , 1Comerter 1 1 1 • I 1 lAddmsseble $ 0.29 $ 0.75 1 $ 2.01 $ 1.91 1 $ 1.;.; $ 1.93 1 $ 1.55 1 -Ittraiclressdp $ 0.42 $ 0.41 1 $ 0.80 $0.79 1 $ 0.76 $ 0.79 1 $ 0.431 . 1Fbmote 1 1 1 'Stan:lard $ 0.03 $ 0.05 1 $ 0.12 $0.14 1 $ 0.14 $ 0.13!, $- 0.12 I I . 1-6C 1 21.1911 21.191 22141 , 53.21i 22841 i • , I I I . I • • : I I i I I I . . : i :•• :. , . : . . I . . RELEVANT FINDINGS REGARDING REASONABLENESS OF TCI'S EQUIPMENT RATES WHEN FACTORED CONSIDERED ALONG WITH DECISIONS OF THE FCC'S CABLE BUREAU (DA96-1488 AND DA96-1753) A. Annual Purchase Costs City staff and the City's Cable Television Consultant interpret Commission rules to allow only for capitalization of costs that are incidental to annual purchase costs. Under 47 C.F.R. § 76.923(f), it is our opinion that the costs TCI capitalized are not among those costs that the Commission defines as incidental to converter purchase costs, but are operating costs. . , . 5 The Commission rule defining the "equipment basket" states that the basket shall include all "direct and indirect material and labor costs of providing, leasing, installing, repairing, and servicing customer equipment."' Pursuant to the 1992 Cable Act, material and labor costs included in the equipment basket must be recoverable by the operator.2 The costs of installing and retrieving converters, the costs of managing the converter inventory, and the material costs of converters are clearly related to providing and installing equipment, and are properly classified as part of the equipment basket. The FCC stated in its remand order DA96-1497,that upon proper application of the rules, TCI must be permitted to recover the labor costs of installing and retrieving converters,the costs of managing converter inventory, and the material costs of converters, consistent with FCC rules. Although TCI states that the costs are incidental to annual purchase costs for converters, the FCC in DA96-1753 found that TCI does not adequately justify its reasons for treating the labor costs of installing and retrieving converters,the costs of managing converter inventory, and the material costs of converters as capital costs as it provides on its Form 1205. Pursuant to Commission rules, annual purchase costs include "acquisition price and incidental costs such as sales tax, financing, and storage up to the time [the converter] is provided to the customer.i3 While the list.of incidental costs in § 76.923(f) is not exhaustive, the costs at issue, i.e., labor costs of installation and retrieval, inventory management costs, and material costs for converters, are more substantive in nature than those mentioned as incidental costs. Rules governing the recovery-of equipment and installation costs do not provide for the capitalization of the cost of retrieval, re-installation, and re-inventorying of converters. Installation costs are to be recovered as separate installation charges, and therefore such costs may not also be capitalized. In addition,FCC rules define incidental costs as costs incurred up to the time the converter is provided to the customer, and the converter installation and retrieval costs that TCI seeks to capitalize would be incurred after the converter is provided to the customer. Indeed, TCI does not distinguish clearly the converter costs at issue from the operating expenses and labor costs that are ordinarily included in Form 1205. 'See 47 C.F.R. § 76.923. 'See Communications Act, §623(b),47 U.S.C. §543(b). Section 623(b)(3)of the Communications Act requires that rates for equipment and installation reflect their actual costs. See also First Order on Reconsideration,Second Report and Order, and Third Notice of Proposed Rulemaking in MM Docket 92-266, 9 FCC Rcd 1164, 1190-1201 (1993) ("First Recon. Order'). 'See 47 C.F.R. §76.923(f). 6 • B. Variance from GAAP The instructions to Form 1205 are an integral part of the Commission's guidelines. These instructions require operators to adhere to GAAP (Generally Accepted Accounting Principles) when completing Form 1205 "to the extent that regulatory considerations permit.i4 If regulatory considerations compel a departure from GAAP, the FCC stated in DA96-1753 that the operator should provide reasons for any such deviations. TCI has admitted in its replies to City inquiries that it did not comply with GAAP in the tabulation of costs contained in its March 1, 1996 Form 1205 and argues that it doesn't have to. The issue for the City at this time, is not simply limited to compliance to GAAP. C. Use of National Figures to Calculate Costs TCI admits that the$20 figure is based on national, rather than system-specific information, but states that this does not justify rejecting the figure in its entirety. Because TCI's existing books do not comply with regulatory demands placed on the books, TCI claims it made more sense to use a conservative figure based on a national cost survey rather than try to develop system-specific figures. In arriving at the$20 figure, TCI provided only a dollar breakdown into four cost components: material costs, installation costs, retrieval costs, and inventory control costs. The City believes TCI failed to provide a reasonable description of how these costs were determined, evidence of general ledger documents which support these costs, and proof that such national supporting data applies in Arcadia. For example, TCI provided the City copies of contract labor invoices related to converter retrieval, but upon further investigation, the TCI's regulatory staff indicated that TCI uses employees to retrieve converters. We make similar findings of the cities of Des Moines, Iowa, and the three cities in Nevada that found that TCI has not provided sufficient support for its$20 figure for converter capital costs, aside from its assertion that the figure is based on a national cost survey. As the Cities note, TCI failed to submit any data or methodology supporting the national figures, such as how a representative sample was selected and the size of this sample.' In addition, the instructions to Form 1205 require that the data be identified at the level of organization at which records are kept, e.g., system-wide.' TCI keeps its records on a system level, so its capital costs per converter figure must be identified at the system level as well. 'See 47 C.F.R. §32.1. 'See Cities Opposition at 5;Carson City Opposition at 10. 'See FCC Form 1205 at 4. 7 D. Double Recovery Another key issue regarding these costs in its Form 1205, is that TCI is seeking to add charges without any corresponding "unbundling" reduction in its maximum permitted monthly programming costs.' • The 1992 Cable Act requires cable operators to charge rates based on actual costs for installation and subscriber equipment.8 Regulated equipment includes all of the equipment located in the subscriber's home,including converter boxes,remote control units,connections for additional television receivers, and other cable wiring used to obtain basic services.9 Cable operators must unbundle charges for equipment, installation, and additional outlets from the basic service tier rate.10 They must also use a specific methodology for determining the actual cost of each piece of equipment and installation." Under this methodology, the cable operator must establish an equipment basket to which it assigns the direct costs of service installation, additional outlets, and leasing and repairing equipment.12 In the equipment basket, the cable operator must allocate the system's joint and common costs including installation, leasing, and equipment repair(but not general system overhead)plus a reasonable profit.13 FCC Form 1205 is used to determine the costs associated with equipment and installation for the basic service tier, and has two distinct uses. First, Form 1205 is submitted along with Form 1200 to establish equipment and installation costs in determining initial rates for regulated cable services. The second use for Form 1205 is to update permitted regulated equipment and installation charges based on equipment basket costs. 'Under FCC Rules,the actual cost of regulated equipment and installation plus a reasonable profit must be separated or"unbundled"from an operators's maximum permitted rates for regulated cable services. See FCC Form 1205 at 1. 81992 Cable Act, §3(b)(3);Communications Act, §623(b)(3). 947 C.F.R. §76.923(a). 1047 C.F.R. § 76.923(b). 1147 C.F.R. §76.923(d)-(m). 1247 C.F.R. §76.923(c). '3Id 8 In the FCC decision DA96-1753, the FCC states that "In filing the Form 1205 at issue, TCI has not established that the costs at issue are new "direct overhead" costs, i.e. from a change in TCI's operations or TCI's investment in new equipment. Instead, TCI asserts that these costs result from a change in its accounting to conform to regulatory demands. A result of changes in TCI's policy for cost classification, however, is not a sufficient justification to include the costs on Form 1205. Because TCI did not include these costs in its previous Form 1205 used for the Form 1200 unbundling, including the costs now would result in a double recovery of the costs, once in the monthly programming service rates and again in the converter charges themselves. Allowing these costs permits an operator to identify "overhead" costs for the equipment basket it had not unbundled when the initial rates for monthly programming services were established. Consequently, the Cities were correct in disallowing costs solely attributable to TCI's change in accounting methods or to a change in its policy of classifying costs for Form 1205 purposes. CONCLUSION City staff submitted its findings to TCI and requested additional information related to discrepancies and omissions of TCI's various forms. TCI has been responsive to the City's requests for information and City staff and its consultant have concluded that certain rates charged by TCI are in excess of what is permittable under the FCC rules and decisions thereto. The differences between the rates charged by TCI for equipment and services and the maximum allowable rates for the period of June 1, 1996 to present,per FCC regulations with the $20 in overhead excluded, are as shown in the table below. RESULTANT RATES WHEN FCC FINDINGS ARE INCLUDED FCC Form Actual T C I ' s CSG's Variance Rates Recalculated Re-calculated Rate* Rate Equipment Rates Standard converter $0.80 $0.79 $0.43 $0.37 Addressable converter $2.01 $1.93 $1.55 $0.46 Remote $0.12 $0.13 $0.12 $ - 9 Installation Rates Form 1205 March 1, 1996 (revised) Unwired home $34.26 $75.31 $34.26 $ - Pre-wired home $17.13 $37.66 $17.13 $ - Additional connection at $11.42 $25.10 $11.42 $ - time of initial installation Additional connection $15.30 $33.64 $15.30 ' $ - requiring separate trip $17.13 $25.10 $17.13 $ - Relocate outlet Upgrade/ downgrade $11.42 $25.10 $11.42 $ - (non-addressable) Charge for changing $11.42 $25.10 $11.42 $ - tiers Hourly Service Charge $22.84 $75.31 $22.84 $ - * Assumes the $20 costs are included Refund liability for previously overcharged amounts is for a period of one year. If the City approves the recommended rates at the public hearing, TCI would be required to refund overcharged rates for the period of June 1, 1996 up to the date of the refund, which is likely to be June 1, 1997 (or 12 months). FCC regulations require TCI to make the refunds within sixty days by either of the following methods: 1. By returning overcharges to those subscribers who actually paid the overcharges, either through direct payment or as a specifically identified credit to those subscriber's bills or 10 2. By means of a prospective percentage reduction in the rates for the basic service tier or associated equipment to cover the cumulative overcharge. This shall be reflected as a specifically identified, onetime credit on prospective bills to the class of subscribers that currently subscribe to the cable system. Refunds will include interest computed at applicable rates published by the Internal Revenue Service for tax refunds and additional tax payments. FINANCIAL ANALYSIS TCI's method regarding refunds is to typically issue credits to subscribers for overcharges. TCI's refund liability is estimated as follows: Standard converters: $0.37 x 445 units x 12 months = $1,975.80 Addressable converters: $0.46 x 19,000 units x 12 months= 104,880.00 $106,855.80 Because this action results in diminished revenue to TCI, franchise fees to the City would also diminish for the billing cycle credits are issued. Although it is too soon to determine the exact amount of TCI's refund liability under the FCC rules, the City is required to credit franchise fees collected related to overcharges made by TCI. TCI has the right to appeal the City's decision to the FCC within 30 days. Under appeal, the Commission would take written comments from the City and the cable operator to determine if the City reached its rate decision on a rational basis. RECOMMENDATIONS. Staff recommends that the City Council: 1. Take Public comment. 2. Adopt resolutions disapproving rates and charges for the certain associated equipment and labor by TCI from June 1, 1996 to June 1, 1997 and ordering refunds of overcharged amounts. 11 .:/•.;;; Iiig,,,,, l reorf.„ 6 , , ., ,, -)---- \_,J 0e/ 0— 0 -rd./ ca .O iie 1„,v,0.-7\ 1' _iR\ta ,,,, / #- '3 " , 0.....- , STAFF REPORT OFFICE OF THE CITY MANAGER Date: February' 1997 TO: HONORABLE MAYOR AND CITY COUNCIL 1 FROM: WILLIAM R. KELLY, CITY MANAGER I 11,14 SUBJECT: REPORT AND RECOMMENDATION PERTAINING TO FCC REMAND (DA96-1497) FEBRUARY 28, 1995 FILING - FCC FORM 1205 The following information has been provided by the City's Consultant, John Risk of Communications Support Group, who will be present at the February 18th City Council meeting to answer any questions you may have with regard to this issue. BACKGROUND DA 96-1497 On September 12, 1996 the Federal Communications Commission released order DA96- 1497 pertaining to TCI's appeal regarding the City's rate determination on June 20, 1995 as it pertains to converter costs identified in form 1205 submitted by TCI Cablevision of Los Angeles County ("TCI") on February 28, 1995. On June 20, 1995, the City found that TCI had incorrectly included in its rate calculations certain costs described by the operator as overhead expenses for converter units. TCI defined. these costs as: material costs (cable jumpers, fittings, etc.); labor costs associated with the installation of converters; labor costs to retrieve converters from customers; and operating costs to manage the converter population, i.e., inventory management costs. The City found that TCI had erroneously capitalized these costs, enumerating them in Schedule C, Capital _________ Costs of Leased Customer Equipment of Form 1205. TCI's inclusion of its overhead expenses for converter units in Schedule C increased the operator's equipment rates: In its review of TCI's Form 1205,the City excluded all of these costs,thereby reducing TCI's rates to subscribers for addressable and non-addressable converters by$0.28 and$0.27 per month, respectively: ; TCI challenged the City's rate determination. The FCC's September 12, 1996 order provides a review by the FCC on the merits of TCI's arguments and the merits of the City's rate decision. The September 12, 1996 order clarifies the issues and determines that TCI must ;, be allowed to recover its equipment costs, but must do so consistent with FCC rules. ` i 1 i LASER IMAGED aig„.„. .,,,„( ".., sT v , • The two key issues in both the City's rate determination and TCI's appeal is whether TCI is entitled to overhead costs in its Schedule C portion of the Form 1205 and whether material costs related to converter installation constitute drop costs. On the first issue, the FCC's September 12, 1996 ruling indicates that overhead costs should be allowed to be recovered by the operator in the equipment basket. The order states that: "The costs of installing and retrieving converters and the operating costs of managing the converter inventory are clearly related to providing and installing equipment, and are properly classified as part of the equipment basket. Thus, TCI must be permitted to recover the labor costs of installing and retrieving converters and the operating costs of managing converter inventory."' However, the order also states that "TCI does not justify adequately its reasons for treating the labor costs of installing and retrieving converters costs as capital costs and including them in Schedule C. Indeed,the operator does not clearly distinguish these costs from the operating expenses and labor costs that are ordinarily included in Schedule B."2 The Commission's instructions for completing Schedule B ask operators to provide "all annual operating expenses . . . for installation and maintenance of all cable facilities." Moreover, operating expenses incurred specifically to maintain and install customer equipment are referenced expressly. Schedule C is used only to "compute the annual capital costs of equipment leased to customers." Thus the September 12, 1996 order states that: "The Commission's instructions for Form 1205 clearly indicate that TCI should include the labor costs of installing and retrieving converters in Schedule B rather than in Schedule C.i3 On the second issue, the FCC's September 12, 1996 order indicates: ' Order Page 4, Paragraph 7 2 Order Page 4, Paragraph 8 3 Order Page 5, Last sentence of Paragraph 8 2 "It is not clear from the record of this appeal whether these materials should be accounted for in Schedule C, Capital Costs of Leased Customer Equipment, or in Schedule B, Annual Operating Expenses for Service Installation and Maintenance of Equipment and Plant. The instructions to Schedule C ask operators to, "list all customer equipment for which there is a separate charge, including . . . different types of converter boxes, and other equipment (splitters and amplifiers)." Operators are asked to account for "supplies" for which there are no separate charges in Schedule B. While the record is not clear whether the material costs in this case represent customer equipment with separate charges or supplies with no separate charges, they appear to be the latter. As we noted in Multivision, "[w]ith respect to the cost of materials associated with inside wiring, cable operators have the option of capitalizing those costs" for which they have established a separate lease charge. If the material costs at issue in this case do not constitute drop costs and are customer equipment for which the operator has established a separate charge, the costs should be included in Schedule C of Form 1205. If the costs are simply supplies for which no separate charge has been established,the operator should include the costs in Schedule B. Accordingly, this issue is remanded to the local franchising authority for further proceedings consistent with this order.' Thus,the FCC said TCI should be permitted to recalculate its Form 1205 to include the labor costs of installing and retrieving converters in Schedule B, and the operating costs of managing inventory in Schedule C. Accordingly, the FCC remands this issue to the local franchising authority for further consideration consistent with this Order. CITY DUTIES UNDER DA 96-1497 The City interpreted the FCC remand to require it to revisit the reasonableness of TCI's proposed rate given the clarifications provided in the FCC's order and to redirect TCI to submit revised forms and provide additional clarifications and information. °Order Page 5, Paragraph 9 3 i Therefore, the City directed TCI in letters dated September 26, 1996 and dated January 21, 1997 to resubmit a revised Form 1205 for the year ending December 31, 1994 to identify costs related to Schedule B and Schedule C. City staff and its consultant, Communications Support Group, Inc. studied the information submitted previously, and recently,by TCI to determine whether labor costs of installing and retrieving converters in the 1994 filing were 1) reasonable, and 2) had already been included in Schedule B; and on the second issue, whether costs related to managing converter inventory were reasonable. FINDINGS TCI's regulatory staff indicated that TCI's FCC Form 1205 dated February 28, 1995 reflected an accounting change which capitalizes$20 in overhead per converter. The$20 was adopted on a TCI-nation wide basis from data TCI collected following a survey of several TCI systems. Accordingly, the figures to derive the $20 were not necessarily derived from the books or experience of TCI. TCI explained that this $20 change had been made in part for regulatory purposes and, in part, for accounting purposes; the change was made as a book entry effective January 1, 1994. The$20, as explained by TCI, consisted of$7 labor to install each converter, $3 material(the few feet of cable with connector on each end connecting the converter with the television set),$7 labor for retrieval of converters(where customers have requested TCI to pick up their converters at home), and$3 inventory management fee. The City staff and Communications Support Group, the accounting expert by the City to assist In rate regulation, have reviewed and explored each of the four components making up the $20 and have concluded that the FCC Rules and Regulations, general accounting principles and long-established rate making principles prohibit the proposed capitalization of$20 per converter as explained in greater detail below. CSG requested TCI provided supporting documentation for the $20.00 per converter unit capitalized on Schedule C of the Form 1205 and verify this figure was not already reported in Schedule B. The following information was provided by TCI. 1) The$3.00 material expense per converter was supported by a list of material costs from the contractor which listed cable jumpers with connectors, splitters, A/B switches, and transformers. This documentation did not provide total amounts or general ledger accounts. In previous documentation provided by TCI in Schedule B categories contract labor and maintenance materials the totals of the general ledger accounts Contract Labor-Drops, Contract Labor- 4 r". i Maintenance, and Contract Labor-Audit were included. TCI did not provide any information that indicates these material costs were not included in the above general ledger accounts which are already included in Schedule B. 2) The$7.00 installation labor expense was supported by contractors invoices for installing converters in New Jersey, New York, Colorado, and Kansas City. TCI did not provide any information which would indicate these costs were not already included in the installation time estimates on Schedule D. TCI in its response to the City took this $7.00 cost over 5 years and included it in Schedule B. At no time did TCI provide a revised Schedule D which increased the scheduled time to complete an installation. 3) The $7.00 disconnect/retrieval labor was supported by contractors invoices from New Jersey, Texas, and Ohio and an explanation that in-house staff is paid $5.00 per converter returned. The contractors varied from collection agencies to installation contractors. Again,TCI did not provide general ledger information or totals which were not already included in the categories, contract labor, and payroll expenses which have been previously reported in Schedule B. Again, all material pertains to calendar year 1994 vs 1995. 4) The $3.00 overhead per converter was supported by and explanation of employee time used to place converters in inventory and transactions on the computer. TCI also explained this figure included warehouse rental space for • the converter inventory and a portion of the billing for on-line addressable capability with the converters. TCI did not provide general ledger information for payroll expenses and computer billing system expenses which were not already included in Schedule B. TCI did not change the expenses in these categories when submitting its revised Form 1205. TCI, also did not provide warehouse rental expense with an allocation of the amount used to house converters. 1. Capitalization Of $7 Per Converter For Installation Is Unjustified TCI explained that the trip out ("truck roll') to install each converter averaged $7 and that it had decided to capitalize that amount per converter. The sum of $7 represents approximately 1/4 hour labor based upon TCI's'permitted hourly service charge of$21.19 and basically represents an independent "truck roll" independent of other reason to be at the customer's home (such as to install cable or add an outlet) for each converter. TCI has 5 provided no records to show that this amount is backed out of calculation for the hourly service charge. TCI's filing indicates that each and every customer had a converter installation during the period in review. This assumption appears excessive. Moreover, the City is of the opinion that the labor attributed to install converters and converter maintenance were already included in the hours attributed to converters and converter maintenance within the context of the FCC Form 393 "equipment basket". It appears to the City that TCI has not backed this labor out of the "equipment basket" into which it had previously been included. Finally,TCI appears to have capitalized as of January 1, 1994 the $7 per converter on the system without taking into account accumulated depreciation. Generally accepted accounting principles would require depreciation to be recognized. Moreover, it would reach back prior to regulation and now capture for rate purposes operational expenses that should have been fully covered in the pre-regulatory environment. In sum, consistent with the City's June 20, 1996 rate order capitalizing$7 per converter as of January 1, 1994 is unreasonable and TCI has not justified this amount. 2. Capitalizing$3 in Material per Converter Is Unreasonable The cable and connectors used to hook up converters to televisions is a de minimis expense item and those costs have been Included in the "equipment basket" used to derive the hourly service charge. In general accounting practice, it might be permissible to capitalize the charges for these materials --however, here it would be difficult if not impossible to justify $3 per converter for the materials and, as stated, those materials have been included in the "equipment basket." 6 3. Capitalization of $7 Per Converter For Retrieval Is Unreasonable Converter retrieval by TCI upon request of a cable subscriber appears to us to be an operational expense. Further,we question how that activity equates to$7--about a half hour "truck roll" per converter. That would assume that each converter retrieval would be a separate trip and that no one returned their converters to TCI's service desk. It also assumes that the technician's labor hasn't already been accounted for in the overall hourly service charge calculation. It appears to the City that TCI assumptions simply are contrary to fact. 4. Capitalization Of$3 per Converter for Inventory Maintenance Is Unreasonable The labor associated with inventory maintenance which, again, in fact appeared to have been fully accounted for in the converter and converter maintenance figures reviewed and considered as a basis for the hourly service charge is an operational expense. No accounting justification was supplied for capitalizing $3 per converter for inventory maintenance expense. 5. TCI's Proposed Calculations Contrary to subsequent FCC Cable Bureau Orders The proposal to capitalize $20 per converter as of January 1, 1994 violates FCC Rules and Regulations, general accounting principles and established rate-making principles as determined by the FCC's Cable Television Bureau in orders regarding other TCI systems. The facts and merits of FCC's orders pertaining to Des Moines, Iowa (DA96-1488) and to Washoe County, City of Reno, Carson City, Nevada City and the City of Sparks, Nevada (DA96-1753) are relevant to City's overall study of the matter. In these cases, the cities asserted that TCI's equipment rates as proposed in Form 1205 dated February 28, 1995 were unreasonable because TCI calculations: 1) attempted to recollect charges that should have been covered at that time; 2) attempted to get rate of return treatment on items that are operational expenses; 3) deviated from general accounting practices; and (4) capitalized expenses which are already included in the operational expenses used to establish rates. 7 The Cities in the Nevada cases disallowed TCI's capitalization of converter costs in TCI's Form 1205 stating that the proposed rates would be "tantamount to a'double recovery of these costs, first in the monthly programming rates and again in the converter charges themselves".5 In addition to this "double recovery" concern, the costs were disallowed because: (1)the costs are inconsistent with the Commission's definition of"annual purchase costs;" (2) the proposed capital costs for converters are not based on a local system; (3) capitalization of the costs is inconsistent with generally accepted accounting principles ("GAAP"); (4) TCI has not substantiated that the material costs it seeks to capitalize are not already in the converter lease charge as an hourly service charge; and (5) labor or other operating costs associated with converter disconnects and converter inventory management are already incorporated in programming service rates.' The Cities excluded the$20 per unit capital cost from Form 1205, thereby reducing TCI's lease rates to the Cities' maximum permitted converter rates in the case of all Cities except Carson City, from$1.12 to$0.75 per month for"converter 1" and from$2.00 to$1.63 per month for"converter 2," and in the case of Carson City, from .98 per month to .61 for "converter 1" and from $1.52 per month to $1.09 for "converter 2."' In these orders, the FCC denied appeals by TCI on all grounds with respect to the capitalization of the labor costs of installing and retrieving converters and the operating costs of managing converter inventory. In the four jurisdictions in Nevada and in Des Moines,the Cities excluded the $20 per unit capital cost from Form 1205, thereby reducing TCI's lease rates similar to the method the City of Arcadia reduced rates in its June 20, 1995 rate determination. The City's subsequent review of TCI's Form 1205 raises similar issues regarding the $20 overhead costs in the TCI's Form 1205 for calendar year ending 1995. 5See TCI Appeals, Exh. 1, at 2; Carson City Appeal, Exh. 1, at 2. 61d. 7See TCI Appeals, Attachment A; Carson City Appeal at Attachment A. 8 I Y Although TCI states that the costs are incidental to annual purchase costs for converters, the City believes TCI does not adequately justify its reasons for treating the labor costs of installing and retrieving converters, the costs of managing converter inventory, and the material costs of converters as capital costs as it provides on its Form 1205. Pursuant to Commission rules, annual purchase costs include "acquisition price and incidental costs such as sales tax, financing, and storage up to the time [the converter] is provided to the customer.i' While the list of incidental costs in § 76.923(f) is not exhaustive, the costs at issue, i.e., labor costs of installation and retrieval, inventory management costs, and material costs for converters, are more substantive in nature than those mentioned as incidental costs. In conclusion, FCC Rules governing the recovery of equipment and installation costs do not provide for the capitalization of the cost of retrieval, re-installation, and re-inventorying of converters. Installation costs are to be recovered as separate installation charges, and therefore such costs may not also be capitalized. In addition, the FCC's rules define incidental costs as costs incurred up to the time the converter is provided to the customer, and the converter installation and retrieval costs that TCI seeks to capitalize would be incurred after the converter is provided to the customer. Indeed, TCI does not distinguish clearly the converter costs at issue from the operating expenses and labor costs that are ordinarily included in Form 1205. City staff and its consultant believe that TCI has failed to justify these operating costs as equipment costs on the Form. FISCAL IMPACT Because TCI implemented the City's prescribed rate during the period October 1, 1995 to February 28, 1996, no issue of refund liability exists for this period. RECOMMENDATION Therefore, in response to the order issued by the FCC under (DA96-1497), City staff has complied with its duties pursuant to the FCC order and fmds that although the Commission's instructions for Form 1205 indicate that TCI should include the labor costs of installing and retrieving converters in Schedule B rather than in Schedule C, we conclude that TCI costs as described are not justified. Because this finding is consistent with the actions of City Council in its adoption of Resolution No. 5862, City staff recommends that City Council adopt the attached resolution affirming compliance to the FCC remand and affirming the reasonableness of the City's June 20, 1995 decision. 'See 47 C.F.R. § 76.923(f). 9 oF�• :5;6:2is... 1 ! -en f�\ '3RPO$pTg9/o, MEMORANDUM • OFFICE OF THE CITY ATTORNEY Date: February 10, 1997 TO: HONORABLE MAYOR AND CITY COUNCIL FROM: MICHAEL H. MILLER, CITY ATTORNEY /1 ri) SUBJECT: ORDINANCE NO. 2067 REGARDING ILLEGAL SIGNS ON PRIVATE PROPERTY INTRODUCTION • The attached Ordinance was prepared in response to City Council concern and direction during November and December 1996. This direction was based, in part, on prior staff reports concerning the subject of illegal and unauthorized signs on property throughout the City. BACKGROUND During the past twenty four months the City has experienced a proliferation of signs, banners, and posters (signs), mostly on private property, particularly on vacant lots or property that is generally unattended. These signs are unrelated to the property or property owner. Also, they are not permitted uses pursuant to the Arcadia Municipal Code. Pinpointing responsibility for placement of the. signs is extremely difficult. This has contributed to the problem is summarized in the following. THE PROBLEM The referred to signs are an eyesore. If not removed they are left unattended only to deteriorate and become litter and debris. They are not permitted uses in the City of Arcadia, and they are inconsistent with City property maintenance requirements and the goals of the Arcadia General Plan concerning the character of the community. These problems are increased by the transient nature of those placing the signs, lack of identity tieing them to a responsible party, and their increased use throughout the City. In order to deal with this particular problem, various Code amendments are recommended along with proposed direction concerning contact with property owners, as described in the following. LASER IMAGED THE ORDINANCE In sum, Ordinance No. 2067 does the following: 1. Sets forth findings to support the need for the ordinance and its rationale under the police power. 2. Amends Arcadia Municipal Code (AMC) Section 9240 to clarify that any use that is not specifically permitted is a prohibited use. Subject signs are not permitted. This amendment assures that their illegality is clear for purposes of declaring them a public nuisance and initiating criminal prosecution, if necessary. 3. Amend Sections 9402.3 and 9405 to the City's Property Maintenance Ordinance provisions. This adds subject signs to the definition and listing of property conditions that constitute a sub-standard condition of property and therefore a public nuisance. This is a prerequisite for City abatement action, cost assessment, and the imposition of civil penalties. 4. Amend Sections 9401 (section 2 of ordinance) and 9407.3(section 5). Predicated on the public nuisance determinations set forth above, these sections provide the amendments that enable a streamlined abatement process to remove the signs, assess the cost of removal to the responsible parties as defined in the ordinance, and authorize the imposition of civil penalties in an amount of$1,000 per day per violation. It should be noted that placement of the signs on property also constitutes a misdemeanor which would enables the filing of criminal complaints and fines up to $1,000 per violation. The proposed ordinance provides a broad based approach that authorizes the City to: (1) cite violators for criminal or civil penalties. (2) remove the signs and assess the cost to responsible parties. It is recommended that this approach, be supplemented by the following direction to Staff. DIRECTION If property owners sign the appropriate documentation affirming that they have not authorized placement of subject signs on their property, the City can utilize the trespass statutes set forth in the California Penal Code as an additional source of action and authority to remedy the problem. Many of the same lots are utilized on a reoccurring basis for subject signs. It is recommended that staff communicate with the involved property owners to (1) put them on notice that they could be deemed responsible parties and (2) seek their confirmation that the signs are not authorized by them to be on their property. RECOMMENDED ACTION Move to introduce Ordinance No. 2067 and direct staff to seek trespass confirmation from involved property owners as set forth above. CONCURRED: William R. Kelly City Manager c: Donna Butler, Community Development tid fit ORDINANCE NO. 2067 AN ORDINANCE OF THE CITY COUNCIL OF THE CITY OF ARCADIA, CALIFORNIA, AMENDING SECTIONS 9240, 9401, 9402.3, 9405 AND ADDING A NEW SECTION 9407.3 PROHIBITING THE PLACEMENT OF SIGNS, BANNERS AND POSTERS ON PRIVATE PROPERTY THAT ARE NOT PERMITTED USES AND DECLARING A PUBLIC NUISANCE SUBJECT TO ABATEMENT, CIVIL PENALTIES AND COST ASSESSMENT WHEREAS,various conditions that become a public nuisance in the City of Arcadia should be included in the nuisance abatement provisions of the Arcadia Municipal Code; and WHEREAS,the following findings and code amendments apply to current problems that need to be addressed as part of the City's nuisance abatement and regulatory process. NOW, THEREFORE, THE CITY COUNCIL OF THE CITY OF ARCADIA, CALIFORNIA DOES HEREBY FIND, DETERMINE AND ORDAIN AS FOLLOWS: SECTION 1. FINDINGS. 1. The Arcadia General Plan includes goals that pertain to the preservation of specific attributes which comprise Arcadia's identity as a "Community of Homes" and provide for their long term protection. Another related goal is to direct the amount and location of land uses in a manner which enhances the environmental, social, physical and economic well-being of Arcadia. • 1