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Staff Report 9 03/05/2001
• 9 City of Petaluma, .California • Memorandum City Mamiger's Office, 11.English:Street,P.,etalunta;CA'94952 (707).778-4345 Fas,(707) 778-4419 E.rail:.cityntgt(a)chpetalumrr.ca.us • DATE: :March:2, 2001 TO: •MayoranfMembers of the City Counnc FROM: Frederick C. Stouder, City Managers SUBJECT: AT&T Audit Report—Agenda Itein #9 March 5,2001 Council Meeting .. Attached is a revised report-frorti the consultant„John Risk. The changes-to this report are as • follows: • 1.• The report submitted.i rthe agenda packet had page numbers cut off from view. As the • consultant will be referring to these page punters,.during his presentation to Council, these are.now`added. 2. The original report submitted'to`the City required three updates to the financial figures to reflect the latest information that was being provided by AT&T following the original report date. The packet distributed`last week included ran earlie"r versidmof the report: The updates are: a. The figute:af the bottom of-page,2..of the Executive Summary and on page 4 of _ the full report shouldaead $1`5,856 09 msfead`of$1;7,06'7.33.:This'chang:was •: -':-J:: . also made,tothe chart°onpage 13. b. On page 3 of the Executive Summary, on page.5 of the full report, and on the chart:onpage 131the}amount owed and the amount of revenues omitted related to • late feeshould=be changedtto read$842:33 arid $^16,486.50 respectively instead. of$717.83 and $14,355:00. If you hade:any questions, please cohtact me. • d:/manager/stodder/fs0301/ke COMMUNICATIONS 'isuPP to GROUP,. INC. 1499 WESTGATE=LANE PENNGROVE, CA 94951 VOICE'(707) 795-8995 - FAX: (707) 795=6258 • EMAIL: jrisk@concentric.net EXECUTIVE SUMMARY' September 15; 2000 1. PURPOSE: The City of Petaluma retained the firm Communications Support Group, Inc. (CSG) to provide a. Variety of consulting,services related to the fourth year review Of AT&T's Petaluma cable franchise:, • Section,27.,1 of the City's Franchise Agreement (Ordinance 1981 NCS --adopted June 19, 1995) calls for these four-year performance. reviews. O.n. May 15, 2000, the City engaged Communications ,Support Group, Inc (CSG) for the purpose of conducting. , audits-re'l'ated to Section 27:1. Specifically, Section 27.1 reads: Four-year Review • A. During the years, which commence on the fourth, eighth and twelfth anniversaries of the effectiverdate of the Franchise the tfty may commence'"awreview of the Grantee's performance :under the Franchise, isiparti of this review, the City may"consider. (1) whether the Grantee has complied with its obligations=under Franchise and applicable law; (2) whether customer service st _ andards technical standard s or bond,or,security fu m nd"requireents are.adequate or excessive; •and;(3).other issues as may be'raised by`the Grantee, the City, or the public. - B. The City may: conduct,public"tiearings to provide;the:Grahtee and the public the opportunity to • comment,on the Grantee's performance and other issues considered:as part of the foul-year• reView.. This report provides a summary offindings,from She various audits performed by CSG and presented in a'report to the City on September 1, 2000., Findings are summarized in the following four areas:r .. -r_ �•_- = �a=ate.- • 1) Franchise Foe e--Audit Findings (including reconciliation of fees paid for the period July'1 , 1998 through December•31, 1999) 2) Franchise Compliance Audit Findings • 3) Additional items requested by City Council "members atthe May 15, 2000 Council meeting. 4) Technical-Compliance-Audit Findings • _ . • Detailed information can •.k e found in CSG'S icomprehensive report. Additionally, separate support documentationis also contained in four exhibit binders accompanying the compreherisive report:, • • • • ExecutiveSummary:doc. •' . Communications Support_Group, inc.,©'2boo Page 1 of 6 - AT&T PETALUMA�FRANCHISE'FOURTH YEAR'PERFORMANCEREVIEW EXECUT,IVESUMMARY September 15;2006 .. 2. METHODOLOGY: As part Of this review, our ascertainment.takes into :account provisions Of the City's municipal code, franchise agreement, the federal Cable Act,.;Federal Communications Commission (FCC)' rules• applicable California iStateelaW. and standard prectices'of the cable7industry. .During the period between June and September 2000, CSG performed the following • services': Conducted`interviewswith City anagement,::staffpertaining to;issues of'performance and non= compliance. , • 7- Reviewed.City documents regarding AT&T's franchise'performance and franchise fee, • payments. Reviewed,current certificates'ofinsurance, bonds and letters of credit asispecified in franchise' agreement. 7 Validated Auditors•repodfrom 1998 Transfer. 7 Conducted interviews.with AT&T'.representatives'on issues pertaining to franchise_fee•payments 'and franchise compliance. • 7 piled compliance checklist of municipal code•and franchise e payments and franchise ,Com _ • 'Provided que`stionnair t g ement requiremen .' e to,AT&T regarding°compliarce with specific requirements';cif municipaIL code and,franchise.,egreement; . 7 Performedaudits in'thesfollowing areas= • • o Franchise fee payment;accuracy • o Franchise compliance'Performance o Technical compliance performance • o Council-members issues raised .-.t.■I '+°mitts• .--�....._...�.� _... _ .. ✓ ;Drafted'repotts'addressing-Leath area of review. 3 • FINDINGS:: 341 FRANCHISE FEE AUDIT • Section .1,:1 of The report icomprises,the ,franchise. fee audit. During ;the franchise fee audit CSG audited-financial records,of AT&T'to determine 'compliance;to.franchise fee paymenrterms asset out in the franchise agreement. A'list of exceptional ';findings follows. • In total, CS,G found $1'5,856:0a in unpaid franchise fees for the period July 1, through December. 31 , 1999,related to the following; • • Executiv m e,Suinary:doc Communications SupportrGroup, Inc. ©2000 Page 2 of 6 AT&T PETALUMAFRANCHISE:FOURTH YEAR PERFORMANCE REVIEW • •- EXECUTIVE'SUMMARY . September 15, 2000 .• 1) Found AT&T had 20 City subscriber addresses,toLthe County. 2) Found an additiona450 addresses.not.in AT&T's database, which may represent past, current -Or future franchise lee reveriues,to the City:3) , .Found that AT&T omitted late fees in 1998 in ttie-arnount of$16;846.50 resulting in a $842.33"franchise fee'liability. 4) Found that in NovemberoFt998 AT:&Tfail'ed-to;pay franchise fees cm $1„326.05 in trip charges resulting in a $66:30 franchise fee liability, 5) Found AT&T underreported $283;1'421901 of advertising revenue due to deductions for agency commissions and national representative fees resulting in $14,157.15 of franchise fees owed., 6) Found it necessary to recalculate advertising, home shopping and program guide revenues due to:the omission of20 subscribers;'discussed above. 7) Determined,that beginning in April 2000 AT&T-purchased a satellite master antenna television system (SMATVx) serving 383[subscribers in' the "Lakeville Apartments” complex on south Ely Rd:.AT&T should be:remitting franchise fees payable to the City for these subscribers. During our review'of records'we found that AT&T did not include revenues for,April and :May of 2000 in its June 30, 2000 quarterly franchise fee payment. Found AT&T's,payments related interactive"services (@Home cable modem service) consistenfwith'transfer.agreement executed in"1999. 8) Found AT&T's digital revenue is included in the basic service revenue consistent with transfer agreement executed in 1999. 9) AT&T has properly complied with Fifth Circuit Court of Appeals decision in City of • Dallas v FCC;;118 F"3d'393 (1997)and'the'transfer,agreement regarding fees paid on •franchise fees; 3:2 FRANCHISE COMPLIANCEAUDIT CSG audited performance: 146 :items. „CSG found AT&T to be in compliance or . substantial compliance ;(depending one nature, of performance criteria) with. 134 items. Major, items found in compliance 'included requirements for insurance certificates, bonds, and letter of credit (see{exhibits"C', D and E of the compliance audit binder). fitrJ' r'.:•:.;.-„ . 11.^' �y.l:'•CUv..r,4 r '_-i.-iti ..r.�}:. ,.tf_I(i I.:w . . F. z--Jr!_ rt ,r,: - =. hr CSG' found AT&T to be ',in non-compliance; potential non-compliance, or conditional -- compliance, to 12 items. Section 2:4 of the compliance•audit report offers suggestions and recommendations for corrective "mea tires. Many of-these items are directly related to AT&T's failure to provide documentation supporting'compliance. Below are listed the twelve:.items of.potential non-compliance or conditional_compliance; ITEM 1: Section 24°;BOOKS.-AND RECORDS -- REPORTS AND RESPONSES TO • QUESTIONS:subsection 24.1. . ITEM'2: Section 714 MAINTENANCE AND COMPLAINTS, subsection 7.4 (B). ITEM 3: Section 7I5 ,Non-discrimination and Equal Employment subsection (A) Statistical reporting of FCC notices to Grantee.. '�. 'This figure is based on actual figures for commissions and rep fees as provided by'AT&T's P&L's submitted by AT&T Media Services corporate office inDenver,beginning in February 1999. • Executive Summary.doc Communications Support Group, Inc. ©2000 Page 3 of 3 • AT&T PETALUMA FRANCHISE:FOURTH YEAR PERFORMANCE REVIEW. EXECUTIVE SUMMARY • „ . September 15, 2000 , ITEM 4: Section 8 SYSTEM FACILITIES, EQUIPMENT AND DESIGN (8 1)(C)(2) Institutional Netvvorls Design, ITEM 5: Section 8, SYSTEM FACILITIES', EQUIPMENT AND DESIGN subsection 8 10 'System Extensiom,Part A. • ITEM 6: • 'Section 8 SYSTEM"FACILITIES,.EQUIPMENT AND DESIGN.hsubsection 8.14 . Ascertainment Of Pregrarrning Part • ITEM 7: _Section .24 BOOKS 'AND 'RECORDS -- REPORTS AND' RESPONSES TO .QUESTIONS SlibseCtiOnS.: 24.1, (B);,24-f1C; 242 (A) ITEM.8: SeCtion 27 PerforrhanceMonitorinwsubsection.27.2tranteetooperation. ' ITEM'9: 'Exhibit A Customer Service of the franchises ordinance ection 2, subsection 2 2.3'Operating Hours. ITEM 10: Exhibit A, section 2 Local Operations subsection 2.2 Telephone Service Part. .22,24 and FCC Customer .Service Rules Title '47 SUBPART- — GENERAL OPERATING'REQUIREMENTS SECTION 7e.309 Customer service obligations. Consumer Service Standards Telephone Answer Time (C)(ii). ITEM11: FCC Customer,Service, Rules'Title 47 SUBPART He- GENERAL OPERATING REQUIREMENTS SECTION 76.309 Customer service Obligations. Consumer Seivice Standards Telephone•AnSwer Time (C)(iv).. ITEM 12 FCC Customer Seryice.Rules;Title 47 SUBPART H - GENERAL OPERATING REQUIREMENTS SECTION 76.309 Customer servibe obligationg.' (C)(2) 'ConsumerServiceStandardS Installations, outages andservice •CSG-determinesAT&T'to be in non-comPliance-to•one issue, pertaining to provision of quarterly reports in.a form upon bythe City and The Graritee: ITEM: PurSuant 'to Section. 24 BOOKS AND RECORDS -- REPORTS AND RESPONSES TO-QUESTIONS supsectiop 24.1% 3..3 COUNCIL MEMBERS 1SSUES. • • During ttpe,,May45,,4000icol‘incil.meetingruthe,c, ityfe jouncil raised specific issues that they were interested in havingj CS61 investigate during the reviOyj, These issues included: . v Rate regulatign • • v Petaluma CommUnity Actesa - • • Utility Uridergrotidding .•• • 7 •Pedestals . Rate Rag-elation: . _ Data, detailed in the comprehensive report, •jg-uggests that rata-:.regtlatiOni-nay lead to , lower charges for Petalumas basit:drily• subscribers and may -lead to lower equipment rates to the entir&,subscriber population But, as the data clearly shows; regulated cities experience higher expanded, basic rates. Since approximately 92% • of Petaluma subscribers take a combination of basic and expanded basiC, these higher expanded basic rates may offset the benefits of rate regulation for the 111 majority of•Petaluma's Subscribers. Nonetheless, as a policy matter, the City-cguld • • Executive Summary.doc Communications Support Group, Inc: ©2000 page•4 of 6 • • AT&T PETALUMA FRANCHISE FOURTH YEAR PERFORMANCE'REVIEW EXECUTIVE SUMMARY September"15, 2000 • consider'rate regulation an.important and useful measure,.in;protecting the interests of the approximately 1,401 'Basic-only subscribers,-some of{whom are of low or fixed incomes. • • ' Petaluma CommunityAccess iIs AT&T Properly'Accounting°For Petaluma.Access Funds?' CSG found that AT&T'S billing'system,tracks both'the numberof'subscribers and the amount collected from 'subscribers related to the $2:0,0 per month access fee contribution. The audit determined that AT&T provides ian -option each month for a subscriber to check whether or not they would like to be charged the access fee. Once.a subscriber selects theoption not to'be charged, the subscriber is entitled to deduct $2.00 from the ?mount he or she-,Owes forthat month. Going forward, according to AT&T's local customer seryicei staff, .AT&T automatically deducts the amount from future billings If a subscriber fails to make,,a choice, the subscriber is • . charged the fee by' default, • • CS,G did not audit the accuracy of access fee payments: CSG recommends the Petaluma Access Corporation,:audit the accuracy of past and -future access fee payments to ensureaccuracygoing forward' Utility Undergroundrng:: • Does AT&T'Participafe With Utility Undergrounding'.Coordination? AT&T regularly sends 'a representative°to meetings related, to underground construction;coordinati'on'with the other utility' companies. AT&T also 'participates with USA (Underground Service Alert) and dispatches a.repre sentative whenever - necessary to protect its underground assets. AT&T has no issues with the City regarding the underground district's .(Rule 20); and supports the efforts of the City related to underground ,standards,, C,SG interviewed the 'City's' construction manager; Rick Skladzien; who,also indicated that there are no issues specific `to • -AT&T's compliance or participation insundergroundmg,,cabs"es t r tea:. Pedestals: AT&T:has a total of 28 fi_ber'•nodes in Petaluma: 'Roughly 55% of these,nodes are located on telephone poles and 45%0 of these .are-in ground-mounted 'pedestals. Additionally, in order to provide' standby powering equipment for its telephony customers, AT&T. Cable has installed lar.fde cabinets containing up to six 12-volt (automotive type) batteries for backup power for their system. Although none are currently in use in Petaluma, some cable companies, including AT&T (in other communities) are,placing in the rights of way propane gas powered generators for stand-by power. As a preventive policy, CSG recommends that,the:City periodically inspect the safety condition'of these cabinets and generators. ExecutiveSummarY doc • Communications.SupportGroup,-;vinc. ©2000 Page 5 of 6 • All&T.REYALUMA FRANCHISE FOURTH YEAR:PERFORMANCE REVIEW EXECUTIVE SUMMARY SePtember 15, 2000 34 TECHNICAL'COMPLIANCE AUDIT • AT&T's tethrlibef perfOrmance was evaluated &JON the technical compliance audit conducted on August 1st and rid of 2000. As is discussed in greater :detail in the comprehensive report, AT&T designed, constructed, and operates a 750 'MHz. Hybrid -.Fiber Coax-:(HFC): :design sy§tern.in Petalurna. This design uses fiber optics to transport signals to multiple' neighborhood Iodations elnOdes'l) where the optical 'signals" are . received and re-modulated as standard Redid Frelcieney, .(RF): There are 28 nodes in - Petaluma:serving apProximately627lsobScribert each. • . . CSG selected three locatiOnslo'Rerform field test's. These locations included City.Hqll, Lucchesi Commodity, Center, and the RCA's Media: Center at Casa 'Grande- High School. As noted in the full teporl, Carrier to Noise and signal levels at the -Access Center Center met or _surpassed' FCC sthnderdS Additionally, certain: findings'from tests performed at the Media Center suggest the need for RCA to inter0(5,o, wiring within the 'Media Center. „ • However,, signal levels at City Hall did not 'meet requirements of„FCC 76.:6057,(a), (3) 'The aura! center frequency of the aural carner must be 4.5 MHz ±5 kHz above thetreguerccy Of the• • visual carrier at the odtpiit of the modulating or processing equiPriferit of Cable television . system, and at the subscriber terminal.' This failure has likely'contributed to the 6-ity Hall test also missing the FCC- requirement(76'.605t(a) (7)) for Carrier to Noise ratio 1114 Section 27 of the franchise agreement `requires ,AT&T to submit a '-etate;ib'f 'cable: technology -report: As stated in the Sbctirif-) 2 0 $oseetiot) .2,:a:Of the Compliance report, AT&T has repeatedly been requested to §blornit ate-port (and •letter:ettatched at . • Exhibit C:beroto). As of the date of thiSr0001-lf:- this?,imPortant 'state of cable technology' report:tie:Shell been'submitted. • ;"''....Cfllc-t-TIP:: :--7.f.4'nkti--4CONCIthUSION:,t±g, • In .spite: of the repeated teasSiiitanbee from :AT&T that compliance is on going, It is troubling that AT&T has been unable to confirm compliance by failing to provide:specific dbcCiMehtetibtit'as requested Ultimately the company 'must ':provide to the %City frandhise, required documentation ..,to confirm :compliance; to areas of the franchise: inditated'Irt our. report. • As it 'PertainS'tCYfterlotljse fee deficiencies, CSG recommends the City notice AT&T of the deficiencies and pursue neceS§lary -Corrective actions :AT&T to the areas indicated in the Mirreport. . - •— , - Finally, as it pertains to PCA's technical needs, CSG recommends the City assist RCA iii seCutidg the assistance of AT&T,to study'the matters oritlinedin:our.fullf report:. - z• • gxecritiliesuinniaty:doc CgmmunicationscSiipport'Group;Inc.•©2000 :Pfige 6 of.6 COMMUNICATIONS SUPPORT GROUP'; INC. 1499 WESTGATE`LANE•PENNGROVE,CA2.94951 Vo10E>(707) 795-8995 FAX: (70_7) 795-6258 EMAIL: jrislD.concentric.net Franchise Compliance,AuditReport ' • Of AT&T Cable Services, City;ofPetal'u ma • Pertaining to Fourth 'Year Performance • September 1,, 2060 • 'PLEASE REGARD:SUPPORT DOCUMENTS`WITH CONFIDENTIALITY 1.0 NATURE+OF STUDY Section 27._t,of the City's Franchise Agreement'(Ordinance 1'981 NCS -- adopted June 19, 1995)calls for reviews every'fourth year during,thefranchise. On-May'15, 2000, the City engaged Communications Support Group, Inc. (CSG) for'the purpose of conducting audits.related'to-Sedtion;27.1 . Specifically, Section 27"1. reads: • Four-year Review A. During :the years; which commence on the fourth; 'eighth °anditwelfth anniversaries of the effective date of'the Franchise 'the city may commence a review'of.the Grantee's performance 'Linder Franchise As part of this:review,-the City may conssider; (1) whether.the Grantee has complied:with its obligations under Franchise and applicable law; (2) whether customer service standards,-technical standards,or!bond,or security fund requirements'are adequate or excessive; and (3) otherissdes as',may be raised.by the Grantee the Cdy, or the public. , • B:;The City ma ,~conduct public,hearingsto provide the,Grantee:and the public the opportunity to, - comment on the Grant s performance and,ether issues considered :es "pad of the Tour-year ee review. . ._•c=a : + i�v. �ca .r, This report details findings'from the rvailbOS audits performed ;by CSG. Our report presents'findings in the folllowing`order' 11 Franchise Fee,Audit'Findings (including.reconciliation of'-fees.paid for"the . peribd.July 1, 1-998 through December 31 , 1'999)' 2) Franchise .Compliance Audit Findings 3)' Additional 'items requested by City Council members at the May 15, 2000 Coundil!meeting, ' 4) Technical Compliehce,AuditFindings• • An executive summary is also provided at the rear of the report. RPT00012.001.FINAL.doc Communications Support Group;lnc. ©2000. Page 1 of 34 • • • AT&T:PETALUMA FRANCHISE FOURTH-YEAR PERFORMANCE REVIEW • SECTION ti -.FIRANCOSEFEE'AUDIT SEPTEMBER •„ 001:1 41. Section 1.1 ' FINANCIAL PROCEDURES AUDIT OF AT&T BROADBAND & INTERNET SERVICES RELATED TO FRANCHISE FEEPAYMENTS TO THE CITY OF PETALUMA FOR THE PERICia JULY1, 1998,TRROUGH CiECEMBER31i- 1999 -'Sectiort11.1 ofthe:Franchlse Agreement,(Ordinance-1981) states: The Grantee shall Pay to the City an amount equal to fiVe (5) 'oertarit .of the, Gross Revenues derived from the operation of its Cable 'System in the City Section 11.2 of the Franchise Agreement ;requires Payments due to the City Under this provision shall, be computed at the end of each calendar quarter and Shall be due within 45 days after the end of the preceding Each payment shall be accompanied by a statement of revenue received for the quarter in connection'with the operation of the Grantees Cable System in The and a • " —" • brier report the basis for coMpUtatieri of fees. The repOntsl'shall(liSt a line item for every source orreVenUetreceived,by the Grantee (as?Specified within the definition of "Gross Revenues ' in Section 2.2) from the operation of its Cable SYstern. 'Gross'Revenues' are defined in Section 2Q of Ordinance #1981 as: • "Gross Revenues"!,shaltmeatell.dash, credits, or other consideration of any kind . . or-raturfe:rbeeiVed directly'orlbdicectly'by the Grantee; its Affiliates, Pori„ariiyother Persbn, livniCh` constitutes:a cable%operator under the Cable Ac from fam'ospuree: whatsoever arising:from, attributable te,or in any way derived from the'Grantees bable. System within the City Gross Revenues include, but are notiliftlitee to fees charged:SubsCriberS for 'Basic iService, fees charged SiabSeriber-s9fOr any optional, premium, per-channel, or per-program service; moot* fees 'charged' Subscribers for any Tier of service other than .Baeit. Service installation, disconnection, rd-connection, and change-in-service fees.'1;leaSed,channel fees, fees, payments, or other CoeSidiTati'grfneCtiVeaefrolrics-P:roVarTfirfier-iffpf.'-`,Oerriege Of PrOgramming, on the Cable System; converter'rentals or sales to cyetomers, personnel services fees±:(over and above Grantee. costs), local advertising revenues regional or national advertising revenue allocable to this System, revenues from home shopping!channels}, sales of Programming guides unique to the Grantee or its affiliates; and such other revenue sources as may now exist or hereafter develop. The definition shall be 'interpreted in a,manner which permits • • the City to collect the maximum Franchise fee. permitted by law, Gross Revenues however, shall not include any taxes imposed: directly upon any user by the state, City, or other governmental ynitappi.colteeted by the Grantee on behalf of, said governmental unit: The amount paid as :a Franchise fee cannot be deducted from Gross ReVendeS. unless prohibited by Federal law. . , • . . - • RpT00012.001:FINAL.doc Communications:Suppoit Grout(); Inc. @2000 „PO? 2.0(34 AT&T PETALUMA FRANCHISE FOURTH YEAR PERFORMANCE REVIEW' SECTION 1.1 - FRANCHISE'FEE'AUDIT �V SEPTEMBER.1, 2000 1,.2 iFINANQIAL,AUDITiCeNSIDERATIONS Six principal questions were considered during the course of.our audit: 1 ) Are AT&T's• accounting procedures sufficient to assure proper franchise fee payments•to'the City? 2) Is AT&T's reporting, of ;revenue supported by our review of various financial records kept'by the company..?' 3) Were franchise fee payments submitted to the nCity.during the period July 1, 1998, through Decem_ ber 31, 1999„ accurate and consistent with franchise requirements?' • •• 4) Are franchise fee calculations compliant with the Fifth Circuit Court of Appeals decision in' City'of Dallas v FCC, 1 ti8. F.3d 393 (1997) and the transfer agreement? 5) Is AT&T properly reporting advertising and home shopping revenues? 6) Does AT&T have an accurate accbunting of Petaluma subscribers? .:. 1.3 METHODOLOGY On June 16, 2000, C.SGs accounting'staff inspected accounting records and•conducted interviews with AT&T representatives, at 'AT&T Communication's San Ramon, CA corporate Offices. • AT&T representatives included; - •,;( Stacie•Kelly;YDireettinof ftegulaticn r Karin Perkins Division Accounting Manager ✓ Sharon Jorgenson Accountant • CSG performed„what is known as an "agreed-to procedures” audit. What this means•is, that revenue •detail .was not exhaustively reviewed; ° Instead, priority was given to inspecting major categories of revenue (subscriber revenue, equipment rental, advertising;, and •shopping) using test months to sample procedures and accuracy: Audit depth was increased based on_ discrepancies;;and; 'compliance issues. This method saved time .and.allowed us to concentrate on areas where.discrepancies and compliance issues were'found. The start date of the audit period, July 1 , 1998, was mutually selected by AT&T and CSG• because it aligned with the audit cut-off of the previous audit performed toy the City. • RPT00012;001 FINAL,,-doc Communications Support Group; Inc. ©.2000 Page 3 of 34 AT&T PETALUMA FRANCHISE FOURTH YEAR PERFORMANCE REVIEW SECTION 11 -:FRANCHISE,FEE AUDIT SEPTEMBERP1, 2000 • CSG reviewed the following dotuments: 1 ) Remittance statementS. and check statements attached to franchise• fee payments from AT&T to,-the City for fiscal yearsfrenclingl "1,998•(Exbil5it A), 1990.•(Exhibit B), and 1s guarter2000. (Exhibit 0); 2) Annual audited: trial balances and general ledgers for fiscal years ending 1.99B,, 1'999 pertaining tO City of Petaluma cable system ; • 3) Cable. Services Group (e billing. system) reports which are Ltsed to • calctilate revenue andfdenveisubSeriber nOrnberefor the period; • 4) Remittance statements showing 'amounts paid and calculation. of prorations for each,:of'tne a) Home shopping channele by source in test months ;during fiscal' • year ending 1998, 1999; •• b) Advertising sales revenue receipts from AT&T and TOliiMedia Servicesfer teet:MbntbSiOuring fiScal year ending1998 T999; 5) Bank deposit statements showing walk-in receipts for test months during fiscal'yeer ending 109B, 4999; • 6) Sub-scriber address lists.asSigned tb the City of Petaluma:: 7) Monthly :accounting :worksheets Showing revenue data. in the franchise lee calculation biz the City; 8) Community access fee records for select months during' the audit period • (E,xhi bit K). • • 9). Unaudited financial statements stibrnifted to the City of Petaluma:: 10). Special worksheets provided by..AT&T related lo advertising ,iieVe-fil_re-S iriCludling Petaluma system general ledge=rs for 1998 and 1999- I :10' -Home shopprng receipts for selected months. , • • , • , ) 12) General ledger figures AT&Tiecorporateibffice in Denver,CO; related advertising agency commissions and national rep firm fees • 1.4 Summary of Exceptional: FirtlinOs:1 In 'total, CSG found, in iunpaid franchise fees for the period July 1 1998. through December 31, 1999, 'relatec:1;lb the following 1) Found AT&T misallocated a total of:20 City subscriber !addresses to the County The exact amount, of franchise fee liability is not knoWn. For further discussion, please see SectiOn1 .5.2•.. • 2) Found an additional 50 addresses not in AT&T's database, which may la. represent past, burrent, or future franchise fee revenues to the :city. This matter requires further study to determine exact franchiteeifee 'liebility,.:if„ • any RPT00012.00:171,1AL.doc Cantmunitations Sispporl.Group,1 Inc. ©2000 Pagqt41f0f-34 • • AT&T PETALUMA FRANCHISE FOURTH YEAR PERFORMANCE REVIEW SECTION 1.1.- FRANCHISE FEE AUDIT SEPTEMBER 1, 2000 • 3) Found that AT&T omitted late fees in -1998 in the amou_ nt of $16,846.50 resulting in;a $842.33 franchise'feeliability. 4) Found that in November of 1998 AT&T failed to pay franchise fees on $1,326.05 in trip{charges•resulting'in a $66.30 franchise fee liability. • 5) Found AT&T underreported $283 142'90' of advertising revenue due to deductions for agency commissions and national representative fees resulting in $14,157.15 of franchisetfees owed 6) Found it necessary to recalculate °advertising, home shopping and program'guide revenues due to the omission of 20 subscribers discussed above. AT&T was found to have underpaid a total of $70:31 related to these three proratedl,categor,ies of revenue. 7) Determined that beginning. in .April 2000 AT&T' purchased a satellite master antenna •system serving 383, subscribers in the "Lakeville r, Apartments"' complex on south :Ely Rd. -AT&T calls this franchise Agent 30. The subscribers of this franchise area automatically become part of the City of Petaluma'franchise' area Therefore, AT&T should be remitting franchise fees payable to the City for these. subscribers.. During our • review, of records we found that AT&T did not include. revenues for April and ;May of 2000 in its June 30 2000 quarterly franchise fee payment. AT&T's accounting staff stated, that this matter would be corrected in AT&T's September 30; 2000 payment: In that this finding concerns franchise.fees eligible to the City, which extend outside of our audit period (ending December 31, '1999) we• did not audit the accuracy of AT&T's reporting of revenue, but would be to do so as add-on work. . CSG recommends the City evaluate this matter following receipt of AT&T's third o - «s •• quarter•2000,Payment. Records indicate thatfranchise feespayable for -- this franchise:area total approximately $550:00 per month. 8) Found AT&T's interactive `services related payments (@Home cable modem service) consistent with transfer agreement executed in.1999. 9) Found AT&T's, digital .revenue is included in the basic service revenue • consistentwith transfer agreement executed in 1999. • 10) AT&T has properly complied with Fifth Circuit Court of Appeals decision in City of Dallas v. FCC, 118 F.3d 393 (1997) and the transfer agreement regarding fees'paid on franchise fees. • ' Based on recalculating gross revenues,using actual figures for,,agency commissions and national rep, firm fees provided io CSG by AT&T Media Services Corporate office in Denver CO. See Section 1.5.2. of the report for additional details.- _ RPT00012.001.FINAL.doc Communications Suppoi ;Group, Inc. ©2000' Page's of 34. • • • AT&T PETALUMA FRANCHISE FOURTH YEAR PERFORMANCE REVIEW SECTION 1.1 - FRANCHISE FEE AUDIT SEPTEMBER 1, 2000, 1.5 DETAILED FINDINGS: 1.5.1. Accounting Procedures And ReiyenapRecognition Each quarter during the audit-period, AT&T Cable remits a check with a cover letter for the payment of the 5% franchise fee. Included with the check' is a worksheet that summarizes revenue by category showingicalbUlation of the fee (ExhibitsA B,- and C). However, detailed calculations related to franchise fee payments are only included in • the financial records„ a document and maintained at AT&T Cable headquarters in San Ramon. • For the period of review, AT&T subscriber revenue records are generated using; software provided by 'Cable Services 'Group which generates reports for subscriber counts, subscriber revenue, cash receipt's, and bad debt. AT&T uses the following • • • categories to report and/onadjust revenue eligible for franchise fees paid to the City: Categories of,Revenues AT&T Communications 'Subscriber. Incorne;,(Basia.ExparideckBaSicf-:Pay.TX/„.-PPVit-'1,- •:,. 4' • 4Equipment •-• g . = 2 -4 Advertising'SaleS • Home ShoPpingthannelcommissions- •- • • . • - Gude • "!. Ot he[11n co rne• • Late Charges 2:4 @Home Modem Service . • • : • Additionally, 'franchise fees are :calculated' On revanues Callected by. affiliates such as Tel Media 'Services for advertising and cw' c for bcime shopping icommisions. These, ' revenues are prorated to 'PetalumalbaSed on subscriber counts lied to billing system reports. • AT&T's Petaluma' Corporation is General Ledger system 1030:176 During the audit peribd the Petaluma Corporation was.(made up of fwo sub-sytems, or agents. 1) Agent 10, which represents the main portions of Petaluma and corresponds • to General Ledgersystern,f7.791; 21 Agent 20, which represents the unincorporated portion of :Sonoma County and corresponds to General Ledger system F7792. • RPTr000nionFINAL.doc communications-support Group; Inc. ©2000 :Page 6-of 34 • AT&T PETALLIMA•FRANCHIBEECCIRTH YEAR PERFORMANCE REVIEW SECTION1.1 -;ERANCHISEFEEtAUDIT . - SEPTEMBER 1,2000 • During the audit period,,the City of Petaluma:contributed approximately 87% of this total system's 'subscribers'. Additionally„aS,IS.distussed iNgreater detail belbw, beginning in • April 2000,,AT&T added .a third agent, Agent 30, which is comprised of subscribers residing residinçHh LakeVille Apartments on South ElyRoad, .1.5.2. Audit Details And Conclusions By Category Subscriber Income And AccoUntinci Billing system reports. for ,several test months were examined for accuracy concerning revenues from Basic, Expanded Basic, Pay TV, PPV, Equipment Rental, Installation, Guide and Late Charges. CSG noted discrepancies 'regarding Late Charges and Trip Charges, which are•disquseed,in greater detail laterlin thisesection. Additionally, on a test basis, ,CSGH,c0-mpared known addresses in Petaluma with billing system reports to ensure proper reporting of revenues CSG compiled two sets of addresses See Exhibits D, 0. The first list WaS.createdytb:,c-brifirM whether addresses at the perimeter of Petaluma were'includecin franchise fee (See Exhibit D). The second list was created to confirm addresses surrounding the ' I Street in response-taconcerns6X0Teed y:council member Keller, (See Exhibit E). 11, Using 'these two lists, CSGrand.,X4T local reustoMer service staff checked the billing system and concluded that.a .totaikA20 addresses were incorrectly accounted to Agent 20 (the County) rather than'A"gent:10'(Oity of Oetaldita). keomelete'listing of these 20 addresses can be seen in Ehibit F. - • • , „ff . • The exact amount of franchise fee liability related: to these Iaddresses is not known. Logically, franchise 'fee liability is based on the number of months each resident has ubscribed to cable dating 'back to the dete. the, -area. Was. annexed by the City. ,Assuming for the purpose off alSetis-sit;IRat'recciftS-idetit 'Cildq"er-16-"eifaiiAd;duration of _ the period in question ariclasSumingthet the"last annexation'by the City was ten years ago, then franchise fees in the amount of $4,800 were paid by AT&T to the County rather than the City-;(based on theforrridla•20:S-cbseribers X':$40 per month x 12 months x 10 years x 5%). In this:case; the County would owe Petaluma the amount due plus interest. Usually; ln: such cases, AT&T would "ask the City and County to agree' to a reasonable:aMblint, then AT&T'WbOld correct the'amounts agreed owed when making • the next-gu-arterly.payments to,the;COUrity.and the pqy:. . AT&T prorates' revenues' for advertising and home shopping between the Petaluma • "-" Agents based on Eguivalent!Basic Units (EBU's). CSG reviewed AT&T's figures related to EBU's for the each year (See .Exhibit ,AT&T'used the following prorations in making franchise fee payments in the years 1998 and 1999 as shown on the next page. • • • • RPT00012.001:FINAL,doe c6mmunications Support Group;inc. ©2000 page 7 of 34 • AT&T PETALUMA FRANCHISE„FOURTH YEAR PERFORMANCE REVIEW SECTIONTht- ERANCHISE,FEE AUDIT SEPTEMBER-1,-2000 . . • .Pioration Formula 1998; : 1999 • _ 'Agent 10; LE37144% • :" ' 7 • .- By•adjusting ,these percentages•for the 2Q subscribers misallotatedJO Agent 20.(Cbunty of Sonoma), the follbwing,percentages'were applied to our audit conClusions: Adjusted ProiatioiL Formula _ 1998 4. 1199.9' Agent,10 , • Aggrig20 t;1200°/61,if Additionally, a total Of 50 addresset got both itSts, cbald not-be.:10Oated in ,P0-435:1's • database,(See Exhibit G) AT&T's staff indicated that the reason these 50 addifeSees are not •part of AT&T's. database,:Us that service has never been provided Because these addresses represent potential future i]subscriber revenue, we recommend that the City encourage .AT&T to further study the market potential of these addresses and to assure when subscribers come on line atAnese eddress:eSthatl,they are properly,coded to'Agenftp, City cif Petaluma. , • Lastly, during Sur audit period we determined that beginning in April 2000, AT&T exbanded, the cable system in Petaluma to include 383, subscribers in the Lakevifle ApartMentr complex on South Ely Rd (previously a private satellite master antennai syteryi). AT&T treated, anew franchise area within the Petaluma system called Agent 30. Linder the terms,of the City's franchise agreement with AT&T, the subscriberS, of . this franchFse area shoul automatically beco-nerpartofAhe.City Of-Petaluma franchise .. area. Therefore, be remitting frerthii-S-51561-0aVableEt-th-67,Citytfor),thOs-67 ,subscribers, it was found during our review of records, that AT&T ,did not include. .- revenues for April and May of 2000 in its June 30,. 2000 'quarterly franchise •fee ipaytent. AT&T's.accounting staff stated that this wouldThe,borrected ihtAT&TTls September:30, 20.0.0 Paynient In that thi.a.rOdin .,tenOerns..frafenise,fees eligible to the City,'which extend outside of odr, audit period (ending December 31, 1999yiiwve, did not perform any additional audit to investigate'these subscriber counts and subscriber • revenues or their impact on franchise fees and,acPess:tontribdtions. Howeyec,we are • willing to do so as add-on work CSC recommends the City evaluate this matter following receipt of AT&T's'third quarter 2000 'paynent. Our brief review of record§ indicates that franchise fees payable for this franchise area total approxiMately:$550.00 per month. • , Late.Feas Consistent with state law AT&T charges delinquent accounts a fate fee of$4175 per • Month, .Late fees i are itemized on subscriberbills and tracked by the billing,system as any other category of subscriber- revenues. It was found during a review of billing,. system records that AT&T omitted late tees in the amount of$14;35600.1in 1998. RPT000l2:00,1.FINALdoc Coininimication-s Simpcirt Gi-Oup, ©2000' Page of44 AT&T PETALUMA FRANCHISE,FOURTH YEAR';PERFORMANGE REVIEW SECTION 1.1 -',FRANCHISE.FEE AUDIT . . SEPTEMBER 1, 2000 • That omission results in a $842.33t franchise fee liability-. Beginning in 1999, late fees were reclassified into the "other.",category and we found no'errors thereafter-. CPSM -318 Finanical Summary'Report Late Fees Income notsreported'in Franchiser Fee.calculation Petaluma -0010 Jul-98 Aug-98 Sep-98 • Oct198 Nov-98 Dec-98 $2,490:00 $ 1;275.00 $1,763;:75 $ 3,944,00 $ 3,718'.75 $ 3,655.00 Fees owed $ 124:50 $ 637/5 _$ 88.19 $ 197:20 $ 185.94 $ 182.75 Trip Charges Similarly, AT&T charges subscribers for trips to "subscribers' homes for services not categorized by any other,code. CSG found that in November of 1998, AT&T failed to pay franchise fees on,$1 326;05 in trip charges. This resulted''in a $66.30 franchise fee liability. Advertising.Revenue • • Local and National advertising ,appears on AT&T cable systems in the Bay Area Advertising is sold through •a wholly owned AT&T' affiliate known as AT&T Media Services. In;prio •years AT&T`Media Services was:named TO Media Services and Bay Cable Advertising. AT&T Media Services sells and tracks advertising sales on a "spot" AO' basis or fee per run. Total,advertising_ revenues in the' Bay Area are pooled among all AT&T Cable systems in the Bay Area . In 1998, AT&T's total Bay Area subscribers numbered' 1322,444 and in 1999, 1 ,366,642. Therefore, Petaluma System.,(Agents 10-'and,'20) represent 1.44%, and 1.45% the regional total'foryears 11998 and 1999 respectively (Exhibit.H). During our audit of advertising revenues, we discovered that AT&T was calculating franchisejees based onIN,et2,revenues ..AT&T.Media' Services pays commissions two'principal manners•' • 1.) Agency commissions 2) National.Rep: Firm fees • Agency commissions are typically 15%-of gross and National'Rep Firms-are 20% of net (e.g. gross, less Agency commissions)., To justify theirposition on netting of revenues, AT&T presented CSG with an opinion by PriceWaterhouseCoopers (Exhibit L). AT&T pays agency commissions;to advertising agencies who bring their clients to AT&T Media Services, For example, J. Walter Thompson might bring Ford:Motor Company to AT&T Media;Services. A Ford ad might appear on all,AT&T cable systems and AT&T invoices J. Walter Thompson on Fords behalf. For purposes:of example let us set an • ad value of S100.00,, J. Walter Thompson would be billed $100:00 less an agency fee. of 15% or.$15.0d. The net revenue to AT&T Media.Services "posted from this ad is $85.00. RPT00012.0011FINA'L,doc. ;Communications Suppott Group,Inc. ©'2000 Page_9 of 34 • AT&T PETALUMA FRANCHISE FOURTH YEAR-PERFORMANCE REVIEW SECTION 1.1 - FRANCHISE FEE AUDIT SEPTEMBER 1, 2000 • National Rep. Firm,fees-:are ;slightly different. AT&T uses a single Boston'firm .called NCC to represent national advertising sales;. In tdisi example,.NCC attracts Mazda to run an ad on AT&T Media services. Mazda is represented by the agency Young and Rubicam; In this case, the $100, is broken down as follows: 15% to Young and Rubicarn; leaving a net iof $85.00 to be :divided between NCC and'•AT&T. Of the $85.00 AT&T pays NCC $17.00 (20%) leaving net revenues to AT&T Media Services"of $68.00. Throughout, the audit period; AT&T deducted Agency commissions and National Rep Firm fees from the Gross Revenues of AT&T Media Services. .Agency commissions are found under general ledger Account 3511 and National Rep Firm Fees,are found under account 3513: In 1998, the media division; then TCI Media Services, ;included account, 3511 and :351.3 on their monthly 'P&L in addition.to a gross revenue figure-from which • accounts 3511, 3513 and out-bound'contra accounts were 'backed out, (See Exhibit I). Out-bound contra accounts involve revenues.,applicable°to cable systems outside,of'the, TCI/AT&T network and therefore represent legitimate exceptions to "gross-revenues." Moreover, beginning in February 1;999 AT&T completely omitted these codes from the P&L and began reporting ,only "net`" revenues •going;forward. CSG :requested actual figures for commissions (GL 351,1:) and Rep fees (GL 3513) but 'they !have; not been provided as of this date Consequently,:AT&T based franchise fees,paid to the City of Petaluma on net numbers and not gross . . . CSG concludes that "netting" of agency commissions,and Rep Firm fees'contradicts the • definition Of Gross Revenues defined in the 'Franchise Agreement To'correct for:this, • CSG.created a' spreadsheet adding backag-ency ;commissions and National Rep fees. Therefore, we have+',projected Gross Revenues based on historic.;averages (See Exhibit. J). "Thin analysis •concludes that AT&T underreported $28 3„1'• 2 902 of advertising revenue due to deductions ,for agency'commissions and National Rep. 'fees resulting in a $14,157.15 franchise fee liabil ity3. ,_ _Y _.. . , ,,• • As a means of:determining the reasonableness of this'audit conclusion •CSG contacted the Cities of Alameda, Oakland, Berkeley `and.Contra .Costa County. All of`these;cities, have recently conducted franchise fee audits. CSG confirmed that franchising • authorities in Oakland and Contra Costa County made similar findings ,related to 'advertising revenues. In 'interviewing the actual, audit staff, Roland';Smith, Internal Auditor, with the City Of Oakland and Bill Morgan 'CPA and .auditor°for Berkeley and • Contra Costa County, the decision to allow..,or disallow Agency commissions and,. . National Rep Firm fees was' contingent on the respective cities' definition of gross 'revenue.: Oakland, having the .largest advertising revenues of the groi5pl(m6st subscribers,) has concluded that AT&T should pay fees in Oakland based on. • q"Toss revenues ('notanet). Oakland reJiewed their findings With'the:City'Attorne)/ and•will, z This figure;is based;on actual figures•for commissions and rep.;fees as provided by Kristine Kinne, • AT&T Media;Services, Denver, CO. Our audit conclusion. further;adjust'advertising revenues by factoring' the :additional 20 subscribers found omitted`from^the proration formula;used by AT&T`in' alculating advertising revenues: RPT00012.001 FN n AL.doc - -CommunicatiosSupporiGroup; Inc. ©,2000, 'Page-10 of 34 AT&T PETALUMA'FRANCHISEFOURTH:YEAR PERFORMANCE REVIEW • SECTION 1.1:'=FRANCHISE FEE AUDIT • SEPTEMBER 1 2000 . be;releasing their report to the City Council shortly: Contra'Costa County is also in';the draft stages but was clear that certain netting'rof revenues should not be allowed: CSG recommends that the"C,ity considerjoining Oakland in presenting a unified position and responding to any challenges which might be made by AT&T related to this issue. • Additionally, further liabilities .related to advertising 'revenues exist for the first two quarters of 2000. As this goes beyond<'the, term of this particular audit. CSG recommends the City complete areview'ofladvertisincrevenues for,:this period. Home Shopping Channel Commissions AT&T carried only one home:shopping channel, 'QVC, ,during•the audit period. Upon a comparison of franchise fee worksheets to general ledger entries, AT&T was .found•to have properly accounted for home shopping• revenues. However, AT&T used a proration formula that did not take,•i'nto account the 20 subscribers omitted from cur address review:, ,CSG audit:.tonclusionscorrectfor this•omission Program Guide Upon a comparison .of franchise fee worksheets to Igerieral 'ledger entries, AT&T was found to-have properly accounted for program guide revenues However AT&T:used a proration cribers�mentioned above. CSG audit . rogation:formula that did not •account the 20'subs conclusions correct for this omission. '•, Other Income , .Beginning in 1999„AT&T includes:late,charges in this:category. All entries were tied to the.general ledger. No additional audit work is necessary; Bad Debt ' AT&T remits franchise fees to the :City based on :revenues, billed .(less bad debt). Consistent. with our findings from'audits in:bther cities,,AT&T in Petaluma :avoids the -- -.” -a potential;_issue of estimating bad debts expense by not including a bad debts,eeserve m ,,,. «„ its franchise fee calculation. Instead,-AT&T;reduces:its'-.revenue by the=actal mount of accounts written off each month'. Corporate policy is to write :off all accounts that are • unpaid after 60 days,, at which time service to the nonpaying, subscriber is canceled. The recovery is automatically generated following application of.'a payment;or credit adjustment to an account with a;written-off balance CSG not'ediAT&Tactually records • all ,recoveries,to the billling-,system 'to generate the actual gross recovery amount This figure is added back to gross, annual receipts as :collections" and is included in the franchise fee "calculation The collection agency fee ,is then deducted from the revenue in the bad debt-allocations account -CSG: verified the gross collection amount and net payment to AT&T where poseible for the period July `1 1998, through December 31 , 1999. No additional audit,work iS necessary'lh thisar'ea:' (a Home'Revenue.• • Beginning in December, 1997 AT&T (then TCI) began offering high speed internet access services via `cable modems under the product name @Home. All @Home subscription activity is`t'racked using',a billing system:.similar to°that used by AT&T for its cable television'`subscribers; however the two systems are independent Additionally, • billing and customer services such as installation and technical •support, are handled RPT00012.001.FINAL'.dee . :Communications Support'Group, Inc.'©2000 Page,11'of 34 AT&T PETALUMA FRANCHISE FOURTH YEAR.PERFORMANCE REVIEW SECTION IA.- FRANCHISESEE AUDIT SEPTEMBER 1, 2o op • via'a separate division of AT&T from that of the cable television division Therefore, separate financial documents were-obtained-andreviewed related to @Home revenues Upon ,a review of @Home revenues, we fOund no accounting discrepancies worthy of addition-al auditing (see tableteloW). Petaluma, California • • @Home Revenue Analysis Report • Date iFinancial,Summary Report Franchise Fee Revenue Report ,Diffei-ende (Net Revenue), . . DeceMOer21998 -$86998:56 $861998.56 $0.00, „ March 1999 $63506.56' $63,557.06 -$0.50 ' June 1999 • $641200.45 , $64,20046 :$0.51 Septeir■beFil999 $7071555 • $7071555 ' $0.00 December 1999 ' $80228.96 $80,228.99 ' , $0 00 * There was a revenue reallodation'of $36,591.68 in December from Sonoma to Petaluma. However, given 'th9-1Pat ttlatrial ,Isi(10SOnbers were identified to.nave been-incorrettly allocated to the'CbOnTyis Agent 20, VS:. PetalLiMa'S!Agetiti10, CSG recommends further audit work be performed by.;the City in determining whether any of these 20 SObscribers- also subscribed to @Home since, DeceMber, 1997. Depending on the ;results 0P.this additional revieW, additional frandhiseifeesTnai be owed the 'City-from the County: • - Clearly, as shown in the chart below, @Home revenues are :growing and should continued to be audited in,subsequent _ . gHome Revenue ArialySis Comparison May and June 1999 to May and June 2060 • May=99 Jun-99 May-00 _J..un,=99----srtyo'Pen-a-nge - gHOtne Fte-Niebties' 5.6274731.$64200.46:$104,333.94 isj09,562.66, 170r66°/p- . Ht. • • 1.5.3 Review Of-' A14401t Report ,From 1,9.98 Transfer — Digital Sefyices and Franchiser:Fee Revenues: •CeG :reviewed and' analyzed general financial'findings reported by-theiCity's previous cOneUltant, C2 Consulting (a i,subcontractor to the Buske Group), ;performed) in 1 998 as part of the City's transfer. CS.G.reyiewecilettersalid correspondence between the'City, TO AT&T and the dity's consultant related to the transfer. Eased On our,review of documents.supplied bytthe•City, the Outstanding issues during the_trianSfer • a) Underpayments of franchisa'feies .thie to -itetnization of franbhiee -fees- (e.'g: 5 th . . ; Circuit Court decision in Dallas Ve. FCC regarding franchise fees on franchise As tees). b) Potential Obberpaymebt, of revenues from new services such ;as digital &. • interactive seryites-(@Home). RPT06012:001.FINAL.doc CoihniariicatiOns Support Group, Inc. ©2000. Page,12 of 34 AT&T PETALUMA F.,RANCHISE+FOUR,TH YEAR PERFORMANCE REVIEW SECTION 1:1 •- FRANCHISE;FEEAUDIT SEPTEMBER'1, 2000 It appears from the 'transfer' agreement (and its various cash =settlements) that reconciled underpayments related to franchise fees on franchise fees and other findings made by the auditor. The'transfer agreement also required AT&T to pay franchise fees on @Home revenues in its,4`h quarter1998 payment toithe City. CSG perused AT&T's financial documents torconfirm and validate compliance to the transfer'agreement. In our review, 'we found that ,'AT&T, consistent :with the .transfer agreement, made an adjustment for @Home revenues in the 4th quarter 1998 which properly included revenues from'digital services and going forward paid 'franchise fees on franchise fees consistent with the Fifth Circuit Court of Appeals decision' in City of Dallas v. FCC, 118 F'3d 393 (1997). 1.6 INTEREST CALCULATION. Interest on unpaid liabilities should `be paid to the ,City; Given the complexity of the various items and given that : some items predate the audit period (subscriber omissions) we have, not included a detailed'',interest table. However, we recommend that the Finance Director and City Treasurer determine exact interest amounts based on months: The 'City` should examine the terms of its franchise or consult with the City Treasurer andr"City.Attorney`regarding'interest terms and final amounts owed the City. 1.7 CONCLUSION The following table summarizes .the findings of our audit and 'totals franchise fee •, liabilities by category. •• Franchise,Fees•Owed July, 1, 1998;to December 31, 999 Franchise Fees From Omitted Suiscnber Revenue $240.00 $480.00 OMITTED SUBSCRIBER!,`TOTAL `' $240 0 0 $480.00- $720.00 Franchise Fees From;Late Fees $842.33 $0.00, LATE FEES'-TOTAL,.:: •$842 33 •'- $0.00 • ' .$842"33 FranchiseeFees,From Trip Charges J66.30 $0.00 Franchise Fees From\Advertising $21"52 22 $12,004.93 `ADVERTISINGiTOTAL $2,1.52.22 $12,004.93 •,"$14,157:15 Adj.Proration'For Revenues`from Advertising Home! Shopping, Program Guide $20.90 $49.41 Proration;Adjustment .;,', $20.90 $49141 TOTAL FRANCHISE.FEES DUE $3,321.75 _ $12,534.34 $15,856•.09 We are of the opinion that_additional revenues:haveafso been, underreported during the period January 1, 2000 to' present belated to subscriber count omissions, advertising and home shopping. We also recommend an"audit be performedto determine whether any of the 20 subscribers subscribed'to @Home. Finally, as stated late in section 4.0 of this report, C'SG recommends the•tity or Petaluma Community Access Corporation (PCA) perform a detailed audit of payments' made by AT&T to PCA for the three year • • period beginning July 1 , 1997 to June 30 ,2000. • END SECTION'1,0 RPT00012.001.FINAL.doc CommunicationstSupport Group, Inc:©;2000 Page 13 of 34 • AT&T PETALUMA FRANCHISE FOURTH YEAR PERFORMANCE REVIEW SECTION 2.0 - FRANCHISE COMPLIANCE AUDIT SEPTEMBER 1, 200 2.0 OVERVIEW — FRANDHISE COMPLIANCEAUDIT' CSG's compliance audit4ftitind AT&T in subStantial,coMplianCe,Withiribet'franchise requiretenta, 171Ovsiever, certain compliance-issues were identified. This report focuses on items that either require additional clarification Iimorder to7derterminei.compliahpe,cor. itemsicvnitWe conclude as of The date of report inipotential non-compliance to the terma,anciconditionsof P.etaluma's franchise agreement For a complete listing of all • findings, please refer to Exhibit B of the compliance audit binder-- FrenChiSe Compliance Chart, • 21 METHODOLOGY • ' • During the rnonthsK.of June and July 2000,,C,SG;performed the following: , 1 . Conducted interVieWs *It ti City management staff 0e-dell:IM4 to issues, of performance,and non-compliande; . . . 2, Reviewed City documents regarding AT&T performance, 3., Conducted'intervjews with Shirley'Gulbransen, Area Director and David Goverment Affairs, -on issues pertaininglio customer 4. Performed,an:on-site;inspection of AT&T's customer service call,center:' 5. Compiled a compliance checklist of,municipal code and franchiSeiagrieenient requirements (see iEt]bit B of the compliance ,audit ;binder); linaiding- 111/ amendments regarding OUSterner:Service:, 6. Peden-liedaudits, -Sought additiOnal inforthatiOn, FCC research, and compiled findings. 2.2 FINDINGS - • SG5reVieckepr..-1:46iternS'of compliance pursuant to Jne IerfrisriancP;cOnditiOns,o,f4T -rm-,44. the franchise agreement Ca --founcrAt&T to be in complianCe, or 'substantial compliance (dep:fridihg on nature of perforfflahee Oriteria),V/ith 134 items. Major items found in icompliance. included requirements for insurance certificates, bonds, and letter of>credit (see exhibits C„ 15 and E cif the,.,bonidliante'audit"binder.).. . , "CS6 found AT&T to be in non,-compliance; potential pon-tornpliance, or tOnbitional compliance, to 12 items. Section 211 of this report Offers, suggestions, and recommendations for corrective MeaSures.. • CSG determines AT&T to be irf.nori-compliencet6 one issue; pertaining to provision of quarterly,repott§ in a forth agreed Upon by, 11)6 tity.andthe,Grantee •, • • • • • • tRPT00012:001.FINAL:dOe Communications Siiplibit,GrotiO, ©2000 Page 14 of 34 ' • • • • AT&T PETALUMA FRANCHISE f001:27117(YEAR PhRF.ORMANCE,REVIEVV SECTION.2:0- FRANCHISE COMPLIANCE AUDIT ' • SEPTEMBER 1, 2050: COMPLIANCE1S$UES . • ITEM 1: Pursuant' to Section 24 ,1300k . AND RECORDS -REPORTS AND RESPONSESITO QUESTIONS subsection 24 1 The Grantee shall provide the following reports quarterly, in a for:En:agreed upon between the, City and Grantee: at the time it :iS stheduled to Make, its Franchise fee payment: Finding: Non=compliance: To the best of out; knowledge, these reports are not being provided in the form consistent with :the franchise agreement. A !report was requested, but not provided. ITEM 2: Pursuant to Section 7 4 MAINTENANCE AND`,COMPLAINTS, subsection 7.4 . - • • • Written complaints concerning billing employee courtesy (respecting employee/employer confidentiality), programming, safety, Grantee's operational policies, outages, signalquality,ilandSerVite disruptions, shall be recorded. The Grantee , will maintain Records of complaints for three (3),years. Copies of the complaint Records , shall be provided to the City on request Finding: , • Conditional"Compliance, Potential Non-compliance CSG inspected outage. records customer complaint files, but our request for a • . , written descriptibrt of AT&T's compliance leg methodology has not been proinclect • ITEM 3: Pursuant to :SeCtion. 7:5 Non-discrimination- and Equal Employment subsection (A) StatiStieelfepofting of Esc notiaes;lo Grantee: Throughout the term of this Franchise, the Grantee shall ,fully comply with the equal employment oppOrtdpity'sbquireMents of federal state, and focal law and, in particular, FCC rules and regulations relating thereto. cipan,pc iiiiet§t by the City, the Grantee shall furnish the City a copy of the:Grantee's annual statistical the FCC, along with: proof of th-ettraritt-caarintialtogrztifitaiicrriikre-Oht5liarice. 'The .Grantee shall - - immediately notify the City in the event the Grantee is:et4eny time determined by the FCC not to befin compliance with FCC rulea or iregUlatibria. Finding: Pending showing of compliance: CSG inspected AT&T's FCC files but foundithexurrent year's report not available for inspetlon. CSG requested report, but itwas.not provided. . ITEM 4: Pursilant to. •Section 8 SYSTEM-FACILIT.IES; EQUIPMENT. AND DESIGN (8.1)(C)(2) Institutional Network Design; • • Under Phase II, which shall be implemented.between i the third (3rd) and fifth (5th) years after the effective daleb,of;:the Franchise; Grantee shall install and activate the software and equipment, required to integrate telephony/data transmission and interactive capability into its system so that the subscriber network may accommodate future PEG and Institutional Network uses in the City of Petaluma through dynamic spectrum 14/ • management technologies or its equivalent., The technological capability described above shall be provided to all public schools and City occupied locations that are . passed by the cable communication system. If such dynarriic 'spectrum management • RPT00012:001.FINAL:dbq CommunicatiobszSupportGioup, Inc. @ 2000 Paje•15 of 34 AT&T PETALUMA FRANCHISE FOURTH YEAR PERFORMANCE REVIEW SECTION 2.0 - FRANCHISE COMPLIANCE AUDIT • SEPTEMBER 1, 2000 technologies are not commercially available and are not financially feasible Grantee may petition the City of Petaluma for i(a) relieffrornimplementing!such technologies c or (b) a deferral of the implementation of such .lechnologieS, If such relief from implementation oar deferral occurs, the Grantee shall :be.!obligated to provide the capabilities and Headend equipment described above in:SectioriS'1,81 'an618.tiG.1 to _ , , aft:public'school;and City-OctuOied locations Within the Franchise-erea. Finding Conditional:Complian'ce: Gene Beatty and Dave Deorsey'indicated that the City elected to pursue other telecommunications-options rather than contract with AT&T for deployment and • inginrenance of a fiber netwOrk., According to AT&T teohnihal Staff end confirmed . by City staff, active AT&T's fibers connect Lucchesi Community Ceoterr, City Hall; , the Access Center; and the School District office The City Hall fiber run includes 24 fibers; but only two are presently it: An additional City building, Water and • • - - Power, Was installed with .2 fibers, but these wet-,e, never lit feed the • AbgeSS. Center. The School District hired AT&T to install 2 fibers to the District's Meiji administration building and four additional schootsiteS. ',§InbethaCity is in , .— itS,'6th,year of the franchise term, CSG,suggests the City.beglitai,discusion with AT&T pursuant to this section of the franchise to interpret the meaning of the requirement "Grantee shall install and activate the ,software' and equipinent required to integrate telephony%data transmission analnteractiyei capability into its system so that the subscriber network may -accommodate.ftiturei'pLG and. • • Institutional Network ,uses; in 'the City of Petaluma through dynamic :spectrum Management technologies or its equivalent " This is unique •'and• unclear language. We consider the !language potentially advantageous to the City and the Corporation, blii,Withaitt a historical perspective, we find it difficult to determine coMpliatiee. ' • ITEM 5: Pursuant to Section e :SYSTEM FACILITIES, EQUIPMENT AND DESIGN subsection 810 SYSterh ExtenSion. PartA: ;L'-Z± . :. The Grantee shall build its Cable System!sOlEthatts,:ab.le:;toiprovideiservice=tepalliar:PaS located Wahl-tithe' City limits, as they existed on the effective date ollnie''FratiChiSe. The Grantee must build the ceble System so that it can: extend service to reSidents, . _ including residents:locate:91:ln areaS::WniCh:May be annexed in.the'f6tUre in accordance With Section 8'.10.8B: Line:Extensienkequiraments. . , • Finding: Potential Compliance During the cadent 'three issues.regarding extension of service developed; Central • • Dow;htOwn, the City Airport, and Corp. 'yard at Hopper Street. CSG recommends thel'CitYCOndtict further study of these issues to.determine ,whethenkf&tirshould :extend sei-Criblopursuantto section 8. 10,SYstem,ExtenSion.• . • . • • . . • • . • 7.• • • _ • --f RPT00012[001.FINAL.doc Conimuriications/S6 pporfGroup; Inc ©200: Page 16 ofj34 , • • • • • AT&T PETALLIMAMANCHISEFOUATH YEAR PERFORMANCE REVIEW SECTION:2.0:- IRA-NICHiSE;COMPLIANCEAUDIT" SEPTEMBERI, 2000 ITEM 6: POrsuant to Sedtion 8, SYSTEM :FACILITIES', EQUIPMENT AND DESIGN, subsection'8.14 Ascertainment ofprptigranirhifig7Part A: At minimum dUring,years fbur (4),.eight (8),, and twelve (12) of the Franchise, the Grantee shall conduct a systematic customer survey of the interests, and preferences of the subscribers within its Franchise Area The Grantee shall report to the City the results Of The Grantee's survey and any actions taken, or to be taken, by the Grantee pursuant thereto. Finding: Compliance'Pending: CSG confirmed that:a survey was perforthEdl The survey summary report was requested, however AT&T has not prOvide011this document to validate the survey's reSults. • ITEM T- Pursuant to Section; 24 TBOOKS l AND .RECORDS -- REPORTS AND RESPONSES TO QUESTIONS subsections:24.1, (B); 24.1C; 24.2 (A): Within ninety days after the close of the Grantee's fiscal year the Grantee shall submit a written annual report, including, but not limited to, the following information: 24,1(B). a financial statement of the Petaluma system, including a . statement. of income, balance sheet, and a :statement of sources and applications:Of:funs which the chief financial Offiter of the Grantee states is true and adcurate; and 41Ik ii. 24.1(C). the. annual report, if any of'the- Grantee, or each Affiliate, which • dontrols, owns, or manages the-Grantee:arid issues An annual report. • 24 2(A) a summary of the previous year's activities in the development of its cable .system: in the City, including but not limited to, additions, deletions, or improvements begun or discontinues during the reporting • , year, services initiated or discontinued, number of Subscribers (including gains and losses). homes passed, and miles of cable distribution plant in . . service (the summary shall also include alicomparison of any construction„ tri -:iFitididirgrc-Abte7rgy-StAm ,upgrades, during the year WitfiffatiRrojettibricr previously pro-Vide•tr;:to the 'City, as well as rate and charge increases • and/or dlecreases‘forthe;breVioUSTristayeary Finding: Pending!Compliance: David Kerr attested that these report's have been faithfully submitted; but CSG's • reddest for a sample showing'has notpeen proyided ITEM 8: Pursuant to Section 27 Performance Monitoring subsection 27.2 Grantee •COOperaticiry Grantee CoOpetation:LT; The Grantee shall cooperate, in the fourth, eighth, and twelfth year reviews, 'including by submitting:reports b•rrthe,State of Cable techriglogy. ' Finding: Potential!Non-Compliance: • CSG has made repeated reddeats for this information but it has not been provided (See Exhibit S of the compliance audit binder, letters to David Kerr and David Dyke). While-it is understandable persannel Changes at AT&T, e.g. . . RPT00012i.001:FINAL:doc -Communications Support Group, Inc. ©2000 Page 17 of 34 AT&T PETALUMA FRANCHISE FOURTH YEAR PERFORMANCE REVIEW SECTION 2.0 - FRANCHISE COMPLIANCE AUDIT SEPTEMBER 1, 2000 David, Kerr's etepodure, would have some, fin pact on AT&T'S. proVide the requested documentation, it is difficult to understand why the request itself was completely-overIbbked. , ITEM 9: ,Pursuant to Exhibit A -CustomerServiCe, ,of the franchises ordinance -Section 2, subsection 2:2.3 Operating Hours: • . • Under normal operating conditions, ninety-seven upercent-(97.46fl.dallS to the Grantee, as measured on an annual basis, will not a busy signalor delay in reaching a cUStomer,service representative or any automated answering etiLiipMent The term "normal operating conditions'!:means those,serViceconclitions!thal are within the control of the Grantee: TheSe,conditions that are het-Withir :the control ollhe:Granitee inclOde, but are not limited to, natural disasters power outages, telephone network outages, and severe or Unusual weather conditions: Those conclitiOnS which are ordinarily within the control of the Grantee, :include, but are not limited to special promotions, pay,per:4Vievv eVents t. rate increases, regular peak or seasonal demand periods, 'andllmaintenancedr upgrade ofthe dable.system. Flnding: 'Potential Noncompliancecor Compliance,Pending:l • CSG performed numerous faijdoM•calls into the PetaltimalcDstornei service line, and found general cbtifOlialide by AT&T to this standard'. Additionally, CSG requested felephone system statistics to support AT&T actual tompliance, to these telephone standards, but these not provided. FinUing PdterlialiNon-Cornpiian-bet This Tine has proven intermittently busy when tone phone not used, indicating that people. with rotary phones might not be able to get through Additionally, CSG requestecl,telephone system statistics to,support,AT&T actual, corripliance to,these telephdrie'sten;Ord& but these were',•nof prbvided. ITEM 10: IPursuant to Exhibit A, section 2 Local Operations,, subsection 2:2 Telephone title,4,l7'SUBPART H - LService Part-2 2t4 and-FCC 'Guistomer-Service Rules GENERAL .ORERATING REdUIRDYIENTS. 'sEcTipNi ;76.309 Customer Service obligations. Consumer Sep/ice' Standards. Telephone Answer Time Under normal operating conditions, the telephone .ansyver time by ,a custerfier,SerVice: representative, wait time and time required to transfer the call shall not exceed thirty seconds when the connection is Made: These-standards 'Shall be Met no less than ninet9Apercent,of the timë, under normal operating cOnditiOns, measured on a - . quarterly:baSiS. Finding t Potential.Non-compliance or CorriOliancePendiog: • CSG'performed numerous random CailS:into\the Petaluma customer service line, anQ• found general compliance to this standard. 'However,. CSG. requested telephone System statistics to supper!' .AT&T actual compliance to these felePhene standards, burthese were'ncit provided: • • ,RPT00012.00tFINAL.cloc Conimunications Support Group; Inc. ©2000' Page 18,:of 34 • AT&T PETALUMA FRANCHISE,'FOURTH+YEAR PERFORMANCE REVIEW 'SECTION 2:0 FRANCHISE;COMPL`IANCE AUDIT • SEPTEMBER>1, 2000 • • • Finding:i Potential Non-Compliance:: This line has proven intermittently busy when tone phone not used, indicating that,people with .rotary phones might not be able to get'through. Additionally, CSG requested telephone system statistics to support AT&T actual compliance , to these'telephone standards;, but these were not.provided. ITEM 11 : Pursuant to FCC Customer Service Rules Title 47 SUBPART H - GENERAL ' OPERATING _REQUIREMENTS SECTION 76:309' Customer service obligations. Consumer`Service Standards`Telephone Answer Time (C)(iv): Under normal operating condition's, the customer-will receive a busy signal less than three (3) percent of the:time,. Finding: COmplianca;Pending TCl/ATT should submit ,telephone Statistics from its quarterly reports to determine compliance with the requirement" that no more than 3% of callers receive busy signals measured on a quarterly basis during the past quarter. CSG recommends a. review of these statistics. Statistics requested, but not provided. ITEM 12: Pursuant,to FCC Customer Service Rules Title-47:SUBPART H - GENERAL OPERATING REQUIREMENTS SECTION "767:309 Customer service •. j obligations (C)(2) Consumer Service Standards Installations, outages and service calls' Under normal operating•conditions,• each of lbe.following four standards will be met,no less than ninety five (95) perbent.of'the time measured on a quarterly basis: (1) Standard InStallationS will be performed within seven (7) business days after an order has been placed':, ' Standard' installations are those that are located'up to 125 feet frorn'the existing distribution system, J- _- (2) Excluding conditions ,beyond:_thescontrol a of aheaoperator_ the cable operator'will .begin working on irseryicg Interruptions' promptly and in 'no event later ,than,24 hours after the .ihtertuption. becomes 'known. The • • cable operator must' begin 'actions `t'o correct other service problems the rnextlbusiness day after notification of the service problem;. (3) The "appointment window =alternatives for installations; service calls and other installation activities will be either a specific time or at maximum, a four-hour .time: block during normal business hours. (The operator may schedule service'calls and other installation activities outside of normal business hours for the express convehienceiof the customer.) (4) An operator .may not cancel an appointment With :a customer after the close of business on the business day prior to`the=sche'd`uled appointment. Finding: 'Compliance Pending: TCI/ATTshould provide the City with service call statistics for•the past quarter to determine compliance with FCC.standards. • RP7T00012i001 FINAL:doc Communications'Support Group, Inc. ©2000° 'Page 19:of 34 • AT&T PETALUMA FRANCHISE FOURTH YEAR PERFORMANCE REVIEW • SECTION 2.0 -'FRANCHISE COMPLIANCE AUDIT . • SEPTEMBER 1, 2000 Pad ofthe reason AT&T has been unable tbSubStantiete'complrance to these items is staffing turnoveMat the cOMpany .Fo(yeara,. the City's':contactfor governmental affairs has beenICAr:lbevid 'Kerr Mr. Kerr departeddhe company without any nOtiteto,Gity staff or CSGon July 3, 2000. AT&T representatives . from otheCoffites"iere"temoorarily.fillinp Mr Kerr's position and delays have been .caused as the City,and CSG determine who is ultimately responsible for answering remaining audit questions. • fbreNample, CSG requested certain records from AT&T in a meeting With :David- 1<errlon',June 2000, in a:letter to usah 1--2itchie, dated July 12,.2000 and'in,a letter to Sue Levitin, dated. August 22; 2600 (See Exhibit. T of the compliance audit hinde . As of this writing CSG'has not yet received.ythel requested:recorOs. For a complete liSting of compliance iSsues please see the attached .P.etalurna . • FranchiSe Compliance Issues Chart, Exhibit A OfithetoMpliance audit'binder. •• . 2.4 COMPL.IANCEREGOMMENPATIQN$ • , 1) CSG suggests,that AT&T correct any issue ofnori-COMpilehte deteritihedibythis audit. , . 2) CSG recommends that the City find .AT&T to be in default of the 'franchise for failing provide required franchise-mandated documentation, to substantiate compliance. Once this .documentation is submitted City can determine: • • whether:AT&T:has complied wiliTtalj franchise proviSions. • _ „ 3) CSG recommends the City review the -terms of the Pedormanbe Bond and determine, Whethert the cddedt. :amount is sufficient or should be increased to meet the 1'0% requirement stated in Section 13 of the franthiSeadteement (see - exhibit D of the compliance a-Atbinder: „ • -- - ,-g-4,,,,z,A)1.,..: ,.C.SG,teeorbi:retiCs'tde,Cityftenbli.itt'ftither-Study of Ceritcal,DOWntbwri,,and_Corp:___. . yard at HoOper,Street. tor deterMide level of connectivity provided irTthOSe afeces: - 5) Scrutiny of AT&T's, Petaluma franchise has yielded' sUggestions. and • -recommendations. At the forefront the City' should recognize that since it • possesses the first cable system of its kind in the area PetaluMe• is in a • leadership:position in terms of telecommunications iMpleMentatibb. This allows the City of Petaluma the opportunity tor some experimentation with these new technolOgies. Break new ground so to speak Therefore City bf',Petal0ma make a.'Strong effort to utilize the technology provided for advanced functions such as:: • f•-` • I) 'Telecoriferencing.and'distance,learning • Geographic nformetion Systems (GIS) Ili) Live broadcast of City council meetings via the Internet iv) Archival and streaming of live and recorded Government meetings via the a • overnmentsweb page', Elvp,SECTION TWO • • • . • POT00912.,001.FINAL.doc rConfintinications:Support.Group, Inc. ©2000 Ralbet20:of 34 - • • AT&T'PETALUMA FRANCHISE FOURTH YEAR PERFORMANCE REVIEW• SECTION,4':,11- ‘66UNCIL MEMBER ISSUES • SEPTEMBER i000 3.0 OVERVIEW -COUNCIL MEMBERS ISSUES 3.1 RATE'REGULATION The City Council requested that CSG comment in our report regarding the 'issue of whether the City could regulate !basic-,cable rates. 'Mr. Beatty, the City's Assistant City Manager, confirmed duririg'bunaudit that the City completed the necessary paper work and was certified by the Federal COrrittitinicatibps•Comitission-to regulate rates back in 1993 or 1994. 3.1.1 Process And Decision Factors: Under FCC rules, in order for the City to implement rate 1egtilation, the City Council must .first adopt an ordinance or resolution stipulating the City's 'authority and procedures to do so and provide the cable company .notice of its adoption of the rate regulation authority ordinance Unless the City adopts the necessary resolution or ordinance and provides the necessary notice of certification to the cable operator, the operator has no obligation to submit the:necessary rate forms. yve have assisted several cities with this ordinance resolution process and will be happy to draft the language of this ordinance for this purpose as add-on work, if requested. 3.1.2 Rate Regulation Considerations: There are a number of factors,:(Some practical, some policy related) to consider in determining whether to become a rate regulairor.y•edthe'rity: A few Of'these issues are •. •"-- discussed below:in question:and answer format. 1 ) What does rate regulation allow the,City tb do? The FCC first codified rate,regulation policies in 1993 following the adoption of the Cable Teld j-ViSiOn Consumer Protection and 'CoMpetition Act of 1992 at Section 623 [47 USC Section 543] - Regulation °et:tales In general, the City can ,regulate rates alhargedJorbaSit'cable.subscriptions,:rateS charged for equipment used tb to receiVe•-cable;signals-(donVerters-and• remotes), 'and rates charged for installation seryites. FCC rules require cable'companies, :subject to basic rate regulations, to submit to franchising !authorities an application to adjust rates. • Rates can be adjusted quarterly or annually•depending on the form used The FCC provides.structured:forms for completing applications known as Form-1205, 1210, 1220 and 1.240. Most 'companies, .1,including AT&T, opt to adjust rates annually using Form 1205 and Form 1240. • 2) What are'rate regulation time requirements'? If a cable :COMOany plans to raise rates in a regulated camMunity,•the-dompany must notify the City ninety days in advance of a proposed adjUatment. This establishes an administrative advantage:0er non-regulated communities where the notice requirement is only '30 .Once the forms are submitted, a 'franchising authority accepts a fiduciary responsibility to review the accuracy of • the forms submitted by the cable company The City has two time windows. The first is a "ninety-day period to determine the reasonableness, of the company's rates prior to the rates taking effecf;, second Is a twelve-month statute of RPT0001,g:001.FINAL.d0c: Corhinimicatiotis SUPpoit.Group„,Inc. V2000 :Page 21`tf.34 AT&T PETALUMA FRANCHISE FOURTH YEAR PERFORMANCE REVIEW SECTION 4.0 - COUNCIL MEMBER ISSUES SEPTEMBER 1, 2000 .. limitations'from receipt ofthe formsto.determine reasonableness>of the rates and order rate 'adjustments and refunds astneeded: Most cities` find the initial ninety-day period too short 'to review the forms and determine,reasonableness,. and, usually take .up, to a year to make a final determination,of reasonableness. r3) What is the administrative harden,related to rate regulation? On average, it takes up to 60 hours"'of either a, trained staff member or a professional consultant to 'perform a cursory review of the both the Form 1205 (equipment and installation rates)eand'the Form 1240 (basic rates)and to render an opinion regarding reasonableness. Additional hours are'needed to request • additional information from the cable company, challenge the.company's,figures; . and adopt a resolution determining'unreasonableness or toi order refunds (as necessary). We estimate, from our'knowl'edge of California clients and cities, that a •city'the size of Petaluma could likely:spend between $5,000 ]and. $7,500 per year in:. consultant costs related to routine enforcement of the FCC;s rate rules. The number jumps to. the range of '620,000 to $,30,000 when a City p r detailed prescribed'l adopts a rate•order.haying the effect of lowering the pr po edrateto a level and determining wheth er refunds,are•needed,: 4) What happens if the City receive-s the relevant'' forms from an Operator'but fails to take action within the subsequent twelve months? • a ; If a'city takes receipt of a company's:rates forms andfai(s to -take action within twelve months from receipt, the company's proposed rates are approved by default.. 5) Arerrate filmgsthe same between cities? Nol,, Only'whencpmmunities are served`from the same..Headend,and'wlth'!similar channel line-ups similar aged systems; and similar franchise terms, will 'a .._.v,._,;, .e.;. company submit'filings with similarrdata =The forms-contain informationaspecific. to each cable system, such as programming' expenses franchise mandated costs, costs of upgrading the system,,eter Therefore,•the filings AT&T produces for Petaluma wilt be differentfrom the"filings produced for Santa Rosa or'Rohnert Park. This explains why Petaluma, with its advanced system: (offering more channels•and' services; such'as cable modems, community 'access center, (and telephbny,)-will have higher rates than',surrounding communities 6) How many, neighboring cities are•rate regulating authorities? • Calistoga•.Cotati Rohnert Park, Santa:Rosa,;Sonoma, St. Helena and all cities of Marro County, except Novato, conduct some form of annual rate regulation activity. • • RP T000123001.FINAL. c '.:Communications Support'..Group, Inc. ©2000 P.age.22 of34 AT&T PETALUMA:FRANCHISE:FOURTH YEAR PERFORMANCE REVIEW SECTION 4.0 rCOUNCLMEMBER ISSUES SEPTEMBERI, 2000 • 7) Is therb a benefitin working together vvith other cities? Yes, when communities are served from the same Headend or when the rates set for these communities are common and determined by the company using the same Forrn. 1240.'and,Form 1205, there are practical' benefits of working 'together. In the case ;bf cities in Marin, and the group of Sonoma County cities listed .above (except Santa 'Rosa), regulatory expenses are 'shared based on subscriber pbbulation-S. This leads to cost savings for any single entity, with the ismallest cities benefiting.the 'most. Petaluma should consider participating with adjoining cities in 'this regard but keeping in mind that its costs may be proportionately higher given Petaluma's size and Petaluma's separate FCC Forms due to its distinct 1-leadend. 8) Are rates likely to be higher or lower between regulated and non-regulated • . • -borrimunities? Years ago, the answer to this question was a resounding yes. However, during the past three years- (culminating with the FCC's withdrawal from regulation of the expanded basic,tiers:in March of 1999), the answer is not so clear On June 15, 2000 the FCC released a comprehensive report on cable industry prices. In this report the FCC looks at issues of competition and regulation on rates and compares changes To prices charged by companies between 1998 and 1999. • They sampled rates for basic cable, combined basic, expanded basic, and converters between systems. Controls were CIsed to separate data for,systems. facing •corn-petitiOn•from other multi-channel video programming providers and for systernS that were dither certified to:Lregulaie rates ior not 3.1.3 FCC Cable Rate Data. The following tables illustrate-some of the FCC findings: • - falife_7:ffAVefages7UhregCilata7•Niciitompetitive Group Monthly Charge ' . 7/1/98 r:.$Change-; % Change Basic Service Tier (BST) _ -$1159 . H.$12;81 *;:• ' • 1..7% •-• Cable Programming Service Tieri(CPST) ' $14..11 • .$15'.43,, ' $1-.32 • 9.4D/0* 2 Programming Services (BST &'CPST), $26170. — $28 24 5.8%*. E•uierne-nt (ConVerter & Remote), $255 , . $0.16 c • 6-3%*- Total. Programe,&Equipment eharge ' Th$29.25 . $30.95; $1.70 Number of Channels - 7/1/98 '7/1/99 $ Change Va Change Channels: (Broalidast & Satellite), 46 5 A9.4 NA*, . 6 2%* - Charge per Channel ' . $0'.66f '.$066 • $0.00-f- - - _ OM% ' Channels: (Satellite...Only) " 35 5 NA 7.9W. Charge'per Satellite Channel ' . $0.97 $0 95 f$0',02 -2.1% S . • RPT00012.001.FINAL.doc 'Communications Support Group, Inc.,©.2600 Page 23 of 34 • AT&T PETALUMA FRANCHISE FOURTH'YEAR PERFORMANCE REVIEW SECTION 4.0 - COUNCIL.MEMBER ISSUES SEPTEMBER 1, 2000 . . Table 8._Averages, Regulated, Nciridompetitive,GituP • Monthly Char4e .7/1/98. 7/1/99 I $ Change; ' F/o Change' Basic Service Tier-(BST) $12,03';,' $12 18 12% Cable,Programtning..Servide Tier (CPST) , ;"..1170..537`" Programming Services (BST & CPST) _ 6.8%11..72 • Equipment (Converter& Remotel_ /$0708 Total Program & Equipment Charge $3o so ; Nuiiibel,„Of Channels H7/1198. 7/1/99 -2 e$,Changei: °A, Change Channels: (BroadcaSli& Satellite) 511 527 NA 3,1%, • Charge per Channel l$0:65..f:- ''..,1$0102• 't 3 2% Channels: (Satellite Only) _ 354.: 366 1NA Charge pe-r Satellite_Channel 1 $0.93121-1. ..:$0.96t, • Table 9. Chargesibr,OtherRegulatedrServices . . Item Competitive Group- "- Noricbtripetitive Group 741/981T-7: ` :---;%Chg. • ' .7/1/98'_' 7/1/99 _Installation T$29.21 $28.18 $35.20. $34.9,4 - Discorineetiori t $0128 $031 - 107%,,.. • $0:42!: . Reconnection $21 20 ' .$21753 : Tier Change , .-6.2% $8.55 Additional Outlet, '$1 *An"asterisit;dertote,va,statistically significant change over time See Attachment B-6 for standard errors for the reported;averages.- These Charts reveal that', in general, rate regulated communities, enjoy lower rates,for basic service tier, but correspondingly, those communities pay higher rates for . expanded basic service tier. ' • • 3.1.4 Comparison Petaluma Vs.'National Averages Petaluma's rates illustrate this trend in the seVerse. The following, two charts compare . Petaluma,rates:with the national,aver.agesbletermined,by,t1?e _ . ' Chart=Petaluma rates 8. National Averages,.Unreguiated; Noncompetitive Group Pet. Nat. ,Pet. Nat. Pet Nat Pet. :Nat Monthly Avg. .Avg. $ % Charge. 7/1/98 7/1/99 7/1/99 '7/1/99 Change;Change Change Change Diflefence Differenbe. Basic,Service $1373 $12.59 $15 09 $1281 '$120' 991% 1:72% Tier.(BST) . , . . . (CPST) ,$14.11; $514.50 $151,43. $1 32 '4.289/p 8.55% .($0.,,,66);:-. $2763 $2670 $2956 $2824 :$1.93. i$1,-.54, :6.83% 5.45% ., -$0.39,- . A:38% . - EqUiPl.11611t ' (Converter $3'55 $2.55 $271 0130$ 0j1.6+ 11.07% 5.90%- $0 14 517% & Remote). - : Total $31'18' `$29.25 ',$$$.41:i $30.95 ;.$2...23- $i 549% • • RPT00012:001.FINALdoc Copmunications-SiripOrt,Group„Mc..©"2000 pa-ge,2:4of 34 . • . . - . . ., . . .. . .. AT&T PETALUMA FRANCHISE FOURTH YEAR PERFORMANCE REVIEW SECTION 4:0 7 COUNCIL IVIEM4R1SLIES 110 SEPTEMBER C:2000 . Chart-petali.irna;per Chanbel rates & National Averages ' Pet.: Nat. Pet. ' Nat. ;.., Pet ' Nat. Difference -- , vet Nat # Difference Avg. . . Ayg. ' a . 198 7/91 7199- ChangeChange Change Change Channels Chan4nels ChannelS: - ::-.4....?.,:l ... - ; ?.• (Broadcast , -.56 46.5 4601 49.4 ', •-•,4 I- 2.9 . 6,67% 5.87% -, 1',10:' ' 1.0.80% •'• & : --'• •,-;--:,.:-., . •. ,-...-, '.; : ' 1. . Satellite) , i r..: :1. _ .,.. • . . - , • Charge Per .. ., ., .. • $0 56 $0.66 $0756 $.066 '$0100 $0.00 u.u0% 0.00% - ...,aiti'- .- 0.00%... Channel I Channels: '' : • : . . ,,. .2.-,, ,.`--; -,;'," ‘tic.':,......-_-.. . • L.. . (Satellite r. 28 .: 32.9 32 35.5 4.0Th. 2.6 ' 12.$0% -7.9%* ...140--- . 460%,., Charge per ,• . , .. ' -- -.1....- - .. . , • Satellite . $1 11 $0.97 $1'.04 $095 ($0.67) ($0.02) L6.66% -2:10% . . -.0.05 •. .."--4.50%: '- - - . • • Channel .:.... .-•. ..ff. i I [:',,''.• -. • ;2',..:,...., 3.1.5 Comparison Ahalyais .. • From these comparison OttajtS, ,basic rates in Petaluma are significantly higher than the national average (as discussed above, due. to Petaluma being a recently upgraded and •, more advanced system, antl,'In part to being an unregulated community with its own access corporation). Petaluma 'enjoys S.loWei-Afiaiti :a"Verage expanded ,basic (CPST, • which the FCC calls Cable Programming Services-i Tie0. When the two tiers are combined, we see that Petaluma rates for 1999 are only '3.°6 higher than the national aVerage. However, equipment 'rates in Petaluma are significantly higher than national averages ($3.85 'vs. $2-71.). Rate regulation might result in lowering equipment charges. Overall, in 1999, 'Petalutn-a's cOmbjnecrrafes forser.■iice and equipment were . • $1.76, higher than the national average when comparing ,to'the FCC's average figures for non-competitve cable Systerns, (Combining, regulated land non-regulated in one ,r.--_1°.." ntf.::•11-::..-:...52-61:56.0)7:::_'. -2:11;:f.i.f.:. .c.9 :.. • . ., _ In terms oftost per channel,.far years in -a i-6W, the c'sebohd chart above shows that the average price,per channel in 199-9 was lower than the national average, ($0.56 vs . $0.66 respectively). -,4dclitionally,-per channel costs for satellite programming in 1999 actually went below 1998 levels :and remain tower than national averages Sateilite programming is defined hete,a's-table services other thanoff-aft broadcast channels ., Finally the two charts above'track the percentage of increases in ,rates between 1998 and 1999. 'Here we see,further distinction between Petaluma and national averages The 'data shows that Petalumas' toialTherceRtages exceeded National averages by 'I .rio, for percentages in other unregulated non-competitive communities (see, chart below). Please note however, that the •percentage change in basic only rates in Petaluma outpaced national averages by 8.2%. Equipment percentages also outpaced IIIII national averages by 5.17°6 : . . . . . . . . .. . _ . RPT00012.001.FINAL.doc conitpcations Support Grouprinc. ©1006, Page25 of 34 AT&TPETALIJMA FRANCHISE FOURTH YEAR PERFORMANCE REVIEW SECTION 4.0 - COUNCIL MEMBER ISSUES SEPTEMBER 1, 2000 • • Comparison Of In Rates Between 1998 And 1999 Between Petaluma And National Averages,In'llThregulated, Non-Competitive '(As A Percentage Of Change) • 12.00% • 8.00% - - 6.00%- • two 4.06A, -----72J;lk • • }41,414 -3"); . 2 000/ Wrift,:ik= F.014, 0 y1 4t4it Fr, '— 4ri qt. •e. •6:60°10 • ? DI Nat. .%,Change .;c Petaluma '% 'Change (c,e, • . • • 3.1:6 Conckision Rate Regiiltidn, _ Data•sudOeSts'tbat rate regulation may jeacito lower,charges for Petaluma's basic-only subscribers and,may-lead to lower bOuiprpent,,rates to the entire subscriber population But as the data clearly shows, regulated cities experience higher expanded bait-rates Since approximately 92% of Petaluma subscribers take a ,cOrribination, of baSic and expanded basic, these ,higher expanded basic rates may offset the beriefits1h,oriate regulation for the majority of Petaluma's subscribers. Nbnetheless, as atpolicy,"rnatter; the City could iconsider rate regulation an important and ?useful measure, in protecting L.-the-interests-of the-approximately-1;401-BasiC-only subscribers, some? of whom 7 loW or- fixed incomes. 3.2 pgTALumA COMMUNITY AC,CESS " • • . _ Is:AT&T Properly Accounting For Petaluma Access,Funds? • CSG found that AT&T's billing system tracks, both the number of subscribers and the amount collected from subscribers related to the $2 00 per month access 'fee CobtributiOn. It was determined during the...a-Licht that AT&T provides an option each Month fb('w,:subscriber. to check,whether,61,not they--,w-ould like,to-be,chatged;the',,abb-ass fee. Once a stibscriber,Selectsthe,option -notO.:be Charged, the subscribe? is entitled to deduct $2.00 Irorig, the amount 4 he or she owes for that month. Going IforWard, according to ATE,TS local customer service ,staff, AT&T automatically deducts the amount'from fOtOre, billings. If a subscriber fails to 'make a choice, the ,subscriber is charged,the fee by ciefaUlt. Since A,T&Tjust began the practice in.May'and June, there. .1/ • RPTobon':on't.FiNitt_doc- Coma unications upport Group, Inc. ©-2000 Page-26 off34, AT&T PETALOMAFANCHISE FOORTWEAR PERFORMANCE REVIEW • • SECTION4,9 - COUNCIL MEMBER ISSUES •SEPTEMBER 1, 2000 was limited information to •audit We only 'audited the methods and amounts being charged, not the-accuracy"of AT&T's payments tb PCA. We reviewed billing system'records for 1999 (See Exhibit K) and madetomparisohs to • secondquarte2000 information provided by AT&T (See chart below)- CommunitY Access Revenue'AnalysiS: Years 199 and 2000 . May 1999 June 1999 May 2000 June 2000 % Change Access Revenue ;,$ 8;561.49,r-: $ .8;37'0:42 . 326;67.000*..)318.62% • .". • As of June 16, 2000, according to records prOvided'by AT&T, 6,768 subscribers opted not to pay the access fee Given the amount of publicity this issue has experienced, it could be expected that the tnumber of subscribers electing the no answer will change over time.' John BertucCi, PCA Executive DireCtor noted that a subscriber had contacted him regarding the fact that the subscriber had checked no but was still being charge the amount of the fee. The City should',fdrther--stUdyithis problem. We are of the opinion that the default "yeS" is,,of great advantage to the City. Under the current billing method, subscribers are given an opportunity to adjust their dpinion each month. As it • currently stands, a subscriber can request no once and never be charged again, unless he/she affirmatively selects' the yes box in subsequent 'months. This is also true for ;4) those who check yes. Further study should be gimen to'determine the,rnanner in which • AT&T handles those cases where a.thlikiSoriber checks no,et one time but later selects the yes box in •a subsequent month, (and vice versa) how will the billing accounts be adjusted going forward? We recommend that the City and PCA continue routine checking of the billing practices of AT&T related to the access fee Since we are not aware of any previous audits, it would be prudent for RCA to perform an audit AT&T's access contribution paw-he-nits-for the past-three years. 3.3 UTILITY UNDERGROUNDING Does AT&T Participate With Utility'Undergrounding Coordination7 During our technical inspection, CSC inquired of Mr. Dan Rumrill, AT&T Area Network Manager, how AT&T participates in the utility' coordination of ,undergrounding. Mr, Rumrill indicated that AT&T regularly sends a representative to ,meetings (related to underground construction coordination with the other utility companies. AT&T also participates with USA (Underground Service Alert) and dispatches a representative whenever necessary to protect its underground assets. AT&T has no issues with the City regarding the underground districts (Rule qo) and supports the efforts of the City related to .underground standards. CSG inten;ieWeOthe. City's construction manager, Rick. Skladzien, who also indicated that there; are no issues specific to AT&T's compliance or participation in undergrounding cables. However, Mr Skladzien indicated that the City has general concerns for all:,utitities performing work in the right Of way, that proper construction practices; resurfacirigh and traffic,dontrol be folloWed. • • • • RPT00012.001.FiNA4..dot Communications'Support Group, Inc. 2000 Page 27 of 34. AT&T'PETALUMA FRANCHISE FOURTH YEAR PERFORMANCE REVIEW SECTION 4.0 - COUNCIL MEMBER ISSUES SEPTEMBER 1,:2000. • 3.4 PEDESTALS • A secondary issue exists:related to construction practices'of AT&T related-tipTedestels. AT&T has 'a total of 28 fiber nodes in Petaluma., ,Roughly 55% of these nodes are located on telephone poles and 45% of these are in ,ground-mounted pedestals. Additionally, in •ordef to provide standby :powering- equipment for its telephony customers, AT&T Qable has installed large cabinets containing up to six 12-volt (automotive,type) batteries for backup power for their system. Although none are currently in use in Petaluma, some cable companies, including AT&T (in other . coffimunities) are placing, in the rights of way propane gas, powered generators, for stand-by power. • As a preventive policy C,SG recommends that the City periodically Thsizect ,the safety - • condition of theseicadinetsand generators (when put in use) for the following reasons. •• • 1) Publib,safety.relatedto)the storagei,df‘flartrnable fuel in the vicinity of possible vehicle dalliSions.' • 2) Pt:Mild-Safety related toJhesize and location of the structureS4and susceptibility to trail-it/pedestrian cOliisions. 3) Aesthelic,concerns about the size/location/screening ofthekstiuctures • • • A) Noise polfution related to.the:clecibel level of fhe generators._ • END SECTION 3.0 • • • • ' • • • • • • • • . RPT00012.001.FliOL.doc Communications SypportGroup;Inc. ©'2000 Page 2.8,ot 34 AT&T-PETALUMA FRANCHISE FOURTH'YEAR:PERFORMANCE'REVIEW SECTION 4.0'- COUNCIL MEMBER 0. SEPTEMBER 1, 2000 • 4.0 OVERVIEW-'TECHNICAL COMPLIANCE AUDIT, CSG's'Teehnical review of AT&T revealed that AT&T met all FCC proof of performance technical requirements. However, the audit further revealed certain areas of technical deficiency as noted in this report. The:technical review was conducted by the following individuals: ✓ John.Risk, President, Communications.Support Group, Inc_ ✓ W F Kohutanycz, CSG Consulting Engineer' ✓ Dan Rumrill, AT&T Area-Network Manager ✓ .Tom Comyns, AT&T Maintenance•Technician: . • 4.1. Purpose And Methodology: CSG provided consulting time for the purpose of evaluating the company's technical performance under Section 8 of the franchise agreement. CSG performed the - following: 1 )', Drafted parameters and.sent correspondence requesting Review of AT&T's Winter 1,999 Proofof'Performance Test (Exhibit,A) 2) 'Inspected AT&T Winter Proof,of Performance Test Results (Exhibit B) and • AT&T's 1999 Cumulative Leakage Report (CLII)to:Signal Quality i) Signal leakage ii) Power supply constructionand;safety iii) Any other items;:deemed pertmentao reliable system operation 3) Observed Signal Qualify at Selected City Tap Locations: ✓ City Hall • - ---✓—Lucchesr-'Gomrnunlfy'Cepter-=—=ir ✓ 'Petaluma,Community Access . 4); Reviewed deployment;of advanced services (such as digital channels Video On Demand (VOD) High,Definition Television (HDTV)), assessed compliance to the industry's 'open cables standards, and other issues of technical readiness given today's state of the,art. • 4.2 Findings . As is discussed in greater detail below, AT&T designed; constructed, and operates a 750 MHz Hybrid' Fiber Coax (HFC) design system in Petaluma, This design uses fiber optics to transport signals•to multiplexneighborhood locations ("nodes' ) where the optical signals are received and re-Modulated'as standard Radio Frequency; (RF). There are • 28 nodes in Petaluma serving'approximately 627 subscribers each Section 27 of the franchise agreement r.equiresi.AT&T to:submit a 'state of,cable technology' report. As stated in the Section 2.0.subsection 2':3 of the Compliance report, AT&T has repeatedly RPT00012.001.FINAL:doc Communications Support Group, Inc..:©'2000 Page 29 of 34 AT&T PETALUMA FRANCHISE FOURTH YEAR PERFORMANCE REVIEW SECTION 4.0 - COUNCIL MEMBER.ISSUES SEPTEMBER 1,-2000 been requested to submit a,report ,(see; letter'attached at Exhibit C hereto). As of the date of this report, this important; 'state of cable technolog y report has not been submitted. • • 4.3 'FCC Winter 1999:Winter Proof Of Performance Testing; CSG reviewed AT&T's winter 1'999 FCC .Proof of Performance Report. Th"e Federal 'Communications Commission (FCC) requires that all cable companies perform,a "Proof of Performance'°test•twice per year These tests are"required to, • be conducted in the„generally hottestfand coldest months ofthe year:, • Typicallly this would be winter and summer. AT&T performed its Winter 2000 test between February and April'2000. ••:Review of winter proof includes following areas of concentration: .FCc Section' .Nature of Test Requirement FCC 7_6,605,(a) (2) Aural:lcerrier Frequency FCC:76.605 (a),(3) Minimum Visual Signal;Levels r FCC 76.605 Ce1(4) Visual'!_Signal'L"evel Changes ” FCC 76.605 (a)r(4) (i) Visual; Signal - :Adjacent‘.'- Channel ?:Relationship . FCC 76.605 a 6 In•Band.Res •oevels FCC 76.605 (aJJ5) Aural`Carrier L ' FCC 76.605 (a)„(7) Carrier to Noise ` FCC 76:605•(a) (8) 'Composite Triple Beat/VI. Order/Cr•oss` ,<IsModulation :FCC'76:605 (a)".(10) aHum Our review,of AT&T's year 2000 formal FCC.test reports suggest the following: AT&T.met all FCC Proof.`ofcP.,'erformancelifequirements, 4.3.1 Signal Quality' . CSG selected three locations to perform fiel"d.tesfs. These locations'included City Hall, Lucchesi Community Center, and the PCA's Media Center at Casa Grande High 'School As noted below, our field;tests duplicated portions,of the FCC 'requirements, Carrier to Noise and signal levels;;et the 'Access Center ,Community Center" met or surpassed FCC 76Y605 (a) (7). 'The amplitude characteristic shall be within •a range of 12 _ . decibels,from'0.75: MHz to 5.0',MHz above the lower boundary frequency of the cable television' channel, referenced'to the„average of"the highest,and lowest amplitudes within these;frequency loundaries•'- However, signal levels at City Hall did not meet requirements; of„FCC 'The aurahcenterfrequency of-the;aural carrier must;be 4.5 MH2,-±5 kHz above:the frequency of the• visual .carrier at the •output of the modulating or processing ,equipment of a cable television tsystem,•and,atthe subscriber=terminal:' RPT00012;001 FINAL:doc . Communications Support Group,anc. ©2000 Page30'of34. . • AT&T PETALUMA FRANCHISE:FOURTH YEARIPERFORMANCE REVIEW. ; SECTION 4:0 -.COUNCIL MEMBER ISSUES , SEPTEMBER,1, 2000 ^• This failure has likely contributed to the-City Hall test also missing the FCC requirement. (76.605 (a) .(7))'fdn. 'Carrier to Noise ratio (C/N): 4.3:2 Signet Leakage:, • CSG also reviewed AT&T's latest cumulative leakage index report: The FCC requires that all cable companies perform 'a comprehensive:`Signal leakage test.on an annual basis This test is designed to assess the amount of stray Radio Frequency(RF) signal g ys tem (if any). This'is done to ensure that the cable system is maintained ash n elelctroni'callyclosed system and signals do'not interfere with licensed Off air users of the'same.frequencies. Review,of AT&T'sFCC :Form 320 filing, "Basic 'Signal Leakage Performance Report," . pursuant to FCC 76:605 (a), (12); 'showed that the fly over method as opposed to the ground-based method was-being employed for the formal filing. This method is on of • -.two methodologies allowed under Form=•320 and provides an:`accurate and timely review • of signal leakage: Ground based ,methods are normally used as a follow up for identified problem areas. The current CLI (Cumulative Leakage Index) fly over testing indicates that the system, is within all pertinent FCC standards. No major leakage was found and minor leaks have been repaired., .4.3.3 Power Supply Construction& Safety: Visual spot check of power supplies;in the City reflected good engineering practices in installation and operation: There:ate a number of areas in the City where there are facilities for the current system on the same! pole,as an earlier over.-built•system. The City may wish to-investigate if both!facilities are currently being used'or if the older one may be removedfrom the.poles. 4.3.4 Observation:at City Tap Locations: In order to ascertain co mpliance with this issue tests and observations were made on overall signal levels and�.Carrier to Noise ratios (C/N) on;the three-PEG channels, t Access Channels 26, 27 and 28. These observations and tests were conducted at the A Center - Casa Grande HighrSchool,. City Half`and the.Lucchesi Community-Center -=:-5- -_ These tests allowed both observation of.the;loCal;Signai being originated and their overall performance after relay to,the Headend, reprocessing:and insertion on the down stream subscriber- network`: The C/N`figures area measure of°the actual and perceived quality of•thesignal;;the signal level figures',representthe ambUnt ofeignat that AT&T is currently delivering to each location. • • • RPToo012:001.FINAL doc Communications:Support Group, Inc. ©1000 Page 31, of 34 • • • AT&T PETALUMA FRANCHISE FOURTRYEAR PERFORMANCE-REVIEW SECTION 4:0 -COUNCIL MEMBER ISSUES • SEPTEMBER • 4111- Measuremenis'Froiltb.ify Tap Locations:_ • Citv';H (Control City Hall Lucchesi Access Hill . (Control Room) (Council Cdrintitinitjr Center Room) w/o two-way „ ‘Charribers) . Center . : . splitter FCC Minimum - 0 dathif at Subscriber rm -EREMPI1i: Ch 2 Si§11511):ever 0.H1:12'dr3rnV :•4:1:1:C113inVri7a.8-ABMV2.7 Ch 78 Signal Level l ::•3t5 ABM 6:5:0;dBmV), - Fgaimipinium: maimmog mg u C/N Channel 26 C/N s•E} - 46d li'- Chanhell27.'C/N ' . • Chanfiel'28,C/N 1/44.5.dlY-71.v. 435db 435db 'tLNiknovvnt. ,467db • L. . , Bold numbers denote failures. ,DBm11= unit of Measurement., decibel ratio of:Voits.jo\orie,rnill,volt,. t Low signal levels did not'allow an accurate Carrier tb,,Noise (t/N):,measurement. • As shown in the 'dliart; levels at City Hall do not meet the FCC requirements for • minimum signal level at the.subscriber terminai,,OidBmV. While:the monitor:in Council . Chambers diplayed this signal level, AT&T-f-shOUtd do additional;letting tbi deter:Mine if Signal levels at the•tap,,serving•City Hall meettfe43,dBmV FCC-standard fOr•the.encrof • • a I 004661.clrbO7.„IrthiS is not the case, the rtd P Res need to be adjusted. If ta5 levels • are sufficiently high then 'adjustment/modification/repair of the internal distribution system ib City hiall may be required. , • 14:3.5 !Public; Educational ancl G.overnmental (PEG) Access;Channels: In addition the ,C111 tests-performed at the three City locations, Oity',Hall, Lucchesi: • . Community Centena_gd Pei?lUlld Community Access (PCA), performance of City .a.channels.vvaS.alath reviewed at tlie-SyStefh,171eadenct: ,RF measurer:OA-Ott:Were made at TqW5poipte-in'the-Signaliflbw:‘ . -• • • :(11) On"the'inboubd•side‘•,,of the fiberinterconneet,with the Access Center, after . the fiber receiVeyand'cobyerSion:to:,RF.. • • ,(2) On the outbound side of the subscriber network, after- .up-conversion to • thahnele6;„27•arid":28, • . • Results show•that the tier-interconnect and RF processing provide a high: quality link, for the i•PEG channels The following chart,oil the following contains the results of - • ihesemeaiur,ementt: • • • • • . •• • RPT00012:r001.0Altibiloc Communications SUptioitGrti:10;!Inc. c):2600 Pa§ AT&T PETALUMA FRANCHISE;FOURTH YEAR PERFORMANCE,REVIEW SECTION 4.0 - COUNCIL MEMBER ISSUES, • SEPTEMBER 1, 2000 • • • Chart-REG RF measurements: • In-Bound Out-Bound C)N Channel Channel__.,. • 3 ?: .52.6_db 6 600db 9 568db b v' :: CU 26 48.6 db 27 49.7 db 28 44.1 db However, we noted, significant signal loss •due •to inferior splitters and cable. AT&T replaced the problem splitter and indicated willingness,to consult Petaluma Community Access (RCA) for further corrective actions. We recommend: RCA Contact AT&T for the purpose of troubleshooting and,building distribution issues. , Additionally, PCA General manager Mr, John Bet-tucci indicated that audio inputs at Lucchesi are not balanced 3-conductor XLR type but are instead an uncommon . unbalanced 'banana plug' type- Since we have been told that Viacom performed the original install at the community center, CSG •recornmends AT&T be asked to assist PCA in replacing these jacks.With 3-conductor XLR type connectors. - 4.3.6 Advanced services deployment: CSG also examined the system for AT&T's deployment.of advanced services (such as digital channels, video on demand, high. definition television); assessing compliance with industry's "open cable" standards, and other issues of technical readiness given today's state of the art. • We found that AT&T is generally offering services comparable with the most advanced --contemporary systems (in California). These-include,digital television (cable)=DOCSIS?='' cable modem Internet 'access, near video on 'demand, and cable based telephony. Its 750 MHz HFC (Hybrid Fiber Coax) distribution system:•appears to be well designed and. • constructed. Technology has advanced from its initial construction and new equipment is now available with-an 860, MHz upper frequency limit but many systems continue to program to 750 MHz or below based upon perceived'subscriber interest in available programming (Cox.Cable Orange County, and AT&T Fremont). Spectrum usage ism vitally important to cable operators• as more advanced services are offered on platforms- of limited capacity Advanced services (such, as High Definition: Television, true Video on Demand) and increased demand (new subscribers) for these have the potential for creating capacity/throughput bottlenecks. As a result, we have requested AT&T provide a review of frequency spectrum-usage es°part of its technology report — see Exhibit C. As mentioned above, AT&T operates "a cable system with electronics capable of passing 750 MHz of bandwidth. Signals for the cable system originate via fiber optic RPT00012.001.FINAL.doc ∎CommunicationsSupport Group, Inc. ©2000 Page 33 of 34 • AT&T PETALUMA FRANCHISE,FOURTH YEAR PERFORMANCE REVIEW SECTION 4.0 -COUNCILMEMBER ISSUES SEPTEMBER 1,2000 cable from A,T&T's.PetalUma Headend. Certain signals (related to digital channels, pay services, and digital music are ;generated from other AT&T facilities The City's, three PEG access channels originate at the Access Center facility and are connected via fiber into the cable system at the petaluma. Headend: The Headend site also serves as processing location fbr•data,SignatSfbr AT&T's high-speed Internet and voice tetephOhy services:, The COM binds:I.signals travel over cable to approximately 28 nodes in neighborhoods throughout the citSi. Each node serves approximately 627 'potential . • custOrners , At each node the light signals are converted into electrical signals and delivered to the customer via coaxial cable. • The spectrum betWeeq5-4.M1- and:550 MHz ts purreritlY used for analog Ytdeb,•stgnals. A portion of the spectrum between, 550 MHz and .70: MHz is being used for digital video, audjo. and data i signals. Telephony services use 8 MHz bf‘CaPatity. CSG has requested a detailext description of AT&T's cable system frequencrdsage, but as of this date, no infOrmatiOn}cas been.submitted.( ee Exhibit a) 4.4 'TECHNICAL RECOMMENDATIONS: 1) • CSG pedoititnends that the city request AT&T in,vestigateighalic4iality, situation at city'Hall end provide corrective gotiOPS. • 2) CSG also observed,that the'recbitling.format being used today's Letiels.oftechnblogy used fdrsPffG production: theretbrerfeCbriimend that the City and Petaluma Community Access Center.. meet to confer about :a • replacement schedule forThisequipment: AT&T and PCA,:should .meet to discuss rewiring the :routing and distribution cables in the 'Media Center to improve picture quality and trari:srniSSioil:hack to AT&T's hea:dentl. 4) AT&T shduld aSked to assist RCA in replacing the audio connectors: ámrthe • • • • END SECTION 4.9 • • EXECUTIVE SUMMARY'TO FOLLOW • 111F ak • • , "RPT00012.001TFINAL.doc Communications Suppoit Giviip,Inc. ©2000, eage-:34,