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14441
i ORDINANCE NO. 14,441 AN ORDINANCE MAKING FINDINGS AND RENDERING A DECISION PURSUANT TO ORDINANCE NO. 13,790, APPROVING REVISED CABLE TELEVISION RATE SCHEDULES, AND FOR OTHER PURPOSES. BE IT ORDAINED BY THE BOARD OF DIRECTORS OF THE CITY OF LITTLE ROCK, ARKANSAS: Section 1. Findings. The Board of Directors makes the 268 following findings, pursuant to Section 8- B- (3)(c) of Ordinance No. 13,790 (herein, as amended, the Franchise Ordinance): (a) Riverside Cable TV, Inc. (herein Riverside) was granted the cable television franchise for the City of Little Rock by the Franchise Ordinance. (b) Pursuant to Section 8 -A of the Franchise Ordinance, Riverside was permitted a certain schedule of rates for provision of basic cable television service and related services. (c) The City of Little Rock has retained rate modification authority, pursuant to law. (d) Riverside was granted the right, under Section 8 -B of the Franchise Ordinance, to request a rate increase after a period of two years from the commencement of service, which time has elapsed. (e) Riverside has complied with the procedure set forth in the Franchise Ordinance for requesting a rate increase, to -wit: (i) A petition was filed with the City of Little Rock on or about February 15, 1983, requesting approval of a schedule of revised rates, there having been included with said petition a statement by Riverside of its justification for the revisions. 0 v-9 M M M M M 11 9 Z69 (ii) A hearing was called by the Board of Directors and was conducted April 19, 1983, as a public meeting at which all parties desiring to speak on the issue of the proposed rate increase were permitted to appear and be heard. Mr. Ron Paulson, Manager of Riverside, presented a videotaped presentation on the necessity for a rate increase. This presentation included a report by Ms. Maureen Houston, Storer's Comptroller, of the net loss that Riverside had incurred to date and the projected net loss without a rate increase. Mr. R. N. Dranke, vice - president of Interfaith Cable Committee; Mr. John Johns, vice - president and production manager at UALR; and Dr. Mary Jean Thomas, Dean of the College of Communications at UALR, stated that Riverside had been beneficial to their operations. Ms. Rhonda C. Stewart, a volunteer for the black access channel, spoke in support of the rate increase. Ms. Julia McGehee of the Little Rock School District spoke in favor of a fair subscription rate. There were no persons present to speak in opposition to the rate increase. (iii) Riverside notified its subscribers of the hearing by notices run on two channels for 24 hours a day on five consecutive days prior to the hearing. Proof of notification is attached as Exhibit "A ". (iv) Legal notices were published in the Arkansas Gazette and the Arkansas Democrat on Wednesday, April 13, and articles appeared in both newspapers prior to the hearing, all of which set forth the time, date 7, 0 0 270 and place of the hearing. Proof of notification is attached as Exhibit "B(1) and (2)." (v) Jack Murphy, Director of Finance and Administration for the City of Little Rock, prepared a financial report for the City Manager and the Board of Directors on Riverside's proposed rate increase. This report, pages 1 -20, is hereby adopted and attached as Exhibit "C ". (f) Riverside has established that the rates proposed for implementation currently are no more than those which are fair and reasonable, both to Riverside and its subscribers, in view of its costs of service, the return on its invested capital, the efficiency and economy of its management, the quality of its service, its compliance with the franchise requirements, and in view of other relevant factors presented by Riverside and by City personnel to the Board and considered by the Board. (g) Riverside has established that the rates proposed for implementation on July 1, 1984, may be reasonably anticipated to be no more than that which is fair and reasonable at that time, in view of the presentation of data as set forth in subparagraph (f), and subject to possible reconsideration by the Board in this regard. Section 2. Approval. (a) Those rates set forth in the attached Exhibit "D ", which is incorporated by reference herein, which are subject to the City's rate modification authority and which are designated to take effect July 1, 1983, are hereby approved, as set forth in Section 8- B- (3)(c) of Ordinance No. 13,790; and (b) Those rates set forth in the attached Exhibit "D" which are subject to the City's rate modification authority and 91 W- W = M 271 which are designed to take effect July 1, 1984, are also approved as set forth in Section 8- B- (3)(c) of Ordinance No. 13,790; provided, however, that said rates scheduled for implementation July 1, 1984, shall not be implemented until and unless: (i) On or before April 1, 1984, Riverside shall have submitted to the City Manager the following financial statements for 1983 that have been audited by a certified public accountant Balance Sheet; Income Statement; Statement of Changes in Financial Position; Detailed Supporting Schedules of Expenses, Income, Assets and other items as may be required; and Statement of Current and Projected Subscribers and Penetration. (ii) Riverside shall also provide the City Manager with a detailed projected income and expense statement for 1984. The statement shall incude figures with and without the July 1, 1984 increase. (iii) The City Manager shall furnish to the Board of Directors a report on the financial data presented. (iv) Riverside has otherwise complied with the Franchise Ordinance. (c) The rates shall go into effect July 1, 1984 unless the Board acts to defer, amend, modify or deny the new rates prior to July 1, 1984. Section 3. Subscriber Service. A subscriber desiring to downgrade the service may be allowed to do so free of charge if he or she brings the converter to a Riverside Service Center for adjustment prior to September 1, 1983. The current fee shall be charged to the subscriber if the downgrade is performed in the 4 272 home until September 1, 1983. If the subscriber is over the age of 65 or has a mobility - related handicap there will be no charges made for this service. Section 4. Construction. Any provisions of Ordinance No. 13,790 in conflict herewith are hereby amended to conform with the terms of this Ordinance. Section 5. This Ordinance shall be in full force and effect from and after its adoption and approval. PASSED: MAY 3, 1983 ATTEST: CIVY CLERK—JANE CZECH 5 APPROVED: r � � CABLE TELEVISION RATE HEARING T.e ;adlx of Me, We Pock Cable tew7,1 rl ha jse, Rrver_ide Cato TV, Inc, has asked the Board of Director of •the C.4 of Lade Rock to acprwe aqID• F058d InCfeaSB In As rate smiCIU^1h7iiB L Commitment to Eccellence A ,0 i8.59 Par, nlonttl, DNinnlrig In rtur qR( i _-2A he Board of Directors will COrldOL1 a l0, cubhc hearing en that request at 7`A t c m. Tuesday evening, AWIII 19, 1933. c fie hearing will be wnduded in me I Board of Directors mset room cn Vle Am of Oily Hall, Markham and c second B�mBandwey streets, Little Rode am du D RIVEpsi�ECgBBLE TV, INC. s CERTIFICATE Ronald D Peuleon Generalwnager p t .. G< ABL ISIO MEA ,D Tne holder of rM televlslOn fraMnife, Rlvarslde Cebb rtur qR( Dlrac- hb TV, In<.. Ms asked fM —1-.1Z l0, o co- Cora of tna Clh Of LIMB Rat ay • Ara ski prove a propeud 1"cr in its nN ucima TM propoul would chenpe LC . :qh tea basic monthly rata to 4.95, eNK- ber au I able Immediately, end Would rata that Set es raU ultimately fe tJ.SO per moNn. bs It vt IOlnnln9 In JuIY, 104. nc Tne Board of DIIMera WII CO^dll Ct a pO e°blie Marmq on toot rpwsf at ]19, �C W I ; m. en TwsdaY a•enlnp, ADrll :9, �- rf '=6a. Tna h Wlli M conducted In .: • ! •tea Board of of DlredoI m room of City I ,,, Muk- ^cr us the second H.11, on Icb ham and Broad Way Streets. Little .d ♦aa Rock, sod It Is own m Jaolio. Mla RIVERSIDE CA BLE TV. INC. �._ at, Ronda D. peolaon. r•i. Gawral Msnaper. on- Nall ie s m n- ta t D•.41;. A- �senri r• NOtI[ae I In, . v Comes the undersigned and hereby certifies to the City of Little Rock as follows: 1. I am Ronald D. Paulson, General Manager of Riverside Cable TV, Inc. (Riverside). 2. Beginning at 7:00 a.m. on April 11 and ending at 9:00 p.m. on April 15, Riverside broadcast a notice of the public hearing on its request for a rate increase. Said • notice was run continuously 24 hours a day on Channels 13 (local origination) and 4 (public access). 3. The text of the notice read as follows: • PUBLIC HEARING CABLE TV RATE INCREASE LITTLE ROCK CITY HALL TUESDAY, APRIL 19 7:00 PM 4. The attached legal notices were run in the Arkansas Gazette and the Arkansas Democrat newspapers on Wednesday, April 13. Copies of the notices were also sent to the news departments of each paper. RONALD D. PAULSON STORER CABLE COMMUNICATIONS 801 Scott Street o 501-376-5700 o Little Rock, Arkansas 72201 &L(-libi+ ° A'L j• • E I Notice CABLE TELEVISION RATE NEAR IN TM holder of 1M Lima R.k Cable tebvlalon Iranchlse. all wrylde Cebb TV, Inc.. Ma caked 1M Board of OtreC- fors of tM City of LIHIe y RocY io aD grove a prapod lalrNy in Ih tale IM Will TM prOpoyl -..to change Ilv C monthly rata to "K eHeO a ImmadlablY. and WWI, rely Mal tab ultimately to Lsg ar m b ginning In July. ,nth los, , oa TM 9oerd of Directors rill Conduct publk hearing an 1M, rpwst et );dp pfn, an Tua, Wenl" y, at W, ,U. TM hearing rill W pp,y I(I In rho . W of alrectors naa,fng room on Me ilecon, floor of city Ib,. Mark- ham and eroadrey street; Llryb Roc4 knd V I. open to tM pyb11<. RIVERSIDE CABLE Tv. INC. Ronald D. psulann, .VI eanarN Manager, • STATE OF ARKANSAS, County of Pulaski ss. 1 JameS D brown , do solemnly swear that I am the Principal Accountant of the ARKANSAS GAZETTE, a daily and Sunday newspaper printed and published in said County, State of Arkansas; that I was the Principal Accountant of the ARKANSAS GAZETTE at and during the publication of the annexed legal advertising in - _ the case of W. C. Bariver - CABLE TELEVISION RATE HEARING pending in thw Court, in said County and at the dates of the several publications of said advertisement hereafter stated, and that during said periods and at said dates Said newspaper was printed end had a bona fide circulation in said county; that Said newspaper had been regularly printed and published in said county, and that a bona fide circulation therein for the period of more than one month before the date of the first pub- lication of said advertisement, and that Said advertisement was published in the regular 1) issue of Said newspaper for times. The first Exhi bl+ ' sw, April w t day -. publication thereof was made of- 1983 the second on the -: day'of 19 —. 4 the third on the . �. _ - of- the fourth an the - - day of—, 19 the fifth an the. - - rk+t,. of .. 19 — the sixth on the day of 19 — and the last on t oy,gf'�'--- •- -K9'�— 20.16 .Fees for prmtirlg�$ "Subscribed and swam to before me this -13th` April. 83 of proof. - $ ay of 19. ' -2 0.16 - : Total $ - • Notory i . - - - - My Commission expire - -- Direct inquiries to the Accounting Department or to the Classified PPO Advertising Manager — 371 -3700. Exhi bl+ ' sw, Date Ll - � y 3 in Account With: Please remit yellow copy with payment. APR 211983 CITY AT��R��Y Em Remit To: Little Rock Newspapers, Inc. P. O. Box 2221 Little Rock, Ark. 72203 To Insure Proper Credit O� Refer To No �+ � Lines at on the following dates: Other Charges: Invoice No. Total Charge — Please Remit $ o.,� $ S� STATE OF ARKANSAS, 1 s& County of Pulaski, 1( I, 1 — do solemnly swear that I am the Publisher, Business Manager, Principal Accountant of the Arkansas Democrat, a daily newspaper printed and published in said County, State of Arkansas; that I was so related to this publication at and during the publication of the annexed legal advertise- ment in the case of pending in the _ Court, in said County, and at the dates of the several publications of said advertisement stated above, and that during said periods and at said dates, said newspaper was printed and had a bona fide circulation in said County; that said newspaper had been regularly printed and published in said Coun- ty, and had a bona fide circulation therein for the period of one month before the date of the first publication of said advertisement; and that said advertisement was published in the regular daily issues of said newspaper as stated above. Subscribed and sworn to before me this day of CVzlyJ�Q ' — , 19 My Commission Expires TABLE OF CONTENTS Purpose of Report 1 Background Data 1 Comparison of Little Rock Rate Before and After Proposed Increase 2 Financial Data 4 Operating Loss 7 Financial Statements B -11 Comparison of TV Rates With Other Cities 15 Return On Investments - Riverside's Computation 16 Return on Investments - Little Rock's Computation 17 Summary Findings 20 Recommendation 21 Alternative 21 ■ � i4�.it4lfi�>riC i• it .. _iii• f• fist � f• ii, si iii• E. Jack Murphy • Room 208 City Hall • Director of Finance Markham & Broadway 8 Administration Little Rock, Ac 72201 371 -4808 M E M O R A N D U M April 11, 1983 TO: Susan F eming, Acting City Manager FROM: E urphy, Director of Finance & Administration SUBJECT: Riversi e Cable TV.'s Request for Rate Increases PURPOSE OF THE REPORT The purpose of this report is to present sufficient financial information to support a decision by the Board of Directors as to whether or not there is justification to allow cable TV rate increases as requested by Riverside Cable TV. No attempt is being made to evaluate the quality of service provided by River- side or the efficiency of its operation. BACKGROUND DATA A. Riverside's Request The written request by Storer Cable Communications included proposed increases in installation costs and the monthly rate for basic TV service. See page 2 for a detailed breakdown of the request and a comparison with the current charges. As you know the City of Little Rock governs only charges related to basic cable service and not to premium channels. Riverside outlined several reasons for their requested rate increases; however, the major one is that the company is losing a considerable amount of money annually. -1- rt rt rr ct rt rt rt F P. F m ro N r rt 1 00 c O co .P W rt ff (t "a rt P. r r w r r w r N N N N N N N 0 n � a Cw� a co ((U7 F P J z lf� 0o o a W rt :0 o in un N N O O 11 O O N 7 In Q 0 u" u, o o Ln Ln Ln ul o Ln vl nysD1, rt r nC ryryyy 4il �bp7 rt L 00 0 O O 0 0 nn rt O OOrt F rn a r r r r VH 7� J r o�D o ID o o 0 a o o1� L71 Ln In 0 0 Ln 00 Ln Ln 0 Ln Ln n O O O O F+ O O O O r � h r to Q £ r N 2 N N N N N N N r C H� p rt O S 0 00 Ln 0 00 00 00 00 rt F+ W Ln W �Sqi w N .P N In P7 pi r (pi N In N � F' N > ~ 1 r Ir r F N O J 'D Q J O 'O 0) O% r R _ O X00 ON 7 n In Ul �D �O Ln (n o kO O W O OO In r O In Ui Ln O O O In 00 000 0 ''L H En 0 i w CD Ln m . o o m o o w 0 0 0-4 O N 0 0 0 0 0 z O o a o n J� T d04 dOP d�O2 d01E �nC dQ ae dwE dP JNF I Y dwP UI °O �" W�j p� pl v N nN F, 8 -0 poO En N F W O00 0 f1 N O a{] �t M O �O f'•� 00 n O •7 rt N Ln o In }Qz a B`. Franchise Ordinance Reouirements for Rate Increase Ordinance 13,790 requires the filing of the following items prior to consideration of rate increases by the Board: 1. Balance Sheet 2. Income Statement 3. Cash Flow Statement 4. Statement of source and application of funds !i 5. Detail supporting schedule of expenses, income, and assets 6. Statement of current and projected subscribers and penetration The company has presented these statements. CERTIFICATION Under the ordinance all financial statements are required to be certified as accurate by an officer of the company. We now have a certification by Mr. W. P. Whelan, vice president of financial administration, Storer Cable Communications. CRITERIA FOR DECISION ON ESTABLISHMENT OF RATES Section 3(e) of the franchise ordinance provides, "The criteria for the Board's decision in such matters shall. be the establishment of rates which are: l.. "Fair and reasonable" to both the grantee and its subscribers, and -3- 2. Shall be generally defined as the minimum rates necessary to meet all applicable costs of service, including fair rate on all invested capital, and 3. All assuming efficient and economical management." Apparently this is standard language because I have seen :it in franchise ordinances in other cities. I must point out these are very imprecise terms that are practically impossible to quantify. FINANCIAL DATA In presenting the financial data that follows we have attempted to analyze from financial statements the company's present financial condition and establish a position on how much money the company may be losing under the current rate structure. A. Statement of Operations The statement of operations for 1981 and 1982 (page 8) presented us by Riverside Cable TV shows revenue, direct expenses, allocated expenses, and net losses for the two years. While this statement has been certified as accurate by the vice president of Storer Cable Communications, I feel some of the items included in the statement should be explained and adjusted in order to convey a clearer picture or representation of actual losses for those years. -4- $. Admin Orative and General Expents This large cost category includes salary of officers, utilities, copyrights, payroll taxes, data processing, etc. Since no detail was provided we questioned representatives of the company about these items and were told that all expenses included here are direct costs that do not include allocated administrative expenses common to Storer and Riverside. C. Depreciation Depreciation costs for 1982 are sbown at $1,550,635, based on straight -line charges over a 10 -12 year life span of the cable distribution system and 3 -10 years for equipment. We questioned the company about the seemingly short periods of time for depreciating assets and they defended it as being necessary and universal in the cable TV industry. If depreciation was charged over a 15 (instead of 12) year life span of the cable system, 1982 cost could have been over $200,000 lower. D. Interest Expense Interest expense in the 1982 statement is shown as $2,969,815. This figure was arrived at by multiplying the prime interest rate charged by Chase Manhattan Bank times the dollar amount of advances provided by the parent company, Storer, to Riverside. These rates range on a monthly basis from 1.6.20% to 11.44 %. -5- While 1P are not knowledgeable about the actual source of the funds Storer provided Riverside, we feel that charging a short -term borrowing prime rate is not justified for purposes of arriving at total operating expenses of Riverside. A fairer interest charge would have been the interest rate at which funds could have been obtained on a longer term basis. If we use an M M interest rate two percent below the prime rate, the $2,969,815 interest charge would be reduced by $403,447. Further, if we use a rate which is three percent below prime, the 1982 interest cost would have been $605,171 less than the $2,969,815. F. Overhead Expense Overhead expense for 1982 was stated at $533,423. According to a note relating to the operating statement Storer's cable division allocates its overhead expense to subsidiaries based on each subsidiary's relative portion of consolidated revenue of the division. We cannot accurately evaluate whether or not this allocation of cost is arbitrary or can be reasonably justified. F. Investment Tax Credit According to notes to financial statements Storer files a consolidated income tax return with the parent company and affiliates and utilizes the separate return method for calculating its income taxes. Tax benefits are not allocated to companies with operating losses. -6- M r M M M M r M M M M M M M M 0 In effect, Storer used investment tax credits of $1,391,184 that were generated during the year by Riverside. Riverside could not take the credit because they had a net operating loss. For rate making purposes we think this tax credit, a benefit taken by the parent company, should be considered to offset part of Riverside's net loss. Recently we've been told Riverside will be allowed this credit sometime in the future_ G. Summary - 1982 Operating Loss To summarize and adjust the reported loss as affected by the figures shown above, we present minimum and maximum adjustments bel.oa. Minimum Maximum Adjustment Adjustment Reported Operating Loss -1982 $3,791,984 $3,791,984 Reduce Depreciation -0- 200,000 Reduce Interest Cost 20 403,447 3% 605,171 Tax Credit 1,391,184 1,391,184 Adjusted Loss $1,997,353 $1,595,629 The purpose in presenting this data is not to attempt to discredit Riverside's certified figures, but to show that the three major factors listed above should be used to offset or substantially reduce the amount of loss, because operating loss is the Primary support for rate increases. Riverside's operating statement for 1981 -1982 follows on the next page along with projections for 1983 and 1984 with and without rate increases. -7- *iverside Cable TV, Inc • Statements of Operations 4 for the years ended December 31, 1982 and 1981 Revenues: Basic Service Premium Service Installations Other Total. Revenues Direct Expenses: Operating Administrative and General Depreciation Selling Total Direct Expenses Allocated Expenses: Interest Overhead Net Loss SIM 19B2 1981 $2,457,033 $ 435,303 3,760,007 1,370,803 110,87E 36,350 11,276 4,705 6,339,192 1,847,161 2,866,981 883,123 1,439,537 753,287 1,550,635 570,436 770,785 423,994 6,627,938 _2,630,840 (288,746) (783,679) 2, 969, 815,, 533,423 159,544 31503 L2.38 159,544 $(3,791,984) $ (943,223) •iverside Cable TV, Inc • Statement of Operations Budget 1983 1983 Budget Basic $ 3,326,210 Premium 5,021.,328 Installation _ _ G0, 000 Total Revenues 8,407,538 Direct Expenses Operating 4,117,102 Selling 188,395 Administrative & General 1,641,219 Depreciation 1,609,132 Total Direct Expenses 7;555,848 Allocated Expenses *Interest 2,323,000 Overhead 573,000 Net Loss (2,044,310) Statistics Basic Subscribers 40,000 Penetration 6506 Premium Units 68,000 Premium to Basic Percentage 170% *Assumed interest rate of 10% applied to average funds advanced. -9- M ON MM M M M M M M M M M M M Riverside Cable TV, Inc Statement of Operations Projected 1984 Basic $ 3,480,000 Premium 5,421,000 Installation __ 48,000 Total Revenues 8,949,000 Direct Expenses Operating 4,297,000 Selling, 188,000 Administrative & General 1,663,000 Depreciation _1,735,000 Total Direct Expenses 7,883,000 Allocated Expenses Interest 2,442,000 Overhead 573,000 Net Loss $(1,949,000) statistics Basic Subscribers 40,000 Penetration 65% Premium Units 71,000 Premium to Basic Percentage 178% -10- H. Analysis of Operating Statement Without a rate increase but with added installations Riverside projects revenue to increase from $6,339,192 in 1982 to $8,407,538 in 1983, an increase of 32.60. On the other hand, total operating costs, including interest expense at 10 %, are projected to increase from $10,131,176 in 1982 to $10,451,848 in 1983, an increase of 5 %. According to their projections the company will experience a loss of $2,044,310. Following are projections of 1983 and 1.984 operating revenue, expenses, and balances. Revenue Basic Service Premium Service Installation Other Total Direct Expense Operating Selling Admn. & General Depreciation Allocated Expense Interest Overhead Total (Loss) Profit RIVERSIDE'S.PROJECTIONS Without An Increase 1983 1984 $ 3,326,210 $ 3,480,000 5,021,328 5,421,000 60,000 48,000 $ 8,407,538 $ 8,949,000 With Requested Increases I:f Effective Ji 1 1983 1984 . * $ 3,792,050 $ 4,812,000 6,167,088 7,710,000 60,000 40,000 $10,019,138 $12,562,000 $ 4,117,102 $ 4,297,000 $ 4,269,520 188,395 188,000 188,400 1,641,219 1,663,000 1,704,440 1,609,132 1,735,000 1,609,100 2,323,000 2,442,000 2,173,000 573,000 573,000 573,000 $10,451,848 $10,898,000 $10,517,460 ($ 2,044,310)($ 1,949,000) (498,322) * Zero inflation assumed. -11- $ 4,560,150 188,000 1,792.,400 1,735,000 1,871,600 573,000 $10,720,150 $ 1,841,850 i without a rate increase Riverside projects losses of I $2,044,310 in 1983 and $1. ,949,000 in 1.984. while these amounts are far Lower than the stated loss of $3,791,984 in 1982 they still need to be considered in light of: (a) The high depreciation charge resulting from the short 10 -12 year life span of the cab Le system. (b) High interest. costs. (c) No credit being given Riverside for income tax credits taken by Storer. There is no absolute way to quantify these factors. Storer can argue that depreciation charges are realistic and interest costs, which were more reasonably computed at loo in the 1983 projection, are fair. The amount of tax credit, if any, generated by Riverside in 1983 will obviously be lower than it was in 1982. Because of the fact the franchise ordinance is not sufficiently de- finitive in its requirements regarding rate making matters such as these, the City appears to be in a position of having to accept Riverside's certified figures. Although we may question the amount of money Riverside may be losing, there seems to be no doubt they are operating at a loss. The real question becomes one of determining where service rates are to be set to insure rates that are "fair and reasonable" to both Riverside and its subscribers. If requested rates are approved by July 1, 1983, the company projects a loss of $498,322 in 1983 and a profit of $1,841,850 in 1984. . -12- i Comparison of Cable TV Rates Proposed by Riverside With Other Southern Cities Although the rates charged by cable TV service suppliers in other cities do not have a direct bearing on rates to be charged in Little Rock, I felt such a comparison might be somewhat valuable in evaluating what is "fair- and reasonable ". Perhaps it will help to know :if pro- posed local service rates are below, equal to, or above rates in other cities. We found it difficult to make absolute compar.isnns because "Basic Services" differ in each city surveyed. The primary difference lies in the number of channels provided in the basic service charge. Nevertheless we think there is enough comparability for the comparisons to be helpful. Further, while premium channel rates are established by the FCC, we included them in the survey because revenue from premium service is included in the company's income statement, and expenses for basic and premium services are not segregated. In reviewing the following material you will note: (1) The first line on the comparison sheet shows monthly charges for cable ready TV sets. Since most sets in Little Rock require a converter, I have added the converter charge in order to obtain a monthly total which is comparable to charges in other cities. 0 -1.3- i (2) Present basic 'service rates, including the converter, are lower in Little Rock than rates in any city surveyed except Austin which is the same. (3) Basic rates requested to become effective in 1983 are lower than all cities except Shreveport and Jackson. Austin is the same. (4) Basic rates requested effective July 1., 1984 are in line with charges in five cities, but above the other three. (5) Premium rates are presently lower in i Little Rock than those in other cities. Proposed increases will bring them in line with five cities. Baton Rouge, Shreveport, and Tulsa are higher. (6) In most cases Little Rock's franchise tax rate of 3% is lower. -14- r H co co w rD w I to. to H N (J N FI in 1 ' Ln (n p O Dn I: O O j 1 0 O O I O. 0 0 L4 c. ro Ho ro O 0 N 00 a Li r,> ryn �j ((D a P N rn — to N N H H' Ci H' CL n rt W 3 (t O N f H• �f H 0 n a r H I a n (D N• N rt H. rr rt :Y C`i 0 a 0 rt it H� rt H- (D a H G (o (D rt 0 �, rt H. ID 1.1 ] I pa o k-' `J H. o a n n a 'G rt w :1 rT a N o H a Ha o (D z (D b rt H a H r D (t a N N (D F'• rt W rt N r I " � F to (n O (F H O O " in Q. E M r N O C H :0 Di p rt rr rt H rt rt rt (o o 0 a H a(D rt r 1 (n C 7� m w Q G r rt H m F- (D n a y (D o 0 a M 7u \ a rt H rt 0 r 0 rt G N 0 N 111 0 0) C N' rt n a rat F, rt a 0 (D n •�Y a (/I (n H. rt (D n n " ;a a rt �t (D o " 0 0 71 111 (D t.7 H- a ro U rt It G G a rt ° N n g fDS (D a (D (D (D " rt rt rt rt rt N r+ H. (D O (D (D O. fJ 0 0 E rr a i r. m n n H H O a O O O 0 O O O U O O Ol > y G M m n ro o o O o O o 0 0 0 0 " G > O 0 O 0 0 0 O 0 0 o H. " :U 1� a" H H (A N N N H (D Z VI ;r cn to Ln N [n O N o o+ o C: rt b ` t H o 0 o C O N R C M H H 7J rt In 0 H O H C H' • z M zy G C ° q d r in to rt N N N N N N H N N N n ti rt o 0 0 o cn O u, o o (n � G ro O 7 0 0 + 0 o o o 0 0 0 a G" (a n r O 0 : m 0 (n n 0 0 0 0 0 0 0 0 0 0 ka 'd 7a O r 0 tC O 0 n x - vo 00 w r. o Hw N 7 O O co � b 0i J�l ' " � z (n .q Q r .n G n r' C (D 7J ° ;n a M rt to to to to n �. rn H H H H N rn H .P G O Ut I I .I I O O o O Un 0n o ry Y O O _ O O O O O 0 O 0 N z ° r rt d a Z7 O I II N O En ut N H in I I in (n Q .'I li : Ut A' C I. %D- ro o Rpo 0° .° N o m b7 H �on 0 0 0 cool 0 O O N v w (D (D (D a a a r H co co w rD w I to. to H N (J N FI in 1 ' Ln (n p O Dn I: O O j 1 0 O O I O. 0 0 L4 c. ro Ho ro O 0 N 00 a RETURN ON INVJWENT _ One of the criteroto be considered in the rate making decision is establishment of rates which are "fair and reasonable" - generally defined as minimum rates necessary to meet all costs of service including - "A fair return on all invested capital" Return on investment is stated as a ratio: R.O.I. = Profit Investments This concept sounds simple enough but in practice it's not that easy. There are differences of opinion about the way "invested capital" is computed, and how certain expense items are considered in determining profit. Further, who establishes what level of return is "fair and reasonable "? There seems to be no accepted norm in the cable TV industry. RIVERSIDE'S R.O.I. METHOD - Riverside presented the following computations: Profit after interest on capital and R.O.I. = before taxes Investments (net property, plant and equipment plus equity deficits) The company expects no profit in 1983, therefore we are showing their computations of projected R.O.I. in 1984 and 1985 which include both requested rate increases. 1984 Profit after interest- before taxes $1,841,850 Investments (net property, plant & $24,749,450 = 7% R.O.I. equipment plus equity deficits) 1985 Profit before interest before taxes $3,713,450 = 14% R.O.I. Investments $20,148,590 We are not in agreement with the inclusion of interest expense and equity deficits. Without interest costs their return would be as follows before taxes: 1984 - 15. 0?/ 1985 - 20.7% -16- SELECTED METHOD* COMPUTING R.O.I. • While searching for a potential solution to this problem I contacted the Arkansas Public Services Commission staff to determine how R.O.I. is figured when setting utility rates. Because I feel their method- ology is fair and can be applied (at least in principle) I have selected it for our purposes. Briefly the PSC's method of allowing rate increases takes into account the cost of debt, a return on equity, interest expense on customer deposits, and an allowance for working capital. Following is a computation applying these factors to Riverside's 1984 operation assuming only the first phase of the requested increase. RETURN ON INVESTMENTS $20,926,599 Property, plant & equipment after depreciation 9,659 Prepaid expense $20,936,258 X 12.01% _ $2,514,450 Working Capital Allowance 1/12 of operating expense (excluding depreciation) $532,787 X 12.01% 63,988 Protected Expenses (excluding interest) 8,701,710 Total Allowed Income - This formula $11,280,148 (1) The current Chase Manhattan prime rate is 10,. %, therefore we think 12% is generous. --17- Percent of Allowed weighted Debt @ 12 -31 -82 $25,713,547 Total Rate Rate Less Int. Incl. 2,969,81.5 $22,743,732 99.41 12% (1) 11.93% Equity 100,000 .44 15% .07% Cust. Deposits 35,900 .15 8% .01% Totals $22,879,632 100.00 12.01% RETURN ON INVESTMENTS $20,926,599 Property, plant & equipment after depreciation 9,659 Prepaid expense $20,936,258 X 12.01% _ $2,514,450 Working Capital Allowance 1/12 of operating expense (excluding depreciation) $532,787 X 12.01% 63,988 Protected Expenses (excluding interest) 8,701,710 Total Allowed Income - This formula $11,280,148 (1) The current Chase Manhattan prime rate is 10,. %, therefore we think 12% is generous. --17- By using the P® method of computing retu4ft on investments at different rates, we arrived at the amount of revenue allowed under the formula and compare amounts with projected income by Riverside. -18- Balance Annual. Projection Proj. Revenue Rate Of Revenue 1984 Revenue Over Return Allowed 1st Increase Only Amt. Allowed 12.03% $11,280,148 $12,190,000 $909,852 130 11,492,685 12,190,000 697,315 14% 11,707,376 12,190,000 482,624, 15% 11,922,026 12,190,000 267,974 16% 12,136,757 12,190,000 53,243 At 15% return Riverside's projected revenue is $267,974 more than the amount produced by the R.O.I. formula. At 16% the two are very close. In reviewing recent decisions by the PSC we find that telephone, power, and gas companies were allowed rates of return ranging from 9.76% to 13.06% with 11% being the average. Considering that investments in the cable industry may involve greater risks than in utilities, which are necessities, I think it is "reasonable and fair" to consider a somewhat higher return on investments. INCOME TAXES-- which are allowed in the PSC formula, are not included in the above computations. Riverside will receive investment tax credits from prior years when it starts showing a profit. -18- (4) Although we have encountered a number of problems, some of which are still unresolved, in attempting to provide sufficient data for the Board of Directors to make a decision, I feel we are now in a position to draw certain conclusions from the material we have. These are included in the following findings. SUMMARY FINDINGS (1) Riverside provided the required documents in compliance with the City franchise ordinance. (2) We've received a cer.tifi. cation of financial data by an official of the company. (3) At our request Riverside has promised future financial statements will be audited and certified by their accounting firm, Coopers & Lybrand. (4) The certified statements show operating losses for 1981 and 1982. Although we questioned the amount for depreciation and interest charges, and whether overhead charges are properly allocated to Riverside, only the magnitude of the loss remains unresolved. (5) In consideration of the City's responsibility under the franchise ordinance and the fact Riverside experienced operating losses in 1981 and 1982 and projects another loss in 1983, a rate increase is justified. -20- • • 273 C M N r-I N r-i N N N N of ° 00 0 ° ° o 0 0 0 C C- I Ln O O r-I CO N N ri rl r-I N t` 1 ti �o O N O N O uO I O I O 00 I7 O O O O I I Ul O M N r-I N r-i N N N N of N = O O O U C C- O o 0 Dv .j �o O N O N O uO I O I O 00 I7 O O O O I I Ul O 0 N r-I N r-i N N N N N N = O O O U C C- O o 0 O� m O O O O I I Ul O d N N N CD O O 2� O O O O O i O O U O O O O O O O O >C O O O O O O O O O O z N r-I N r-i N N N N N N = O O O C C- O o 0 CDO O j In u Ul d N N N CD O O 2� O O O O O i O O O O O O O O O O O >C O O O O O O O O O O O U Irl O C O O O O O O ' l U") (D Irl O O O O O O ti cl N r-I N r-I N N N N N N I ro � rl }+ m H N r-I N r-i N N N N N N O O O O C C- O o 0 CDO O j In u Ul d N N N CD O O 2� O O O O O O O O . 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