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HomeMy WebLinkAbout1985-03-05; City Council; 7894-1; Report on Cable TV performance evaluationTITLE REPORT ON CABLE TV PERFORMANCE EVALUATION DEPT. HD.& CITY AlNJ CITY MGR.: Q w > a; p' q q 0 .. z 0 E = 0 2 V a z RECOMMENDED ACTION: Receive and accept the Performance Evaluation Review of Cable Television Information Center (CTIC). ITEM EXPLANATION: The City Code requires a performance evaluation on the Cable TV operators after the 5th and 10th year of operation. the Council an to review the staff performance in representing the City's interests; and to review and recommend changes to the City Code in view of changes in law and regulations in the intervening period. CTIC was also requested to do a rate analysis/review since both Cable Companies had submitted rate requests which were pending. Both Cable Companies subsequently notified the City that they were electing to deregulate under California Statutes of 1983 and under the Federal 1984 Cable Deregulation Act. CTIC was advised of this OR January 10, 1985 by letter from the Director of Utilities and Maintenance and requested to delete the rate analysis from the project and substitute, therefore, a review of compliance with the various deregulation statutes when the formal deregulation requests were submitted by the operators. This will be a very simple review sLnce all pertinent information was developed as a part of the performance evaluation. The final statement of the consultant's summary, "Several items will bear further scrutiny by both the companies and the City, but by-and-large Carlsbad is benefiting from what we believe to be quality cable service from well-managed companies," indicates a high level of performance. Items for staff attention will be accomplished and returned to Council for appropriate action. The purpose of the evaluation is to providc independent evaluation of the Cable TV operations of the City; , -/-' FISCAL IMPACT: The total "not to exceed" agreernent with CTIC was $23,625. Billing for work performed through January, 1985, is $15,543.78. The major costs of the project are complete and only the compliance review and letter report remain outstanding. EXHIBIT: 1. CTIC Performance Evaluation Review e e r C’ Performance Evaluation Review of and for the Carlsbad Cablevision Rancho La Costa Cable TV City of Carlsbad, California February 8, 1985 PREPARED BY CTIC ASSOCIATES 1500 North Beauregard Street Suite 205 Alexandria, VA 22311 (703) 845-1700 e ii I' e TABLE OF CONTENTS P2 - r I. INTRODUCTION General Summary of Findings 11. GENERAL COMPLIANCE I Suggestions for Modification of City Code I 111. FINANCIAL REVIEWS OF CARLSBAD CABLEVISION (CABLEVISION) AND RANCHO LA COSTA CABLE TV (LA COSTA) I1 A. Carlsbad Cablevision: 1979-1983 I1 B. Rancho La Costa Cable TV: 1978-1984 I1 IV. SYSTEM REVIEWS: CARLSBAD CABLEVISION (CABLEVISION) AND RANCHO LA COSTA CABLE TV (LA COSTA) I A. Cablevision I B. La Costa I e @ I' r I. INTRODUCTION AND SUMMARY OF FINDINGS CTIC Associates was retained by the City of Carlsbad on November 2, 1984 to review two requests for rate increases and to perform a five-year performance review of both cable systems serving Carlsbad. During the course of this study both cable companies initiat- ed actions permissible under California law to seek rate deregula- tion from the State, These actions continue to be pending while the companies prepare the required information to determine if they qualify for State deregulation. Since the financial viability of a company is also an integral part of any performance evaluation, the financial data submitted by both companies has been evaluated and is discussed in Chapter 111. Section 5.28-050 of the Carlsbad City Code requires that at the end of the fifth and tenth years of a franchise term, the grantees' performance will be reviewed by the City. "This perfor- mance review shall include the grantee's quality of service, the grantee's extension of service, and shall be directed toward e e VXA 1-2 effecting alteration of the terms and conditions of the franchise to effect those technical and economic changes which have occurred during the franchise period expired to date ." During the week of December 17, 1984, Harold E. Horn, project manager from CTIC Associates and William Kohutanycz, Director of Technical Services for CTIC visited both cable systems and with City officials, City files were reviewed, Specifically examined were ordinances, resolutions, Council Minutes, each company's ori- ginal proposals, final agreements, complaint files, and correspon- dence files dealing with cable television. Company records were also reviewed. Financial and operational information was requested and examined, and system documentation, including maps, service orders, and complaint logs were examined. A discussion of General Compliance findings is found in Chapter 11. Mr. Kohutanycz obtained specific technical information from each company detailing each system design, operational standards, FCC Proof of Performance filings, and testing procedures. Picture quality observations were made at a number of test points through- out the distribution system of each of the cable operations. The discussion of technical compliance is found in Chapter IV. Both companies were most cooperative and were readily respon- sive to questions of the consulting team and in providing request- ed information. I’ 0 $ 1-3 On Thursday, December 20, 1984, from 3:OO p.m. to 5:OO p.m. and again at 6:30 p.m. to 8:30 p.m. Harold Horn and Roger Greer, Director, Utilities and Maintenance Department were available in the City Council Chambers at an advertised public session to hear and discuss any questions or complaints raised by the public. Both cable companies also provided company executives to assist in any discussion that might involve their respective operations. Only one citizen utilized this opportunity and this was to discuss a problem he was having in getting service extended within a rather large lot. r GENERAL SUMMARY OF FINDINGS - Generally speaking, both cable companies appear to be we11 managed and present no serious problems. The quality of delivered services was generally very good for both companies. Both companies have appeared to comply with the line extension policy of the City with a few minor exceptions that were allowable. Both cable systems have been built to accommodate future up- grades should they become necessary. La Costa has already expanded its capacity considerably beyond what it originally proposed to the City. Both companies have expanded their service offerings to accom- modate satellite and pay TV programming that were not included in their original proposals or required by the City. 0 0 1-4 Both systems are financially viable operations. Cablevision VIJ is organized as a classic limited partnership and appears to be doing very well for its limited partners. La Costa is a viable operation but is not making a rate of return that it would probably desire. La Costa has a very favor- able penetration (85 percent) but only a fairly good density of housing (78 houses per mile). Cablevision has a better density of housing (98 HPM) but a less favorable penetration (64 HPM). These results are not surprising given the nature of each of the areas served. Both companies have a very similar number of subscribers per plant mile. (La Costa: 66 subscribers/mile; Cablevision: 62 subscribers/mile.) Each of the following chapters describes in detail all of the findings made by the study team. Several items will bear further scrutiny by both the companies and the City, but by-and-large Carlsbad is benefitking from what we believe to be quality cable service from well-managed companies. 0 0 r1* 11. GENERAL COMPLIANCE In the course of the interviews with company officials and reviewing City records the following matters weere identified that will need to be given attention by both company and City officials. Generally speaking most of these items are readily correctable and not considered to be in major noncompliance. (1) Section 5.28.090 requires an annual renewal of corporate surety bonds in amounts established by City Council. In reviewing the records in the City Clerk's office and records kept by the Director of Utilities and Maintenance, it ap- pears that these bonds have not always been filed on an an- nual basis. This matter should be examined further by City officials to make sure that the bonds are annually filed with the City Clerk in the correct amounts. The La Costa bond is set at $25,000 and the Carlsbad Cablevision bond at $100,000. .* 74 0 0 I .. b, 11-2 w (2) Section 5.28.120 requires the following policies of insurance to be filed with the City Clerk: (a) General comprehensive liability insurance in the amount of $2,000,000; (b) Bodily injury liability insurance in the amount of $300,000; (c) Property damage liability insurance in the amount of $100,000; (d) In lieu of insurance required in (b) and (c) the grantee may provide a combined single limits policy for bodily injury and property damage of not less than $500,000.00. The City is also to be named as an additional insured in any insurance policy. The Carlsbad Cablevision insurance policies (Certificate of insurance) have been filed with the proper endorsement naming the City as an additional insured. However, the General Com- prehensive Liability coverage of $2,000,000 was not in evi- dence in the City Clerk’s file. The La Costa insurance policies were not all in evidence and the policies on file did not appear to carry the necessary endorsements required by ordinance. These policies should also be checked for compliance as to current coverage in the amounts required. .b ’ 4- a e c U 11-3 (3) Carlsbad Cablevision stated that they have not been providing written notices prior to providing cable service in compliance with Code Section 5.28.030(f)(3) and Code Section 5.28.210(i). The first section requires notification of each subscriber describing the procedures available to the subscriber for receiving and acting upon their complaints. The second code section, requires notification of subscribers regarding the grantee‘s use of public rights-of-way and that subscriber’s agree they will make no claim or undertake an action against the City of Carlsbad if cable service is interrupted or discontinued @ (4) Neither of the companies have been providing all the finan- cial information required on an annual basis. Generally La Costa has been coming close to compliance but Cablevision has typically not been providing the required information. Both companies did, however, during the study, provide most of the information required by the consultant to enable an analysis of each system’s financial viability. Code Section 5.28.190 requires each grantee to provide an an- nual financial report reflecting the Carlsbad systems only. These statements require: (a) Balance sheet; 4- 0 0 L - 11-4 1 (b) Income statement ; (c) Cash Flow statement; (d) Statement of sources and application of funds; (e) Detailed supporting schedules of expense income, assets and other items as may be required; (f) Statement of current and projected subscribers and pene- tration. These statements are to be accompanied by the certification of an independent CPA as to the appropriateness of accounting methods used and the allocations made therein relative to the Carlsbad system. In addition all financial reports requested by the City for purposes of rate consideration shall be certified by the Treasurer of the Company. If both companies are successful in their current attempt to qualify for deregulation of their rates under California State law, the City would no longer have jurisdiction over rate regulation. Under the new federal law that became effective December 29, 1984, the City would have been re- quired to end rate regulation by December 29, 1986. Assuming that the City's regulatory authority over rates is preempted by State and/or Federal law the Annual Financial Reports should still be required (5.28.190) so that the City can monitor the financial viability of the present operators. L‘ 0 0 ,’ c 11-5 > This information will be essential to have been maintained in order to comply with the new Federal regulations pertaining to franchise renewals since considerable documentation is required at that time in order to evaluate the existing company’s performance and their ability to meet community needs and possible upgrading to state-of-the-art technology. Ia Costa has filed statements for 1982 and 1983 which are rather complete except for the absence of detailed schedule of expenses, income, assets and subscriber count. This informa- tion was, however, provided by the company during the course of this study. Both the 1982 and 1983 statements were certi- fied by a CPA and the Treasurer of the Company. Cablevision had filed income statements for 1979, 1980 and 1981 and expense statements for 1979 and 1980, however, no balance sheets had been provided, no cash flow statements and no Sources and Uses statements since 1981, or detailed income, expenses or assets were filed. No statements were certified by the Treasurer of the grantee and while the 1979, 1980 reports claim figures are audited no auditors opinion was included. z- e 0 CL .. 11-6 'r During the course of this study Cablevision did file sufficient information to permit an analysis of their financial viability. Apparently Cablevision had been under-paying their franchise fees since 1980 resulting in an audit by the City's Finance Department that disclosed that Cablevision owed the City $36,113.88. The La Costa system, under a similar audit, owed a small amount - $579.72. amounts have subsequently been paid by the companies. It is our understanding these (5) Very few written complaints have been officially filed with the City rearding either company. The virtual absence of anyone in attendance at the two sessions conducted by the consultant to hear directly from the public regarding any problems they might be having, suggests that both companies are operating in such a manner that has greatly minimized public criticism. In reviewing the complaints on file the quality of services and signals were seldom mentioned. What few complaints were on file related to the business side of the operation. The Cablevision system had generated a few callers who resented long periods of being kept on "hold," and "a surly attitude exhibited by customer contact person- nel." A few complaints for both systems have resulted from billing problems, channel programming changes, and FCC im- posed "blackout" of certain programs. L. 0 0 w .' 11-7 I The Director of Utilities and Maintenance, who is responsible for following up on complaints made to the City government by subscribers, has stated that management personnel of both firms have been extremely responsive to actions required by the City, (6) According to Section 5.28.140, transfer of control of a sys- tem in Carlsbad cannot occur without the prior consent of the Council - a transfer of control is defined in the ordinance as the acquisition or accumulation of more than 20 percent of the voting shares of the grantee, It is possible that Rancho La Costa Cable TVmay have been in non-compliance with the ordi- nance if it did not seek Council approval of its ownership change in 1982. In 1982, Rancho La Costa, Inc. transferred 100 percent of its interest in the system to La Costa Hotel and Spa. La Costa Hotel and Spa is a partnership which is composed of sub- stantially all former shareholders of Rancho La Costa, IRC. according to their audited statement. Technically, a transfer of control occurred even though the ultimate ownership may not be different. The information we have does not specify if the distribution of ownership amongst the former shareholders of Rancho La Costa, Inc. changed so as to effect an ultimate trans- fer of control. Both the City and La Costa may wish to examine this matter to determine if an action by Council is necessary to validate the change that occurred in 1982. L. e e c 0 11-8 * SUGGESTIONS FOR MODIFICATION OF CITY CODE (1) Section 5.28.050 (i) of the City Code details a procedure that would no longer be applicable for renegotiation or renewal of existing contracts. The new federal Cable Communications Act of 1984 outlines specific, formal and informal proce- dures that control future renewals. Since this new law is preemptive, presumably no change is required, as long as the City followed the Federal procedures, however, many cities are re-writing their codes to conform to the new procedures. If this is desired CTIC can readily supply the appropriate new language or it can be obtained directly from the Act itself. The current provision for renewing for five-year periods is permissible under the new act (no specific time requirements are mentioned) however, this time period is unusually short and may serve as a disincentive to a lender to finance any major system improvements that may be required in the future. Seldom have we seen renewal periods less than for 10 to 15-year periods. (2) When the City originally adopted its regulatory Code it re- tained the right to increase the franchise fee rate in the event FCC limitations were eliminated. Because this language - I. e e i w 11-9 w (5.28.040 (d)) was specifically included in the Code, Carlsbad, we believe, is now permitted under the new Federal, law, if it so chooses, to increase the fee to not more than 5 percent after holding a public hearing and affording due process. . (FCC jurisdiction on this matter has been eliminated by the new law.) The City should be aware, however, that the cable companies are also now permitted to list the franchise fee as a separate item on the subscriber bill. (3) Apparently Carlsbad has never adopted the standards required under Code Section 5.28.160(b)(c). These standards are to It govern the engineering, construction, installation, service, and maintenance of all cable television systems in the City, including but not limited to standards governing carrier levels, signal-to-noise ratios, hum modulation, distortion levels, channel interactions and inter-reactions.'' The absence of specific standards will make it difficult to enforce any future technical monitoring or improvement that might be needed as systems begin to be overextended, equipment develops obsolescence, and system failures result from aging of facilities. - L1 e e .. 11-10 (4) As a final suggestion, in our opinion, Section 5.28.175(e) should not be included in a generic ordinance that regulates cable systems generally. This section describes specific rates for specific cable companies and should be part of the ordinances granting those companies franchises or perhaps placed in specific ordinances or resolutions that established rates for these companies. . 0 1- 111. FINANCIAL REVIEWS OF CARLSBAD CABLEVISION (CABLEVISION) AND RANCHO LA COSTA CABLE TV (LA COSTA) A. CARLSBAD CABLEVISION: 1979-1983 This report describes the financial history and condition of Carlsbad Cablevision as reflected in the audited financial statements of the partnership covering the period of April 4, 1979 through December 31, 1983. 1. CURRENT SYSTEM STATISTICS As of January 3, 1985, Carlsbad Cablevision consisted of 108.88 miles of plant passing 10,666 homes. Of these homes, 64 percent cur- rently subscribe to its $10.95 per month basic service charge for a total of 6,778 basic subscribers. This is about 10% higher than the national average of $9.95 for basic service*. The operator experiences a .8 pay service to basic subscriber ratio for its three pay services, Home Box Office , Cinemax, and The Playboy Channel. The system experiences an average density of homes per cable mile of 97.96. System density is one measure of potential profitability. Typically, an average density of 100 homes per mile or more is con- sidered good. The Carlsbad Cablevision system experiences reasonably good system density. * As reported by Paul Kagan Associates. e 111-2 % 2. HISTORICAL SUMMARY OF FINANCIAL PERFORMANCE a. Formation of the Partnership Carlsbad Cablevision is a limited partnership formed on September 27, 1978 for the purpose of acquiring the cable system. The partnership has one general partner, an affiliate of Daniels and Associates, and several limited partners including Daniels Cablevision, Inc. also an affiliate of the general partner. The limited partners contributed $724,880 in partnership capi- tal in addition to an authorization for the Carlsbad franchise contributed by Daniels Cablevision, Inc. According to the audited financial statements, the value of the franchise contributed by Daniels Cablevision, Inc. was assessed at $95,120. In exchange for the franchise contributed, Daniels Cablevision received an 11.6 percent interest in the limited partnership. Syndication and organization expenses associated with the formation of the limited partnership totalled $81,424. Syndica- tion costs represented a little more than 10 percent of the cash proceeds of the limited partnership offering. According to the audited statements the terms of the partner- ship agreement call for any cash distributions as well as alloca- tion of profit and loss to be made 99 percent to the limited partners and 1 percent to the general partner until all partners a !. c- 111-3 'I have received distributions equal to their total capital contribu- tions. In addition, the next $1.75 million of cash distribution will be made 70 percent to the limited partners and 30 percent to the general partner. Thereafter, 50 percent of distributions would be made to the general. partner and 50 percent to the limited partners. This type of limited partnership distribution structure has been very common in the CATV industry. b. Acquisition of System Assets in 1979 On April 4, 1979 the partnership purchased from Daniel Cable- vision, ' Inc. the Carlsbad cable system as well as 'la substantial portion of the equipment and cable necessary to complete construc- tion of the system." The purchase price of the system appears to have been $753,426, of which $500,000 was the assumption of long- term debt and $196,217 in other liabilities. c. System Management ?he partnership entered into a management agreement with Daniels and Associates. an affiliate of the general partner and the previous owner of the system. According to the audited state- ments, Daniels and Associates receives a 5 1/2 percent management fee with a minimum of $25,000 in addition to reimbursement of e 0 .1 111-4 direct expenses up to $25,000 annually. Daniels and Associates has received the following payments for management services : 1979: $18,750 1980 : $36,371 1981: $37,620 1982: $62,817 1983 : $81,830 In addition, the partnership has entered into a joint office lease agreement with Daniels and Associates. d. Fiscal 1979 (April-December) During the first year of operation of the cable system, the partnership acquired the existing system assets as noted and invested an additional $700,000 in property plant and equipment. A total of $1 million in long-term debt was arranged through Security Pacific Bank of which $500,000 appears attributable to the system acquisition and another $500,000 associated with increase in plant assets after acquisition. During the nine months of fiscal 1979, the partnership re- ports $30,138 in revenues, of which $25,443 are attributed to subscriber services. This implies an average subscriber base of under 300 subscribers. Operating expenses including general, selling and administrative costs and management fee reported totaled $226,000 which appears high for such a low level of revenue generated. 0 0 I1 1-5 . Using 150 percent declining-balance for the used assets ac- quired and double declining balance for new assets, the partner- ship reported $37,887 in depreciation. The estimated useful life being used to determine depreciation expense is nine years for the headend, 7-8 years for the distribution system, 10 years for build- ings. These estimated useful lives are relatively short compared to most systems we have reviewed. Typically, for example, the useful life of new distribution plant is estimated to be 12-15 years. According to the audited statements, $73,569 of acquisition costs is being carried as goodwill or going concern value. This amount represents the difference between the purchase price of the system and the market value of the tangible assets purchased. The partnership is amortizing this cost. In addition, the partnership is amortizing the franchise cost, the $95,120 value associated with the franchise authorization con- tributed by Daniels Cablevision, Inc. in exchange for its partner- ship interest. and loan costs. The partnership is also amortizing organizational Total amortization reported in 1979 was $31,200. Total interest costs on the Security Pacific Note totaled $69,210, all of which was capitalized. According to the audited statement, the terms of the loan called for an interest rate of the prime rate plus three percentage points until required levels of cash flow are achieved, after which 2 1/2 percent over prime 1 0 0 I 111-6 w rate would be the prevailing rate. specify what the required levels of cash flow are. The audited statements do not The partnership reports a $271,778 pretax loss in 1979. No provision is made for taxes because the individual partners report their distributive share of partnership income or loss on their personal. tax returns. According to the audited statements the partnership return of income filed in 1979 reported a $352,775 loss, which is $80,997 more in loss than reported on the audited statements. The audited statements explain the differential as the result of alternative accounting policy in the treatment of depreciation expense and other expense items. e. Fiscal 1980 (January-December) The partnership reported a capital expenditure of $420,056 in 1980 for property plant and equipment. Because the operation continued to generate a cash loss in 1980, additional funds totalling $420,000 were borrowed from Security Pacific National Bank. The system generated $218,119 in revenue in 1980, a substan- tial improvement over 1979. However, operating costs exceeded $414,000, leaving an operating loss before interest and deprecia- tion of $196,312. statements, some of the reported operating costs are a pro rata According to the notes accompanying the audited 5. 0 0 j 3 1 . 111-7 allocation of the operating costs of a number of systems Daniels and Associates manage in San Diego County. The auditor's report states that these costs ($302,674 in 1980) are allocated based on Daniels & Associates' personnel ratios in each system. Depreciation expense reported for 1980 was $236,408 and amor- tization totalled $41,600. Total interest expense on the $1.42 million long-term debt totalled $208,676 of which $60,408 was capitalized. In addition, the partnership capitalized $145,553 of operating and depreciation expenses . A pre-tax loss of $622,588 was reported in 1980. The partner- ship return of income reported $701,487 in loss, $78,899 more loss than in the audited statements. f. Fiscal 1981 The partnership reports $891,056 in expenditure for property plant and equipment in 1981. In addition, it sold to an affiliate of the partnership a portion of its headend, earth station, and origination equipment for $279,989. This resulted in a gain to the partnership of $37,824. According to the audited statements, the partnership then purchased for $75,908 a 10 percent interest in a joint venture with an affiliate of the general partner. The ,- 0 0 1 - . 111-8 v joint venture owns and operates a headend system via an amplitude modulated link. In 1981, the partnership borrowed an additional $80,000 through its loan agreement with Security Pacific National Bank. In addition, the partnership borrowed an additional $138,525 from an unspecified party according to the audited statements at a 12 percent interest rate. The partnership also entered into a loan agreement with an officer of an affilate of the general partner. According to the audited statements, this officer has committed to lend up to $1.050 million to the partnership on a subordinated basis. The principal and interest at 12 percent are payable upon sale of the Carlsbad system. According to the audited statements, the partnership bor- rowed $683,000 under these terms in 1981, and accrued $51,593 in deferred interest costs. Revenues from cable service reported for 1981 ($452,485) re- vealed a 120 percent increase over 1980. In addition, the partner- ship reports $43,989 in revenue from gain on sale of assets and other sources. Operating costs continued to exceed revenues by $89,158. Reported depreciation expense in 1981 was $405,362. Amortiza- tion expense was $41,601. Total interest costs on the three outstanding loans totalled $374,089, an average of about 20 percent interest on average indebtedness. .. 0 e I + - 111-9 The partnership reported a $865,687 pre-tax loss in 1981 and a $418,723 negative cash flow. The partnership return of income for 1981 showed $753,037 loss, $112,650 less than the audited statements show. g. Fiscal 1982 (January-December) Capital expenditure for property, plant and equipment was $503,848 in 1982. Because in 1982, the system was still not generating positive cash flow, additional funds were borrowed. According to the audited statement, the partnership borrowed an additional $600,000 from Security Pacific Bank. In addition, $45,000 was borrowed under the subordinated loan agreement with the officer of the affiliate of the general partner. In 1982, $88,307 in deferred accrued interest was added to that loan. The partnership repaid $34,747 in principal to the $138,526 note taken in 1981. Revenues increased to $993,921. For the first time operat- ing income (before depreciation and interest expense) was positive ($286,196). Depreciation Expense reported for 1982 was $448,772. Amorti- zation expense reported was $50,471. Total interest expense on the three outstanding notes total- led $437,296, averaging 16 percent on average indebtedness. .- e e h -. 111-10 The partnership reported a $650,343 net loss in 1982. The system generated a negative cash flow of $151,100. h. Fiscal 1983 (January-December) In 1983 the partnership added $214,051 to property plant and equipment. It borrowed an additional $170,552 under its subordi- nated loan agreement, and repayed $33,133 under its 12 percent note. An additional $120,487 was added to its subordinated loan agreement with the officer of the affiliate of the general partner. The system generated $1.332 million in revenues against operat- ing and administrative expenses of $908,927 generating income before depreciation, interest and taxes of $423,551. Depreciation expense reported in 1983 was $420,846. Amorti- zation expense was $49,668. Total interest expense reported was $414,432, averaging 13 percent of outstanding debt. The partnership reports an operating loss of $461,395 in 1983 and, for the first time, a positive cash flow of $9,119. 3. ANALYSIS OF FINANCIAL CONDITION The financial condition of the Carlsbad Cablevision operation must be analyzed from the perspective of its ownership structure. * .. e e - 1- s I 111-1 1 If this system were owned by a group of stockholders, the fact that the system has yet to show a positive net income could be an indication for concern. However, in this case, the limited partnership structure allows the limited partner investors to "write off" the losses and investent tax credits against their personal tax liability. The general partner has invested no equity capital and while the general partner carries full fi- nancial liability for the system, the market value of the system when sold would more than offset any currently outstanding lia- bility, To exemplify the relative profitability to the investors, we offer the following portrait. Since we have no data, for the fol- lowing theoretical example we assume that the system was sold in 1984 for $800 per subscriber less outstanding liabilities. We also assumed investors were in the 50 percent tax bracket. Limited Partners Inve s tme n t ($820,000) Loss ITC 1979 tax saving* 174,624 + 74,250 = $ 248,874 1980 tax saving 347,236 + 41,580 = $ 388,816 1981 tax saving 372,753 + 88,215 = $ 460,968 1982 tax saving 321,920 + 49,881 = $ 371,801 1983 tax saving 228,390 + 21,191 = $ 249,581 Estimated Net Value of Ownership $1,000,000 Internal Rate of Return - 40% *Based on 99 percent of reported loss at 50 percent tax bracket; ITC = Investment Tax Credit 0 m 1 111-12 As shown, we estimated that the limited partners have earned a $1.7 million in tax savings between 1979 and 1983. Had the system been sold in 1984, the limited partners would have achieved an average annual internal rate of return of 40 percent based on tax savings. It is more difficult to assess the level of profitability to the general partner since affiliates of the general partner are involved in a variety of the business functions. Affiliates of the general partner hold a 11.6 percent interest in the limited partnership in addition to serving a management funtion, leasor of office space, joint partner in other operations, and lendor. Overall financial viability of the operation exists. bve- nues and operating income have rapidly improved over the past five years. Reported losses appear more a function of accelerated depreciation and the method of financing used. As of 1983, for every dollar of equity capital invested since 1979, $4 of debt capital was used. This high degree of financial leverage results in proportionately higher interest costs which from a tax shelter perspective is good but it does have a negative affect on the appearance of profitability. As noted before, the limited part- ner; have most likely done very well from a tax shelter position over the past five years. I I I Revenue Operating Expense I I ] Operating Income I 1979 1980 1981 1982 1983 1 30,138 218,119 497,009 993,921 1,332,478 71,596 202,835 312,520 1 425,586 552,270 1 I I (41,458) 15,284 1 184,489 568,335 780,208 ,I I I \General Selling and 1 I 1 ! ministrative experience 135,571 175,255 191,503 18,750 36,341 37,620 ' Management Fee t I Other Expense 6,912 I - - I lM I I i 62,817 81,830 I 219,322 274,827 I -1 1 - Depreciation, Interest and Taxes (202,691) (196,312)' (44,634) 286,196 423,551 I I 69,087 ' 278,008 Interest - 148,268 Depreciation and Amortization I 1 I 446,964 499,243 470,514 I 374,089 437,296 414,432 Pre-Tax Income (Loss) (271,778) (622,588) (865,687) I (650,343) (461,395) i I (262,691) (344,580) (418,723) (151,100) I ICash Flow 1 I I 9,119 I I I 1979 1980 I 1981 1982 1983 Current 452,778 133,178 167,377 Property Plant ] and Equipment 1 Accumulated 1,173,258 1,701,094 2,229,281 I 1 Depreciation (37,887) (381,475) (691,190) Net Property Plant and Equipment 1,135,371 1,319,619 1,538,091 Franchise Cost 95,120 95,120 95,120 I I 1 89,542 95,110 I 2,655,18 2,869,112 (1,085,193),(1,505,919) 1,569,988 1,363,193 i 95,120 95,120 Financing, Goodwill, Other 188,878 Amortization ( 31,200) TOTAL ASSETS 1,840,947 188,728 229,028 I 229,428 ' 229,428 ( 72,800) (114,402) (164,873) (214,541) 1,663,845 /1,915,214 ' 1,819,205 1,568,310 1 1982 $ 503,848 1979 1 \ 1980 1981 1982 1983 1,000,000 1,420,000 I Note 1: Note 2: Note 3 (including 1 Deferred I Interest ) 1,500,000 12,100,000 2,100,000 138,525 103,778 70,665 1 734,593 I 867,900 1,158,939 ] I 1 Note 1: I Note payable to Security National Bank. 1 Note 2: I I ~ after quarterly interest and principal. However, loan appears to have been renegotiated before 1981. Principal payments now deferred until 1984. I I 12 percent note with final installment due December 31,l 1985. f 1 1 I I 1 Note 1 I-Note 2 1979 1980 1981 1982 1983 1 1 1 I I 1,000,000 420,000 80,000 1,100,000 -1 1 - , 138,525 - I Note Deferred --i---i- 1 Note 3 i- Repayment: 683,000 45,000 170,552 f I I 51,593 88,307 120,487 1 I I I Note 1 I 500 , 000 - 1 Note 2 1 34 , 747 33,113 I I Interest Expense 69,210* 208,676* 374,089 437,296 I I 414,432 1 I -.. m t t 111-18 B. RANCHO LA COSTA CABLE TV: 1978-1984 This report describes the financial history and condition of Rancho La Costa Cable TV as reflected in the audited financial statements and supplementary financial data of the firm covering the period of Fiscal 1979 through September 30, 1984. 1. CURRENT SYSTEM STATISTICS As of February 1, 1985, the Rancho La Costa TV system consists of 70 plant miles passing 5,500 homes. Of these homes, 4,653 sub- scribe to its $10.50 per month basic service. This yields a market penetration rate of 85 percent. This is a very high rate of market penetration compared with an industry average of 56 percent. The basic service charge of $10.50 is slightly higher (5 1/2 percent) than the average national basic rate of $9.95*. The system experiences an average density of homes per cable mile of 78.6. System density is one measure of potential profita- bility. Typically, an average density of 100 homes or more per mile is considered good; below 60 homes per mile is considered poor. The Rancho La Costa system experiences fair system density. *As reported by Paul Kagan Associates L. * e -. * 111-19 2. HISTORICAL SUMMARY OF FINANCIAL PERFORMANCE a. Ownership In 1978, the system was a wholly-owned subsidiary of Rancho La Costa, Inc. and was known as La Costa Community Antenna System, Inc. The company appears to have been formed with 500 shares of $10 par common stock. On February 25, 1982, Rancho La Costa, Inc, transferred its 100 percent interest in the system to La Costa Hotel and Spa. La Costa Hotel and Spa is a partnership composed of sub- stantially all former shareholders of Rancho La Costa, Inc. b. Fiscal 1978 - Year Ending December 31 In 1978, the firm invested $138,326 in equipment for the cable system. This investment was primarily funded from a $77,329 cash flow and $65,188 in advances from Rancho La Costa, Inc. As of the end of 1978, total advances from the parent company totalled $291,077 which was carried as a liability on the financial statements and appears as the only source of long-term debt. No interest expense was reported associated with the advances. This is a slightly unusual treatment based on our experience, Typically, most parent companies do charge interest cost on some or all of advances which are expected to be repaid in the course of business. ). 0 e 111-20 The firm reported $244,949 in revenues in 1978. Operating and administrative expenses totalled $167,620. This yields an operating ratio (operating expense to revenues) of 68 percent "he firm is depreciating its assets over 10 years in a straight line basis. In 1978, $24,144 in depreciation expense was reported. The firm reports no income tax in 1978 on $53,185 earnings. Subsequent financial statements indicated that the parent company has incurred substantial losses and as such incurred no tax liability on these earnings. c, Fiscal 1979 Reported capital expenditure for 1979 totalled $327,038. Of this amount, $280,693 was to increase fixed assets. The remaining amount was construction-in-progress. Funding for this expenditure reportedly came primarily from operating cash flow ($130,557); additional advances from the parent company ($107,049) and an increase in short-term borrowing or payables ($79,444). The additional parent company advances increased the balance of parent company liability to $398,126. Total revenues increased 36 percent in 1979 to $332,187, Of this amount, $278,761 were monthly subscriber fees; $29,122 were installation fees; and $24,303 were contract fees. The firm indicates that it received $14,300 for providing service to its parent company's - '. I) 0 111-2 1 resort operations, Operating expenses increased to $201,633 or by 20 percent, resulting in an improved operating ratio of 61 percent. Income before interest and depreciation was $130,554, Operating expense associated with salary and benefits totalled $107,975 in 1979, an increase of approximately 9 percent over 1978. This adjustment appears to be associated with salary and benefit increases rather than personnel additions. Non-personnel related expense increased 8 percent in 1979, due primarily to increases in legal fees, subscriber expenses, billing and utilities. Due to increases in assets, depreciation expense increased to $39,073 in 1979. kt earnings were reported at $91,481 with no tax indicated due to parent company losses. Total cash flow generated $130,554. d. Fiscal 1980 The firm reported capital expenditures totalling $381,409 in 1980. This expenditure was financed primarily from operational cash flow ($169,124); additional advances from the parent company ($114,268); and a note payable of $160,000. The financial state- ments indicate that this note payable was a three-year note col- lateralized by system assets with interest costs of two percent over prime. In 1980, the firm reduced the note's principal balance by $42,000. I. e 111-22 The balance of parent company advances increased to $512,394 in 1980. System revenues increased to $537,321 in 1980. One principle source of this increase was the addition of HBO (pay television in 1980). HBO generated $138,607 in revenue in 1980. In addition, monthly basic fees increased 24 percent. Converter rental fees of $15,821 were collected, most likely associated with rental charges to HBO subscribers. The operator also received $29,100 in revenues from providing cable service to its parent company's resort operation. Overall, revenues improved by 62 percent in 1980. Operating and administrative expenses increased to $358,640 in 1980, an increase of 78 percent over 1979. Of this amount, $64,131 was paid to HBO. Payroll related expenses increasedby 21 percent in 1980. It appears that the firm added one or two personnel in 1980. In addition, it appears that it increased its fleet of leased vehicles. Significant increases were also reported in legal fees, subscriber fees, non-HBO programming cost, billing expense office supplies and utilities. Income before interest and depreciation in 1980 was reported to be $178,681, an increase of 37 percent over 1979. Net income was lower in 1980 than 1979 due to added interest costs and increased depreciation expense. Total interest expense paid was $18,876, which averaged 14 percent of the average balance of the notes payable. -._ I) a \ 111-23 Reported net income for 1980 was $60,898 with cash flow total- ling $159,805. e. Fiscal 1981 The firm reported a $94,315 capital expenditure in 1981. It also apparently loaned an officer $24,000 and repaid $56,000 of its note payable. Primary sources of funds included $146,782 from operations and an additional $40,186 advance from its parent corn- PanY * The balance of parent company advances increased to $552,580 in 1981. The note payable balance decreased to $62,000. Revenues increased to $683,029 in 1981. Of this amount $210,798 was attributable to HBO. Monthly basic fees increased 13 percent. Contract fee income increased to $20,337 and conver- ter rental fee revenue increased to $28,375. Revenue received from providing cable service to the parent company's resort opera- tion totalled $32,462 in 1981. Total revenues improved 27 percent in 1981. Total operating and administrative costs significantly increas- ed in 1981 to $524,248; up 46 percent from 1980. Again it appears that the operator added staffing which resulted in a 28 percent increase in personnel costs. In addition, the firm reports three new categories of expense in 1981: accounting expense ($12,000); contract maintenance ($2,336) and fees and licenses ($2,398). The .’. e a L 111-24 cost of providing HBO, which is based on approximately 50 percent of HBO revenues, increased by $38,856. The operating ratio increas- ed to .77 in 1981. before interest and depreciation declined in 1981 to $158,781 from $178,681 in 1980. This is a somewhat unfavorable ratio. Yncome Reported interest expense in 1981 was $19,490. This averages 22 percent of the average balance of the note payable and appears consistent with high interest rates in the 1980-1981 period. Depreciation expense increased to $113,495 in 1981. Net income reported in 1981 was $25,796 continuing a pattern of decline since 1979. f. Fiscal 1982 As noted earlier, system ownership was reorganized in 1982 from a corporation owned by Rancho La Costa, Inc. to a partnership owned by former shareholders of Rancho La Costa, Inc. All previously re- ported parent company advances treated as liabilities were subsequent- ly transferred to a paid-in capital (equity) account which held a $528,970 balance as of the end of 1982. Approximately $44,000 was repaid to the parent company in 1982. The firm reports a $146,816 expenditure for plant and equipment, funded entirely from operating cash flow. In addition, the firm appears to have loaned an officer an additional $18,500 and repaid $56,000 of its note payable. '. * e \ I1 1-25 Revenues increased 30 percent in 1982 to $892,103. Monthly basic service fees increased by 44 percent to $562,550 and pay cable fees increased to $278,960. Provision of cable service to the La Costa Hotel and Spa generated $39,800. Operating and administrative expenses increased 25 percent in 1982. Wage related expense rose 13 percent. A significant portion of operating expense increase was attributed to revenue-related expense items such as copyright, franchise fees, the access foun- dation payment and pay cable expenses which increase with the substantial increase in revenues. The firm earned $233,221 in operating income; an increase of 47 percent from 1982. The operating ratio improved slightly to .74. Reported depreciation expense for 1982 was $135,184. Interest expense for 1982 was reported at $10,253. 1982 net income was $80,584. g. Fiscal 1983 In 1983, the firm reported a $411,835 capital expenditure for equipment. In addition to the $266,790 provided from operations, the expenditure was financed from a $38,857 borrowing from the parent company. In addition, the firm drew down $44,000 on a $280,000 line of credit it had established at one plus prime. According to the audited statements, the firm sold some assets for $9,207 and incurred a $47,083 loss on the sale. No indication 0 0 - '* '. 111-26 was made of the nature of the assets. In addition, the firm pur- chased for one dollar a lot to be used for the construction of a CATV antenna. This was apparently a part of an agreement between Rancho La Costa, Inc. and La Costa Land Company. Revenues continued to improve in 1983 to $1,008,870, an increase of 13 percent, Basic revenues increased by about 15 percent and pay television income increased by 11 percent. Revenues from providing cable service to the La Costa resort operation totalled $41,850. Operating and administrative expenses increased by 12 percent in 1983. Gross wages increased by 40 percent to $220,407 however, $58,306 was capitalized. Income before interest and depreciation increased to $273,000, a 17 percent increase over 1982. The oper- ating ratio improved slightly to .73. The reported loss on the disposal of assets ($47,083) caused net income to decline in 1983 to $57,222. 2. OVERALL FINANCIAL PERFORMANCE The Rancho La Costa system is a small cable television opera- tion with a fair density of homes per cable mile. However, it experiences a very attractive market penetration rate of 85 percent. Over the past seven years, it appears to have significantly expanded its operations and has invested almost $1.5 million in plant and equipment. e e -'. \ 111-27 The owners have earned an average rate of return of about 7 per- cent on net assets. While this is less than an optimal level of return for the investor, the system appears financially strong with revenue growth significantly exceeding operating expense increases over the past seven years. I I 1978 1979 1980 1 Revenue 244,949 332,187 537,321 Operating Expense I 132,604 159,084 252,813 1 Operating Income 112,345 ' 173,103 284,508 I General and Administration 35,061 1 42,549 105,827 Income Before Interest and Depreciation 77,329 130,554 178,681 Depreciation 24,144 39,073 98,907 -4--+ I - 1981 1982 1983 683,029 892,103 1,008,8 360,261 480,952 523,7 322,768 411,151 485,O' 163,987 177,930 212,O' 273 , O( 158,781 ' 233,221 113,495 135,184 158,6( - In t eres t - I 1 Other - - Pre-Tax Income 53,185 91,481 , Tax 1 - - - Net Income 53,185 91,481 f Cash Flow 77,329 130,554 t 18,876 19,490 10,253 299 47,0( 64,31 I 7,200 791 60,898 25,796 80,584 57,2. 139,291 215,768 215,81 - - - 60,898 25,796) 87,784 1 - - I I 159,805 1 1 1978 1979 I Current 12,145 6,570 1 1980 1981 1982 1983 32,500 849 53 204,719 196,7' Fixed Land 8,675 Building 143,306 Property 363,446 TOTAL 515,430 (Accumulated Depreciation) (143,525) Net Fixed Assets 371,905 Franchise Cost (Net) 20,869 TOTAL ASSETS 404,919 I 8,678 8,678 8,678 8,678 836 143,306 143,306 143,306 143,306 143,3t 690,484 11,071,893 1,269,671 1,321,933 1,599,76 842,468 1,223,877 11,321,655 11,464,917 1,755,9[ (182,598), (281,505) (398,020) (529,649), (623,75 659,803 942,372 923,635 935,268 1,132,lf 24,562 29,118 23,584 19,759 15,9: 691,002 1,003,990 1,032,172 1,059,746 1,344,86 I 1982 $ 146,816 1983 $ 411,835 1978 1979 1980 1981 1982 1983 Note Payable I Parent Company 291,077 Contract Payable , 1 118,000 62,000 6,000 50,000 1 I 18’793 1 398,126 512,394 552,580 - 21,546 I I I I e 0 LL .- 1 IV. SYSTEM REVIEWS CARLSBAD CABLEVISION ( CABLEVISION) AND RANCHO LA COSTA CABLE TV (LA COSTA) A. CABLEVISION 1. COMPLIANCE REVIEW FOR CABLEVISION Cablevision’s system and operations were examined to determine whether it was in general compliance with the terms of its franchise. System requirements were established after reviewing the three major documents that define the franchise - Chapter 5.28 of the Carlsbad Municipal Code, Ordinance /I6058 and Cablevision’s original proposal. a. Service Area/Line Extensions In Ordinance a6058 and the proposal the Carlsbad community was split into two independent service areas with one served by Cablevision and the other to be served by La Costa. At the time of CTIC ‘s visit Cablevision stated that its system was available throughout its entire franchise area however there were a * 0 .- 1' L -.. IV-2 few limited cases where although the system was available potential subscribers could not be immediately installed. These were either trailer parks where a right of entry had not yet been granted by the owner or one or more apartment buildings where either a right of entry had not yet been granted or contract negotiations had not been com- pleted. be serviceable when these issues are agreed upon. In any event the residents in these situations were said to In total Cablevision is using approximately 109 miles of cable plant to pass 10,660 dwelling units in its service area. Of these, it has acquired 6,778 basic subscribers, a 63.5 percent penetration. Cablevision serves Carlsbad from a single headend located at Squire's Dam which relays signals to a hub on Kelly's Mountain via AML micro- wave. Cablevision also uses this headend and microwave system to pro- vide service to other communities in the CarlsbadjNorth County area. total of seven separate microwave paths are used, including the one to Kelly's Mountain (from which all of its Carlsbad subscribers are served) and one to La Costa's headend, which is used for a regional/ access interconnect. A b. Channel Capacity Code Section 5.28.030 and the RFP documents set a minimum capacity of 20 downstream channels for any cable system serving Carlsbad. In 0 0 *\ IV-3 -- its proposal Cablevision stated that it would go beyond this minimum and construct a system that would be capable of delivering up to 36 channels (300 MHz) with 30 initially operating. Cablevision has constructed a 300 MHz system using Sylvania/ Texscan equipment. That portion of the existing plant built prior to 1983 (approximately 85 percent) was built and spaced for 300 MHz opera- tion. The newer sections of the system have been built and spaced to allow for future expansion of capability using new amplifier modules to 400 or 450 MHz. The older plant could probably be expanded ultimately to 400 MHz operation without major reconstruction by using new high gain amplifier modules in existing housings. Cablevision has met its franchise obligations as written, thus any further expansion is at its option, and is not a requirement per se. C. System to be Two-way Capable Code Section 5.28.030 and the proposal call for the system to be two-way capable. Although two-way activation was not a requirement, in its proposal Cablevision stated that it possibly would activate limited portions of its upstream capacity for such things as a link with City HalS . Cablevision has met its requirements with the construction of a two-way capable system. At this time it has not activated any portions of this capacity. e 0 L. 1 IV-4 d. Dedicated Channels - Access Code Section 5.28.030 and the proposal specify that at least three access channels would be provided - one government access channel, one public access and educational access. Cablevision's current chanel lineup shows two channels designated for public access (Channels 13 and 30), one dedicated to the San Diego County Schools (Channel 23), and one channel shared by Palomar College (Channel 3), however, no channel is designated for local government usage. e. Studio/Access Equipment Code Section 5.28.030(a)(8) required the cable company to main- tain a studio and production capability when a level of 3500 sub- scribers was reached. It also allowed for a company to petition regarding this requirement if there were two or more franchises in the City (with either or both having subscribers at the 3500 level) so there need not be an unnecessary duplication of facilities. The Code does not specify the makeup of the studio but one is contained in Cablevision's proposal. The studio was to consist of: one color camera with appropriate accessories two record/playback videotape units one lighting kit/package three microphones with appropriate accessories I) I) b\. I' -. IV-5 At present there is one studio "serving" Carlsbad which is locat- ed at Cablevision's offices and operated and maintained by Cablevision. The equipment in this studio is much more sophisticated and comprehen- sive than the minimal description contained in the proposal. La Costa pays Cablevision a set monthly amount for its share of the support of the studio and 1 percent of basic revenues is placed into a fund to support access. f. Interconnection with Schools and Other Public Buildings Code Section 5.28.030 requires the operator to provide connection with public schools and community colleges, and buildings owned and controlled by the City which are used for public purposes. Cablevision feels that it has given the required connection to all locations which have requested them. Its records show connections at: Carlsbad High School La Palma High School Pine Street High School Jefferson Elementary School Mag no1 ia El emen t a r y School Carlsbad City Library and two connections noted as "Fire Fighter" v 0 bs. ' 2 -7 IV-6 g. FM Audio Service Ordinance 6058 calls for the company to provide at least 15 FM radio signals received off-air. The proposal states that up to 30 individually processed audio signals will be provided. At this time Cablevision is providing 21 individually processed radio signals including three satellite channels - MTV, the Movie Chanel, and Home Box OFfice . h. Interconnection with Other Systems Code Section 5.28.030 (d)(l)-4) sets up requirements for the com- pany to interconnect with other cable systems. If there is more than one company servicing the City, when subscriber counts reach 3,500 a single channel, one-way, headend to headend interconnect is to be implemented. The grantee is also required to interconnect, at the direction of Council, with other nearby systems for origination and access purposes. Relief of these requirements may be given due to technical or economic difficulties or by the inability to conclude negotiations with other systems. At this time Cablevision has effected a headend to headend inter- connect with La Costa via its AML microwave system. This is a one-way interconnect from Cablevision to La Costa however it is not a single channel, but rather "gives" La Costa all of Cablevision's programmed 0 ** - I .. IV-7 channels. In this way the interconnect can "deliver" the local com- munity channel plus satellite channels used with local commercial inser- tion and the Palomar College programming. We do not know whether the Council has directed Cablevision to interconnect with any systems be- yond the limits of Carlsbad, but would note that due to its system design (single master headend with AML microwave linked hubs) Cablevisio, has in effect interconnected Carlsbad with the other communities it serves from its headend. In a somewhat related area we should note how Cablevision has linkec its Carlsbad system with its headend for local programming. Presently a single channel F11 microwave system links Cablevision's offices/studio with the system headend. Character generators for the automated channel, are located at the headend with input signals being carried via telephonc lines, In addition to this system Cablevision has constructed a land line coaxial cable interconnect that will link its offices and the heade This will be a 300 MHz mid-split system using C-Cor equipment. This wil be used for the studio input and for any other needs that may arise in tl future. The existing microwave system will be maintained as a backup, i. Local Office Code Section 5.38.030 and the proposal call for the operator to mail tain a local office and meet certain standards for availability to the pi 9 e +'. .' -" IV-8 -- Cablevision has exceeded the "normal business hours" requirement for its office hours by having extended hours till 7:OO p.m. on weekdays It attempts to respond to all service calls within two hours with 24 hours being the worst-case response unless the subscriber requests a different schedule, including holidays and weekends. j. Other Features to Note SATELLITE SIGNAL RECEPTION No requirements were made regarding satellite signal reception how- ever Cablevision's proposal did state that it was probable that earth stations would be installed in the future. Along these lines Cablevision has installed two Scientific Atlanta 5.0 meter antennas with fixed frequency and frequency agile receivers at its headend. One of these antennas is configured with a dual feed so programming may be received from a total of three satellites. In addi- tion Cablevision has an extra antenna installed at its offices. This antenna is not used for subscriber programming (it could be considered a "showpiece" and is used to evaluate new programming) but could be used as a backup for one of the antennas at the headend, using the local interconnect to send programming back to the headend for distribution. 9 0 -. 'c * -.. IV-9 .- 2. SYSTEM PERFORMANCE =VIEW CTIC's field performance evaluation was preceded by an in-house review of Cablevision's most recent FCC proof-of-performance record and the company's service call summaries. The proof showed that all appli- cable FCC requirements were being met or exceeded, and the summaries showed no unusual number or types of service calls for a system of this type and age based upon our examinations of other similar systems. To independently check these two records, an on-site evaluation was con- ducted . The first step in CTIC's field evaluation was the examination of re- ceived signal quality at the system headend. This step is a vital part of any examination as there can be no expectation of acceptable delivered signal quality (to subscribers) unless acceptable quality signals are first received by/at the headend. The cable distribution system cannot improve the quality of a "poorly received" signal. Observations at the headend showed that most signals were received with good quality, however, there are a few exceptions which should be noted. Channel 6, XETV and Channel 23 San Diego County Schools appeared to have a slightly noisier or weaker picture than other system channels which seemed to be source related as it varied with the program being carried. Channel 16, CNN, also showed a slightly noisier picture but an exact cause was not determined. We should note that the noise noted on these channels was at the threshold of visibility and would likely not 9 a IIr ', * IV-10 be found objectionable or possibly visible to most subscribers. vision should continue to monitor this situation to determine whether there are any corrective actions which could be taken on a local level. Cable- The next step in the evaluation was to check the received signal quality at the microwave hub serving Carlsbad residents. This step was important for the same reason as the initial check at the headend. These observations showed the same performance as at the headend plus Channel 34, Lifetime showed at slight amount of noise at the threshold 0; visibility and Channel 11, KTTV showed some interference which appeared to be cross mod, with the horizontal and verticle sync intervals showing on the Channel 11 picture. This type of performance was seen throughout the field test points and like the "weaker" channels noted at the head- end the degradation of the channel was just at the threshold of visibil- ity at close (18" - 24") observation. not caused any subscribers to complain Cablevision should investigate this more fully and take whatever corrective actions are warranted. Thes channels varied somewhat in quality from little deterioration of pic- ture quality to the point where degradation was visible but would likely not be found to be objectionable. While this performance has probabl The final step in our performance evaluation was to determine the quality of signals that were being delivered to subscribers' homes. As it is infeasible in a limited time frame to conduct a statistically valid sampling of signal quality in actual residences in Carlsbad (given the numbers involved and the difficulties often encountered in coordinating access to private homes) delivered signal quality was evaluated by 0 e ‘4 -- IV-11 proxy with examinations conducted at the end of the longest amplifier cascades in the service area. As the actual amount of degradation a signal will suffer is largely determined by the number of amplifiers the signals must pass through to reach a given subscriber, the extreme points in the distribution system are reasonably representative of worst-case system performance. In addition to the system extremities, examinations were also conducted at a number of other test points in the distribution system to represent average system performance. The test points chosen were: Testpoint # Approximate Location 1. Daisy Lane & Iris Court 2. Carlsbad & Juniper 3. Ocean & Garfield 4. Buena Vista Circle 5. Nob Hill Drive 6. Avenide dehita & Via Astuto 7. Hillsboro Court & Chatom 8. Woodstock & Lancaster 9. Calalpa & Mimosa 10. Tamarack & Adler 11. Roosevelt & Chestnut 12. Chestnut & Washington With the exception of the channels previously noted observations at the field test points showed generally good quality signals on all other channels except at Test points #ti, #8 and #9. At these points a very c 0 'I t -- -- IV-12 minor beat (horizontal/diagonal lines) was seen on one or more of the upper channels (i.e., 30 and up). This beating could likely come from one or more pieces of active equipment (trunk, bridger or line extender amplifier) in a given cascade being out of alignment or malfunctioning. The beats seen were not at a level that would be obvious to subscribers however Cablevision should re-check these points and take corrective ac- tion. Overall our examination showed that the cable system is capable of delivering good quality signals to the ends of the longest amplifier cascades. The few problems noted appeared to be isolated occurrences (not affecting major system components or large numbers of subscribers) and were not overly severe at the time of our visit. With proper atten- tion these problems should be eliminated and quality "restored .'I Our examination showed that on the whole the Cablevision cable system ap- pears to be well constructed and maintained given the overall age of the system and should be able to deliver good quality signals to all sub- scribers. While the system should be able to meet high standards, we should note that given the large number of individual components in the system (headend, cable, amplifiers, taps, drops...) it is quite likely that a single component could fail unexpectedly or be damaged, affecting one or more subscribers' service. We point this out, not to excuse Cablevision during these instances, but rather to stress that in these cases, timely maintenance and service are necessary to restore the quality of service. 0 0 -. '. -- .- IV- 13 8. LA COSTA 1. COMPLIANCE REVIEW FOR LA COSTA As noted in the earler discussion CTIC examined the operator's system in Carlsbad in light of compliance requirements established by a review of the franchise's governing documents: Chapter 5.28 of the Municipal Code, Ordinance /I6058 and La Costa's 1977 proposal to the City. a. Service Area/Line Extension As outlined in Ordinance 6058 and the La Costa proposal, La Costa is franchised to provide service in the southeast section of Carlsbad, in the La Costa area which was operating at the time of the franchise grant, and in other contiguous areas where service could logically be provided. La Costa proposed to provide ser- vice to all subdivisions in this area but stated that it would not provide service to isolated single houses, unless costs were paid by the subscriber, At the time of CTIC's visit La Costa was apparently meeting these requirements and further had extended its system to new developments so that service would be available upon occupancy, m e *' .- .- * IV- 14 In serving this area La Costa uses approximately 75 plant miles and passes 5,500 homes. It has acquired 4,653 subscribers for a penetra- tion of 84.6 percent. A single headend, located at Zodiac Street is used to receive and process all signals. This headend is scheduled to be moved in the Spring or Summer of 1985 approximately 1 1/2 miles to the site of the new reservoir in the vicinity of Alga Road and El, Fuerte, Preliminary work has been started on this project including the installation of some new cable which will be needed with the slight design change. La Costa is also going to use the relocation of the headend as an opportunity to upgrade its satellite receivers and replace off-air antennas. The new location and antennas are expected to minimize the effect of electrical interference which has affected some of the low band VHF signals from Los Angeles during the Summer months. b. Channel Capacity Code Section 5.28.030 and the RFP documents set a minimum chan- nel capacity of 20 downstream channels for any cable system serving Carlsbad. La Costa's proposal reflected this limit and stated that it expected to be able to upgrade its system from its then 12-channel capacity to 20-channel capacity in mid-1978. At the time of our visit La Costa had expanded its system beyond these stated limits and was operating a 300 MHz system capable of carrying about 36 downstream channels, This system has "' ' 9 0 -- IV- 15 been rebuilt from the initial system using C-COR electronics. In this rebuild all trunk and distribution actives (amplifiers) and passives (directional couplers, splitters) were replaced. Cable and subscriber taps were replaced as necessary. actives in use are only capable of 300 MHz operations, when they were installed they were physically spaced as though the system would operate to 400 MHz. Therefore a further upgrade to 400 MHz would be possible, however, the same type of considerations must be given - i.e., suitability of existing cable, taps and passives. Although the c. System to Be Two-way Capable Code Section 5.28.030 and the proposal call for the system to be two-way capable. La Costa's proposal noted that a substantial economic base was required before a system could consider two-way activa- tion and stated that as soon as it was technically and economical- ly feasible it would provide two-way services. La Costa has constructed a system which is capable of two-way communication. At this time this capacity has not been activated. e 0 .. f, -., -- IV- 16 d. Dedicated Channels - Access Code Section 5.28.030 specified that at least 3 access channels were to be provided: 1 government channel, 1 public channel and 1 educational channel. These channels were not reflected in La Costa‘s proposal. At this time La Costa has one channel which is used for public access (Channel 30, Carlsbad Community Programming) one channel that carries educational programming (Channel 3 is shared between KABC Los Angeles and Palomar College) however no channels are shown dedi- cated for government access. We would note that La Costa’s channel line up does show one channel as a subscriber information channel (f33) and that 5 other channels are reserved for future programming. e. Studio/Access Equipment Code Section 5.28.030 (a)(8) required the cable company to main- tain a studio and production capability when a subscriber level of 3500 was reached. The code also allowed flexibility in this requirement in the event that more than one cable company was providing service within the City. The cable company would be allowed to petition the City for relief based upon some alternate method of meeting access needs, the intent being a desire not to require unnecessary duplication of facilities. La Costa’s proposal noted that a mobile 0 a .. I, -- I_ IV-17 unit would be made available when its system had 3,500 subscribers. The "makeup" of this unit was not detailed. At the present time La Costa and Cablevision have reached an agreement* so there is one studio, located at Cablevision's office, which is available to all Carlsbad residents. It is our understand- ing that La Costa pays Cablevision an annual amount to cover its share of studio related expenses and that both companies contribute 1 percent of revenues into a pool to support access grants. f. Interconnection with Schools and Other Public Buildings Code Section 5.28.030 requires the operator to provide connec- tion with public schools and community colleges and buildings owned and controlled by the City used for public purposes. According to La Costa the only two such public buildings in its service area, the fire house on El Camino Road and Arena1 Road and the library in Von's Plaza, are receiving service. La Costa also will provide service to the new school being constructed in its service area upon completion. *CTIC has not been able to find a copy of the actual studio facili- ties agreement which would have enabled an actual compliance check to be made. The Council Agenda of 1/5/82 does describe some of the details of a plan that was being proposed for system interconnection and also referenced the studio agreement. e 0 .. '1 c. ." IV-18 g. FM Audio Service Ordinance 6058 calls for the company to provide at least 15 FM Radio signals received off-air. La Costa's proposal states that 14 FM stations will be carried. At this time La Costa is providing FM services via the broad- band method. In this method the company puts up a single antenna at the headend and receives the entire local FM environment. The company cannot pick and choose which stations it will relay to subscribers or equalize differing signal levels, but all stations received at the headend are made available to subscribers. h. Interconnection with Other Systems Code Section 5.28.030 (d)(l)-4) set up requirements for the company to interconnect with other cable systems. If there is more than one cable company within the City, when subscriber levels reach 3500 a single channel, one-way, headend to headend interconnect is to be implemented. The grantee is also required to interconnect, at the direction of the council, with other nearby systems for origination and access purposes. Relief of these requirements may be given upon petition showing technical or economic difficulties or by the inability to conclude negotiations with other systems. In its proposal La Costa agreed to these terms but stated that it felt e 0 ** . XI J -. -- IV-19 that interconnection was not economically feasible at the time of its proposal submission. At this time an interconnection between the La Costa headend and the Cablevision headend has been affected by equipping the La Costa headend so that it can receive an AML microwave feed from Cablevision's existing microwave distribution system. This is a one-way link (from Cablevision to La Costa) however it is not limited to a single channel, but instead carries all of Cable- vision's channels. In addition to using this system to receive programming from the studio facilities (Channel 30 - Carlsbad Community Programming) La Costa also received Channel 3 (for Palomar College) and certain satellite services~ which are used with local commercial insertion. At the time of our visit La Costa was also using this link to receive Channel 10 - KETV from San Diego, until its antenna could be replaced. Although there is a functioning interconnect between the Cablevision headend and the La Costa headend, it is not clear whether all requirements of the code are being met. Code Sec- tion 5.28.030 (d)(l) speaks in the singular as "the system" and "grantee". The requirements are for grantee to establish a single channel, headend to headend interconnect with any other system within the City, when a subscriber level of 3,500 is reached, While speaking in the singular, the plural case is implied as the discussion concerns multiple franchises within the City. As 7 m *' . '< * .- ..- IV-20 there are two grantees, and two systems, it is not clear whether this code section actually requires two channels, one from Cable- vision to La Costa and one from La Costa to Cablevision. As was discussed earlier there is an existing multiple channel intercon- nect from Cablevision to La Costa. La Costa personnel indicated that it might be technically possible to engineer a return link with Cablevision either headend to headend or via an actual inter- connect of distribution systems in the field. i. Local Office Code Section 5.28.030 calls for the operator to maintain a local office and meet certain standards for availability to the public. The La Costa proposal states that its office will be manned during regular office hours and that an answering service would be used at all other times. La Costa's office is open from 8:OO a.m.-5:00 p.m. Monday through Friday. An answering service is used at all other times. There is one technician on standby for emergency service 24 hours a day. La Costa's policy is to respond to all service calls gen- erally the same day as received, or as scheduled for the subscrib- ers' convenience. After-hour calls regarding outages or snow on all channels are responded to immediately. For after hours calls, the standby technician will attempt to contact the subscriber 7 0 a'. '* "- -- IV-2 1 until midnight, and later if the problem appears serious. An attempt will be made to schedule a service call for the daylight hours, however the technician will respond after hours as needed. j. Other Features to Note SATELLITE SIGNAL RECEPTION No requirements were made concerning satellite signal recep- tion although La Costa's proposal did state that it expected to offer its subscriber's pay television on or about July 1, 1978 (no reception method was noted). At this time La Costa has two satellite antennas in use, an older Hughes 5.0 meter used to pick up most satellite programming from RCA's F 111 R satellite, and a smaller Harris Delta Gain antenna used to receive programming from Hughes Galaxy I satellite. When the headend is moved, La Costa plans to update these facili- ties with a new Harris 6.1 meter antenna for F I11 R and using the Hughes antenna for Galaxy. It is likely that the existing delta gain antenna or another similar unit will be used on a temporary basis during the move to receive the Disney channel from Galaxy I as this antenna can be easily moved. During the move the satellite receivers will also be updated with the replacement of the remaining older Hughes receivers with new Microdyne frequency agile receivers which will increase the flexibility of the reception facilities. A number of the original receivers have already been replaced. , 1 ? e eL , .) IV-22 2. SYSTEM PERFORMANCE REVIEW Prior to an actual field evaluation of system performance CTIC first reviewed La Costa test data for its 1984 Proof of Performance and recent subscriber complaints. The tests, conduct- ed on October 3 and 4, 1984 showed performance within FCC require- ments however, as comments on the results point out, signal levels on a number of system channels (not the Class I signals--broadcast signal--which are covered under FCC standards) needed adjustment and apparently there had been a processor malfunction involving Channel 5 (KTLA from Los Angeles) which caused its signal level to drop. The test forms noted that corrective action should be taken, and the review of recent complaints did not show any concentration of calls which could have been caused by such performance. To check on the current condition of system performance, CTIC then conducted independent field examinations a The first step in this field examination consisted of obser- vations of received signal quality at La Costa's headend. As has been noted in an earlier section of this report, an examination of received signal quality is a vital part of the overall field exami- nation as there can be no expectation of good quality signals at the subscribers' location, if signals are not first received at an acceptable quality level. The distribution system itself cannot improve upon the quality of any given signal. P e .I. *< # .- - IV-23 Observations at the headend showed that most signals were ac- ceptably received/processed, however, there are two exceptions which we note, First of all Nickelodean (Channel 16) showed a small amount of what looked like electrical impulse interference. Also KCET from Los Angeles (Channel 22) showed a slight beat (horizontal/ diagonal bars). No immediate cause for this behavior could be identified and as the remainder of this section will note, this performance was not constant, but varied over time. Overall the level of interference was not seen at an objectionable level (for exceptions see following discussion concerning field test point #2) however, La Costa should identify the causes of this interference and take corrective action. The final step in our performance evaluation was to determine the quality of signals that were being delivered to subscribers' homes. As it is infeasible in a limited time frame to conduct a statistically valid sampling of signal quality in actual residences . in Carlsbad (given the numbers involved and the difficulties often encountered in coordinating access to private homes) delivered signal quality was evaluated by proxy with examinations conducted at the end of the longest amplifier cascades in the service area. As the actual amount of degradation a signal will suffer is largely determined by the number of amplifiers the signals must pass through to reach a given subscriber, the extreme points in the distribution system are reasonably representative of worst- case system performance. In addition to the system extremities, ? 0 me. * .* . -- IV- 2 4 examinations were also conducted at a number of other test points in the distribution system to represent average system performance. The test points chosen were: Testpoint # Approximate Location 1. End of Unicornio 2. End of La Golondrina Court 3. End of Altiva Place 4. Avenida Topanga & Via Ostra 5. Swallow Lane 6. Arena1 Lane 7. Calle San Felipe & Calle Madrid 8. Cadencia 6 Borla 9. Aldea & Cadencia 10. Sal ien t e Way The beats seen on Channel 22 were seen again at Testpoint fl but were not seen at any other points until the last examination at #lo. As this beat was seen at the headend and at two widely separated distribution points (but not at any others) it appears as though it is entering the system at the headend and is not a problem with the distribution system. As it is intermittent in appearance it will not be a simple task to isolate, however, La Costa should continually check on this situation. At the time of our visit the beats were at the threshold of visibility and would 4 .I e * I. . IV-25 likely not cause subscribers to complain. Nonetheless La Costa should monitor this channel to insure that the interference does not worsen. At Testpoint #2 interference on Channel 16 (Nickelodeon) was again noted however this was much more intense than that previously seen at the headend. At this testpoint the interference seen was a white "flashing" that affected the entire screen and an accom- panying audio modulation which occurred regularly with a period of from 5-10 seconds. Radio contact with the headend revealed that this flashing was seen at this point but a check of the Cablevision microwave feed did not show it on the Cablevision system. The interference seen was easily visible and would have proven objec- tionable to viewers (similar interference, with a much lesser intensity was also seen on Channel 19 at this testpoint). This interference appeared to be headend-related but did not last long enough (i.e., at any other testpoints) to confirm this or to iden- tify the cause. La Costa should closely monitor this situation to determine what corrective actions are needed. Picture quality at all other testpoints was good except for very minor beats seen at Testpoints #7, 119 and #lo. Beats were seen at the threshold of visibility at these points on two channels at each point; either Nickelodean and MTV (Testpoint f7) or CNN and PlTV (Testpoints #9 and #lo). These beats appeared to be a distribution system "problem," possibly from the overloading of some system com- ponent in the affected cascades. The problem would likely not cause P e bb I .I- . m IV-26 subscribers to complain but La Costa should address it if it has not already done so. Finally, we should note that throughout our observations it appeared as though the pay channels using the Oak system of scrambling and descrambling were slightly noisier (although none the less acceptable) then those secured with the Eagle system. Checking the Oak converter back at the cable office indicated that it was indeed the converter and not a weakness of the distribution system. It is unlikely that a subscriber would become aware of this difference unless he were working two identical TV sets, each one fed by a different converter. La Costa plans call for the eventual replacement of all old Oak units. Our examination of the La Costa system showed that the cable system is capable of delivering good quality signals to the ends of the longest amplifier cascades. The few problems noted appeared to be either intermittent headendjprocessing problems (Channels 16 and 22) or minor adjustment requirements at a few test points and were not overly severe at the time of our visit. With proper attention the field problems should be eliminated and quality "restored ." The headend problems may be somewhat more difficult to identify given their sporadic nature. Our examination showed that on the whole the La Costa system appears to be well constructed and maintained given the overall age of the system and should be able to deliver good quality signals to all subscribers. While the Ir a v * -r -8 1 L IV-27 system should be able to meet high standards, we should note that given the large number of individual components in the system (headend, cable, amplifiers, taps, drops.. .) it is quite likely that a single component could fail unexpectedly or be damaged, affecting one or more subscribers' service. La Costa's demand maintenance policies should serve to minimize the impact of these occurrences. e 0 Mr. Frank Aleshire February 25, 1985 City Manager City of Carlsbad 1200 Elm Street Carlsbad, California 92008 RE: Exemption From Local Regulation or Control of Rates and Charges Dear Mr. Aleshire: 1. On February 18, 1985, La Costa Community Antenna .System, Inc, (herein "La Costa") pursuant to the provisions of 53066.1 (a) (e) (B) of the California Government Code filed its initial notice for an exemption from local regulation by the City of Carlsbad of rates, charges and rate structures of its cable system. A true and correct copy of La Costa's letter, dated February 18, 1985 is attached hereto as Exhibit A and incorporated herein as though fully alleged. 2. Pursuant to the provisions of 53066.1 (a), La Costa herewith submits its certified statement under penalty of per jury : (1) The name under which the cable television system is doing business: La Costa Community Antenna System, Inc. dba Rancho La Costa Cable TV. (2) The mailing address and telephone number of the system: 7628 El Camino Real, Carlsbad, Calif. 92008-9990. Phone (619) 436-3401. I 0 0 Mr. Frank Aleshire Page Two February 25, 1985 (3) The video channel capacity of the system: thirty- six (36) channels. (4) The subscriber penetration ratio of the system com- puted within sixty days prior to the issuance of the notice to the franchisor: seventy-six (76%) per cent. (5) The method by which the system receives television signals from a satellite-to-earth receiving station: La Costa employs an earth station which picks up the satellite services. -- (6) An identification of the significantly viewed television stations within the county in which the system operates: Call Sign Bdcast Channel No. Type of System Location KCST 39 Network San Diego KNBC 4 Network Los Angeles XETV 6 Independent .Tijuana, Mexico KFME3-TV 8 Network San Diego KGTV 10 Network San Dieyo KPBS 15 Educational San Diego KCOP 13 Independent Los Angeles KCET 28 Educational Los Angeles XEWT 12 Independent Tijuana, Mexico KUSI 51 Independent San Diego KTTY 69 Independent San Diego (7) The facts demonstrating timely compliance with the community service channel requirement set forth in subdivision (f) : t e 0 Mr. Frank Aleshire Page Three February 25, 1985 a) In subparagraphs (f) (1) (C) , La Costa has available three channels for community service programming; channel 30 is currently in use and two additional channels are in reserve and available for such use. .. . .. b) La Costa has complied with paragraph (f) (2). See Resolution No. 6841, approving an agreement with La Costa for community based CATV programming and Agreement. incorporates-herein as though fully alleged Resolution No. 6841 and Agreement, attached hereto as Exhibit B. La Costa c) La Costa has provided arid will continue to provide, if requested, to individuals, groups and entities using community service channels, technical advice by local program staff and .. reasonable access to local studio and earth station receiving facilities. d) La Costa has notified and will continue to notify secondary schools and community colleges located within the franchise area which furnish training in the uses of community service channels of the availability of the system's community service channels. e) La Costa has available and will continue its availabj lity for use without charqe tape playback facilities for entrance into the system. D 0 0 I Mr. Frank Aleshire Page Four February 25, 1985 .. f) With this election to exempt from local regulation rates and charges, La Costa will furnish the name, address and telephone number of the system, the name of the system manager and the status and utilization of the community service channels, to the Foundation For Community Service Cable Television. 3. That the notice required to be published in a newspaper of general circulation within La Costa's franchise area was pub- lished in the La Costan on February 21, 1985, the Carlsbad Journal on February 20, 1985 and the Blade Tribune on February 20, 1985 pursuant to the provisions of section 53066.1 (1)(a)(4) and that more than two years have elapsed following the completion and activation of more than eighty (80%) per cent of the plant miles required to be constructed by La Costa pursuant to:the original terms of its franchise. Respectfully submitted, La Costa Community Antenna Systc Inc., dba Rancho La Costa Cable By; Vice President and eneral Mi ?A Fred Morey * . * *-\ 6 * 1 Declaration of Fred Morey State of California ) 1 San Diego County 1 I, Fred Morey, vice president and general manager of La Costa Community Antenna System, Inc. dba Rancho La Costa Cable TV hereby declare under penalty of perjury that the facts alleged in the foregoing letter are true and correct to the best of my knowledge and belief. -- Executed at Carlsbad, California this 25th day of February 1985. ?J % Fred Morey