Council Communication

Resolutions Authorizing a Cable Television Rate Increase in the Telecommunications Fund and Surcharge on Electric Accounts
Meeting Date:	September 6, 2005		Primary Staff Contact:	Lee Tuneberg, 552-2003
Department:	Administrative Services		Email:	tuneberl@ashland.or.us
Contributing Departments:			Secondary Staff Contact:
Approval:	Gino Grimaldi		Email:
Estimate Time:	30 Minutes

Statement: This communication provides options to Council for changing cable television (CATV) rates and establishing a surcharge on electric utility accounts to meet AFN financial requirements.

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Background: Better financial stability of the Telecommunications Fund was a key discussion during the FY 2005-06 budget process held in April and May of this year. Everyone's goal was to establish a means of providing adequate fiscal support to the Ashland Fiber Network (AFN) for FY 2005-06 while Council considered what changes are needed for its telecommunications system that was begun in the Electric Fund in FY 1998-99. To date AFN has been funded by two bank loans and internal borrowings for construction and operational costs that were rolled together in a $15.5 million refinancing done in August of 2004. Construction of the system, where financially practical, was considered complete in FY 2003-04. This means that the City has only one complete year of operational history available for comparison purposes. The refinancing included monies to be set aside, helping to pay the first debt service however, $200,000 was needed as a subsidy from the Electric Fund to provide sufficient cash to meet the July 15th payment of $802,000. The $200,000 was provided in June. The budget for FY 2005-06 was created relying on the $200,000 subsidy mentioned above to be included in the balance carry forward with remaining bond proceeds from FY 2004-05, a $500,000 operational transfer from the Electric Fund balance as a subsidy and additional revenues through rates and fees of $200,000. This would result in a $70,000 ending fund balance and a carry forward into FY 2006-07 of $210,000 if no contingency was spent during this year. The long-term budget shows the following years requiring 10% increases in revenues each year and subsidies increasing for several years to balance. The Electric Fund, as the original guarantor of AFN was identified as the provider of subsidies even though the 2004 bond covenants specify that any unrestricted resources could be employed as Council chooses. AFN's operational revenue for FY 2004-05 totaled $2.6 million. Operational expenses (excluding bond issue costs) were about the same. Projections for FY 2005-06 are $2.835 million in operational revenues (including added revenue from rate increases and excluding the subsidy transfer of $500,000) and $4.220 million in expenses (including $140,000 in Contingency but not including depreciation and amortizations totaling $500,000). The shortfall is $1.395 million and the long-term budget reflects that amount reduced to $890,000 through the subsidy transfer and the balance covered by a carry forward of $963,000. The amount needed is $738,000 for FY 2005-06. In order to meet or exceed the target of at least $70,000 fund balance carry forward on June 30, 2006, a combination of actions must take place to provide $738,000 in the remaining 9 months. These actions include rate increase(s), a subsidy or subsidies and cost savings. Narratives of these follow. Rate Increases: AFN has raised cable television rates twice in the last 15 months. The increases for cable television (CATV) were 8% in June 2004 based upon a consultant study and 6.6% in February 2005 to provide revenues to offset those not generated by other initiatives. Although there have been some changes in the CATV line-up, the overall package is relatively the same as two years ago. AFN's CATV rates are thought to be 25 - 30% below national averages, the range depending on how dissimilar tiers and line-ups are factored. Charges for cable modem services were raised significantly during the same time period and are now thought to be priced competitively and should not be raised. Initial discussions included increasing CATV to the national average. Such a change is significant and may best be managed in steps or done at the least sensitive time. The attached July 19, 2005, memo to Council addresses many of these concerns. Attached is a chart showing connections in the prior year. The cycle of connections in the fall, with fewer disconnections in the spring, is thought to be consistent with seasonal changes and television viewing. Approximately two years ago the City discussed that the appropriate time for annual rate increases should be around January to best coincide with this cycle and marketing. Comparisons of a 15% (step approach toward market) and 25% (at or near market in one step) are provided, both being done effective January 2006 to allow product or line-up improvements to minimize the advantage afforded competing systems. Subsidy: The first direct subsidy was the $200,000 done last June from the Electric Fund to provide cash to pay July's debt service. In the budget is an additional $500,000 transfer from the Electric Fund balance. An electric rate increase was deferred in that the fund balance is above the targeted minimum and the only need for the proposed rate increase was perceived as generating funds for AFN. Additionally, an increase in electric rates would have benefited the General Fund through user tax and franchise fee revenue. The budget reflects that impact but the $150,000 impact on the General Fund is offset by a projected larger carry forward from FY 2004-05. Instead of a direct transfer a surcharge has been recommended whereas a set amount ($3 -$10 per electric account per month) could generate sufficient revenues directly to AFN without any added fee or tax going to the General Fund, similar to existing taxes and surcharge. To meet the overall needs of AFN there is a need to identify whether a surcharge is in addition to or replaces the operational transfer. A surcharge of $5 per electric account will generate approximately $50,000 per month, and if established effective October 1 would provide $450,000 to AFN in this fiscal year. Six dollars would provide $540,000, seven dollars equates to $630,000, etc. Cost savings: Not having to spend all appropriation levels can be beneficial as long as important expense such as staffing, marketing, capital refresh investments and debt service are met. Included in the calculations above is an amount for unidentified expenses called Contingency in budgeting. Any of this not utilized improves the bottom line and carries forward to the subsequent year. AFN spent 98% of the original appropriation levels for FY 2004-05 and left $57,000 in Contingency unused. The above calculations are done assuming that all budget appropriations and Contingency are consumed. Fiscal action(s) needed: The budget established was predicated on fiscal steps being taken in the current year. The Electric Fund balance that is currently available for use will not be there in following years without increased electric rates. This establishes the need to establish a surcharge to subsidize AFN related costs as needed. The tools Council uses to balance the Telecommunications Fund for FY 2005-06 can change for following years as operating AFN changes. Provided in the options section of this report are a few of the things that could be done. With the many variables and preferences that come into play, utilizing different elements of the options provided can satisfactorily meet fiscal requirements. Timing of the changes can impact the proposed options such as implementing rate changes sooner may provide more revenues by end of year at a smaller percentage increase. Significant changes now will affect things that may be proposed later either by the new director or arising through the Options Committee. The City must anticipate that customers and citizens will combine any rate increase with any surcharge to evaluate the value of the service provided for the total cost paid. The surcharge proposed, as with any subsidy transferred, is partially funded by some citizens who still cannot receive all of AFN's services. For comparative purposes, staff is providing tables showing a 15% and a 25% increase in January and potential impacts to the end of FY 2005-06. This is based upon preliminary FY 2004-05 customer counts, revenues and expenses and projecting into FY 2005-06 the potential range of impacts a significant CATV rate increase may include: 15% Increase in CATV Rates as of January Impact On: Customer Counts 3,200 3,040 2,880 2,720 2,560 Change in Counts 0% -5% -10% -15% -20% Revenue $65,855 $39,995 $14,115 $(11,530) $(37,430) Expenses - $(18,158) $(36,360) $(54,342) $(72,544) Net Impact $65,855 $58,153 $50,475 $42,812 $35,114 The previous table shows the possible impact on AFN finances with a 15% CATV increase and a range of percentages representing zero to 20% reductions in customer counts. It should be noted that in FY 2004-05 the number of customers increased by 50 despite the above mentioned increases however, it is difficult to predict sensitivity to increases as AFN's rates approach market and it is equally difficult to accurately estimate the number of new customers that went with competing systems or technology after comparing price and line up. 25% Increase in CATV Rates as of January Impact On: Customer Counts 3,200 3,040 2,880 2,720 2,560 Change in Counts 0% -5% -10% -15% -20% Revenue $109,725 $ 81,716 $153,605 $25,785 $ (2,350) Expenses - $(18,158) $(36,360) $(54,342) $(72,544) Net Impact $ 109,725 $ 99,874 $89,965 $80,127 $ 70,194 A comparison of local rates for CATV tiers reflecting a 15% and 25% increase to Ashland customers is as follows. Discussions regarding national rates included Ashland existing rates being 25 to 30% less so an Outside the Area column is provided. CATV Rate Comparison* AFN Competitor Existing Rates Existing +15% +25% In Ashland Outside Estimate Community $   7.87 $   9.06 $  9.84 N/A N/A Basic $ 12.96 $ 14.92 $ 16.21 $ 13.07 $ 20.00 Expanded $ 32.37 $ 37.25 $ 40.48 $ 32.40 $ 48.00 Digital Plus $ 43.88 $ 50.49 $ 54.87 $ 38.30 N/A Premium Channels (2) $ 10.01 $ 11.52 $ 12.52 ** N/A *Plus applicable franchise and PEG access fees. **Included in Competitor's Digital Plus The reader should note that these comparisons are difficult as program line-ups vary from community to community and system to system. Rather than advertise the latest promotional programs for the competition, the table reflects published rates in town and outside. Since marketing practices are such that private companies publish their base charges and add on taxes and fees when billed, the comparison is before franchise and PEG access fees. Subsidy table: As you can see there are several combinations of fees, charges and subsidies to meet fiscal requirements and the elements can be changed between years as need dictates. As shown in the second column below, a Transfer of $420,000, a surcharge of $3 in October and a rate increase of 15% in January will provide enough resources to meet requirements for the year. FY 2005-06 Surcharge Amount/month/account $ 3 $ 3 $ 4 $ 4 $ 5 $ 5 $ 6 $ 6 Estimated Shortfall $(738,000) $(738,000) $(738,000) $(738,000) $(738,000) $(738,000) $(738,000) $(738,000) Transfer from Electric $420,000 $400,000 $330,000 $310,000 $240,000 $220,000 $150,000 $130,000 Surcharge Revenue $270,000 $270,000 $360,000 $360,000 $450,000 $450,000 $540,000 $540,000 Surplus (Shortfall) $(48,000) $(68,000) $(48,000) $(68,000) $(48,000) $(68,000) $(48,000) $(68,000) CATV Rate Increase Net Impact      15% Increase with 10% fewer customers $50,475 $50,475 $50,475 $50,475 OR      25% Increase with 20% fewer customers $70,194 $70,194 $70,194 $70,194 The above table shows that not all of the budgeted transfer from the Electric Fund would be needed with either rate increase in January, even if the surcharge was set at $3. The unused amount of the transfer and any surplus in revenue generated by the surcharge could be held in reserve to address capital refresh or costs related to operational changes identified later. A table showing all comparisons from $3 - $10 is attached. However, the following table presents the need in FY 2006-07 that must be addressed in time for the budget process, all things remaining constant. A higher surcharge set in FY 2005-06 will reduce the amount of the surcharge needed in the following year. FY 2006-07 CATV Rate Increase Net Impact $ 7 $ 7 $ 8 $ 8 $ 9 $ 9 $ 9 $ 9 Estimated Shortfall $(900,000) $(900,000) $(900,000) $(900,000) $(900,000) $(900,000) $(900,000) $(900,000) Transfer from Electric $840,000 $840,000 $960,000 $960,000 $1,080,000 $1,080,000 $1,200,000 $1,200,000 Surcharge Revenue $270,000 $270,000 $360,000 $360,000 $450,000 $450,000 $540,000 $540,000 Surplus (Shortfall) $(60,000) $(60,000) $60,000 $60,000 $180,000 $180,000 $300,000 $300,000 CATV Rate Increase Net Impact      15% Increase with 10% fewer customers $50,676 $50,676 $50,676 $50,676 OR      5% Increase no change in customers $24,710 $24,710 $24,710 $24,710 The above table shows that a $7 surcharge would generate $840,000 revenue in FY 2006-07 which approximates the debt service payment for that year. A $5 surcharge for nine months in FY 2005-06 will provide $450,000 that year and $600,000 in FY 2006-07. If all of the Electric Fund transfer is used in FY 2005-06, the surcharge could be set at $5 and not be changed for FY 2006-07, estimating that all requirements are met through June 30, 2007.

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Related City Policies: In June, 2005, Council accepted a policy to fund cash shortfalls in AFN through the Electric Fund. Staff requested and Council authorized a $200,000 subsidy from the Electric Fund in June 2005 to assist in paying for debt service. The FY 2005-06 budget also includes a $500,000 subsidy to AFN in the form of a transfer from the Electric Fund. On July 19, 2005, Council accepted staff's recommendation to defer an electric rate increase in favor of more information on wholesale power costs. The possibility of a surcharge for AFN's benefit was also discussed. With a rate adjustment and a surcharge being approved, no other subsidy or transfer between funds would be done for AFN without prior Council approval.

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Council Options: To meet financial obligations a combination of changes are needed but the timing and size of changes are optional. The following represent options currently available: 1. Do not change rates or establish a surcharge until January 1, 2006, allowing the: a. Options Committee to complete its work. b. Selection of a new AFN director. c. AFN staff to develop sufficient changes to CATV services to balance the increase. The impact of taking this option requires transferring some portion of the budgeted $500,000 transfer, minimized by a larger surcharge (approximately $11/account/month) and the 25% rate increase to meet the $738,000 need. - 2. Establish a surcharge effective October 1 on electric accounts of $3 per month to generate $270,000 in FY 05-06 with the $500,000 and a $7 charge per month in FY 06-07 to generate $840,000 the next year, or set the surcharge at $5 for both years with the $500,000 transfer. This option does not include a rate increase. - 3. Raise AFN CATV rates for existing tiers an intermediate amount (15%) with the $5 surcharge (generating $450,000) to: a. Generate $35,114 -$65,855 in CATV revenue depending on timing and customer reaction toward the increases. b. Reduce subsidy from Electric transfer to $222,145 - $252,886 based upon the $738,000 need. c. Move toward a policy that the city does not subsidize cable television. - 4. Raise AFN CATV rates for existing tiers 25% to "market" with the $5 surcharge (generating $450,000) to: a. Generate $70,194 - $109,725 in CATV revenue depending on timing and customer reaction toward the increases. b. Charge more closely what it costs to provide the service. c. Reduce subsidy from Electric transfer to $178,275 - $217,806 based upon the $738,000 need. d. Employ a policy that the city does not subsidize cable television.

Staff Recommendation: Staff believes an argument can be made for any of the four options above for fiscal reasons but remain cautious about too many changes and processes occurring at the same time. Making changes to ensure fiscal stability of AFN during FY 2005-06 is necessary, especially as operational changes are considered. Staff recommends Option #3 including a surcharge of $5 effective October 1, a rate increase effective January set at the necessary level and balanced with a change in services and a subsidy transfer from the Electric Fund as needed (estimated at $210,000 - $500,000) for the following reasons: i. The community then contributes to the fiscal well-being of AFN and retirement of the City's debt. ii. The surcharge is set once for almost two years but can be amended if needed. iii. The City moves toward charging for the cost of service of cable television. iv. Electric reserves are used to soften the impact on customers in the first two years.

Potential Motions: Council moves to: EITHER a. Adopt the attached resolution to establish a surcharge on electric accounts for the benefit of AFN in the amount of $_______ (from $3 - $10), or b. Adopt both attached resolutions establishing a surcharge on electric accounts for the benefit of AFN of $_______ (from $3 - $10) AND raising CATV rates _____% (10% - 30%) or c. Adopt the attached resolution to increase cable television rates _____% (10% - 30%) but do not establish a surcharge at this time. OR No motion, Council prefers to defer the surcharge and cable television rate increases for more information from staff, the new director or information from the Options Committee, etc.

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Attachments: 1) A Resolution Establishing Cable Television and Internet Rates for the Ashland Fiber Network, Readopting all other Rates without Change & Repealing Resolution 2004-40. 2) A Resolution Adding a Surcharge to Electric Utility Rates for the Purpose of Subsidizing Ashland Fiber Network. Click on the PDF file link below to view the following attachments:    • Memo to Council dated July 19, 2005    • FY 2004-05 Cable Customer Count report    • AFN Funding Comparison Table

2005-0906_AFN_Attachments.pdf (215KB)

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