A proposal by Group W Cable to increase rates and cut promised services because of higher-than-expected construction and operating costs has met with strong opposition by city officials.
At last week's City Council meeting, two days after the proposal was submitted, councilman Bill Applegate lashed out at the cable company, accusing it of trying to renege on its contract.
"They say they grossly underestimated the cost to build. Well, that's too bad," he said. "They said they're not getting a favorable return. Well, that's too bad too. We didn't guarantee them a cost-plus contract."
"It was a contract they freely entered into," said Mayor Jim Armstrong. "It's set in writing."
City Cable Administrator Warren Carter was even more blunt: "I am distressed by the unconscionable act of the cable operator to be taking advantage of the law in a manner in which its makers never intendeded. I would go so far to say that our cable operator is playing dirty pool."
The federal Cable Communications Policy Act of 1984 deregulated all rates except basic service as of Dec. 29, 1984. Local control over basic service rates will be lost Dec. 29, 1986. Other conditions of a franchise agreement are not affected.
However, last year Group W promised not to raise rates until 1986. The cable company made the promise as a compromise in a dispute with the city over the deadline for completing construction of the system. Group W was given an additional nine months and met the October, 1984, deadline.
Group W's proposal will probably be included in an April 16 public hearing originally set to evaluate the company's performance in its first three years. Such an evaluation is to be held every three years, according to the 15-year franchise agreement that was awarded in 1982.
Carter said an independent cable consultant will probably evaluate the proposal, in addition to the staff study, which is still incomplete.
What Is Being Asked
In its proposal, the first attempt to revise a cable franchise in the South Bay, Group W is asking:
- For a rate increase in June or July from $6.95 to $8.95 for basic service and from $7.95 to $9.95 for premium channels such as HBO and the Movie Channel.
- To deactivate the second of a dual-cable system, which would reduce the number of channels from 120 to 60.
- To consolidate staff, equipment and channels for community programming, or so-called public access, with Group W's systems in Lawndale, Hawthorne and Gardena.
(Group W will separately renegotiate the franchises in the other South Bay cities. Officials from those cities said they are reserving comment until the proposal is fully evaluated by their staffs.)
Larry Windsor, Group W's general manager in Torrance, said he believes that when his proposal is fully analyzed, the city will understand that the proposed changes are fair and necessary.
To Avoid Litigation
He said he is going to the city with his proposal, although he feels many of the company's requests could be achieved without City Council approval, because "we're trying to avoid what other systems have done and just make the changes and end up in court."
In the 20-page proposal, Group W's regional director of corporate affairs, Richard Waterman, said the changes were needed because "an adequate financial return on its investment . . . is not being achieved."
He said the company has spent $31 million rather than the $16 million it estimated it would cost to build the system for 48,000 homes. About 24,000 households subscribe. Waterman said a significant part of the problem stems from additional miles of cable that had to be installed because the city's original request for proposals miscalculated the distance by 108 miles.
In addition, he said, the more expensive underground cable installation was three times the estimate in the bid because the city did not allow the company to crisscross streets. Instead, the cable was laid down one side of the street and then the other side.
Waterman said operating costs have increased because the costs of programs have increased. As an example, Waterman said, ESPN, an all-sports channel, initially paid cable systems four cents per subscriber to run its program. But now ESPN now charges systems 15 cents per subscriber for the programming.
Waterman said the system had a $1-million net operating loss through 1984, compared to projected losses of only $170,000 for the same period.
"Industry and Wall Street projections and forecasts have been revised to reflect marketplace realities," he said. "Some have strengthened the industry by removing many of the blue-sky forecasts that plague most high-tech businesses early in their development."
Waterman said the rate increase is needed to achieve an adequate rate of return of between 15% and 18%. He said Group W offers among the lowest rates of any cable system, and that even with the $2 rate increase it would still be lower than the average rates in the South Bay for both basic ($10.89) and premium ($10.97) channels. Countywide, he said, the average rate is $10.49 for basic and $11.07 for premium channels.
A Matter of Profit
"We either make it a business, or we get out of it," Waterman said of criticism on the company's profit goals. "If the company can put its money in the bank and make a better profit, what do you think it is going to do?"
Waterman said that by deactivating one of the cables, the company could save nearly $60,000 a year in electricity alone. He said that although the system has a 120-channel capacity, only 52 channels are used for satellite and local broadcasts. The remaining 68 channels are used for community programming and bulletin boards.
The proposed changes would consolidate many of those community bulletin boards into one channel, and El Camino College and California State University, Dominguez Hills, would share a channel. The city's government channel would remain unaffected.
"It doesn't make sense to have a bulletin board that repeats itself over and over all day on a channel by itself," Waterman said.
Waterman said that by consolidating local programming, or "clustering" as it called in the industry, costs can be reduced without affecting the quality of the programs.
Focusing on Quality
He said that with the four cities sharing programming on one channel, the company could focus on the "quality of programming produced locally, rather than requiring a specific number of hours."
Group W Cable, owned by Westinghouse Electric Corp., has negotiated franchise revisions for more than 33 systems in six states, including California.
Its most recent negotiation in Southern California was in its 70,000-home franchise in Santa Ana, where many of the same modifications being proposed for Torrance were eventually accepted.
Council members there initially vowed to make Group W stick to its commitments and even imposed a $10-million fine on the company. The franchise negotiations became a campaign issue in the November city election.
But after the election, an agreement was reached before the end of the year. At the time, Santa Ana City Manager Robert Bobb said the concessions made to Group W may "financially appear to be one-sided, but they are not. In fact, I think the hard commitments we are getting from Group W will be of real value to Santa Ana in the future."
The city also canceled the $10-million fine.