Town Pumps Falcon on Overbuild Costs

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The Federal Communications Commission allows operators to
recover the cost of system improvements, but a California county wants to know if
consumers have to dig deep to pay for rebuild-cost overruns.

At an Aug. 4 public hearing, officials in California's
San Luis Obispo County will ask Falcon Cable TV Corp. to explain how a system rebuild --
improving a 36-channel, 300-megahertz system to 72 activated channels and 750 MHz --
skyrocketed in cost from an estimated $4.6 million to $7.9 million.

They believe that inefficiencies, construction errors and
other factors may have contributed to sending Falcon's rebuild budget 71 percent over
the original estimate.

Barry Egan, Falcon's regional manager, confirmed that
the system went way over budget, but he said he has only been at the helm since December.
The general manager and other local executives who approved the construction costs no
longer operate the system. Egan himself is poring over boxes of paperwork to prepare
Falcon's public response to the county inquiry.

"We need to prove to them why it's
justified," Egan said.

He also confirmed that San Luis Obispo, located near
California's central coast, is Falcon's first experience with a 750-MHz rebuild
in that state.

"I don't think that anyone here begrudges them a
return on their investment ... but 71 percent over budget?" countered Ellen Sturtz,
franchise coordinator for the county's engineering department.

The debate in San Luis Obispo could become a microcosm of
developments elsewhere as operators upgrade systems to take advantage of new technologies.

Local regulators welcome, and even demand, improvements to
infrastructure to improve basic service, but they are already privately debating whether
consumers should pay for "gold-plating" a system with bandwidth that may not
benefit basic-cable customers.

For instance, San Luis Obispo authorities noted that Falcon
didn't need to jump all the way to 750 MHz to resolve the picture and reliability
complaints of its approximately 9,000 customers. The new plant is 112-channel-capable, but
Falcon reserved 37 channels for "future technologies," and not programming to
benefit cable customers.

The county retained a consultant -- Public Knowledge of
Portland, Ore. -- to look over Falcon's Form 1235 filing, in which it details its
costs to justify rate hikes that are designed to provide an operator with an 11.25 percent
rate of return on its plant investment.

Falcon's planned Aug. 1 hikes, including the
FCC-allowed cost-of-living rate increase that it has already taken, added $5.33 per month
for the basic-service tier and $2.50 for expanded basic, according to the county.

But Public Knowledge's Jay Smith advised the county
that he believes that a hike of only 87 cents total on both tiers is justified. Among the
costs that he questioned:

• "Excessive" plant-construction costs:
Smith pegged the average rebuild cost in California at $17,500 per aerial mile, and at
$22,500 for undergrounding. Falcon's costs are $26,900 for aerial and $51,000 for
undergrounding, Smith said -- figures that the operator disputes.

• Allocation of headend costs to the county, rather
than to the entire region that Falcon serves.

• Failure to deduct added advertising and home
shopping revenue from upgrade costs.

Other operators that have experience with total rebuilds
asserted that it was difficult to judge whether Smith's assertions that the per-mile
cost of the system is excessive are true.

They pointed out that there are many different ways of
accounting, and that California has different rules that impact cost.

Falcon itself said California Public Utilities Commission
rules on risers and placements added to the cost of construction. Falcon also said the
rebuild faced more undergrounding than anticipated; Smith disputed that assertion, saying
that Falcon's underground miles were less than the original submitted estimate.

"Given the size of the overrun, the primary reason for
the excessive cost appears to be weakness in Falcon's construction-management
practices. For example, many added costs for [PUC] compliance 'retrofits' were
avoidable if Falcon had simply conformed to the requirement from the outset," Smith
wrote in his report to the county.

He also criticized Falcon for failing to salvage enough of
the old plant.

Egan said little beyond the amplifiers was salvageable, and
the plant has been used in the nearby Atascadero system, which has yet to be rebuilt.

The costs soared despite an effort by the county to monitor
the ongoing project through monthly reports, which took place in 1995 and 1996. What would
the county do differently if it knew then what it does now?

"Don't be first," Sturtz said ruefully.
"We don't want county subscribers paying for their learning curve."

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