FOR RECORD ONLY $//Appeal ORDER, Century Cable, Brea and La Habra, CA, DA 95-537//$ $/76.922 Rates for the basic service tier/$ $/76.923 Rates for equipment and installation/$ $/76.944 Commission Review of Franchising Authority Decisions/$ $/76.986 A La Carte Offerings/$ Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matter of: ) DA 95-537 ) CENTURY CABLE ) OF SOUTHERN CALIFORNIA ) ) Appeals of Local ) Rate Orders of the City of ) La Habra, CA and the City of ) Brea, CA ) CONSOLIDATED ORDER Adopted: March 17, 1995 Released: March 20, 1995 By the Chief, Cable Services Bureau: I. INTRODUCTION 1. By this Order, we consolidate two related proceedings into one proceeding and rule on the merits raised in each proceeding. Specifically, we resolve the appeals filed by Century Cable of Southern California challenging the local rate orders adopted by the Cities of La Habra and Brea, California. In the interest of administrative efficiency, we have decided that each appeal is sufficiently related to the other to justify the joint resolution of all the issues raised by each of the concerned parties in one consolidated proceeding. 2. On April 28, 1994, Century Cable of Southern California ("Century"), the franchisee in the above matters, filed with the Commission appeals of two local rate orders adopted on March 28, 1994 by two of its local franchising authorities in the City of La Habra and the City of Brea, California (the "Cities"). Century also filed requests for stay of both local rate orders on April 28, 1994. These requests were originally granted on May 17, 1994, pending resolution of Century's appeals. On May 13, 1994, the Cities filed oppositions, urging the Commission to reject Century's appeals and to allow the Cities' rate orders to go into effect unchanged. On May 19, 1994, Century filed a reply to each of the Cities' oppositions. The Cities' rate orders establish new rate schedules for Century's basic service tier and associated equipment and installations and direct Century to issue subscriber refunds. 3. Century challenges the Cities' rate orders on several grounds. First, Century claims that the Cities improperly treated its six-channel a la carte package as a regulated offering. Second, Century argues that the Cities misapplied the Commission's rate regulations by ordering Century to set its rates for addressable converters at their current or actual levels, rather than at their higher, but permitted levels. Third, Century claims that the Cities erred in their review of Century's Form 393 by adjusting Line 204 of Part II in a manner contrary to the Commission's rules. Finally, Century asserts that the Cities failed to comply with the Commission's procedural requirements when they issued their rate orders. 4. Under our rules, rate orders made by local franchising authorities may be appealed to the Commission. In ruling on appeals of local rate orders, the Commission will not conduct a de novo review, but instead will sustain the franchising authority's decision as long as there is a reasonable basis for that decision. Therefore, the Commission will reverse a franchising authority's decision only if it is determined that the franchising authority acted unreasonably in applying the Commission's rules in rendering its local rate order. If the Commission reverses a franchising authority's decision, it will not substitute its own decision, but instead will remand the issue to the franchising authority with instructions to resolve the case consistent with the Commission's decision on appeal. With respect to a determination made by a franchising authority on the regulatory status of an a la carte package as part of its final decision setting rates for the basic service tier, the Commission has stated that "the Commission will defer to the local authority's findings of fact if there is a reasonable basis for the local findings," and the Commission "will then apply FCC rules and precedent to those facts to determine the appropriate regulatory status of the [a la carte package] in question." II. DISCUSSION A. TREATMENT OF A LA CARTE PACKAGE 5. As part of their decisions setting Century's basic tier rates, the Cities found Century's collective or package offering of six channels (AMC, TNT, Discovery, CNN, TBS and TNN), known as the Century Select package, to be a regulated tier of service. The a la carte package at issue was first offered to Century's subscribers on September 1, 1993, when Century restructured the service offerings on its La Habra and Brea systems. Century states that its restructuring involved eliminating its 14 channel cable programming services ("CPS") tier and offering six of the channels, TNT, CNN, TBS, TNN, AMC and the Discovery Channel, on an individual basis and also as a package that Century alleges is not subject to rate regulation. Century moved the remaining channels from its CPS tier to its basic tier. 6. Century argues that the Cities' decision to treat its a la carte package as a regulated tier of service is contrary to the objectives of the 1992 Cable Act and the Commission's a la carte rules and, therefore, the Cities' adverse ruling on Century's a la carte offering should be overturned. Century argues that its a la carte package complies with the Commission's a la carte rules in effect at the time the package was created and that the Cities' reliance upon the 15 interpretive guidelines announced by the Commission in March 1994 to determine the regulatory status of Century's a la carte channels constituted "retroactive rulemaking." In response, the Cities assert that they properly applied the Commission's guidelines on a la carte packages in treating Century's package as a regulated tier and therefore, that their decisions are reasonable and should be sustained. 7. The facts presented in this appeal closely resemble the facts presented in one of our recently issued letter of inquiry orders on a la carte packages, Century Cable TV, Brunswick, Georgia, LOI-93-44, LOI 94-4, DA 94-1426 (Cab. Serv. Bur., released Dec. 12, 1994) ("Century of Brunswick"), in which we resolved the regulatory status of an la carte package offered by Century on its Brunswick, Georgia, system that is similar to the a la carte package at issue in these appeals. Specifically, the a la carte package at issue in Century of Brunswick was a six channel package, made up of channels formerly available on Century's two CPS tiers, which was offered as part of a restructuring. In that case, we found we could not say that it was clear that the a la carte package at issue was not a permissible non-rate regulated offering under our rules. We further concluded that in light of the prior confusion over what constituted a permissible non-rate regulated a la carte offering, it would be inequitable to subject the operator to refund liability or to require the operator to restructure its tiers so as to return the channels offered in the a la carte package to regulated tiers. Instead, we found that the a la carte package at issue may be treated as a new product tier under the Commission's Implementation of Sections of the Cable Television Consumer Protection and Competition Act of 1992: Rate Regulation, Sixth Order on Reconsideration and Fifth Report and Order, MM Docket Nos. 92-266 and 93-215, 10 FCC Rcd 1226 (1994) ("Going Forward Order"). 8. We find that the Cities' determinations that Century's a la carte package is a regulated tier are inconsistent with the action taken in the letter of inquiry orders, and in particular, in Century of Brunswick. We further find that, in accordance with Century of Brunswick, Century's a la carte package should not be treated as a rate regulated tier of service. Accordingly, we are remanding this issue to the Cities so that they can enter an order consistent with our findings in Century of Brunswick. B. ADDRESSABLE CONVERTERS 9. Century also challenges the Cities' rate orders with respect to the rate that they established for Century's addressable converter boxes. Century alleges that the Cities set its rate for addressable converters at the current rate rather than at the maximum permitted rate as calculated under its Form 393. The Cities respond that even though they ultimately agree that Century's permitted rate for addressable converters should be $1.25 per month, not $0.73 per month, they instead approved the actual rate of $0.73 per month because a contrary result would have violated the Commission's rate regulations and the then-existing "rate freeze" imposed by the Commission. 10. FCC Form 393 is the official form used by regulators to determine whether an operator's regulated rates for programming, equipment and installations were reasonable during the time period from September 1, 1993 until May 14, 1994. Form 393 is divided into three separate, but interrelated parts. In Part II, the operator calculates its maximum permitted programming rates, while in Part III, the operator calculates its maximum permitted equipment and installation rates. Part I is a cover sheet that lists the various programming, equipment and installation rates that have been calculated in Parts II and III and compares them to the rates the operator has actually charged during the period of review. 11. The operator's maximum permitted rates are derived by completing Parts II and III of the Form 393, pursuant to which the operator calculates the actual aggregate revenues collected by the operator for regulated programming, equipment and installation, as of the initial date of regulation ("current rate") or as of September 30, 1992. After calculating actual aggregate revenues, the operator converts those revenues to a per-channel rate, and then compares the per-channel figure to the applicable benchmark rate. If an operator's current per-channel rate is below the applicable benchmark rate, then the operator's rate is deemed reasonable, but it must remain at its current level. If its current per-channel rate exceeds the benchmark rate, the operator must then compare its September 30, 1992 per-channel rate to the applicable benchmark rate. If its September 30, 1992 per- channel rate is above the benchmark rate, it must reduce this rate to the benchmark rate or by 10%, whichever reduction is less. After computing the permitted rate level in this manner (whether based on current rates or September, 1992 rates), monthly equipment and installation costs are removed to derive the maximum permitted programming rates. Maximum permitted rates for equipment and installations are based on actual cost and are calculated in Part III of the Form 393. 12. If a franchising authority does not dispute the bases for the figures presented in a cable operator's Form 393 or has not discovered any mathematical errors in the form, the franchising authority should then approve the operator's maximum permitted rates, as derived by the form. A franchising authority should not require the operator to set a particular rate for programming, equipment or installations at any rate less than its maximum permitted rate, even if its current or actual rate is below its maximum permitted rate. Instead, the franchising authority should allow the operator to charge up to its maximum permitted rates, as derived by Form 393. In these appeals, the Cities did not dispute either the validity of the figures used in Century's Form 393 or the accuracy of the calculations in the form. Moreover, they agreed with Century that its maximum permitted rate for addressable converters as determined in its Form 393 should be $1.25 per month. Therefore, the Cities should allow Century to charge its maximum permitted rates, as derived by the Form 393. The Cities are incorrect in stating that allowing an operator to increase a particular rate from its current level to its maximum permitted level would have violated the Commission's rate freeze. In the Rate Freeze Order, the Commission ordered that rates of cable services subject to regulation under the 1992 Cable Act be frozen as of April 5, 1993. Under the terms of the Commission's rate freeze, once an operator became rate regulated, the rate freeze no longer applied to that operator. Therefore, we reject this argument. 13. While the Commission will sustain the decisions of franchising authorities if there is a reasonable basis for doing so, we expect franchising authorities to adhere to the mathematical principles underlying the benchmark methodology, particularly when calculating an operator's refund liability. For instance, in this case, the Cities may not order Century to set its equipment rates for addressable converters below maximum permitted levels. Accordingly, we are remanding this issue to the Cities so that they can reconsider their rulings in a manner consistent with our findings. C. EQUIPMENT REVENUE ALLOCATION 14. Century argues that the Cities substituted inappropriate and inaccurate data for Century's equipment revenue figure in its entry for Line 204, Worksheet 2, Part II of Form 393. Century claims that the Cities improperly substituted their own data for this portion of the form because they determined that Century had not used revenue amounts from the fiscal year preceding September 30, 1992. Instead, Century had used data from the fiscal year ending May 31, 1993, which was its most recently completed fiscal year prior to the filing of its Form 393. Century claims that the equipment revenue data that it had submitted to the Cities was in accord with the Commission's rules because the Commission clarified in a public notice that this portion of the form required data from ". . . the most recently completed fiscal year prior to the time the operator completes the form." In response, the Cities assert that under their own interpretations of the Commission's guidelines, this portion of the form requires the use of data from an operator's fiscal year that ended before September 30, 1992. Because Century failed to provide this data, the Cities argue that they were required to use the best information available as a substitute. 15. We agree with Century that the Cities improperly rejected the data that Century submitted as its entry for Line 204, Worksheet 2, Part II of Form 393 and incorrectly substituted their own data. As Century correctly notes in its appeals, we have previously stated that this portion of the form requires data from the most recently completed fiscal year, not data from the fiscal year prior to September 30, 1992. We find that the Cities were not reasonable in rejecting Century's data and substituting their own data for this entry when Century's data had been submitted in accordance with our rules. Therefore, we are remanding this issue to the Cities so that they can render a decision in accordance with our findings. D. PROCEDURAL ISSUES 16. Finally, Century claims that the final basic service tier rates approved by the Cities in their rate orders adopted on March 28, 1994 were less than the tentative rates contained in resolutions issued by the Cities on March 24, 1994 at the Cities' final public meetings. Century claims that the lower, final rates are based on substantively inaccurate information, resulting from procedural improprieties by the Cities in issuing their rate orders. Specifically, Century asserts that the Cities' final rate orders incorporate rate calculations that were based on the erroneous assumption that Century provides bulk subscriptions to both its basic service tier and its CPS tier, when, in fact, it provides them only to the basic service tier. Century claims that after the public meetings on March 24, 1994, the Cities solicited further information from Century on March 25, 1994 concerning its total number of bulk subscriptions. Century provided the Cities with a figure representing its bulk subscriptions in equivalent billing units ("EBUs"). Century asserts that the Cities then used this information to set Century's rates by changing the subscriber numbers that Century had provided in its Form 393, resulting in lower basic service tier rates. Century claims that the Cities incorrectly used Century's information to change its CPS tier subscriber numbers when it should only have been used to change its basic service tier numbers. Because Century's bulk subscriptions are only available for the basic service tier, the Cities' miscalculation of its subscriber numbers resulted in unreasonably reduced permitted rates for the basic service tier. Because the Cities did not consult with Century in this final stage of its review and because Century was given no opportunity to comment on the Cities' final decisions, Century claims that the Cities issued rate orders based on inaccurate information. 17. Century also asserts that the Cities never made available to it or the public a copy of their own Form 393s reflecting the calculations on which their rate orders were based. Century contends that a copy of each Cities' Form 393 is essential for it to independently analyze the mathematical bases for the Cities' decisions. Century claims that because the Form 393 is central to benchmark rate regulation, franchising authorities should be required to provide copies of the form for public review. 18. In response, the Cities argue that Century's procedural arguments are merely attempts to confuse the real issues. The Cities argue that Century has not established that the Cities violated any of the Commission's procedural rules or were so unfair so as to deprive Century of due process. The Cities contend that the resolutions adopted by the Cities on March 24, 1994 specifically authorized the City Manager to collect further information from Century and to adjust Century's rates accordingly, within prescribed limits. The Cities assert that Century officials were at their meetings and were aware of this decision to which they did not object. The Cities emphasize that they were both under a fast-approaching deadline, imposed under the Commission's procedural rules, to issue a rate order, based on the best information available, by March 28, 1994. Both of the Cities' last scheduled City Council meetings prior to this deadline were March 24, 1994. The Cities contend that they were forced to balance the need to issue comprehensive rate orders by March 28th with local constraints, such as the scheduling of City Council meetings, that exist independent of those requirements contained in the Commission's rate rules. Therefore, the reasonableness of the Cities' decisions must be judged in this context. Moreover, the Cities assert that Century never indicated that the EBU figure that it provided the Cities to account for its bulk subscriptions was only applicable to its basic service tier. Therefore, it was reasonable for the Cities to assume that the figure applied to both the basic service tier and the CPS tier. 19. The Cities also dispute Century's contention that they were required to publicly provide a copy of the Form 393 upon which they based their rate orders, arguing that the Commission's rules only require a franchising authority to provide a written explanation for its decision. The Cities assert that Century was closely consulted throughout the review process and that it was provided with ample opportunity to review and comment on the Cities' decisions, and, as a result, it received fair and reasonable treatment. 20. We find that there were no procedural irregularities in the Cities' consideration of Century's Form 393. However, because the Cities do not challenge Century's allegation that it has no bulk subscriptions to its CPS tier or that the Cities' use of that figure was incorrect, we find that it was inappropriate for the Cities to set Century's basic service rate operating under the incorrect assumption that Century had bulk subscriptions to its CPS tier. Therefore, we are remanding this matter to the Cities for resolution in accordance with the terms of this Order. 21. With respect to Century's claim that it did not receive a copy of either of the Cities' Form 393 to verify the Cities' calculations, although franchising authorities are required to provide a written explanation for their rate orders, they are not required to provide operators with a copy of a recalculated Form 393. Moreover, in this instance, the Cities provided Century with written decisions as well as copies of many of the documents they relied upon in issuing their decisions, including their consultant reports. It appears from the submissions that each of the Cities and Century have been in close contact throughout the rate review process and that the Cities have made extensive efforts to inform Century of their actions. We note that Century was able to present arguments in its appeals addressing very specific and technical aspects of our rules as applied to the Cities' rate orders. Based on all of this, we conclude that Century had enough information to understand the logic and to recognize the factual bases of the Cities' decisions. III. ORDERING CLAUSES 22. Accordingly, IT IS ORDERED that the appeals of local rate orders filed by Century Cable of Southern California, with respect to the issue of the regulatory status of Century's a la carte package, are REMANDED to the City of La Habra and the City of Brea for resolution in accordance with the terms of this Order. 23. IT IS FURTHER ORDERED that Century's appeals with respect to the issue of Century's permitted charges for addressable converters are REMANDED to the City of La Habra and the City of Brea for resolution in accordance with the terms of this Order. 24. IT IS FURTHER ORDERED that Century's appeals with respect to the issue of Century's equipment revenue allocation in Line 204 of Part II of Form 393 are REMANDED to the City of La Habra and the City of Brea for resolution in accordance with the terms of this Order. 25. IT IS FURTHER ORDERED that Century's appeals with respect to the Cities' miscalculation of Century's basic service tier rate are REMANDED to the City of La Habra and the City of Brea for resolution in accordance with the terms of this Order. 26. IT IS FURTHER ORDERED that our stays of the rate orders issued by the City of La Habra and the City of Brea which were granted pending the resolution of this appeal are hereby VACATED. 27. This action is taken by the Chief, Cable Services Bureau, pursuant to authority delegated by section 0.321 of the Commission's rules. 47 C.F.R.  0.321. FEDERAL COMMUNICATIONS COMMISSION Meredith J. Jones Chief, Cable Services Bureau