NOTICE ************************************************************************* NOTICE ************************************************************************* This document was originally prepared in Word Perfect. If the original document contained-- * Footnotes * Boldface & Italics --this information is missing in this version The document format (spacing, margins, tabs, etc.) is changed too. If you need the complete document, download the Word Perfect version. For information about downloading documents (FTP) see file pnmc5021. File pnmc5021 (.txt & .wp) is in directory \pub\Public_Notices\Miscellaneous. ************************************************************************* Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of) ) TCI-TKR of Northern Kentucky, Inc. ) d/b/a TKR Cable of Northern Kentucky ) ) ) Appeal of Local Rate Order ) MEMORANDUM OPINION AND ORDER Adopted: August 6, 1996 Released: August 19, 1996 By the Chief, Cable Services Bureau: INTRODUCTION 1. On January 10, 1995, TCI-TKR of Northern Kentucky, Inc. ("TKR") filed an appeal of the local rate order adopted on December 7, 1994, by its franchising authority, the Kenton/Boone Counties Cable Television Board ("Board"). In the local rate order, the Board established regulated rates for basic cable service and associated equipment, provided by TKR, as allowed by the Cable Television Consumer Protection and Competition Act of 1992 ("1992 Cable Act"). The local order requires TKR to implement certain rate reductions and to issue refunds to subscribers dating back to November 7, 1993. The Board opposes TKR's appeal. 2. In its appeal, TKR challenges the Board's rate order with respect to the following issues. First, TKR states that the Board failed to issue a tolling order and failed to timely issue an accounting order, which is required by Commission rules if additional time is needed by the local authority to review a rate form. Thus, TKR alleges that the Board did not have the authority to order refunds. Second, TKR alleges that the Board's rate order does not provide a rational basis for its decision. Third, TKR challenges the Board's finding that TKR should not pass through Kentucky's "public service corporation property tax" to its subscribers. 3. 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. The Commission will reverse a franchising authority's decision only if it determines 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. DISCUSSION A. Procedural Challenges (1) Tolling Order 4. TKR alleges that the Board failed to follow Commission procedures by not issuing a tolling order or entering a decision within 30 days after receiving TKR's FCC Form 393 and consequently lost its authority to order refunds. When a cable operator files either a benchmark or cost-of-service rate justification, Commission rules provide a franchising authority 30 days in which to review the rate filing before the proposed rates become effective. In cases involving benchmark filings (i.e., filings based on FCC Form 393 or Form 1200), a franchising authority may toll this deadline for an additional 90 days, by issuing a brief written order, if it needs more time to review the filing, which gives the franchising authority a total of 120 days to issue an order before the proposed rates go into effect. 5. TKR submitted its FCC Form 393 to the Board on May 16, 1994. TKR asserts that the Board failed to issue a tolling order within 30 days of receipt of the Form 393, as required by our rules, and that TKR's rates were therefore deemed effective on June 16, 1994. The Board states that it adopted a tolling order extending the deadline for issuance of a local rate decision at its May 18, 1994 meeting. TKR disputes the fact that the Board issued the May 18, 1994 tolling order. It contends that the first correspondence it received from the Board was in August 1994 and notes that the minutes for the Board's May 18, 1994 meeting do not indicate that the local authority voted on and adopted the tolling order. The Board filed a supplemental opposition to TKR's reply which includes a copy of the tolling order, the adoption of which apparently was not recorded in the minutes at that meeting, and a videotape of the meeting. TKR, in response to the Board's supplemental opposition, contends that the purported tolling order was invalid because it did not meet the Commission's requirements for tolling orders. Specifically, the operator alleges that the Board's tolling order does not specify the reason(s) for the extension of time, nor does the order state that the local authority needs additional time to review the operator's rates. Based on our review of the tolling order and videotape, it appears that the Board adopted a tolling order at the May 18, 1994 Board meeting. With respect to TKR's complaints regarding the substance of the tolling order, the tolling order states "the Board extends the deadline for adoption and issuance of a written rate order to a date not later than September 14, 1994." Nothing in our rules requires the Board to explain in a tolling order the reasons for granting the extension of time, only that additional time is needed. The Board, by extending the review period until September 14, 1994, indicated that it needed additional time. Accordingly, we find that the Board adopted a tolling order on May 18, 1994 in accordance with our rules and extended its review period for ninety days. (2) Accounting Order 6. TKR next claims that the Board failed to preserve its refund authority because it did not issue an accounting order within 120 days after the FCC Form 393 was submitted. As support for its claim, the operator notes that although the accounting order was passed on November 7, 1994, it was not reduced to writing until the Board's approval of the minutes containing the Accounting Order on December 5, 1994. TKR further states that although it submitted its FCC Form 393 on May 16, 1993, the first correspondence it received from the Board regarding the submission was on August 18, 1994. TKR characterizes this correspondence as a request for "clarification" of substantiating information and states that the request contained no allegations that TKR failed to complete the FCC Form 393 or failed to include supporting information. The Board disputes TKR's assertions and contends that its accounting order was issued well within the 120-day time requirement of Commission regulations. In explanation, the local authority states that its review period was automatically suspended during the period in which the local authority waited for answers to its requests for additional information made to TKR on August 16 and September 26, 1994. According to the Board, these requests were necessary because TKR submitted incomplete information. The Board contends that TKR did not sufficiently answer its requests for information until October 12, 1994, and the local authority states that it issued an accounting order on November 7, 1994, which it contends was within the review period given the fact that the review period was suspended for the time period August 16 through October 12, 1994. 7. Our rules provide that if a franchise authority does not make a decision within the tolling period, it must issue an accounting order before the end of the tolling period to preserve its ability to order refunds. If an operator files a facially incomplete rate justification, which includes the failure to file the necessary supporting schedules, the tolling period deadlines for the franchising authority to rule on the reasonableness of proposed rates are suspended while the franchising authority awaits receipt of the necessary information. Similarly, if an operator files a complete filing, but one about which the local authority has questions, the deadlines may be automatically suspended if the information sought is so significant as to delay the entire examination of the rest of the rate justification, or if the operator fails to supply the information promptly. 8. Our review of the pleadings reveals that on August 18, 1994, 94 days after receiving the FCC Form 393, the Board requested clarification regarding the operator's channel count and directed TKR to provide rate cards and channel lineups for September 30, 1992 and September 1, 1993. The Board also requested data and actual calculations to support TKR's hourly service charge and charges for leased converter boxes and remotes. TKR attempted to answer the Board's inquiries on October 3, 1994, but questions regarding the operator's channel line-up were not finally resolved until October 12, 1994. Because the FCC Form 393 calculations could not be done without the information concerning the accuracy of the operator's channel counts, we conclude that this information was crucial to the Board's evaluation of the operator's FCC Form 393, Part II. Similarly, because the FCC Form 393 calculations also could not be completed without the information concerning TKR's Hourly Service Charge and Charges for Leased Converter Boxes and Remotes, we conclude that this information also was crucial to the Board's evaluation of the operator's FCC Form 393, Part III. We conclude that the information sought was of such significance as to delay the examination of the rate justification. In accordance with our rules, we find that the review period was automatically suspended from August 16, 1994 until the receipt of the necessary information on October 12, 1994. Thus, the Board's review period was suspended for 56 days and did not expire until November 9, 1994. As the Board has attached a written copy of the accounting order indicating that the order was passed on November 7, 1994, we conclude that it was timely adopted. B. Written Decision 9. TKR argues that the Board failed to satisfy the procedural requirements of the Commission's rules by failing to provide a written decision stating the basis for its rate prescription and an explanation of why TKR's rates were unreasonable and why its own prescribed rates are reasonable. The Board replies that, pursuant to Kentucky state law, state governmental agencies speak only though their minutes, and thus the Board was prohibited from explaining the basis for its decision in its rate order. The Board argues that Commission regulations require simply that local rate decisions be publicly available. It claims that it met this requirement because the minutes of its December 7, 1994 meeting clearly disclose that the Board ordered a rate refund because it disagreed with TKR's assessment of subscribers for the Kentucky "public service property" tax. The Board states that these minutes were publicly available at its office and that TKR was aware of the reason for its decision because prior to the meeting the operator received a consultant's report enumerating the Board's concerns, the operator was present at the Board's December 7, 1994 meeting, and after the meeting the operator rebroadcast the meeting over its public access channel and had public access to the minutes of the meeting. 10. In rate regulation proceedings, the cable operator bears the burden of proving the reasonableness of its proposed rates. The local franchising authority must provide the cable operator with an opportunity to participate in the rate review proceeding and to provide documentation supporting its proposed rates. Thereafter, if the local franchising authority determines that the operator's proposed rate exceeds the maximum permitted level as defined by the Commission's rate standards, it may prescribe a rate different from the proposed rate provided that the local franchising authority affirmatively demonstrates in a written decision why the operator's rate is unreasonable and why its prescribed rate is reasonable. While there is no requirement that the franchising authority embody its rate order in a single document, our rules do require that the franchising authority's decision be publicly available and provide a sufficient basis for its decision to allow an operator and other interested parties to know why the rate was disapproved so that the operator may appeal the local authority's decision. Here, the local authority's written decision is in two parts and consists of: (1) a one-page document entitled "order" and dictating the maximum permitted rates that the operator is required to charge for basic service and equipment and (2) the minutes from the local authority's December 7, 1994 meeting explaining the Board's basis for finding TKR's rates unreasonable and the Board's reasoning for finding that its prescribed rates are reasonable. As a reason that its order did not contain the basis for its rate prescription and an explanation of why TKR's rates were unreasonable, the Board cites Kentucky State law which requires state governmental agencies to speak only through their minutes. However, the "order" indicating the maximum permitted rates does not make reference to the second document containing the minutes. Thus, despite the Board's arguments to the contrary, we are unable to discern that its order refers to the minutes containing the Board's justification for its rate reduction. Based upon the detailed, issue-specific appeal petition filed by the operator, however, it is obvious that TKR knew the Board's basis for the rejection of its rates. Accordingly, we find that the Board's failure to inform the operator of the availability of the minutes is harmless error. Thus, we deny TKR's appeal with respect to this issue. C. Pass Through of State Tax 11. The Commonwealth of Kentucky requires all corporations which do business in the Commonwealth to pay a "corporation license" tax. However, certain "public service corporations" are exempted from this tax and instead pay a "public service corporation property tax" based on a multiple of their cash flow. The Commonwealth specifically classifies cable television companies as "public service corporations." 12. In the present appeal, TKR assessed its subscribers for the entire amount of this public service corporation property tax as an external cost and indicated this assessment on its subscribers bills as an external cost. In reviewing TKR's submission, the Board disallowed TKR's treatment of the public service corporation property tax as an external cost and added the charge to TKR's actual basic service rate. As a result of this addition, the Board found that TKR's total actual basic service tier rate, including the pass-through of the public service corporation property tax, exceeded its maximum permitted rate, and the Board ordered corresponding refunds. TKR objects to this disallowance of the tax as an external cost. TKR admits that the public service corporation property tax is not an actual franchise fee, but asserts it fits within the limited exception that allows operators to pass through, as an external cost, state or local taxes which are taxes on transactions between cable operators and cable subscribers. The operator alleges that it should be permitted to pass through this tax for the period of November 1993 through July 1994, and also pass through any future payments of this tax. As a justification for this position, TKR asserts that while the public service corporation property tax is not an actual franchise fee, the manner of assessment is similar to that of a franchise type fee because the tax is based on TKR's subscriber revenues and thus is a tax on its transactions with its subscribers. 13. The Board states that the Commonwealth of Kentucky applies a "general corporate tax" to corporations doing business within the Commonwealth. According to the Board, certain corporations such as public service corporations, including cable corporations, are excluded from the general corporate tax and in lieu of the corporate tax pay a public service corporation property tax. The Board contends that the public service corporation property tax does not fit within the limited exception carved out by the Commission because the tax is not imposed solely on the provision of cable service. Rather, the Board argues that the public service corporation property tax is in fact a general corporate tax which is assessed differently upon public service corporations. Thus, the Board argues that the fee charged to subscribers for the tax should be included in the actual basic service tier rate. The Board, however, does not explain how the tax is calculated for each type of public service corporation. 14. The 1992 Cable Act established two categories of taxes to be considered in the establishment of rates. The first category is assessments of general applicability which are those taxes applied against all types of business. The second category is taxes and fees imposed by any state or local authority on transactions between cable operators and subscribers. Only the second category of taxes can be treated as external costs. The first category of taxes, taxes of general applicability, are taken into account in our benchmark methodology and included in the maximum permitted rate calculated under this methodology. 15. The Commission adopted a narrow exception to the rule which prohibits the pass through of taxes of general applicability regarding in those cases in which cable operators are assessed in a unique manner for non-industry specific taxes. In such situations, the Commission allowed operators to pass through taxes of general applicability to its subscribers as an external cost. To assist local authorities and operators in their determination of whether the relevant tax of general applicability fits within this exception, and accordingly may be passed through to subscribers as an additional charge, the Commission explained: Where the assessment [of general applicability] is very directly related to subscriber revenues, such as where the tax is based on a value of intangible assets formula effectively calculated from the operator's income for the provision of cable service, then such a tax should, we believe, be treatable as a cost subject to "external tax treatment" on a going forward basis [and may be charged to subscribers in addition to the operator's maximum permitted rate]. Where . . . the assessment process is not different for cable and other business, we would expect this tax [of general applicability] to be one of the costs to be accounted for under the inflation adjustment process. 16. TKR asserts that the Board erred by not allowing TKR to treat the public service corporation property tax as an external cost and that it should be allowed to asses its subscribers for this cost. TKR does not indicate whether the amount of its public service corporation property tax has changed since the initial date of regulation. Based on the record, we are unable to discern whether TKR charged its subscribers an external cost solely for increases in the public service corporation property tax or for both the original tax as it existed at the time of regulation and increases in the tax. Therefore, we must address two issues: (1) the permissibility of TKR's assessment of the "public service corporation property tax," as it existed on the date of regulation, as an external cost, and (2) the permissibility of TKR's assessment solely of increases in the tax as an external cost. 17. With regard to TKR's pass-through of the tax as it existed at the time of regulation, the Commission's rules provide that operators may pass through to subscribers only changes in external costs that occur after the date on which the basic service tier became subject to regulation. We do not allow operators to pass through the amount of external cost as of the initial date of regulation, because the Commission's survey data, from which the benchmark was derived, included those costs. Accordingly, if TKR assessed its subscribers monthly for the public service corporation property tax as it existed at the time of regulation, the Board was correct in adding TKR's charge to subscribers for the tax to the operator's actual basic service tier rate to calculate the operator's total actual basic service rate charged to subscribers and to compute any related refund liability. 18. With regard to TKR's possible pass-through of increases in the tax to its subscribers as an external cost, we must determine whether the public service corporation property tax is a non-industry specific tax which is assessed in a unique manner against cable operators. Because the tax is assessed against all "public service corporations," we conclude that the public service corporation property tax is a non-industry specific tax. Therefore, unless TKR was able to take advantage of the limited exception the Commission allows, TKR would not be able to pass through the tax as an external costs. Accordingly, we must next determine whether the tax is assessed in a unique manner against cable operators and therefore fits within the limited exception. Neither party has provided details regarding the taxation formula used to assess taxes for other public service corporations. Without this information we are unable to discern whether the public service corporation property tax is uniquely assessed against cable operators and fits within the Commission's limited exception. If it does fit within the limited exception, increases in the tax may be passed through to TKR's subscribers as an external cost in addition to the operator's maximum permitted rates. Accordingly, we are remanding this issue to the Board for further consideration. If the Board determines that taxes on other public service corporations are assessed using the same formula as is used for cable operators, then the Board should treat the public service corporation property tax as a tax of general applicability which may not be passed through to subscribers. In that case, the Board should determine any possible related refunds by calculating TKR's actual basic service tier rate including any past charges to subscribers for the public service corporation property tax. The Board should also prohibit TKR, in the future, from treating the tax as an external cost. ORDERING CLAUSES 19. Accordingly, IT IS ORDERED that the Appeal filed by TCI-TKR of Northern Kentucky, Inc. regarding the issue of the Kenton/Boone Counties Cable Television Board's alleged failure to issue a tolling order IS DENIED. 20. IT IS FURTHER ORDERED that the Appeal filed by TCI-TKR of Northern Kentucky, Inc. regarding the issue of the Kenton/Boone Counties Cable Television Board's alleged failure to timely issue an accounting order IS DENIED. 21. IT IS FURTHER ORDERED that the Appeal filed by TCI-TKR of Northern Kentucky, Inc. regarding the issue of the Kenton/Boone Counties Cable Television Board's alleged failure to provide a written decision stating the basis for its rate prescription IS DENIED. 22. IT IS FURTHER ORDERED that the Appeal filed by TCI-TKR of Northern Kentucky, Inc. regarding the issue of the Kenton/Boone Counties Cable Television Board's disallowance of TKR's pass through of the Kentucky's State Public Service Corporation Property tax IS REMANDED to the local franchising authority for further consideration in accordance with the terms of this Order. 23. 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 (1995). FEDERAL COMMUNICATIONS COMMISSION Meredith J. Jones Chief, Cable Services Bureau