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: ) ) FALCON CABLEVISION ) ) Appeal of Local Rate Order ) of County of San Luis Obispo, CA ) MEMORANDUM OPINION AND ORDER Adopted: August 7, 1996 Released: August 21, 1996 By the Chief, Cable Services Bureau: INTRODUCTION 1. On July 20, 1995, Falcon Cable Systems Company ("Falcon") filed an appeal challenging the local rate order adopted on June 20, 1995 by its local franchise authority, the County of San Luis Obispo, California ("the County"). The rate order establishes rates for basic tier services, maximum permitted equipment charges for remote controls, addressable converters, and video control centers, and an hourly service charge. It also orders an accounting related to wire maintenance charges and a refund of charges in excess of the permitted rates for the period from December 1, 1994 through the effective date of the rate order. 2. Falcon raises three issues in its appeal. First, Falcon contends that the County erred by excluding costs associated with disconnection activities from its calculation of Falcon's hourly service charge ("HSC"). Second, Falcon alleges that the County erred by artificially inflating the number of hours associated with installation activities, thereby reducing Falcon's HSC. Third, Falcon argues that the County improperly disallowed Falcon's recovery of its costs of relocating part of its plant in the Town of Templeton, California as external costs. 3. In an opposition dated August 4, 1995, the County contends that the adjustments it made to Falcon's rate filings are reasonable and that Falcon has not met its burden of showing them to be unreasonable. The County asserts that it made adjustments to Falcon's HSC to achieve consistency in the costs and hours used to determine the HSC, as required by Commission decisions. The disallowance of costs associated with the relocation project as external costs was reasonable, the County contends, because the conditions established by the Commission for external treatment of these costs have not been met. Discussion 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. 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. A. Calculation of Hourly Service Charge 1. Disallowance of Disconnection Labor Hours 5. The first issue we address concerns the proper calculation of Falcon's HSC as determined in Falcon's FCC Form 1205. FCC Form 1205 is the official form used to determine the costs of regulated cable equipment and installation. Form 1205 has two distinct uses. First, Form 1205 is submitted along with Form 1200 and is used to establish equipment and installation costs in determining initial rates for regulated cable services. These equipment and installation costs are converted to a monthly per subscriber cost that is subtracted from figures derived from programming and equipment revenues in the Form 1200 in order to determine maximum permitted programming service rates. In following the mathematical principles embodied in these calculations, lower equipment basket costs lead to higher programming rates, while higher equipment basket costs lead to lower programming rates. The second use for Form 1205 is to update permitted regulated equipment and installation charges based on equipment basket costs. Higher equipment basket costs on Form 1205 (resulting in lower programming rates on Form 1200) correlate with higher equipment and installation rates. Conversely, lower equipment basket costs on Form 1205 (resulting in higher programming rates on Form 1200) correlate with lower equipment and installation rates. 6. The County reduced Falcon's HSC from $70.32, as determined on FCC Form 1205 calculations submitted to the County, to $28.94. The County achieved this reduction by disallowing 42% of the direct in-house and contract labor hours reported by Falcon in support of the HSC and excluding the disallowed hours, which it labeled "Unregulated direct labor hours," from its calculation of the HSC. The County thus excluded from the calculation of the HSC all direct labor hours claimed by Falcon as attributable to disconnection activity. Falcon asserts, in effect, that the hours disallowed by the County for disconnection activity are properly included in the equipment basket as determined pursuant to its Form 1205 calculations. Falcon argues further that, because the County does not allow cable operators to impose disconnection charges, it should be allowed to recover these equipment basket costs by including them in the determination of the HSC. 7. In Meredith, we clarified that costs of disconnections properly belong in the equipment basket, irrespective of whether the cable operator in fact charges the subscriber for disconnections. There we pointed out that the elements of costs included or excluded in Form 1205 calculations are not based on whether subscribers are billed to cover such costs. We noted that the "equipment basket" includes all "direct and indirect material and labor costs of providing, leasing, installing, repairing, and servicing customer equipment," and that the rule explicitly excludes general administrative overhead and general marketing expenses. Although costs related to disconnection activities are not specifically identified as a part of the equipment basket, we pointed out that it is not unreasonable to consider such activities within the category of "servicing customer equipment," noting that revenue from disconnection activities is identified in Form 393 as revenue from equipment services that should be included in the revenue computations on the form. The fact that an operator may not bill subscribers for disconnection activities does not change the characterization of disconnection activities as "equipment services." Because the County does not permit Falcon to bill subscribers for disconnection activities and because disconnection costs are to be included in the equipment basket, the County must permit Falcon to recover those costs from equipment and/or installation charges. Prohibiting such recovery precludes Falcon from establishing rates that reflect actual costs, a result that is inconsistent with the actual cost standard required for equipment and installation rates under the 1992 Cable Act. Therefore, we will remand this matter to the County with direction to allow Falcon to recover costs associated with disconnection activity in the HSC. 2. Consistent Counting of Labor Hours 8. Falcon reported 2,089 hours of installation labor as direct (billable) labor hours applicable to equipment basket activities in support of its HSC. The County added 3,017 hours to the hours reported by Falcon, and used the increased total as the denominator in calculating the HSC, resulting in a further reduced HSC. The County claims this method complies with our decision in Falcon (Thousand Oaks, California) by assuring that the activities included in Falcon's reported costs were consistent with the reported labor hours. Falcon (Thousand Oaks, California), however, held that a consistent number of hours must be used in calculating the HSC so that cable operators have opportunity to recover all costs associated with providing equipment and installations, including a reasonable profit. 9. Our rules do not specify a particular method for counting labor hours. Cable operators are required only to explain how they derive the figures they report, and we have therefore seen a variety of approaches. Using installation service as an example, an operator may count only the time an installer is actually at a subscriber's premises performing the installation (often called "direct" or "billable" hours). Another operator may include the time spent driving to and from the premises (often called "indirect" or "non-billable" hours), while another operator may take a different approach by counting an installer's total paid time and dividing by the number of installations performed. Some operators also include supervisory time. None of these approaches is necessarily "better" than others; they are simply different ways of allocating costs to services. In reviewing an operator's HSC calculations, the primary concern should be to ensure that its equipment basket costs are fully recovered. In order to ensure full and accurate cost recovery, an operator must be permitted to use the same method of counting labor hours in calculating the HSC as it does in applying the resulting specific charges for performing various installations and equipment maintenance tasks. 10. As noted above, Falcon included only billable labor hours in calculating its original HSC. The County, on the other hand, recalculated the HSC by adding additional non-billable labor hours to the billable hours reported by Falcon. However, the County did not use the same method for counting the labor hours associated with the various installation and equipment activities that it used for determining revenues produced by the charges applied to those activities. For that reason, the resulting HSC precludes full recovery of equipment basket costs and therefore conflicts with 47 C.F.R.  76.923(a). Application of the reduced HSC allowed by the County to direct (billable) hours will prevent Falcon from fully recovering its costs associated with the equipment basket. We therefore remand this issue to the County with directions to use the same method that it uses to count labor hours in the calculation of the HSC when it applies the HSC to the various installation and equipment maintenance tasks. As long as a franchising authority uses the same method for counting both the total number of labor hours in calculating the HSC and the labor hours charged for the various installation and equipment maintenance tasks, then its HSC review will result in proper cost recovery. B. External Cost Treatment of Relocating Outside Plant 11. The third issue raised by Falcon has to do with the County's review of Falcon's FCC Form 1210. FCC Form 1210 is the official form an operator uses to justify adjustments in the rates it computed on its FCC Form 1200, which is used to establish an operator's initial maximum permitted rates, or on a previously filed Form 1210. In the Form 1200, an operator calculates its provisional rates and its full reduction rates. An operator's initial maximum permitted rates are the higher of the two. An operator may file a Form 1210 to adjust its rates to reflect changes in external costs, channel additions and deletions, and inflation. External costs include the following categories of costs: state and local taxes specifically applicable to the provision of cable television service; franchise fees; costs of complying with franchise requirements; retransmission consent fees and copyright fees incurred for the carriage of broadcast signals; other programming costs; and Commission regulatory fees. An operator may file for changes in external costs for the period beginning at the end of the last quarter for which an adjustment was previously made through the end of the quarter that has most recently closed preceding the filing of the Form 1210. An operator may file a Form 1210 up to quarterly, but must file in the quarter following a decrease in costs due to channel deletions and within a year following a decrease in other costs. An operator must file for a rate increase within a year of the cost increase in order to recover those costs in its rates. 12. The County excluded an amount claimed by Falcon on Form 1210 as "Franchise Related Costs" for recovery of "external costs" attributed to an action of the County Board of Supervisors on February 4, 1992 requiring that utility lines be relocated under ground in the Town of Templeton, California. On the basis of this exclusion, Falcon's maximum permitted basic service rate was reduced by approximately four cents. The County states that the relocation requirement was established in 1992 before the initial date of cable rate regulation in the Fall of 1993. Therefore, the County argues, the obligation was already in place, and Falcon should not report any increase because of this obligation as an "external cost." The County also notes that franchise-related costs are identified in the instructions to FCC Form 1200 as the costs of satisfying franchise requirements to support public, educational and governmental channels or any other services required under the franchise. From this premise, the County argues that the requirement to bury the lines is not a mandated cable service, but is instead a construction requirement applicable also to other utilities. The County also faults Falcon for not providing support for the amount of the costs claimed, and for allocating all of these costs to the basic tier and none to cable programming tier, which it points out is also carried on the relocated facility. 13. Falcon asserts that, because the plant relocation obligation was imposed by the County, the costs of that relocation were beyond its control and that the relocation project "was an integral obligation of providing service under [its] franchise." Falcon argues that the Commission in the Rate Order permitted cable operators to pass on to subscribers costs beyond the control of the cable operator that arise from satisfying franchise requirements without a cost- of-service showing. It argues further that Commission rules permit cable operators to adjust rates quarterly for changes stemming from complying with franchise requirements and that the relevant date for Form 1210 purposes is when the cost is incurred, not when the obligation is imposed. Falcon asserts that amortization of expenditures of this kind over the life of the facility involved here, as reflected by the inclusion of this item on the FCC Form 1210 submitted to the County, allows rates to remain stable while permitting recovery of costs incurred by large and infrequent capital expenditures. It argues that the County's position that the requirement is not a service is irrelevant, because no service could be provided except by means of the plant involved here. Falcon contends that the ability of other utilities to pass their associated cost on to their customers makes it irrelevant that this obligation was also imposed on other local utilities. 14. The County found in the local rate order that the obligation of Falcon to relocate plant in the Town of Templeton under ground was in place well before the onset of rate regulation, noting that the Board of Supervisors established that requirement in February 1992. Falcon has offered no evidence that contradicts this finding. To the contrary, Falcon tacitly confirms this finding by admitting that the requirement to bury the lines is an integral part of providing services under its franchise and has been in the County's cable television ordinance since 1971. Furthermore, by asserting that the relevant date for FCC Form 1210 purposes is when costs are incurred, not when they are imposed, Falcon is not quarreling with this County finding. It is seeking instead to pass the amortized cost of implementing that obligation through to subscribers as an "external cost" not subject to existing rate caps. In this context, we are obliged to accept the County's finding that the obligation of Falcon to relocate cable plant underground in Templeton predates the onset of rate regulation in September 1993. 15. In the Rate Order, the Commission identified categories of costs that a cable operator may "pass through" to subscribers without a cost-of-service showing, even if that results in rates that exceed the price cap otherwise established under our rate regulations. The Commission also provided a starting date for measuring changes for which the basic tier service per channel rates may be adjusted by their treatment as external costs. For all "external costs," other than franchise fees and retransmission consent fees, the Commission set the starting date as the date on which the basic tier becomes subject to regulation or 180 days after the effective date of rate regulations, whichever would come first. The Commission illuminated this cut-off date by stating, "Any prior changes in costs will not receive external treatment [fn. omitted]," emphasizing that this cut-off date represented "the best balance between practicality of administration and the operator's recovery of external costs." We believe the Commission has made it clear that costs associated with an obligation incurred prior to the cut-off date should not be accorded pass-through treatment. 16. For these reasons, we will affirm the County's disallowance of costs associated with Falcon's relocation of plant under ground in the Town of Templeton, California, because such costs are not entitled to treatment as external costs. Falcon's obligations with respect to the project that gave rise to those costs were established by the County Board of Supervisors' action of February 4, 1992, which predates the effective date of regulation by the County "in the Fall of 1993," the cut-off date established by the Commission for such treatment. ORDERING CLAUSES 17. Accordingly, IT IS ORDERED that Falcon Cable Systems Company's appeal of the County of San Luis Obispo's local rate order IS GRANTED to the extent indicated herein and is otherwise DENIED, and that the matter IS REMANDED to the County for resolution in accordance with the terms of this Order. 18. 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