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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 Telecable ) ) Appeals of ) Franchising Authority's Resolutions ) and Orders Regulating Basic Cable ) Rates in Atlanta, Texas ) MEMORANDUM OPINION AND ORDER Adopted: August 7, 1996 Released: August 19, 1996 By the Chief, Cable Services Bureau: INTRODUCTION 1. By this Order, we consolidate two separate appeals filed by Falcon Telecable ("Falcon"), the franchisee in the above matters, regarding local rate orders issued by its local franchising authority, the City of Atlanta, Texas ("the City"). Specifically, Falcon filed an appeal of the City's August 1, 1994 local rate order in which the City established Falcon's regulated rates for the basic programming service tier and associated equipment and installation charges for the period September 1, 1993 through May 14, 1994, and ordered related refunds. The City based its findings on the recommendations of an independent consulting firm hired by the City to review the Form 393 submitted by Falcon. Falcon also filed an appeal of the City's January 3, 1995 local rate order, in which the City established rates for Falcon's basic programming service tier and associated equipment and installation charges for the period beginning May 15, 1994. The City also ordered Falcon to issue refunds to subscribers for the period beginning July 14, 1994. The City based its findings on the recommendations of an independent consulting firm hired by the City to review the Form 1200 submitted by Falcon. In deciding these appeals, the Bureau has reviewed all the pleadings filed in each of the separate proceedings. We have determined that the two proceedings are sufficiently similar and related to one another to justify the joint resolution of all the issues raised by Falcon and the City in one consolidated proceeding. STANDARD OF REVIEW 2. 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. August 31, 1994 Appeal 3. On August 31, 1994, Falcon filed a petition for review of a local rate order adopted on August 1, 1994. The August 1 Order established regulated rates for Falcon's basic programming service tier and associated equipment and installation charges, and required Falcon to issue refunds dating back to September 1, 1993. The City based its findings on the recommendations of an independent consulting firm hired by the City to review Falcon's Form 393 filed on February 21, 1994. 4. As a basis for its August 31, 1994 Appeal, Falcon contends that the City improperly reduced its Hourly Service Charge ("HSC"), thereby precluding it from fully recovering its equipment and installation costs. Falcon further contends that because of this misapplication of the Commission's rate regulations, the City has improperly imposed a refund liability that is greater than the level allowed under our rules. 5. The first issue raised by Falcon involves the number of labor hours used in calculating Falcon's HSC and Falcon's installation and equipment rates on FCC Form 393, Part III. 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. 6. 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 figures 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 rate for programming. Maximum permitted rates for equipment and installation are based on actual cost and are calculated in Part III of the FCC Form 393. Under our regulations, the maximum permitted rates are deemed to be reasonable, as required by the 1992 Cable Act. 7. Under our rules and Form 393, an operator's regulated customer equipment and installation charges are limited to its actual costs, plus a reasonable profit. The converse is that an operator must be permitted to recover all its costs associated with providing those equipment and installations, including a reasonable profit. These costs are known as the Equipment Basket costs. The charges for installations and equipment derived in Part III of Form 393 are calculated to provide for recovery of these costs. The HSC methodology "uses time spent in related activities as the factor for allocating [installation and equipment maintenance] costs to the various charges." Central to the derivation of the permitted installation and equipment charges is the calculation of the HSC. The HSC is derived by dividing the operator's annual customer equipment maintenance and installation costs by the total number of hours spent on maintenance and installation of customer equipment in the year. An operator may charge customers for installations based on the HSC multiplied by the number of hours spent on a particular installation, or alternatively, it can establish fixed charges for various types of installations by multiplying the HSC by the average time it takes to do each type of installation. An operator's various equipment lease charges are derived by multiplying the HSC by the total number of hours a year the operator spends maintaining and servicing the equipment, plus the annual capital costs for that equipment, and then allocating this total amount over the number of equipment units in service. 8. Falcon asserts that the City improperly denied it full recovery of the costs associated with providing regulated customer equipment and installations by arbitrarily increasing the total number of labor hours in the calculation of the HSC. As support for its claim, Falcon states that the City made no attempt to specify which activities were included or excluded in arriving at this higher labor hours figure or how Falcon could recoup its equipment costs under the City's revised rates. Falcon contends that the total number of labor hours applicable to equipment costs should be 2,509. Falcon states that it derived the 2,509 hours from an estimate of labor hours spent on billable activities, based on actual transactions performed in 1992 and verified by actual HSC revenue collected during the six-month period from October, 1993 through March 1994. In calculating its original HSC, Falcon included only "billable" hours, i.e., time spent on activities for which it charged subscribers. Since Falcon did not charge its subscribers for disconnections, downgrades, and time not spent on subscribers' premises such as time spent stocking materials and drive time, it excluded these "nonbillable" hours from its calculation. Falcon contends that if we conclude that the City's action in increasing the number of labor hours used to calculate the HSC was reasonable, then Falcon must be permitted to use the same method of counting hours in the calculation of its regulated customer equipment and installation charges. 9. The City's consultant found that Falcon's estimate of labor hours was too low because, under Falcon's proposal, actual productive hours were less than 50% of the total hours of Falcon's three installers. Based on this finding, the City increased Falcon's labor hours to 1,500 for each of Falcon's three installers for a total of 4,500 hours. As justification for this adjustment, the City's consultant compared Falcon's HSC to 147 cable systems across the country and found that only seven systems had an HSC greater than $50 per hour. The City's consultant noted in its report that the increase in labor hours and the resulting decrease of the HSC to $26.05 were reasonable because the median and the average hourly service charges in its database were $25.15 and $27.15, respectively. Neither the City nor its consultant provided any further justification for the increase in labor hours or an explanationn of the methodology used to calculate the increase. 10. The City questioned the reasonableness of Falcon's labor hours figure of 2,509 total billable hours and increased Falcon's labor hours to 4,500 total hours. While a local franchising authority may question the reasonableness of an operator's calculations, if it recalculates the questioned figure it must provide a reasonable basis for its recalculations. For example, the local authority may request additional information from the operator regarding the calculations in question. Upon receiving answers to its questions, the local authority may recalculate the questioned figure based upon the operator's responses. If the operator fails to comply with the request, the local authority may recalculate the figure based upon the best available evidence. We are unable to discern whether the City recalculated Falcon's labor hours figure based upon the operator's answers to requests for additional information or whether the local authority recalculated the figure using the best available evidence. While the City's consultant noted in its report that the national median and average hourly service charges in its database were $25.15 and $27.15, neither the City nor its consultant has explained the correlation between this data and the selection of Falcon's labor hours figure. There is no other explanation in the record to justify the increase in labor hours to 4,500. Accordingly, based on the record in the present proceedings, we are unable to discern the basis, if there was one, for the City's selection of its labor hours figure. We must therefore remand this issue to the City for further consideration consistent with this order. B. February 2, 1995 Appeal 1) Computation of the Basic Service Rate 11. On February 2, 1995, Falcon filed a petition for review of a local rate order adopted on January 3, 1995. The January 3 Order established regulated rates for Falcon's basic programming service tier and associated equipment and installation charges for the period beginning May 15, 1994. The January 3 Order also required Falcon to issue refunds for the period beginning July 14, 1994. The City based its findings on the recommendations of an independent consulting firm hired by the City to review Falcon's Form 393 filed on August 12, 1994. 12. Falcon raises two challenges to the City's January 3 Order. First, Falcon reiterates its contention that the City improperly reduced its HSC, thereby precluding it from fully recovering its equipment and installation costs. Second, Falcon asserts that the City incorrectly calculated Falcon's basic service tier rate by using the operator's number of channels as of July 14, 1994 rather than March 31, 1994, as prescribed by the FCC Form 1200. The City did not file a response to Falcon's February 2, 1995 appeal. 13. FCC Form 1200 is the official form used to determine whether regulated rates for programming, equipment and installations are reasonable under the revised benchmark rules which apply to operators beginning May 15, 1994 or upon the expiration of the deferral period provided under our rules for operators to comply with the revisions to our rules. Through the use of Form 1200, an operator calculates three sets of figures: (1) the operator's actual March 31, 1994 rate level; (2) the operator's March 31, 1994 benchmark rate level; and (3) the operator's "full reduction" rate level. These figures are used to derive an operator's maximum permitted rates. 14. The operator first completes Module A of the Form 1200 to calculate its March 31, 1994 per subscriber monthly regulated revenue. Next, the operator completes Module B to calculate changes in external costs which the operator is entitled to reflect in its rates but which have not yet been passed through to its subscribers. In Module C the operator enters its data with respect to a number of variables to calculate its March 31, 1994 benchmark rate level on a per subscriber, per month basis. The operator's March 31, 1994 actual rate level (Module A plus external costs calculated in Module B) is then compared to the benchmark rate level derived in Module C, with the operator carrying forward the smaller of the two. If the March 31, 1994 actual rate level is smaller, the operator completes Module D, subtracting the monthly per subscriber equipment cost calculated in Form 1205 and adding external costs calculated from Module B. If the benchmark rate level is smaller, the operator completes Module E, subtracting the monthly per subscriber equipment cost taken from Form 1205. Depending on which is used, either Module D or E establishes per-tier rates, which the operator carries forward into Module F, as its so-called provisional rates. 15. In the second part of Form 1200, the operator derives its full reduction rate based on its September 30, 1992 rates. To compute this rate, in Module G, the operator calculates its September 30, 1992 total monthly regulated revenues per subscriber, reduces that amount by 17%, and adjusts upward by 3% to reflect the inflation from September 30, 1992 until September 30, 1993. In Module H, the operator then adjusts the results from Module G for changes since September 30, 1992 with respect to subscribers, regulated channels, and satellite channels. In Module I, the operator subtracts a monthly per subscriber equipment cost amount from Form 1205, establishes per-tier rates, and adjusts for changes in external costs. In Module J, the operator compares its aggregate provisional rate with its aggregate full reduction rate. The maximum permitted rates an operator is actually allowed to charge are either the provisional rates (Module F) or the full reduction rates (Module I), depending on whether the aggregate provisional rate is greater or less than the aggregate full reduction rate, and are entered into Module K. 16. In addition to Form 1200, an operator may file Form a 1210 to justify adjustments in the rates it computed on its FCC Form 1200 or on a previously filed Form 1210. 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 as often as 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. 17. Falcon alleges that the City's consultant arrived at the basic service rate of $19.35 by inserting 27 channels on Line A1 (number of basic service channels) of Module A of FCC Form 1200, rather than the 31 channels that Falcon provided on March 31, 1995, as prescribed by the form. According to Falcon, on March 31, 1994, its regulated service consisted of only a single basic service tier of 31 channels and did not include a cable programming service tier. Subsequently, on July 14, 1994, Falcon restructured its tiers to include a 27 channel basic programming service tier and a 4 channel cable programming service tier. Falcon contends that on December 5, 1994, it filed a FCC Form 1210 reflecting all required adjustments to its Form 1200 rate through the end of the third quarter of 1994, the quarter in which the restructuring took place. Based on its consultant's recommendation, the City recalculated Falcon's 1200 and established Falcon's rates based on the July 14, 1994 reduced basic service channel count. There is no indication that the City reviewed Falcon's FCC Form 1210. 18. Module A of the FCC Form 1200 requires operators to calculate their "monthly regulated revenues per subscriber as of March 31, 1994" and requires operators to input channels per tier as of "March 31, 1994." Accordingly, in reviewing Falcon's FCC Form 1200, the City should have established Falcon's rates using the operator's basic programming service tier channel count, as of March 31, 1994, rather than the operator's reduced restructured basic programming service tier channel count, as of July 14, 1994. Instead, the City's review of Falcon's restructured July 14, 1994 basic programming service tier rates should have been a separate proceeding whereby the City evaluated Falcon's restructured rates using Falcon's FCC Form 1210. As the City was unreasonable in using the July 14, 1994 data to calculate Falcon's regulated revenue in its FCC Form 1200, Module A, we are remanding this issue to the City for further consideration so that it may enter an order consistent with our findings. Upon remand, the City must evaluate Falcon's Form 1200, Module A, using the operator's March 31, 1994 channel count of 31 basic programming service tier channels. The City may then evaluate Falcon's restructured July 14, 1994 rates using the Form 1210 and the restructured basic programming service tier channel count of 27 channels. ORDERING CLAUSES 19. Accordingly, IT IS ORDERED that Falcon Telecable's appeal of the City of Atlanta's local January 3, 1995 rate order, regarding the issue of the calculation of Falcon's basic service tier rate for the period beginning May 15, 1994 is REMANDED to the local franchising authority for resolution in accordance with the terms of this Order. 20. IT IS FURTHER ORDERED that Falcon Telecable's appeal of the City of Atlanta's local August 1, 1994 and January 3, 1995 rate orders, regarding the issue of the calculation of Falcon's Hourly Service Charge and related refund liability is REMANDED to the local franchising authority for resolution in accordance with the terms of this Order. 21. 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