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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Before the Federal Communications Commission Washington, D.C. 20554 ) In the Matter of: ) ) TCI CABLEVISION OF AUBURN, INC. ) TCI CABLEVISION OF TACOMA, INC. ) ) Appeals of Local Rate Orders ) of: ) ) Pierce County, Washington WA0062, WA0420 ) Orting, Washington WA0060 ) Ruston, Washington WA0306 ) Wilkeson, Washington WA0383 ) CONSOLIDATED ORDER Adopted: January 13, 1998 Released: January 21, 1998 By the Deputy Chief, Cable Services Bureau: I. INTRODUCTION 1. By this Order, we consolidate two proceedings involving TCI Cablevision of Auburn, Inc. and TCI of Tacoma, Inc. (TCI) and rule on the merits in each proceeding. We have determined that the proceedings are sufficiently similar to justify the resolution of all the issues raised by each of the parties in one consolidated proceeding. Specifically, the Bureau resolves in this Consolidated Order two separate appeals of local rate orders issued by the local franchising authorities, the Pierce County Council and the Rainier Cable Commission (the LFAs). The rate orders establish new regulated rate schedules for TCI's basic service tier rates. Specifically, the LFAs' rate orders require TCI to implement certain rate reductions and to issue refunds to subscribers, dating back to July 14, 1994. 2. TCI argues that the LFAs improperly disallowed TCI's entry on Line C6 of FCC Form 1200 for the number of additional outlets on its systems. TCI states that the disallowance by the LFAs affected its Form 1200 calculations and produced lower maximum permitted rates. TCI also contends that the LFAs impermissibly required TCI to calculate refunds from July 14, l994 until TCI complies with the local rate orders without any consideration being given for intervening cost increases which could be reflected in higher maximum permitted rates. The LFAs did not file responses to TCI's appeals. II. BACKGROUND 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. Therefore, 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. 4. 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. 5. The operator first completes Module A of 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 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. 6. 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. Additionally, an operator may file Form 1210, up to quarterly, or Form 1240, up to annually, to claim changes in external costs and inflation that justify rate increases. III. DISCUSSION A. Line C6 of Form 1200 7. In computing its benchmark rate level in Module C of Form 1200, an operator is required to complete entries for several benchmark variables. The benchmark formula is intended to derive a rate level which approximates the level a similarly-situated operator subject to competition would charge. The benchmark rate level is determined by considering several variables, such as the number of subscribers, the number of channels, and the number of additional outlets charged, all of which affect the benchmark rate level. The benchmark formula's only function in the new system is to determine which operators are "low-priced" operators subject to transition relief and therefore are not required to set their rates based on their full reduction rates. An operator with (i) a current, i.e., March 31, 1994, rate level below the benchmark rate level or (ii) a current rate level above the benchmark rate level but with a full reduction rate level below the benchmark, is a low-priced operator. The low-priced operator with a current rate level below the benchmark generally does not have to reduce its rate level, and the low- priced operator with a current rate level above the benchmark rate level but with a full reduction rate level below the benchmark is required to reduce its rate level only to the benchmark. 8. Included among the variables used in the benchmark formula is the number of additional outlets in fiscal year 1993, which is entered on Line C6. TCI completed entries for additional outlets in each 1200 filing, which were disallowed by the LFAs because TCI did not charge subscribers for the additional outlets. The LFAs recalculated TCI's benchmark by entering zero for the number of outlets on Line C6, which, TCI states, resulted in a reduction in its maximum permitted basic tier rates. TCI argues that there was a cost of providing additional outlets even though no charge was made, and that an operator such as itself that "bundled" its additional outlet costs into its other rates cannot charge as high a rate as an otherwise identical operator that separately itemized its additional outlets. 9. Our instructions for Line C6 of Form 1200 ask the operator to provide the average monthly number of additional outlets for which there was a charge to subscribers in fiscal year 1993, and to compute the average number of additional outlets over only those months in the year for which there was a charge for additional outlets. A Benchmark Fact Sheet further explaining our instructions for calculating an operator's benchmark rate restates this instruction. Neither our rules, nor our instructions for completing Form 1200, permit operators to include additional outlets for which no charge is assessed on Line C6 as a benchmark variable. The LFAs' disallowances of TCI's entry for Line C6 were in accordance with the instructions to the Form 1200. 10. TCI believes that its failure to charge for a service, for which it could have charged, unfairly reduces its benchmark rate level. This is essentially an argument challenging the reasonableness of the revised benchmark formula and our rules. The revised benchmark formula is designed to approximate the rate level of a similarly situated operator facing competition. The Commission's rate survey upon which the benchmark formula was based requested data on additional outlets for which a fee was charged. To ensure consistency in the application of the benchmark formula, we must disallow consideration of additional outlets for which there was no charge. Because the LFAs' decision in this regard were reasonable, we deny TCI's appeals of the LFAs' disallowance of TCI's entry on Line C6 of Form 1200. B. Calculating Refund Liability 11. TCI next alleges that the LFAs improperly ordered refunds for the time period from July 14, 1994 "until such time as TCI reduces its basic service rates to the maximum permitted level." TCI argues that the LFAs' orders fail to account for any intervening upward rate adjustments to which TCI would be entitled under our rules. TCI argues that, based on our decisions concerning offsetting, it must be credited for increases which it would have been allowed to make to its maximum permitted rates, even if it had not yet requested or implemented the rate adjustments. 12. Under our rules, a rate adjustment with respect to basic rates becomes effective after it has been approved by the regulator or after the review period for such approval has lapsed. An operator's per month refund liability, i.e., the difference between the amount actually charged and the permitted rate, continues at the same level until the operator reduces its actual rate or the operator, in accordance with our rules, obtains increases its maximum permitted rate. The per month refund liability does not decrease just because the operator might be able to increase its rates but did not do so. For example, if TCI's programming costs increased in the latter part of 1994, but a Form 1210 subsequently filed on January 2, 1995 was not approved until March 1, 1995, TCI could not increase its maximum permitted rates until March 1, 1995. TCI's monthly refund liability, if it had not yet reduced its rates, would be based on the difference between its actual rates and the rates established by the LFA's orders through February 28, 1995. Beginning March 1, 1995, the monthly refund liability would be based on the difference between TCI's actual rate and the new approved rate until the reduction is implemented or until the next increase is approved. Should TCI's rates that are approved pursuant to Form 1210 equal or exceed its current rates, no further refund liability would accrue as of the date of such approval. 13. Franchising authorities require sufficient time to review rate justifications so they can protect subscribers from potentially unreasonable rate increases. The passage of time affects all operators in the same manner. However, were we to allow operators whose rates are above their maximum permitted rates to reduce their refund liabilities because of cost increases without the approval of the local authorities, those operators would have an incentive to delay complying with local orders that directed that their rates be reduced to maximum permitted levels. Those operators would also gain an advantage over operators who had set their rates at maximum permitted levels and must await approval from local authorities before increasing their rates. 14. TCI's reference to our offsetting cases, in which we have held that refund liability is computed by comparing the operator's aggregate revenues to revenues that would have been realized from maximum permitted rates, is misplaced. Those decisions hold that the franchising authority must offset any undercharges in rates against overcharges in other rates. This is unrelated to the situation TCI poses here, where subsequent cost increases have occurred which it claims reduce its refund liability. For these reasons, we find that the LFAs' orders with respect to calculation of TCI's refunds are reasonable, and therefore TCI's appeals on this issue are denied. IV. ORDERING CLAUSE 15. Accordingly, IT IS ORDERED that the appeals of TCI Cablevision of Auburn, Inc. and TCI Cablevision of Tacoma, Inc. of the local rate orders of the Rainier Cable Commission, for the communities of Orting, Ruston, and Wilkeson, Washington, and the Pierce County Council, for Pierce County, Washington, regarding TCI's entry on Line C6 of Form 1200 and the local franchising authorities' method for determining TCI's refund liability, ARE DENIED. 16. This action is taken by the Deputy 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 John E. Logan Deputy Chief, Cable Services Bureau