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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 EASTERN IOWA ) ) Appeal of Rate Orders Denying Basic Service ) Rates in Iowa City, Iowa ) MEMORANDUM OPINION AND ORDER Adopted: February 13, 1998 Released: February 20, 1998 By the Deputy Chief, Cable Services Bureau: I. INTRODUCTION 1. TCI Cablevision of Eastern Iowa (TCI), the franchised operator of a cable television system in Iowa City, Iowa (City), has appealed two related rate orders issued by the City, which is the local franchising authority. The first order, issued in 1996, reduces TCI's calculation of its maximum permitted rate based on two findings. First, the City determined that TCI used the wrong measure of inflation. Second, the City refuses to allow TCI to include, as external costs, the cost of relocating some of its wires. The second order, issued in 1997, reduces TCI's basic service tier rate. TCI bases that rate on the maximum permitted rate at issue in the first order. Iowa City defends its decision in the resolution accompanying each order and in its 1996 Comment on the Appeal. 2. This order consolidates both appeals for reasons of administrative efficiency and because they involve the same two issues. II. BACKGROUND 3. Under the Communications Act, the Commission reviews appeals of rate orders issued by local cable franchising authorities. When considering appeals, the Commission will not conduct a de novo review, but instead will sustain the franchising authority's decision as long as the franchising authority did not act unreasonably in applying the Commission's rules. If the Commission reverses a franchising authority's decision, it will not substitute its own judgment, but will remand the case to the franchising authority with instructions to resolve it consistent with the Commission's reversal. 4. To justify rates for the period beginning May 15, 1994, operators must use the FCC Form 1200 series. In Form 1200, an operator calculates its provisional rates and its full reduction rates. Operators may then change those rates every quarter using Form 1210. Alternatively, operators may change their rates annually using Form 1240. Form 1240 sets a maximum permitted rate and projects inflation, reasonably certain and quantifiable changes in external costs, and changes in the number of regulated channels for the year after the rate change. External costs include: state and local taxes for the provision of cable television; 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. Any incurred cost that the operator fails to project may accrue with interest and be added to rates at a later time. If actual and projected costs are different during the rate year, a "true-up" mechanism is available to match estimated costs with actual cost changes. The "true-up" requires operators to decrease their rates or, alternatively, permits them to increase their rates to account for these over- or underestimations. 5. An operator that seeks to increase its maximum permitted rate has the burden of demonstrating that the increase conforms with our rules. The operator must submit the necessary rate forms and respond to a franchising authority's request for supporting information. After reviewing an operator's FCC Forms 1200 and 1240, along with any additional information, the franchising authority may either approve the operator's requested rate increase, or it may issue a written decision explaining the factors it considered in denying the increase. IV. SUMMARY OF THE PLEADINGS A. 1996 Appeal 6. On March 1, 1996 TCI completed Form 1240 to establish a maximum permitted rate of $11.3035 per subscriber per month and submitted it for review by Iowa City. The City returned the filing with adjustments, two of which TCI now appeals. The review process included two requests for additional information. TCI responded by submitting a revised Form 1240 on June 7, 1996 that resulted in a new rate of $11.1987 per subscriber per month. 1. Inflation Figures 7. TCI argues that the City erred in requiring the use of a lower inflation figure. Citing Commission regulations and our Vacaville decision, TCI argues that an operator only needs to use the inflation factor available when it completes its initial filing, not whatever figure has become available by the time the franchise authority reviews the rate. When TCI first filed its Form 1240, it used a preliminary Commerce Department figure of 2.61%, but by the time TCI submitted its revised Form 1240, the Commerce Department released a lower, 2.22% figure. TCI argues that the Commission has already ruled on the use of exactly the same figures at issue in this case. In Vacaville, the operator used the preliminary 2.61% inflation factor when it filed its Form 1240. During its review, the local franchise authority (LFA) replaced it with the subsequently released 2.22% factor. The Commission ruled for the operator because the company "calculated its 2.61% figure based on preliminary information from the Department of Commerce before we ultimately adopted the 2.22% figure." TCI asserts that the approach in Vacaville is the same approach it used, and even takes the defense one step further. The operator argues that it actually had the right to use a higher, 2.96% inflation figure, but "voluntarily concluded that the best approach was to use the preliminary update." 8. Iowa City states that TCI produced no record of the 2.61% figure and, even so, had the time and opportunity to use the 2.22% factor. While acknowledging that the lower figure was not available when TCI first submitted its Form 1240, the City notes it was available when TCI later corrected a "material error" in its original submission through its revisions. Iowa City argues that TCI should have taken the opportunity to refresh its rate calculation. 2. Cable Relocation 9. TCI states that because Iowa City required it to relocate cable as part of a municipal road project, the City incorrectly disallowed TCI's recovery of the $8,000 value of that work as an external cost. TCI cites the Thirteenth Order on Reconsideration to support its position: "[W]e will permit operators to pass through to subscribers the cost of meeting franchise requirements that they remove aerial facilities and place them underground." TCI points to an Iowa City ordinance providing that a franchisee "shall ... relocate in other public place any property of the Grantee when required by the City." Because the City required TCI to relocate its cable, TCI argues, the associated expenses "are precisely the sort of costs allowable as an 'external' pass through." TCI states that it only seeks recovery for that part of the relocation occurring inside city limits, and thus within the franchise agreement's purview: "the $8,000 at issue is attributable entirely to work performed ... inside the city limits." 10. Iowa City responds by arguing that TCI failed to itemize its $8,000 cost, by pointing out inconsistencies in TCI's arguments, and by challenging the operator's interpretation of the law. In its 1996 Resolution regarding TCI's Form 1240, the City stated, "there is no provision in the Franchise Agreement nor in the City's ordinances which would authorize the inclusion of [the relocation] costs." In its Comment on the Appeal, Iowa City chooses not to reassert that argument. Instead, the City argues that not only has TCI "provided inadequate justification for these costs," but the operator initially attributed the $8,000 to relocations both inside and outside city limits, while, in its appeal, TCI has assigned the costs to work completed "entirely" inside city limits. Iowa City questions why the geographic area of the work differs between the initial Form 1240 filing and the appeal, yet the cost remains the same. 11. In addition to questioning TCI's facts, Iowa City challenges TCI's interpretation of the law. The City argues it only required TCI to "accommodate" the road project and did not ask it to move cable underground. This is the key, Iowa City argues, because the Commission limits pass- throughs to cases where an LFA demands underground relocation of cables that are on poles. The City indicates that, By [TCI's] own admission, 1,547 feet of the 1,699 feet of cable that was disturbed... was "aerial cable [that] had to be restrung," not moved underground. With respect to the 152 feet of cable that TCI states was "buried underground," there is no indication that this cable was previously in the air. Iowa City concludes, "This activity does not amount to a 'franchise requirement' that TCI 'remove aerial facilities and place them underground' as contemplated by the Thirteenth Order on Reconsideration." The City states that TCI has no legal right to recover its outlays as external costs. B. 1997 Appeal 12. In TCI's 1997 appeal the operator objects to the City's decision that the basic service tier rate is overstated by four cents per month per subscriber. TCI based its 1997-1998 basic service tier (BST) rate on the higher maximum permitted rate it defends in its 1996 appeal. The City rejected this rate for the same reasons it rejected the 1996 maximum proposed rate -- TCI uses the wrong inflation figure and improperly included the cable relocations as external costs. Similarly, TCI challenges the decision using exactly the same arguments that it did in the 1996 Appeal. Iowa City filed no opposition. III. DISCUSSION A. Inflation Adjustment 13. TCI should have updated its Form 1240 with the 2.22% inflation figure when it responded to Iowa City's request for additional information. When an operator revises its Form 1240 for a reason other than the availability of more accurate inflation figures, it must also take the opportunity to refresh its rate calculations. 14. Although TCI supports its arguments by citing the Commission's Vacaville decision, the circumstances are significantly different. In Vacaville, unlike here, the operator made no supplemental filings and therefore did not have the opportunity to refresh its calculations with a more recent inflation number. The Commission's Cencom decision is more relevant. In Cencom, the operator applied for review of an Order in which the Bureau found that the operator had not justified its CPST rate. In recalculating the operator's maximum permitted rate, the Bureau corrected errors in the operator's inflation calculation and "refreshed" the inflation figure with the most recent data. The Commission affirmed the Bureau's decision, explaining that when a rate is unreasonable on its face or when an operator has committed an error in justifying its rates, the Bureau is correct in using the most accurate inflation figure. When the inflation figure is refreshed, neither consumers nor the operator are harmed, because consumers pay only for the inflation experienced by the operator and the operator recovers the full cost of the inflation it experienced. Refreshing inflation figures in this circumstance is fully consistent with Commission precedent. 15. According to Iowa City, TCI committed a material error in justifying its rates. This prompted two Iowa City requests for additional information, to which TCI responded with supplemental filings. Because the filings occurred after the Commerce department had released the final 2.22% inflation figure for the period, TCI should have taken the opportunity to refresh its inflation calculation. Consistent with the Cencom decision, we agree with the City and deny this aspect of TCI's Appeal. B. External Costs 16. Iowa City, pursuant to a city ordinance, required TCI to accommodate a road project by moving portions of its cable. The Commission allows cable companies to pass on the costs of certain franchise requirements to their subscribers. This includes "the costs of removing cable from utility poles and placing the same cable underground," but only when the operator is not already in the process of upgrading its system. On the record before us, TCI's relocations do not fit all the conditions imposed upon this right to recover. 17. The regulation provides that, as long as the LFA does not require burial, the LFA may require an operator to move its cable while denying the operator external cost treatment. The City only required TCI to "accommodate" the road project, and did not specifically demand removal of the cable from poles to underground. More significantly, TCI itself states that it buried only 152 feet of the 1,699 feet of relocated cable; it "restrung" the rest. Our regulation only requires external cost recovery for costs of buried, not restrung, cable. At best, TCI could only recover the costs of the 152 feet of buried cable. Notably, the regulation also requires that the cable moved underground must have first been on a pole, and, as the City points out, TCI has not stated whether the 152 buried feet was previously on a pole or was simply new cable. 18. TCI has the burden of demonstrating that the City's decision was not reasonable. It has not demonstrated that the City specifically required cable relocation underground, it did not explain why it deserves cost recovery for the 1,547 feet of cable that was not buried underground, and it did not state whether the 152 feet of buried cable was relocated from poles. TCI did not sufficiently explain why its costs were $8,000 both when it described the relocations as occurring inside and outside city limits and, later, when it said the work was done entirely within city limits. On the record before us, TCI has not met its burden of demonstrating that Iowa City's decision to deny recovery of the cable relocation costs was inconsistent with Commission rules. We believe Iowa City reasonably refused to allow TCI to recover its cable relocation costs as external costs. V. ORDERING CLAUSES 19. IT IS ORDERED that TCI's appeals are DENIED. 20. This action is taken by the Deputy Chief, Cable Services Bureau, pursuant to authority delegated by the Commission's rules in 47 C.F.R.  0.321. FEDERAL COMMUNICATIONS COMMISSION John E. Logan Deputy Chief, Cable Services Bureau