******************************************************** NOTICE ******************************************************** This document was converted from WordPerfect to ASCII Text format. Content from the original version of the document such as headers, footers, footnotes, endnotes, graphics, and page numbers will not show up in this text version. All text attributes such as bold, italic, underlining, etc. from the original document will not show up in this text version. Features of the original document layout such as columns, tables, line and letter spacing, pagination, and margins will not be preserved in the text version. 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 ) ) Time Warner Communications ) CUID No. NY0769 (Rochester) ) ) ) Complaint Regarding ) Cable Programming Services Tier Rates ) ORDER Adopted: June 5, 1997 Released: June 6, 1997 By the Chief, Cable Services Bureau: 1. In this Order we consider a complaint against the January 1, 1997 rate increase that the above-captioned operator ("Operator") implemented for its cable programming services tier ("CPST") in the community set forth above. Operator has attempted to justify its CPST rate through a benchmark showing on FCC Form 1240. We have already issued an order which resolved complaints filed against Operator from September 1, 1993 through November 30, 1995. Accordingly, this Order addresses the reasonableness of the Operator's CPST rate of $22.47 effective January 1, 1997. 2. The Communications Act authorizes the Federal Communications Commission ("Commission") to review the CPST rates of cable systems not subject to effective competition to ensure that rates charged are not unreasonable. If the Commission finds the rate unreasonable, it shall determine the correct rate and any refund liability. The Telecommunications Act of 1996 ("1996 Act") and our rules implementing the new legislation ("Interim Rules"), require that complaints against the CPST rates be filed with the Commission by a local franchising authority ("LFA") that has received subscriber complaints. An LFA may not file a CPST rate complaint unless, within 90 days after such increase becomes effective, it receives more than one subscriber complaint. 3. To justify rates for the period beginning May 15, 1994 through a benchmark showing, operators must use the FCC Form 1200 series. Operators may justify adjustments to their rates on an annual basis using FCC Form 1240 to reflect reasonably certain and quantifiable changes in external costs, inflation, and the number of regulated channels that are projected for the twelve months following the rate change. Any incurred cost that is not projected may be accrued with interest and 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 correct estimated costs with actual cost changes. 4. On March 11, 1997, the LFA filed a complaint regarding the January 1, 1997 increase in Operator's CPST rate in the community referenced above. In its complaint, the LFA asserts that it has received more than one subscriber complaint against Operator's CPST rate increase, thereby triggering the Commission's jurisdiction to review this complaint. The valid complaint from the LFA triggers an obligation by the cable operator to file a justification of its CPST rates with the LFA. Thus, in this case, Operator is required to justify the increase in its CPST rate which is the subject of the LFA's complaint. 5. Operator has submitted FCC Form 1240 to justify the rate increase that went into effect on January 1, 1997. In addition to its FCC Form 1240, Operator raises affirmative defenses to the LFA's complaint. Specifically, Operator claims that its rates are not subject to regulation because the Operator is subject to effective competition in the community set forth above and has filed a petition for special relief ("Effective Competition Petition") to that effect. Operator also argues, as an affirmative defense, that the CPST rate charged in the community set forth above was established as part of a system-wide, revenue-neutral rate structuring that comports with the Commission's recently adopted uniform rate-setting methodology ("Uniform Rate Rules"). If the Commission is unable to reach a determination regarding Operator's affirmative defenses within the 90-day statutory deadline for resolving the complaint filed by the LFA, Operator requests that any adverse determination regarding Operator's CPST rate be suspended pending resolution of its defenses. 6. On June 3, 1997, the Commission adopted an Order denying Operator's Effective Competition Petition for the community referenced above. Therefore, we will not consider Operator's effective competition affirmative defense. Further, we will not consider Operator's second affirmative defense because Operator has not filed a petition for special relief pursuant to the Uniform Rate Rules to support its rate averaging methodology. Consequently, we find that both of Operator's affirmative defenses are moot. We will therefore review Operator's FCC Form 1240 to determine if Operator has correctly calculated its maximum permitted rate ("MPR") for its CPST. 7. Upon review of Operator's FCC Form 1240, we find that Operator's MPR of $21.61 and its actual CPST rate of $22.47, effective January 1, 1997, are not justified. In particular, Operator made true-up adjustments through to the effective date of the rate increase. This is incorrect. The annual adjustment afforded by FCC Form 1240 allows operators to project changes in external costs, inflation, and the number of regulated channels. This structure avoids the delay some operators experienced in recouping costs through multiple rate adjustments throughout the year. Because projections will not reflect the costs that actually occur, the Commission provided, as part of the annual adjustment, a "true-up" to correct projected cost changes with the actual cost changes. However, the Commission has noted that, as FCC Form 1240 must be filed 90 days before an increase is to take effect, the period for the true-up will not coincide with the previous year's projections. The true-up data is intended to indicate real, not projected data. This policy is reflected in the instructions accompanying FCC Form 1240. 8. Based on this instruction and considering evidence in the filing, reasonable time for closing accounts and completing forms, we have adjusted Operator's true-up period from 12 months to 9 months. This adjustment required that we refresh Operator's inflation factors to 2.22 for the second quarter of 1996 and to 2.21 for the third quarter of 1996 and adjust Worksheet 1 accordingly. As a result, the true-up inflation factor in Module C, Line C1 for the 9 month period was corrected to 1.0171 instead of the 1.0239 used by the Operator for a 12 month period. We have adjusted Module E, and have corrected the number of months on Line E2 to 9 months and Line E3 to 3 months. We have also adjusted the inflation segment in Module F, Line F5 to reflect the corrections made in Line C1. This has resulted in a corresponding adjustment on Line F9 (MPR for True-Up Period 1). 9. The reduction in the length of the true-up period also results in a reduction in Line H2 (Revenue From MPR for Period 1). This results in a corresponding reduction in Line I8 (True- Up Segment for the Projected Period). In total, our adjustments to Operator's FCC Form 1240 result in a reduction of the MPR for the Projected Period to $21.37 (Line I9). Thus, Operator has failed to demonstrate that its January 1, 1997 rate of $22.47 was not unreasonable. To the extent that external costs from the three months disallowed from Operator's true-up period have been averaged into the rates charged in the nine months allowed in Operator's true-up period, and have not been removed by our adjustments, we will order Operator to make a month-by-month accounting of such external costs. Such accounting shall allow a comparison of the actual external costs for the permitted nine-month true-up period with the recovery of external costs afforded by the external cost segment for that period as calculated on Worksheet 7. We will order the removal of any over- recovery, plus interest, identified thereby in Operator's next FCC Form 1240 filed with the Commission. Any such over-recovery of external costs shall be added to the amount otherwise reportable on Line H1 of Operator's next FCC Form 1240 rate calculation. 10. Accordingly, IT IS ORDERED, pursuant to Section 0.321 of the Commission's rules, 47 C.F.R.  0.321, that Operator's CPST rate of $22.47, effective January 1, 1997 in the franchise area set forth above, IS UNREASONABLE. 11. IT IS FURTHER ORDERED, pursuant to Section 0.321 of the Commission's rules, 47 C.F.R.  0.321, that the complaint referenced herein, IS GRANTED. 12. IT IS FURTHER ORDERED, pursuant to Section 76.961 of the Commission's rules, 47 C.F.R.  76.961, that Operator shall refund to subscribers in the community referenced above that portion of the amount paid in excess of the maximum permitted CPST rate of $21.37 per month (plus franchise fee) plus interest to the date of the refund, for the period from January 13, 1997 to the day before Operators implements the maximum permitted CPST rate of $21.37. 13. IT IS FURTHER ORDERED, that Operator shall promptly determine the overcharges to CPST subscribers for the stated periods, and shall within 30 days of the release of this Order file a report with the Chief, Cable Services Bureau, stating the cumulative refund amount so determined (including franchise fees and interest), describing the calculation thereof, and describing its plan to implement the refund within 60 days of the Commission approval of the plan. 14. IT IS FURTHER ORDERED, pursuant to Section 0.321 of the Commission's rules, 47 C.F.R.  0.321, that Operator revise the calculation of its maximum permitted CPST rate in its next FCC Form 1240 filing in accordance with our findings in this order and, in addition, that Operator attach to its next FCC Form 1240 filing a month-by-month accounting of its external costs from Operator's nine-month true-up period as found on Operator's Worksheets, and that Operator adjust its rates in its next FCC Form 1240 filing for any over-recovery of external costs, plus interest, identified thereby. FEDERAL COMMUNICATIONS COMMISSION Meredith J. Jones Chief, Cable Services Bureau