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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 ARCADIA/ ) SIERRA MADRE ) ) Appeal of Local Rate Order of the ) City of Arcadia, California ) ORDER Adopted: January 6, 1998 Released: January 9, 1998 By the Deputy Chief, Cable Services Bureau: I. INTRODUCTION 1. On January 11, 1996, TCI Cablevision of Arcadia/Sierra Madre ("TCI") filed an appeal of a rate order adopted on November 21, 1995, by its local franchising authority, the City of Arcadia, California ("the City"). The City reviewed TCI's FCC Form 1210, which TCI filed to establish increased basic service tier ("BST") rates. On January 29, 1996, the City filed a reply to TCI's appeal. For the reasons set forth below, we deny the appeal. II. STANDARD OF REVIEW 2. Under our rules, rate orders issued 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. III. DISCUSSION 3. In its rate order, the City required TCI to reduce its BST rate from $12.20 per month to $11.64 per month, and it ordered TCI to credit subscribers the difference between the rate actually charged and the approved rate. TCI asserts that the City incorrectly reduced the franchise-related costs TCI included on line B7 of its Form 1210 by (i) rejecting TCI's two-year depreciation schedule in favor of a seven-year depreciation schedule; and (ii) failing to include an 11.25% rate of return on the costs at issue. The dispute concerns TCI's recovery in its rates of $287,682, which was used to purchase video equipment necessary for TCI to broadcast City Council meetings to cable subscribers. The City maintains that its seven-year depreciation schedule is supported by the Commission's rules. The City also claims that it was not required to include a rate of return amount when it recalculated the costs at issue because TCI did not include any return amount when it itemized the costs on the Form 1210. A. Depreciation Schedule 4. TCI contends that the depreciation schedule for the costs at issue should be tied to the term of the franchise, which had approximately two years remaining when TCI filed the Form 1210. Acknowledging that the Commission adopted a different methodology in its final cost-of-service rules, TCI argues that its approach is justified under the circumstances. According to TCI, the costs were incurred in connection with City approval of a corporate reorganization and a two-year extension of the franchise, when TCI agreed to pay the City a lump sum of $272,682 for the purchase of production equipment and three annual payments of $15,000 for operating support. The production equipment was installed in the City Council chambers to broadcast City Council meetings to cable subscribers. TCI admits that the useful life of the equipment could exceed two years but states that its franchise might not be renewed and that a successor franchisee might not be willing to purchase the equipment. 5. In response, the City argues that its order comports with the Commission's rule that franchise-related capital costs should be depreciated over the useful life of the facilities or equipment in question. The City states that its seven-year depreciation period for the production facilities was based on the estimated useful life of the equipment, which the City derived from a survey of local production studios. The City asserts that TCI has not shown that renewal of its franchise is unlikely and points out that the federal statutory scheme favors the incumbent operator, which is TCI. The City disputes TCI's characterization of the lump sum payment, arguing that the payment was not tied to the two-year extension of TCI's franchise but instead was intended to remedy TCI's noncompliance with the public access provisions of its original franchise. 6. The City's selected depreciation schedule for the franchise-related costs is reasonable. The depreciation schedule is based on a good-faith estimate of the useful life of the equipment, which is the method the Commission has prescribed for franchise-related costs. We reject TCI's argument that the depreciation schedule should be tied to the remaining term of the franchise. Depreciation schedules should not be tied to the term of the franchise unless the operator can show that renewal is not likely and that in the event of nonrenewal the operator would not be able to recover the value of the assets. TCI has not demonstrated, beyond its mere assertion, that renewal of its franchise is unlikely or that it would be unable to sell the equipment to a successor franchisee or otherwise recover the value of the equipment. B. Rate of Return 7. TCI states that the Commission's rules allow operators to earn an 11.25% rate of return on their franchise-related capital investments, which are reported on Line B7 of the Form 1210. TCI claims that the City's order is unreasonable because the allowed franchise-related costs do not include a return amount. 8. The City agrees that the Commission allows operators to earn a return on certain costs but argues that TCI is not entitled to a return on its franchise-related costs because it did not include a return amount in the total costs reported on line B7 of its Form 1210. As evidence, the City points to TCI's response to the City's request for a breakdown of the costs at issue. In a letter dated August 18, 1995, TCI stated: The costs on Line B7 were paid to the City of Arcadia in June 1994: Description Date Paid Period Covered Monthly Amt One time pmt for extension of fran. June 94 24 months $11,361.75 Annual Pmt for franchise ext. June 94 12 months $1,250.00 Total $12,611.75 The City asserts that its recalculation of the franchise-related costs was proper. 9. We agree with the City. The August 18, 1995 letter from TCI to the City indicates that TCI did not include a return component in the franchise-related costs it reported on its Form 1210. Rather, TCI simply divided the total costs at issue by the number of months in the selected depreciation period. The City's replication of and reliance on this methodology was reasonable. The City was not required to remedy TCI's omission of a return component. IV. ORDERING CLAUSES 10. Accordingly, IT IS ORDERED that the appeal by TCI Cablevision of Arcadia/Sierra Madre of the local rate order of the City of Arcadia, California, IS DENIED. 11. This action is taken by the Deputy Chief, Cable Services Bureau, pursuant to authority delegated by Section 0.321 of the Commission's rules. FEDERAL COMMUNICATIONS COMMISSION John E. Logan Deputy Chief, Cable Services Bureau