******************************************************** 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 ) ) TCI Cablevision of Greater Michigan ) CUID Nos. MI0040 (City of Petoskey) ) MI0126 (City of Harbor Springs) ) MI0294 (Resort Township) ) MI0357 (Bear Creek Township) ) Complaint Regarding ) Cable Programming Services Tier ) Rate Increase ) ORDER Adopted: January 22, 1998 Released: January 23, 1998 By the Deputy Chief, Cable Services Bureau: 1. In this Order we consider complaints against the June 1, 1997 rate increase of the above- captioned operator ("Operator") for its cable programming services tier ("CPST") in the communities referenced above. We have already resolved all the complaints filed from September 1, 1993 through September 15, 1995. This Order addresses only the reasonableness of Operator's June 1, 1997 CPST rate increase. 2.. Under the Communications Act, the Federal Communications Commission ("Commission") is authorized 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 a rate to be unreasonable, it shall determine the correct rate and any refund liability. The Telecommunications At of 1996 ("1996 Act") and our rules implementing the new legislation ("Interim Rules"), require that complaints against CPST rates be filed with the Commission by a local franchising authority ("LFA") that has received more than one subscriber complaint. 3. The LFA for the franchise areas referenced above filed complaints with the Commission on October 30, 1997, against Operator's June 1, 1997 CPST rate increase from $13.51 to $13.90. The LFA verified that it received more than one subscriber complaint for each of the franchise areas. The filing of a complete and timely LFA complaint triggers an obligation upon the cable operator to file a justification of its CPST rates. The Operator has the burden of demonstrating that the CPST rates complained about are reasonable. 4. In its complaints, the LFA requests that the Commission review Operator's charges for equipment related to the CPST. Operator responds that it does not have any equipment that is specific to the CPST. Under Section 76.923(a) of the Commission's rules, all equipment used to receive the basic service tier ("BST") is subject to rate regulation, regardless of whether such equipment is used to receive other tiers of regulated programming and/or unregulated service. Such equipment related charges are subject to regulation by the LFA. According to Operator, subscribers use the same equipment to receive both BST and CPST programming. Therefore, the LFA's complaints do not trigger our jurisdiction to regulate Operator's equipment charges. However, the LFA has jurisdiction to determine the reasonableness of Operator's equipment rates. 5. The LFA also attached to its complaints a Memorandum citing news articles indicating that Operator was receiving revenues from programmers and asserting that these revenues should be used to offset increases in Operator's external costs. Operator responded to the LFA's Memorandum by reviewing the various programming deals discussed in the Memorandum and stating that "any revenues which [Operator] may have received in connection with these deals do not require offsetting under the Commission's offset rule . . . and various clarifications of this rule." 6. The Communications Act states that the Commission, in determining whether CPST rates are unreasonable, shall consider "the revenues (if any) received by a cable operator from advertising from programming that is carried as part of the service for which a rate is being established, and changes in such revenues, or from other consideration obtained in connection" with the CPST. In Implementation of Sections of the Cable Television Consumer Protection and Competition Act of 1992: Rate Regulation, Report and Order and Further Notice of Proposed Rulemaking, MM Docket No. 92-266 ("Rate Order"), the Commission concluded that cable operators may recover increased costs of programming from subscribers but not to the extent an operator receives revenues from the programmer on account of carriage of programming. The Commission developed rules that required that an operator's increases in programming costs be offset by any revenues received by the operator from programmers. The Commission, however, did not "require cable companies to report increases in advertising revenues and to offset those increases against any external costs." 7. The Cable Services Bureau ("Bureau") has stated that payments from programmers to operators need only be offset on a channel by channel basis; so that any rebates or payments in consideration of carriage from a programmer will be applied to payments from the operator to that programmer but will not offset payments to other programmers. The channel by channel standard for offsetting may also be applied on a programmer specific basis, where the programmers are ultimately controlled by separate and distinct entities. On May 19, 1994, the Bureau stated that an operator need not offset "a programmer's payments to an operator for advertising time to promote the programmer's offerings, or payments to reimburse the operator for reasonable, documented expenses of marketing the program service to consumers," provided "the programmer has routinely and ordinarily reimbursed the cable operator for promotional expenditures prior to [May 19, 1994]. 8. In Implementation of Sections of the Cable Television Consumer Protection and Competition Act of 1992: Rate Regulation, MM Docket Nos. 92-266 and 93-215, Sixth Order on Reconsideration, Fifth Report and Order, and Seventh Notice of Proposed Rulemaking ("Going Forward Order"), the Commission also required an operator to offset revenues received from programmers against its per channel adjustment under the new going forward methodology. Specifically, the Going Forward Order provided that revenues received from programmers must be deducted from programming costs and, to the extent revenues remain, from the operator's per channel markup. In Implementation of Sections of the Cable Television Consumer Protection and Competition Act of 1992: Rate Regulation, MM Docket Nos. 92-266 and 93-215, Twelfth Order on Reconsideration ("Twelfth Reconsideration Order"), the Commission eliminated the requirement that home shopping service commissions be offset against the per channel markup. 9. In its response to the LFA's Memorandum, Operator cites generally the applicable rule and Bureau letters regarding the offsetting of programming costs with additional revenues received from the programmer. The Operator fails to provide a specific explanation concerning the application of those rules to the revenues involved in the subject CPST rate justification. The Bureau's statement that reimbursements for customary and verifiable promotional costs do not require offsetting "does not permit, absent special circumstances justifying a waiver, programmers to initiate reimbursement of promotional expenses, or significantly expand reimbursements, without the offsetting . . . ." The Commission's rules seek "to safeguard against programmers initiating or significantly expanding promotional reimbursements and recovering the reimbursements in higher programming charges to operators that could, in turn, result in higher charges to subscribers . . . ." We have previously stated that we would monitor the application of the limitation closely. We order Operator to provide, for each CPST channel for which programming costs are being increased or revenues are being received from programmers, a channel by channel explanation of the revenues received from programmers, a description of the revenue, as well as a channel by channel explanation of its programming costs increases, along with documentation explaining why, pursuant to the Commission's rules, the revenues received from programmers should not offset the increases in Operator's programming costs. 10. We have examined the documentation, including FCC Forms, which Operator has submitted to justify its June 1, 1997 CPST rate. To justify rates for the period beginning May 15, 1994 through a benchmark showing, operators must use the FCC Form 1200 series. Operators are permitted to make changes to their rates on a quarterly basis using FCC Form 1210. Operators may alternatively 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. 11. On February 22, 1996, the Commission issued an order granting Operator a waiver (the "Waiver Order") of certain rate adjustment requirements in its initial filing of the Commission's annual rate adjustment form (FCC Form 1240). Specifically, the Waiver Order allowed Operator, in its initial FCC Form 1240 filings, to include estimated changes in costs, inflation, channels and subscriber information attributable to the period between the last date for which actual cost data was available and the effective date of the new rates. In the Waiver Order, Operator was instructed to include in its initial FCC Form 1240 filing certain calculations, such calculations to be performed on FCC Form 1240 (primarily in Module G), or off FCC Form 1240, in an alternative showing done pursuant to the Waiver Order's "General Guidelines." Operator chose to use an alternative showing pursuant to the "General Guidelines" rather than perform its calculations directly on FCC Form 1240. 12. On October 25, 1996, Operator wrote to the Commission requesting review and approval of a modified FCC Form 1240 to justify rates for the projected period from June 1, 1997 to May 31, 1998. On January 9, 1997, we consented to the Operator's use of the form for such period in lieu of filings on the Commission's standard FCC Form 1240. 13. To justify its CPST rate, effective June 1, 1997, Operator submitted two FCC Forms 1240, the first for the projected period June 1, 1996 to May 31, 1997 ("First Form 1240"), and the second for the projected period June 1, 1997 to May 31, 1998 ("Second Form 1240"). Operator's First Form 1240 used Operator's alternative showing, calculated pursuant to the Waiver Order. Operator's Second Form 1240 followed the format set forth in Operator's October 25, 1996 letter. On reviewing the submitted forms, we determined that neither of the submitted forms produced identical results to filings that would have been made on the Commission's standard FCC Form 1240. 14. Accordingly, on December 12, 1997, Operator submitted new standard FCC Forms 1240, for the projected periods June 1, 1996 to May 31, 1997, and June 1, 1997 to May 31, 1998, which performed the Waiver Order's calculations directly on the standard FCC Forms 1240 as well as the calculations described in Operator's October 25, 1996 letter. Review of both standard FCC Forms 1240 is necessary to calculate the appropriate maximum permitted rate ("MPR") and the refund amount, if any, for the period beginning June 1, 1997. Operator also submitted a refund plan which calculated the amount of refunds owed to subscribers in the communities referenced above for the duration of the one year projected period ending May 31, 1998. 15. Upon review of Operator's new FCC Form 1240, for the projected period June 1, 1996 to May 31, 1997, we find that Operator has correctly calculated its MPR of $13.63. Upon review of Operator's new FCC Form 1240, for the projected period June 1, 1997 to May 31, 1998, we find that Operator has correctly calculated its MPR of $13.85. However, Operator's actual CPST rate, effective June 1, 1997, is $13.90. Operator has submitted a refund plan which calculates, with interest, the total amount of overcharges that will be collected from CPST subscribers in the communities referenced above from the date of the first subscriber complaint in each community to May 31, 1998. Upon review of Operator's refund plan, we find that Operator has correctly calculated, with interest, the amount of overcharges that will be received from subscribers during the projected period ending May 31, 1998. These calculations result in a total refund amount of $.59 per CPST subscriber in CUID Nos. MI0040 and MI0357 including interest, $.55 per CPST subscriber in CUID No. MI0126, and $.60 per CPST subscriber in CUID No. MI0294, including interest. While we reserve for further review the issue of Operator's revenue and any offsets concerning its programming costs ("revenue/offset" issue), we now order Operator to pay the refund amount of $.59 to each current CPST subscriber in CUID Nos. MI0040 and MI0357, $.55 to each current CPST subscriber in CUID No. MI0126, and $.60 to each current CPST subscriber in CUID No. MI0294, within 60 days of the release of this order. We will also order any rate Operator charges on and after June 1, 1998 shall be premised on Operator's use of (1) the standard FCC Form 1240 for rate calculation purposes and (2) $13.85 as Operator's Current Maximum Permitted Rate as called for on Line A1 of its FCC Form 1240 filing for the projected period beginning June 1, 1998. Contingent upon Operator's refund payment to its subscribers, we have determined that Operator's total CPST rate collections in the communities referenced above, for the projected period June 1, 1997 to May 31, 1998, will be reasonable, pending our review of the revenue/offset issue. 16. Accordingly, IT IS ORDERED, pursuant to Section 76.961 of the Commission's rules, 47 C.F.R. Section 76.961, that Operator shall refund to CPST subscribers in CUID Nos. MI0040 and MI0357 the amount of $.59 within 60 days of the release of this Order. 17. IT IS FURTHER ORDERED, pursuant to Section 76.961 of the Commission's rules, 47 C.F.R. Section 76.961, that Operator, shall refund to CPST subscribers in CUID No. MI0126 the amount of $.55 within 60 days of the release of this Order. 18. IT IS FURTHER ORDERED, pursuant to Section 76.961 of the Commission's rules, 47 C.F.R. Section 76.961, that Operator, shall refund to CPST subscribers in CUID No. MI0294 the amount of $.60 within 60 days of the release of this Order. 19. IT IS FURTHER ORDERED, pursuant to Section 76.962 of the Commission's rules, 47 C.F.R. Section 76.962, that Operator, within 90 days of the release of this Order, shall file with the Chief, Cable Services Bureau, a certification of its compliance with the refund requirements of this Order, and a certification of its intent to comply with all other aspects of this Order. 20. IT IS FURTHER ORDERED, pursuant to Section 0.321 of the Commission's rules, 47 C.F.R. Section 0.321, that Operator shall use (1) the standard FCC Form 1240 for rate calculation purposes and (2) $13.85 as Operator's Current Maximum Permitted Rate as called for on Line A1 of its FCC Form 1240 filing for the projected period beginning June 1, 1998, pending our review of the revenue/offset issue. 21. IT IS FURTHER ORDERED, pursuant to Section 0.321 of the Commission's rules, 47 C.F.R. Section 0.321, that Operator shall file with the Chief, Cable Services Bureau, within 30 days of the release of this Order, a channel by channel explanation of the revenues received from programmers, a description of the revenue, as well as a channel by channel explanation of its programming costs increases, for each CPST channel for which programming costs are being increased or revenues are being received from programmers, along with documentation explaining why, pursuant to the Commission's rules, the revenues received from programmers should not offset the increases in Operator's programming costs. 22. IT IS FURTHER ORDERED, pursuant to Section 0.321 of the Commission's rules, 47 C.F.R. Section 0.321, that the complaints referenced herein against the rates charged by Operator in the communities set forth above ARE GRANTED TO THE EXTENT INDICATED HEREIN. FEDERAL COMMUNICATIONS COMMISSION John E. Logan Deputy Chief, Cable Services Bureau