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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 of Pennsylvania, Inc. ) ) Appeal of a Local Rate ) Order of the Township of ) Shaler, Pennsylvania ) MEMORANDUM OPINION AND ORDER Adopted: March 12, 1998 Released: March 17, 1998 By the Deputy Chief, Cable Services Bureau: I. INTRODUCTION 1. TCI of Pennsylvania, Inc. ("TCI"), the franchised operator of a cable television system serving the Township of Shaler, Pennsylvania ("Township"), has filed an appeal of two local rate orders adopted by the Township on June 20, 1995. The Township reviewed TCI's proposed rate increase on the rental fees of converter boxes (FCC Form 1205), and a basic service tier ("BST") rate increase (FCC Form 1210). The Township filed no opposition. We are remanding this matter for the reasons stated herein. II. BACKGROUND 2. The Township denied TCI-PA's proposed equipment rate increase in a one-page letter, concluding that the proposed rate increase was unreasonable; that the cable operator had provided the Township with the maximum permitted rate for the converters, not the actual lease rate; that TCI would not let the Township know whether it was experiencing a profit at its headend serving Shaler; and that the charges for maintenance and installation were based on estimates and not on actual costs. 3. On the same day, the Township also denied TCI's proposed BST rate increase (FCC Form 1210) arguing that the cable operator's request for a rate increase followed too close an earlier rate increase for the BST that the Township had approved; that TCI would not let the Township know if it was experiencing a profit at its headend serving Shaler; that the cable system operator was charging advertisers to promote their products and services on the cable system and, at the same time, was charging cable subscribers to view the advertisements; that cable television subscribers do not have any input in deciding what programming TCI offers; and that the Township disagreed with the way TCI packaged its programming. 4. TCI challenges the two local rate orders on the grounds that the Township has acted in contravention of governing Federal regulations and raised irrelevant issues. The specific grounds challenging each conclusion denying the proposed rate increases are examined below. III. STANDARD OF REVIEW 5. Under our rules, rate orders made by local franchising authorities may be appealed directly 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 local 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 local 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 in a manner consistent with the Commission's decision on appeal. IV. DISCUSSION A. Converter Rate Increase. 1. Amount of Increase 6. TCI argues that the amount of a rate increase alone is not determinative of its reasonableness. It contends that the reasonableness of the proposed increase should be based on whether the increase is justified in accordance with the Commission's rate regulations, rather than solely on the amount of the increase or how the local franchising authority feels about the rate increase. In its local order, the Township contended that a rate increase of between 100 and 300 percent for the lease of a converter box was unreasonable. 7. We agree with TCI. Pursuant to the 1992 Act, the Commission established standards for the calculation of maximum permitted rates for installation and lease of equipment used by subscribers to receive the BST. A local franchising authority is authorized to review the operator's rate forms to determine whether the operator's proposed rate increase for installation and lease of equipment comports with those rules. If the proposed rate increase is accurately calculated pursuant to the Commission's regulations, using accurate information, the rate is deemed reasonable and lawful under the 1992 Cable Act. Specifically, rates at or below the benchmark are presumed to be reasonable; rates above the benchmark are presumed to be unreasonable. Therefore, the magnitude of a rate increase alone is not determinative of its reasonableness. 2. Actual Charges vs. Maximum Permitted Rates. 8. TCI asserts that as long as its lease equipment rates are within the maximum permitted rates, it may choose to charge subscribers less than the maximum permitted rate. The cable operator thus maintains that the Township should only be concerned with whether the proposed rate increase comports to the Commission's rules and not whether TCI will exercise its business and marketing discretion and charge less that the allowable rate. The Township contended that TCI failed to reveal whether it intended to charge as much as the maximum permitted rate or something less. 9. Under the 1992 Act and the Commission's implementing rules, a local franchising authority has the responsibility to ensure that the rate a cable operator charges for the lease of equipment is within the Commission's maximum permitted rates. Whether the operator opts to charge subscribers an actual lower rate, however, is a discretionary decision by the cable operator. 10. In the instant case, TCI determined that the maximum permitted monthly rate for the rental of an addressable converter was $3.74. Therefore, the Township must determine whether that rate is correctly calculated, not whether TCI will charge subscribers a lower monthly fee. We note, however, that FCC Form 1205 requires the operator to compare actual charges against maximum permitted rates. If TCI did not complete the form it should have done so. The record is not clear on this point. 3. Profitability. 11. TCI agrees that the Township is authorized to review the reasonableness of its proposed rate increase but argues that the franchising authority cannot specifically inquire into the profitability of the local cable system. Township officials asserted that TCI has failed to submit certain information indicative of whether the cable system is experiencing a profit at the headend serving the Township. 12. Profitability is not an element that the Township should consider in the rate review of TCI's proposed benchmark rates. The benchmark rates developed by the Commission already reflect an element of profitability or rate of return. The Commission based benchmark calculations on the rates charged by firms subject to effective competition. In doing so, it effectively accounted for the costs of providing service for those systems, and also the need for any viable company to earn a "normal" or "competitive" rate of return. A competitive rate is generally one that reflects actual cost including a reasonable profit. 13. We agree with TCI. The Township should not be examining the issue of profitability as a separate element of the benchmark rate process. Separate consideration of that element by the Township is irrelevant to the ratemaking process because, as noted above, it already has been factored into the Commission's benchmark rates. 4. Estimates vs. Actual Costs. 14. TCI disputes the Township's conclusion that the proposed rates for maintenance and installation are unacceptable because they are based on estimates rather than on actual costs. TCI argues that the Commission's rules allow cable operators to compute their proposed rates using average costs of their most recent financial information (cost data) of actual work performed, even if a point system is employed. 15. In rate regulation proceedings, the cable operator, not the local franchising authority, bears the burden of proving the reasonableness of any proposed BST rates and associated equipment. The local franchising authority, after providing the cable operator with an opportunity to participate in the rate review proceeding, including the opportunity to provide documentation supporting the proposed rates, is fully justified in prescribing a rate based on the information available to it at the time it issues a rate order, as long as it explains why the operator's proposed rate is unreasonable and its own prescribed rate is reasonable. 16. The instructions accompanying Form 1205 direct the operator to attach an explanation of how it calculated the time devoted to maintenance and installation of customer equipment and services. The scant record before us, however, does not indicate whether the operator provided the Township with the required explanation or whether the Township requested such an explanation, if it had not been provided. 17. In the local rate order, the Township rejected TCI's allocation of 21 percent of labor hours to the installation and maintenance of converters because the assignment was based upon service call estimates rather than on actual time records. In the Rate Order, the Commission stated that it anticipated that cable operators would "use their past experience and historical data to make the best estimate of the number of service and repair hours for remotes." The Commission added that the "[c]harges for leasing converter boxes and all other equipment [would] be calculated in the same manner as for remotes." We interpret this to mean that cable operators may use estimates for establishing labor hours devoted to the maintenance of converter boxes. This is in accordance with the Hourly Service Charge methodology which "uses time spent in related activities as the factor for allocating [installation and maintenance] costs to the various charges." Thus, any reasonable allocation of labor hours for maintenance would be accepted. Accordingly, we remand the issue of the use of estimates for the allocation of labor hours to the Township for resolution in accordance with our findings herein. B. Basic Service Tier Rate Adjustment. 1. Proximity Between Rate Increases. 18. TCI asserts that its BST rate increase complies with Sections 76.309 and 76.964 of the Commission's rules and that the Township should, therefore, make a determination in accordance with the applicable rate regulations, not on irrelevant and unfounded allegations. In its local order, the Township contended that the operator's BST rate increase was submitted too soon (60 days) after a $0.06 rate increase had been approved. In response, TCI argues that there are no time-constraint regulations that prevent cable operators from submitting a BST rate increase soon after the local franchising authority approves a previously-sought rate increase. 19. The proximity between rate increases is irrelevant to the rate review in question. At the time of this appeal, Commission regulations limited regulated cable operators to filing rate increases no more frequently than quarterly to account for increases in external costs, and annually for inflation. Cable operators could file up to four rate increases per year (one every three months) with the local franchising authority. The Commission's rules do not require cable operators to wait until a quarterly rate increase has been approved by the franchising authority before filing another quarterly request. TCI is correct that the filing of a subsequent rate increase is not dependent on the date of approval or denial of a prior filing. 2. Advertising Revenues. 20. TCI maintains that the Township is wrong to deny a proposed BST rate increase because TCI collects advertising revenues from two sources. TCI argues that the inclusion of the element of advertising revenues into the ratemaking process is irrelevant. The Township claims that TCI is collecting advertising revenues twice: once as compensation from the sponsors of commercial advertisements carried on the cable system, and once from subscribers (included in tier charges) for viewing the advertisements shown during TCI's programming. 21. We concur with TCI. In Time Warner Entertainment Co., L.P., et al. v. Federal Communications Commission, the U. S. Court of Appeals upheld the Commission's earlier decision to not require cable operators to "report increases in advertising revenues and to offset those increases against any external costs." The Township's rate review should not include an examination of TCI's advertising revenues. 3. Programming and Subscriber Input. 22. TCI asserts that a cable operator's choice of programming and packaging are not factors to be considered in determining the reasonableness of a rate adjustment. TCI maintains that it welcomes comment from subscribers which it considers in developing programming packages. The Township challenged the lack of subscriber input concerning the programming TCI offers its subscribers and how that programming is packaged (the Township refers to this as "bundling"). The Township also contended that TCI's channel line-up is duplicative or similar between tiers. 23. Except for any public, educational and governmental programming required by the franchise agreement, a local franchising authority cannot require a cable operator to carry a specific cable service or to package its programming in a particular manner. Cable operators are required to provide subscribers a BST to which subscription is required for access to any other tier of service or to purchase any other video programming. The BST, at a minimum, must include all television broadcast stations provided to any subscriber (except superstations) and any public, educational and governmental programming required by the franchise agreement to be carried on the basic tier. In addition, the cable operator has the discretion to carry additional programs on this tier. 24. A rate review is not the proper vehicle for the Township to deal with the programming decisions of the cable operator. Under Section 626 of the Communications Act the franchising authority may provide the public in the franchise area the opportunity to participate in identifying the future cable- related needs and interests of the community, and to review the performance of the cable operator during the current franchise term. This authority is not related to the ratemaking authority the Township exercises pursuant to the Commission's rate regulations. V. ORDERING CLAUSES 25. Accordingly, IT IS ORDERED that the appeal filed July 20, 1995, by TCI of Pennsylvania, Inc. is GRANTED and the local orders dated June 20, 1995 are REMANDED to the Township of Shaler, Pennsylvania for proceedings consistent with the terms of this Memorandum Opinion and Order. 26. This action is taken by the 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