Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matter of: ) DA 94-1606 ) TCI CABLEVISION OF ) COLORADO, INC. ) ) Appeal of Local ) Rate Order of City of ) Boulder, CO ) ORDER Adopted: December 28, 1994 Released: December 28, 1994 By the Chief, Cable Services Bureau: I. INTRODUCTION 1. TCI Cablevision of Colorado, Inc. ("TCI"), the franchisee in the above matter, filed on July 6, 1994 an Appeal of Local Cable Rate Order adopted on June 6, 1994 by its local franchising authority, the City of Boulder, Colorado ("the City"). The City opposes TCI's appeal. The Rate Order establishes a new regulated rate schedule for TCI's basic service tier rates and associated equipment. Specifically, the City's Rate Order requires TCI to implement certain rate reductions and to issue refunds to subscribers, dating back to September 1, 1993. 2. In its review of TCI's Form 393, the City reduced TCI's rates for its basic service tier to the maximum permitted rate, but ordered TCI to keep its rates for equipment and installation at the current levels, rather than at the higher, maximum permitted levels. TCI argues that because of this misapplication of the Commission's rate regulations, the City has improperly reduced TCI's regulated revenues by setting its rates for equipment and installation below the levels permitted under the benchmark regime and has imposed a refund liability that is greater than the level allowed under our rules. TCI argues that it should be permitted to offset its refund liability for its basic service tier rate with its undercharges for equipment and installation rates. TCI also contends that the City improperly established a 7.0% interest rate on the refunds required by its local rate order instead of the applicable rate for IRS tax refunds. Finally, TCI contends that the City improperly regulated rates for certain types of equipment, A/B switches and equipment to receive Digital Music Express ("DMX") and FM radio services from TCI, which TCI argues, are not subject to regulation. We consider each of these issues in turn. II. DISCUSSION 3. Under our rules, rate orders made 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. Therefore, 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. A. Refund Offsets 4. FCC Form 393 is the official form used by regulators to determine whether an operator's regulated rates for programming, equipment and installation were reasonable during the time period from September 1, 1993 until May 14, 1994. Form 393 is divided into three separate, but interrelated parts. In Part II, the operator calculates its maximum permitted programming rates, while in Part III, the operator calculates its maximum permitted equipment and installation rates. Part I is a cover sheet that lists the various programming, equipment and installation rates that have been calculated in Parts II and III and compares them to the rates the operator has actually charged during the period of review. 5. The operator's maximum permitted rates are derived by completing Parts II and III of the Form 393, pursuant to which the operator calculates the actual aggregate revenues collected by the operator for regulated programming, equipment and installation, as of the initial date of regulation ("current rate") or as of September 30, 1992. After calculating actual aggregate revenues, the operator converts those revenues to a per-channel rate, and then compares the per-channel figures to the applicable benchmark rate. If an operator's current per-channel rate is below the applicable benchmark rate, then the operator's rate is deemed reasonable, but it must remain at its current level. If its current per-channel rate exceeds the benchmark rate, the operator must then compare its September 30, 1992 per-channel rate to the applicable benchmark rate. If its September 30, 1992 per- channel rate is above the benchmark rate, it must reduce this rate to the benchmark rate or by 10%, whichever reduction is less. The adjusted rate will be its maximum permitted rate for programming. Maximum permitted rates for equipment and installation are based on actual cost and are calculated in Part III of the Form 393. Equipment rates are derived from capital and maintenance costs per unit of equipment. Installation rates are derived from the calculation of a hourly service charge and application of that charge to different types of installations. Under our regulations, the maximum permitted rates are deemed to be reasonable, as required by the 1992 Cable Act. Requiring cable operators to set all or some of their rates for programming, equipment or installation below their maximum permitted levels would force them to charge rates at levels below those specifically allowed under our rules. 6. If a franchising authority does not dispute the bases for the figures presented in a cable operator's Form 393 or has not discovered any mathematical errors in the form, the franchising authority should then approve the operator's maximum permitted rates, as derived by the form. A franchising authority should not require the operator to set a particular rate for programming, equipment or installation at any rate less than its maximum permitted rate, even if its current or actual rate is below its maximum permitted rate. Instead, the franchising authority should allow the operator to charge up to its maximum permitted rates, as derived by Form 393. In this proceeding, the City did not dispute either the validity of the figures used in TCI's Form 393 or the accuracy of the calculations in the form. Therefore, the City should allow TCI to charge its maximum permitted rates, as derived by the Form 393. 7. After setting the various regulated rates that an operator is permitted to charge on a prospective basis, a franchising authority should then determine if the operator is liable for any subscriber refunds. A refund liability can be imposed when an operator's actual charges exceed maximum permitted levels during the applicable period of review. If an operator's aggregate revenues computed from its actual rates exceeded its revenues computed from its permitted rates during the period of review, the operator must refund the difference to subscribers. If the operator's aggregate revenues computed from its permitted rates exceeded its aggregate revenues computed from its actual rates, the operator will not be required to issue any refunds for that period of review. In this proceeding, any refunds to be paid by TCI should be calculated based on this method. 8. While the Commission will sustain the decisions of franchising authorities if there is a reasonable basis for doing so, we expect franchising authorities to adhere to the mathematical principles underlying the benchmark methodology, particularly when calculating an operator's refund liability. For instance, in this case, the City may not order TCI to set its equipment and installation rates below maximum permitted levels. Further, the City must offset or reduce any refunds it may order by the difference between the actual equipment and installation rates that TCI charged and the maximum permitted rates that it could have charged during the applicable period of review. According to TCI's uncontested submission, the City has directed TCI to charge less than its maximum permitted levels for certain components of its regulated service and to issue refunds without regard to the fact that some rates are below maximum permitted levels. We are remanding this case to the City so that it can reconsider its ruling in a manner consistent with our findings. B. Interest Rate for Refunds 9. TCI next contends that the City incorrectly established a 7% interest rate on the refunds required by its local rate order. The 7% rate represents the IRS overpayment rate. TCI argues that our rules mandate the applicable interest rate in such circumstances is the IRS rate for tax refunds, which in this instance is 6.0%. We agree with TCI. Our rules explicitly state that interest on subscriber refunds shall be computed at the applicable published IRS rate for tax refunds and additional tax payments. In this instance, as the parties agree, the interest rate for tax refunds is 6.0%. This issue is therefore remanded to the City for further proceedings consistent with this order. C. Nonregulated Equipment 10. TCI next contends that the City improperly set rates for certain equipment that TCI claims is nonregulated. Specifically, the City established rates for A/B switches and for equipment to receive DMX (a music service) and FM radio services provided by TCI through its cable system. TCI argues that this equipment is not properly subject to regulation by the City because it is used by subscribers only to receive off-the-air broadcast and radio signals and not used for the reception of its basic tier service. 11. Under the Commission's rules, rates for equipment that is used to receive basic service are regulated. Regulated equipment ". . . consists of all the equipment in a subscriber's home that is used to receive the basic tier. . . . Such equipment shall include, but is not limited to: (1) converter boxes; (2) remote control units; (3) connections for additional television receivers; and (4) other cable home wiring." This list of equipment is not intended to be an exhaustive list of all possible types of regulated equipment, but all such equipment, at a minimum, "must be used to receive the basic service tier." While the Commission has interpreted the phrase "equipment used to receive the basic service tier" broadly so as to comport with Congressional intent, the switches and equipment at issue are simply not used to receive cable service. A/B switches are used by subscribers to switch off cable service and to receive, instead, off-the-air broadcast signals. The switches are used only by cable subscribers who choose not to watch cable programming. We note also that the switches are available from other sources. Not only are the A/B switches not "used to receive the basic service tier," but competitive sources for such switches exist through which subscribers may obtain them. The audio equipment is used only by cable subscribers who choose to receive music and radio services from their cable operator and not for reception of basic service. Accordingly, we conclude the City's determination that A/B switches and equipment used to receive audio services constitute regulated equipment is unreasonable and we remand the City's decision regarding the regulation of A/B switches and audio equipment for further proceedings consistent with this ruling. III. ORDERING CLAUSE 9. Accordingly, IT IS ORDERED that TCI Cablevision's appeal of The City of Boulder's local Rate Order IS REMANDED to the local franchising authority for resolution in accordance with the terms of this Order. 10. This action is taken by the Chief, Cable Services Bureau, pursuant to authority delegated by Section 0.321 of the Commission's rules. 47 C.F.R.  0.321. FEDERAL COMMUNICATIONS COMMISSION Meredith J. Jones Chief, Cable Services Bureau FOR FCC RECORD ONLY $/ORDER remanding local rate order of Boulder, CO, DA94- /$ $/76.922 Basic Tier Rates/$ $/76.942 Refunds/$ $/76.944 Commission Review of Franchising Authority Rate Decision/$