FOR RECORD ONLY $//Appeal ORDER, in the State of New Jersey, DA 95-25 //$ $/76.922 Rates for the basic service tier/$ $/76.944 Commission Review of Franchising Authority Decision/$ $/1.45(d) Request for Stay/$ Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matter of: ) DA 95-25 ) TCI OF NORTHERN ) NEW JERSEY ) ) Appeal of Local ) Rate Orders of State of New Jersey ) Board of Public Utilities ) MEMORANDUM OPINION AND ORDER Adopted: January 9, 1995 Released: January 10, 1995 By the Chief, Cable Services Bureau: I. INTRODUCTION 1. TCI of Northern New Jersey ("TCI"), the franchisee in the above matter, filed on August 24, 1994 an Appeal of a local cable Rate Order adopted on July 7, 1994 by its franchising authority, the New Jersey Board of Public Utilities ("the Board"). The Board submitted an Opposition to the Appeal on September 2, 1994. The Rate Order establishes a new regulated rate schedule for TCI's basic service tier rates and associated equipment. Specifically, the Board's Rate Order requires TCI to implement certain rate reductions and to issue refunds to subscribers, dating back to September 1, 1993. 2. TCI alleges that the Board approved the lower of TCI's maximum permitted rates and its actual rates for each of its regulated services, rather than allowing TCI to charge its maximum permitted rates for each category of regulated service. TCI argues that because of this misapplication of the Commission's rate regulations, the Board has improperly reduced TCI's regulated revenues by setting some of its rates 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 also argues that the Board inappropriately set its rates for A/B switches and VCR installations. TCI asserts that the rates charged for the provision of A/B switches and the installation of VCRs lie outside the purview of local rate regulation. The Board, in its Opposition, states that it reasonably applied the Commission's rules in ordering a refund that did not authorize a balancing of past overcharges and undercharges. The Board argues that no mechanism exists to provide the offsetting approach requested by TCI. The Board also argues that A/B switches and the installation of VCRs should be subject to rate regulation. The Board contends that A/B switches should be regulated because a subscriber has no need for an A/B switch unless that subscriber also receives basic service. The Board also contends that VCR installations are essentially the same as the connection of televisions to the basic service tier and should, similarly, be regulated. 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 the 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. 4. FCC Form 393 is the official form used by regulators to determine whether an operator's regulated rates for programming, equipment and installations 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 permitted programming rates, while in Part III, the operator calculates its 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. A. Calculation of Maximum Permitted Rate Levels 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 Form 393. Equipment rates are derived from capital and maintenance costs per unit of equipment. Installation rates are derived from calculation of an hourly service charge and application of that charge to different types of installations. Under our regulations, maximum permitted rates for programming, equipment and installation 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 installations 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 Board 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 Board 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 in relation to past overcharges. A refund liability may be imposed by the franchising authority when an operator's actual charges exceed their maximum permitted levels during the applicable period of review. If an operator's aggregate revenues computed from its actual rates exceed 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 exceed 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 rates below maximum permitted levels. Further, the City must offset or reduce any refunds it may order by the difference between the actual equipment 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 enter a ruling consistent with these findings. B. A/B Switches 9. In response to TCI's second argument concerning the regulation of A/B switches that are used to receive off-the-air broadcast signals, we have previously held that such switches are not devices directly related to the delivery of basic cable service and therefore their price should remain unregulated. Regulated equipment consists of equipment in the subscriber's home that is used to receive regulated cable service. The A/B switches at issue are used by subscribers to switch off cable services and to receive, instead, off-the-air broadcast signals. The switches are used only by cable subscribers who choose not to watch cable programming. Since the switches are not "equipment used by subscribers to receive the basic service tier" within the meaning of Section 3(b)(3) of the 1992 Cable Act, their price is not subject to regulation. C. VCR Installations 10. We disagree with TCI that the regulatory treatment accorded to A/B switches should be accorded to VCR installations as well. TCI had established two different charges to install a subscriber's VCR by connecting the VCR to the subscriber's cable service. One charge applied to the operator's installation of the VCR during the subscriber's initial installation of cable service. A second, and higher, charge applied to the operator's installation of the subscriber's VCR if a separate trip by the cable technician were required. The 1992 Cable Act directed us to establish rate standards for "installation and lease of equipment used to receive the basic service tier. Our rules provide that regulated equipment consists of all equipment in a subscriber's home used to receive basic service. Rates for installation of such equipment must be based on actual costs and must be "unbundled" or priced separately. When basic service is installed through a subscriber's VCR, the VCR is used "to receive the basic service tier." Since VCRs are, indeed, used "to receive the basic service tier," TCI's charges for VCR installations are subject to our rate regulations. Those charges must comport with the actual cost standard of our rules. 11. Accordingly, IT IS ORDERED that TCI of Northern New Jersey's appeal of the New Jersey Board of Public Utilities' local Rate Order, regarding the issue of TCI's permitted charges for converter boxes and remote controls is REMANDED to the local franchising authority for resolution in accordance with the terms of this Order. 12. IT IS FURTHER ORDERED that TCI of Northern New Jersey's appeal of the New Jersey Board of Public Utilities' local Rate Order, regarding the regulatory status of TCI's A/B switches is REMANDED to the local franchising authority for resolution in accordance with the terms of this Order. 13. IT IS FURTHER ORDERED that TCI of Northern New Jersey's appeal of the New Jersey Board of Public Utilities' local Rate Order, regarding the regulatory status of TCI's VCR installations is DENIED. 14. 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