Before The Federal Communications Commission Washington, D.C. 20554 DA 95-160 In the Matter of ) Abington, MA 0225 ) Bourne, MA 0247 HARRON COMMUNICATIONS CORP., ) Halifax, MA 0229 ) Pembroke, MA 0228 Petitioner,) Plympton, MA 0245 ) Rockland, MA 0224 v. ) Sandwich, MA 0246 ) COMMONWEALTH OF MASSACHUSETTS ) COMMUNITY ANTENNA TELEVISION ) COMMISSION, ) ) Respondent. ) ) Appeal of Enforcement of ) Local Rate Orders ) CONSOLIDATED ORDER Adopted: February 6, 1995; Released: February 7, 1995 By the Chief, Cable Services Bureau: I. Introduction 1. Harron Communications Corp. ("Harron"), the franchisee in the above-referenced matter, filed on June 20, 1994 a Consolidated Appeal and Request for Stay of the local rate orders adopted May 20, 1994 by its franchising authority, the Commonwealth of Massachusetts Community Antenna Television Commission ("CATC"). In the local rate orders, CATC established regulated rates for basic cable service and associated equipment as required by the Cable Television Consumer Protection and Competition Act of 1992 ("1992 Cable Act"). Harron seeks a stay of the local rate orders pending Commission resolution of its appeal on the merits. CATC opposes the request for stay as well as the appeal on the merits. In this consolidated order, we decide the merits of the appeals and therefore dismiss the request for stay as moot. 2. Under our rules, rate orders adopted by local franchising authorities ("LFAs") may be appealed to the Commission. In ruling on appeals of local rate orders, the Commission does not conduct a de novo review, but instead will sustain the LFA's order as long as there is a reasonable basis for its decision. The Commission will therefore reverse a LFA's decision only if it is determined that the LFA acted unreasonably in applying the commission's rules in rendering its local rate order. If the Commission reverses a LFA's decision, it will not substitute its own decision, but will instead remand the issue to the LFA with instructions for its resolution. II. Discussion 3. Harron's appeal rests on the treatment of various items in its FCC Form 393 filing by CATC. 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 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. 4. 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 calculation of an 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. 5. Virtually all of the issues Harron raises on appeal relate to the determination of proper costs and labor hours for completion of FCC Form 393. These include: (1) CATC's calculation of Harron's Hourly Service Charge ("HSC"); (2) CATC's allocation of Harron's customer equipment maintenance and installation costs; (3) the allocation of Harron's supply expense costs; (4) the allocation of its salary and benefit expenses; (5) the allocation of its utility expenses; (6) the allocation of its drop material expenses; (7) CATC's calculation of Harron's converter repair hours; (8) and CATC's calculation of Harron's refund lability. We consider each of these issues in turn. Harron also questions the authority of local franchising authorities ("LFAs") to require refunds. We have responded to that argument previously and have established rules which authorize the local franchising authority to order refunds for unreasonable basic service tier rates. We will not revisit that issue here. A. Hourly Service Charge 6. Harron first asserts that CATC improperly inflated Harron's HSC, in Part III of its FCC Form 393, by decreasing the total number of labor hours for maintenance and installation of customer equipment. The HSC is designed to recover the costs of service installation and maintenance of customer equipment. In calculating its original HSC, Harron included both direct and indirect costs on Line 3, Step A and also direct and indirect hours related to service of regulated equipment and installation activities on Line 4, Step A. In recalculating Harron's Form 393, CATC entered the applicable direct and indirect costs on Line 3, but only the hours directly associated with service and installation on Line 4 of Step A. This resulted in a higher HSC because the total costs entered on Line 3 were divided by a smaller number of hours. Similarly, CATC excluded indirect hours from the calculation of installation rates on schedule D, and from the calculation charges for remotes and converters in Steps C and D, Lines 9 and 16. 7. Commission rules state that indirect costs must be included, as both CATC and Harron did, in the equipment basket calculation. Harron only disagrees with CATC's exclusion of the associated indirect hours in the calculation on Line 4, Step A, and claims that both direct and indirect hours should have been included for the calculation to be complete. In fact, the inclusion or exclusion of indirect hours, if properly done, should not affect an operator's total recovery, although it may affect the exact prices charged for installations and equipment. Line 3 of Step A reports the total costs, excluding the capital costs for leased customer equipment, that the operator will recover through equipment and installation charges. These costs are allocated among different equipment and installation charges in the remainder of Step A, Schedule D, and Steps B through F. If indirect hours are consistently excluded in these calculations, as CATC did, the HSC will be higher, but the number of hours over which the HSC is charged will be lower. So long as the total number of hours underlying Schedule D and Steps C through F is the same as the number of hours entered on Line 4, the operator's total recovery will equal the costs entered on Line 3. 8. CATC ordered Harron to allocate its Line 3 costs among equipment and installation charges by excluding indirect hours throughout the allocation process, rather than by including indirect hours throughout. CATC's treatment of indirect hours in Part III of FCC Form 393 was therefore reasonable and did not harm Harron. B. Equipment Maintenance and Installation 9. Harron next contends that CATC erred by increasing the percentage of costs attributable to customer equipment maintenance and installation in Line 3, Step A (the total annual capital costs and expenses incurred for maintenance of customer equipment and installations) on Harron's FCC Form 393. Line 3, Step A is determined by multiplying Line 1, Step A (annual cost of maintenance and installation of cable facilities and services) by Line 2, Step A (customer equipment and installation percentage). Harron arrived at the Line 2, Step A percentage by dividing the number of person hours performed with respect to regulated services by the number of total work assignments completed by its installation and maintenance staff. In its order, CATC increased this figure. Part of the percentage increase was due to CATC's correction of math errors made by Harron in calculating this figure. For example, Harron obtained the yearly figure by annualizing its productivity data for the first four months of the calendar year. In converting this to annual data, however, Harron multiplied the data covering a period of four months by four instead of three. Harron repeated this error in its service report. The remainder of the increase in the costs percentage figure was due to the addition of regulated work assignments, including relocates, reconnects and reconnects of additional outlets, which CATC concluded Harron should have included, but did not, in its calculations. Harron claims that CATC's action makes an invalid comparison between direct hours spent in connection with regulated activities with the direct and indirect hours spent in connection with allegedly unregulated activities. CATC counters that no comparison took place. Line 2, Step A, CATC continues, allows an operator to establish the cost of its equipment basket, whereas treatment of indirect hours concerns itself with allowing an operator to fully recover its equipment basket costs, which are distinct steps in the equipment calculation process. 10. CATC's correction of Harron's math errors was both proper and reasonable. Furthermore, Commission rules define regulated work assignments as those associated with providing, leasing, installing and maintaining customer premise equipment. CATC's addition of the person hours associated with relocates, reconnects and reconnects of additional outlets was therefore reasonable. C. Supply Expenses 11. Harron next contends that CATC improperly excluded some of its supply expenses from its equipment basket calculations without sufficient explanation. Harron did not, as requested, supply CATC with detailed information explaining or justifying its supply expenses. CATC therefore excluded such categories as head-end electronic repairs and outside engineering consulting because it concluded that Harron had failed to meet its burden of proof by demonstrating that these costs should be included in the equipment basket. 12. When an operator does not respond to the local franchising authority's (LFA) requests for additional, specific information within a reasonable time, then the LFA has no choice but to determine rates for the non-responsive operator on the best information available. Here, CATC excluded some of Harron's supply expenses because Harron failed to meet its burden of proof under our rules by demonstrating the supply expenses should have been included. In this instance, CATC's action was both appropriate and reasonable. D. Salary and Benefit Expenses 13. Harron also disagrees with CATC's revisions to Schedule B of FCC Form 393. Specifically, under Harron's salary and benefit expenses, CATC reduced the portion of the Manager/Supervisor or Plant Manager's salary allocated to expenses for service installation and maintenance of equipment to 25% from the 34.39% figure reported by Harron in its revised Form 393. Harron reported two different salary allocation percentages for these positions, without an explanation or justification for either, on two different FCC Form 393s filed with CATC. CATC therefore did not accept either allocation and instead, revised the figure to reflect the average allocation for such expenses CATC experienced with other operators. 14. CATC's reallocations under Harron's salary and benefit expenses were, in this instance, reasonable. Harron presented inconsistent figures with no justification for either amount. Where an operator is unable to carry its burden by demonstrating that certain figures on its FCC Form 393 form are reasonable, as Harron was unable to do here, then the LFA may revise those figures, basing them on the best information then available to it. E. Utility Expenses 15. Harron also disagrees with CATC's revision of its utility expenses, included in Schedule B of FCC Form 393. As mentioned above, Harron filed two Form 393s with CATC and reported different utility costs on both. In its original filing, Harron submitted a utility percentage of 18.88% related to expenses for service installation and maintenance of equipment and in its revised filing, it submitted a figure of 34.39%. Since Harron did not explain which figure was more accurate and provided no explanation for the revision, CATC weighed both figures and determined that 20% represented a reasonable figure and adjusted Harron's From 393 accordingly. 16. CATC's adjustment of Harron's utilities expenses were, in this instance, reasonable in the same way that CATC's reallocation of Harron's salary and benefit expenses was reasonable. Where an operator is unable to carry its burden of demonstrating that certain figures on its FCC Form 393 form are reasonable, as Harron was unable to do here, then the LFA may revise those figures, basing them on the best information then available to it. F. Drop Material Expenses 17. Harron next contends that CATC improperly increased its drop material expenses for primary installations on Schedule B to reflect 100% of Harron's associated costs. CATC justifies the increase on the basis that Harron did not provide documentation showing that these drop expenses included only those on the customer's side of the demarcation point. CATC reasoned that since Harron included all labor costs associated with an installation in Schedule B that it was appropriate to include all material costs associated with an installation as well. 18. Commission rules direct operators to include in the equipment basket only those costs related to providing and maintaining customer premises equipment on the customer's side of the demarcation point, but allow them to charge for the entire labor cost of the primary installation, not just that portion inside the demarcation point. CATC's decision to include all the material costs associated with the installation was therefore unreasonable. This issue is remanded to CATC with instructions to include only those costs associated with an installation from the demarcation point into the dwelling unit, a figure necessarily less than 100%. G. Contract Converter Repair Hours 19. Harron next objects to the method CATC used to calculate the equivalent number of converter repair labor hours, on Line 4, Step A of FCC Form 393, conducted by an outside vendor. Specifically, Harron contends that CATC improperly concluded that 80% of the reported converter repair costs were attributable to labor costs. Furthermore, Harron claims that CATC improperly estimated the amount Harron spent on converter repair conducted by contract service providers for the communities of Abington and Halifax. Harron did not provide CATC with the hours associated with contract converter repair for any of the communities involved in this proceeding, although it did include expenses for all but two communities, Abington and Halifax. CATC concluded that in order to properly reflect converter repair as a direct cost, both time and expenses need to be included in HSC calculations. CATC then requested Harron to submit a revised filing or additional information that incorporated contract converter repair hours in Line 4, Step A. CATC claims that Harron did not respond to that request. During the course of its rate proceedings, CATC states that it encountered a large number of cases where operators did not include the contract converter repair hours in calculating their HSC, as in this case. The majority of those operators told CATC that they received a bill for contract labor that did not itemize labor or material components of the total bill, but the operators estimated that approximately 20% of such total bills were from material costs with the remaining 80% comprising labor costs. Based on the information provided by other Massachusetts operators, CATC divided 80% of the total cost figure supplied by Harron by a service charge of $25 to arrive at the hours of estimated repair time. These hours were then added to Line 4, Step A and a corresponding change was made to Line 16, Step D. In order to complete these calculations for Abington and Halifax, CATC used contract converter repair expenses from the Bourne/Sandwich system, which Harron did supply, to estimate the amount spent on contract converter repair in Abington and Halifax. Specifically, CATC divided Harron's contract converter repair costs by the total amount spent on equipment and installation activities in the Bourne/Sandwich system to arrive at a contract labor percentage for the two communities. CATC then multiplied the resulting figures by the number that Harron listed as the total amount spent on these services for the Abington and Halifax systems. These figures were then multiplied by 80% and divided by the service charge of $25 to arrive at the hours of estimated repair time for Abington and Halifax. 20. Since instructions to FCC Form 393 state that operators should include the total number of person hours spent on maintenance of customer equipment, CATC did not err by including contract converter repair hours on Line 4, Step A. Moreover, nothing in our rules states that contract labor should be treated differently from in-house labor. The rules state that "total person hours" should be used. Again, since Harron did not provide the information requested, CATC was forced to devise a methodology to estimate the converter repair hours. From its public hearings with Harron and other operators, CATC learned that operators often received a consolidated invoice, that did not itemize labor or material components, from their contractors for converters that are sent out for repairs. Since Harron did not respond to its request for more detailed information, CATC relied on the responses it received from other operators, a majority of which stated that approximately 20% of such invoice totals stemmed from material costs and 80% from labor costs. CATC then used this 80% figure to estimate the contract converter repair labor hours from the cost figure that Harron supplied. In this instance, where Harron did not provide the requested information, CATC's actions were reasonable. Likewise, since Harron did not respond to CATC's requests for information about contract labor expenses for Abington and Halifax, CATC had no choice but to estimate the expenses based on the best information available. CATC's action in this regard appears reasonable as well. H. Refund Liability 21. Finally, Harron asserts that CATC failed to look at the aggregate of equipment and programming rates in determining refund liability. Harron is correct in noting that we allow an operator to reduce any refund liability by allowing an offset between its above- permitted prices and its below-permitted prices. CATC contends, however, that it recognized this principle, but that, contrary to Harron's contention, the resulting rate adjustment may not completely reduce its refund liability. 22. After setting the various maximum 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 LFA may order the operator to 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 Harron should be calculated based on this method. 23. 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, CATC may not order Harron to set its equipment rates below maximum permitted levels. Further, CATC must offset or reduce any refunds it may order by the difference between the actual equipment rates that Harron charged and the maximum permitted rates that it could have charged during the applicable period of review. Upon review, it appears that both Harron's and CATC's contentions regarding refund liability are raised prematurely. In its rate order, CATC merely required Harron to refund to subscribers "that portion of previously paid rates determined . . . to be in excess of the initial permitted rates . . .." Harron should be permitted to calculate its refund liability as discussed above. III. Ordering Clauses 24. Accordingly, IT IS ORDERED that Harron's Consolidated Appeal of CATC's local rate orders in the communities of Abington, Bourne, Halifax, Pembroke, Plympton, Rockland and Sandwich with regard to the local franchising authority's power to order refunds, the hourly service charge, equipment maintenance and installation costs, supply, salary and benefit and utility expenses and contract converter repair hours ARE DENIED. The issue concerning drop material expenses IS REMANDED to the Massachusetts Community Antenna Television Commission for further consideration consistent with this Consolidated Order. The issue concerning refund liability is premature and therefore IS DISMISSED. Harron's Requests for Stays are rendered moot and therefore ARE DISMISSED. 25. This action is taken by the Chief, Cable Services Bureau, pursuant to authority delegated by  0.321 of the Commission's rules. 47 C.F.R.  0.321 (1993). FEDERAL COMMUNICATIONS COMMISSION Meredith J. Jones Chief, Cable Services Bureau