FOR RECORD ONLY $//Appeal ORDER in Fairfax, VA, et al, DA 95-201//$ $/76.923 Rates for equipment and installation/$ $/76.944 Commission Review of Franchising Authority Decisions/$ $/1.45(d)Request for Stay/$ Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 DA 95-201 In the Matter of ) Fairfax County, VA ) Fairfax, VA MEDIA GENERAL CABLE OF ) Falls Church, VA FAIRFAX COUNTY, INC. ) Herndon, VA ) Vienna, VA Appeal of Local Cable Rate Ordinances ) ) Request for Stay ) of Local Cable Rate Ordinances ) CONSOLIDATED ORDER Adopted: February 9, 1995 Released: February 10, 1995 By the Chief, Cable Services Bureau: I. Introduction 1. Media General Cable of Fairfax County, Inc. ("MGC"), filed on November 3, 1994 an Appeal ("Appeal") of an Emergency Ordinance, which was adopted by Fairfax County, Virginia ("County") on October 10, 1994. On November 3, 1994, MGC also filed a Request for Stay of the Emergency Ordinance pending resolution of its Appeal. 2. The County coordinated its cable rate regulation efforts with the following jurisdictions in which MGC provides cable television service: City of Fairfax, Va.; City of Falls Church, Va.; Town of Herndon, Va.; and Town of Vienna, Va. All five of the above- captioned jurisdictions (collectively, "Communities") adopted the analysis performed by a consultant employed to analyze MGC's rates. All of the jurisdictions adopted virtually identical ordinances ("Ordinances") setting rates for MGC's basic service tier and associated equipment and installations. Accordingly, in its Appeal, MGC requested that the Commission consolidate all of the Ordinances for review in this proceeding. In the interest of administrative efficiency, the Commission will consolidate all of the Communities' Ordinances for review in the instant proceeding and this Consolidated Order is applicable to all of the Communities captioned above. 3. In the Ordinances, the Communities approved MGC's basic service tier rates, but recalculated and reduced MGC's regulated rates for its equipment and installations, pursuant to the Cable Television Consumer Protection and Competition Act of 1992 ("Cable Act of 1992"). The Communities also ordered MGC to issue refunds or credits to subscribers for those charges collected prior to July 14, 1994, which were in excess of MGC's maximum permitted equipment and installation rates. 4. In its Appeal, MGC challenges only those portions of the Ordinances in which the Communities ordered MGC to refund all equipment and installation overcharges prior to July 14, 1994. MGC submits that it properly calculated its equipment and installation charges and that the Communities' recalculations are in error. Accordingly, MGC requests that the Commission overturn those portions of the Ordinances which order MGC to refund all equipment and installation overcharges prior to July 14, 1994. II. Standard of Review 5. Under the Commission's rules, appeals of franchising authorities' local rate orders are reviewed by the Commission. In ruling on an appeal of a local rate order, 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 a 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. III. Discussion 6. In order to justify its rates for the basic service tier, MGC submitted a cost of service filing to the Communities. Although the Commission determined that a benchmark and price cap approach should serve as the primary method for regulating basic service tier and cable programming service tier rates, the Commission also concluded that because the benchmark methodology might not produce fully compensatory rates in all cases, it was appropriate to permit operators, as an alternative, to justify rates based on costs, using individual cost of service showings. The cost of service approach was intended to be used only if an operator believed that the maximum permitted rate under the benchmark formula would not enable the operator to recover costs reasonably incurred in providing rate regulated cable services. 7. Although MGC submitted a cost of service filing to the Communities, the sole issue raised in MGC's Appeal involves the calculation of its equipment and installation rates on FCC Form 393. Because equipment and installation rates are subject to regulation on an actual cost basis in both benchmark and cost-of-service proceedings, an operator's maximum permitted equipment and installation rates would be the same under both methodologies. FCC Form 393 is the official form used by cable operators to determine whether their regulated rates for programming, equipment and installations are reasonable. FCC Form 393 is divided into three (3) 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 under review. Maximum permitted rates for equipment and installation are based on actual cost and are calculated in Part III of FCC Form 393. 8. In Schedules A, B, C and D of Part III, an operator calculates (1) the capital costs of leased customer equipment; (2) the capital costs associated with service installations and the maintenance of customer equipment; (3) the annual operating expenses for installations and maintenance of equipment; and (4) the average installation charges for the various types of installations which the operator performs. As part of an operator's calculation of its annual capital costs (for both its customer equipment and for items associated with the installation of cable service and the maintenance of customer equipment), the operator must include in Schedules A and C any "federal and state income taxes payable by the cable entity." The operator then adds these income tax obligations to (1) its return on investment; and (2) its annual depreciation expense to determine its total capital costs. Therefore, the higher an operator's state and federal income tax liability, the higher its annual capital costs, which is one of the bases upon which an operator determines its maximum permitted equipment charges in Steps C, D and E of Part III of FCC Form 393. The higher an operator's capital costs, the higher its maximum permitted equipment and installation rates. 9. The Communities contend that the amount of income taxes MGC included in its equipment and installation rates in Schedules A and C of Part III of FCC Form 393 was overstated. It is the Communities' position that because MGC did not adjust its income tax figures in Schedules A and C to reflect the deductibility of interest expenses from any state and federal income taxes owing or paid, the amount of income tax included in its equipment and installation rates was inflated, thereby causing its equipment and installation rates to be artificially high. The Communities contend that MGC should not be permitted to assess a rate based upon expenses which it had not actually incurred or prudently should not have incurred. MGC does not dispute that interest is an expense that is deductible for purposes of computing income tax obligations. Rather, MGC contends that it relied upon the instructions accompanying the Commission's Form 393, which do not require a deduction for interest expenses. The Communities rebut MGC's argument by contending that MGC should have read FCC Form 393 to assume the obvious principle of the tax deductibility of interest expenses when it calculated its income tax obligations on Schedules A and C of FCC Form 393. 10. MGC also advances what it terms an "analytically discrete" reason why it should not be required to refund its alleged equipment and installation overcharges. MGC claims that the Communities' consultant's report states that MGC could have charged its subscribers up to an additional $3.5 million per year for basic tier service. Thus, MGC claims that had it been adequately advised as to what was required in the FCC Form 393 equipment and installation calculations, it would have increased slightly its basic service rates in order to keep revenues at the level that management decided were required. The Communities effectively rebut this argument by pointing out that MGC had the opportunity to make this precise adjustment beginning July 15, 1994, when it began deducting interest expenses from its total income tax obligation in its equipment and installation calculations on FCC Form 1205. MGC declined to do so. 11. As noted in paragraph 5, supra, the Commission will sustain a franchising authority's decision as long as there is a reasonable basis for that decision. After a careful review of the record in the instant proceeding, and given the well-known principle of the tax deductibility of certain interest expenses, we find that the Communities' Ordinances are based upon a reasonable interpretation and application of the Commission's rules and forms. Accordingly, we deny MGC's Appeal. IV. Ordering Clauses 12. Accordingly, IT IS ORDERED that the Appeal filed by Media General Cable of Fairfax County, Inc. is DENIED. 13. IT IS FURTHER ORDERED that, in light of the resolution of its Appeal herein, the Request for Stay filed by Media General Cable of Fairfax County, Inc. IS DISMISSED as moot. 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 10. Neither the FCC Form 393, its accompanying instructions, nor the Commission's rules specifically provide that cable operators must deduct interest expenses when calculating their income tax obligations. It was, therefore, reasonable for MGC to assume that, in the absence of any such directive from the Commission, it was not required to deduct its interest expenses from its income tax calculations on Schedules A and C of FCC Form 393. Accordingly, we find that the Communities' decision to order MGC to refund equipment and installation overcharges based upon MGC's failure to deduct interest expenses from its income tax calculations was unreasonable. In order to comply with the requirements of FCC Form 393, the Communities must recalculate MGC's maximum permitted equipment and installation rates without deducting interest expenses from MGC's income tax calculations in Column G of Schedules A and C, and modify their Ordinances accordingly.