FOR FCC RECORD ONLY $//Harron Communications Corp., State of Michigan, MO&O, DA 95-546//$ $/76.922 Rates for Cable Programming Service tiers/$ $/benchmark cable rates/$ Before the Federal Communications Commission Washington, D.C. DA 95-546 In the Matter of ) ) Harron Communications Corp. ) CUID Nos. MI0065, MI0540, MI0549, State of Michigan ) MI0626, MI0789, MI1052, ) MI1055, MI1793 Benchmark Filings To Support ) Cable Programming Service Prices ) Memorandum Opinion and Order Adopted: March 20, 1995 Released: March 22, 1995 By the Chief, Cable Services Bureau: Introduction 1. Here we consider complaints about the prices Harron Communications Corp. ("Harron") was charging for its cable programming service ("CPS") tier in the communities designated by the CUID numbers referenced above in the State of Michigan. Harron has chosen to attempt to justify its prices through benchmark showings on FCC Form 393. This Order addresses the reasonableness of Harron's prices only through May 14, 1994. At a later date we will issue a separate order addressing the reasonableness of the prices after that date. 2. Under the Cable Television Consumer Protection and Competition Act of 1992, and our rules implementing it, 47 C.F.R. Part 76, Subpart N, the Commission must review CPS prices upon the filing of a valid complaint. The filing of a valid complaint triggers an obligation on behalf of the cable operator to file a justification of its CPS prices. Under our rules, an operator may attempt to justify its prices through either a benchmark showing or a cost-of-service showing. In either case, the operator has the burden of demonstrating that its CPS prices are not unreasonable. 3. The Commission's original rate regulations took effect on September 1, 1993. The Commission subsequently revised its rate regulations effective May 15, 1994. Operators with valid CPS complaints filed against them prior to May 15, 1994 must demonstrate that their CPS prices were in compliance with the Commission's initial rules from the time the complaint was filed through May 14, 1994, and that their prices were in compliance with the revised rules from May 15, 1994 forward. Operators attempting to justify their prices for the period prior to May 15, 1994 through a benchmark showing must complete and file FCC Form 393. Generally, to justify their prices for the period beginning May 15, 1994 through a benchmark showing, operators must use the FCC Form 1200 series. Procedural Matters 4. The first complete and timely CPS complaints in the franchise areas addressed in this Order were completed and served on Harron and received by the Commission on the dates set forth in Appendix A. 5. Harron filed its initial FCC Forms 393 for the franchise areas addressed in this Order on November 15, 1993. Harron amended its justification on July 14, 1994, in response to a Cable Services Bureau Order citing common deficiencies observed in benchmark filings generally. Harron further amended its justification on February 17, 1995, in response to a Commission letter which requested further clarification of Harron's showing. Harron submitted additional information for all areas on February 7, 1995 in response to a Cable Services Bureau Public Notice offering operators the opportunity to make optional supplemental filings. 6. Harrison Township, one of the complainants in CUID No. MI0540, filed a response to Harron's answer on December 7, 1993, claiming that Harron's package offering of a la carte channels (1) is subject to rate regulation and (2) violates the negative option billing provision of the Commission's rules, 47 C.F.R.  76.981. The City of St. Clair, one of the complainants in CUID No. MI0549, filed an amended complaint on June 27, 1994, making similar arguments. Harron filed a motion to dismiss the amended complaint on July 20, 1994. Preliminary Matters 7. On September 1, 1993, Harron restructured its service offerings by removing three channels from its CPS tier and offering those channels on an a la carte basis either individually or as a package. In a recent order resolving a letter of inquiry addressed to Cablevision Industries ("CVI"), we found that CVI's similar offering in Wake Forest, North Carolina was not subject to rate regulation. Relying on the Commission's Going Forward Order, we found that CVI's restructured service offering did not constitute a clear evasion of our rate rules. We therefore permitted CVI to treat its a la carte package as a new product tier that may be priced at market level under the Going Forward Order. We apply the same principle to Harron's offering here, and we therefore find that Harron's a la carte package is not subject to rate regulation under Section 76.922 of the Commission's Rules. 8. With regard to negative option billing, we have found in previous decisions that cable operators did not violate the statutory and regulatory prohibitions against negative option billing when they created a la carte packages on or near the effective date of the Commission's rate regulations and automatically subscribed to those packages all customers who previously received the subject channels. There is no evidence in the record that Harron's practices differed in any relevant respect from the facts in those cases. We therefore find that Harron has not engaged in prohibited negative option billing, and we shall dismiss the City of St. Clair's amended complaint. Discussion 9. Harron asserts that its monthly CPS tier prices are justified by its benchmark filings because its prices are equal to or lower than the maximum permitted charges, as calculated in the filings. Upon review of Harron's Form 393 filings, we have found that Harron has not correctly calculated its maximum permitted prices, and it is therefore appropriate to make the following adjustments to Harron's calculations in Form 393: a. In its Form 393 filings, Harron's calculations for its rate-regulated package as of the initial date of regulation (Form 393, Part II, Worksheet 1 and Form 393, Part I) count Channel 54 as a regulated satellite channel on the CPS tier. However, according to the channel line-ups included with Harron's responses to complaints, Channel 54, the Global Network, is available only in Port Huron, CUID No. MI0065. Therefore, for all areas other than CUID No. MI0065, we reduce the number of satellite channels used in calculating the benchmark on Form 393, Part II, Worksheet 1, Line 121 from 29 to 28 and reduce the number of total regulated channels used to calculate the benchmark on Form 393, Part II, Worksheet 1, Line 121 from 41 to 40. We also reduce the number of channels in the CPS tier on Form 393, Part II, Worksheet 1, Line 102 and Form 393, Part I, from 29 to 28. These adjustments have the net effect of increasing the benchmark channel rate entered on Line 121 of Worksheet 1 and reducing the number of channels used to calculate the maximum permitted rate in Part I. b. In its Form 393 filings, Part I, for Port Huron, Michigan, CUID No. MI0065, Harron sets forth $15.95 as its current rate for the cable programming service tier excluding franchise fees, and for all of the other franchise areas which are the subject of this Order, Harron sets forth $15.40 as its current rate for the cable programming service tier excluding franchise fees. However, on Worksheet 1 of Part II, Harron sets forth $10.91 as its monthly charge for the CPS tier for Port Huron, Michigan, CUID No. MI0065, and $10.95 as its monthly charge for the CPS tier for all other franchise areas which are the subject of this Order. The rates set forth in Part I are consistent with the charges which appear on Harron's rate cards for these franchise areas. Therefore, we have adjusted Harron's Forms 393 to reflect a charge of $15.95 for the CPS tier in Port Huron, Michigan, CUID No. MI0065, and $15.40 for the other franchise areas which are the subject of this Order. This adjustment increases the base rate per channel on Worksheet 1. c. In Column G of Schedules A and C of Part III of its FCC Form 393, Harron did not report any income tax expense. Harron is a Subchapter C corporation and is therefore required to pay corporate income tax. By omitting its tax entries in Column G, an operator reduces its effective rate of return on equipment and installations and thereby could increase its CPS price. We therefore calculate Harron's federal income tax allowance on Column G of Schedules A and C on the basis of a 35% corporate tax rate. Furthermore, the Commission has stated that tax- paying business entities must gross-up their tax entries in Column G of Schedules A and C (i.e., calculate the tax as a percentage of return on investment plus tax). In accordance with this principle, we recalculate Column G of Schedules A and C (and subsequent steps) using a grossed-up federal income tax rate of 53.85% of Harron's return on investment. d. In its Form 393 filings of February 7, 1995, Harron incorrectly calculated the Inflation Adjustment Factor (Form 393, Part II, Worksheet 1, Line 127, and Form 393, Part II, Worksheet 4, Line 401). Lines 122 and 125 of Form 393 require the operator to enter Gross National Product Price Index ("GNP-PI") data for the latest quarter for which data is available that ended before the date through which the Inflation Adjustment Factor is calculated. On its most recent Forms 393, Harron calculated the Inflation Adjustment Factor through October 1993. However, Harron completed Lines 122 and 125 using updated GNP-PI data for the first quarter of 1993, rather than the third quarter of 1993. Harron's calculation of the Inflation Adjustment Factor is therefore incorrect. e. We must therefore recalculate the Inflation Adjustment Factor on the basis of the most accurate data currently available for the date for which Harron filed Form 393. On its most recent Forms 393, Harron entered 13 months on Line 124, indicating that its filing was as of the end of October 1993. On July 29, 1994, the Department of Commerce released corrected inflation data including GNP-PI figures of 122.3 for the third quarter of 1992 and 125.7 for the third quarter of 1993. Using these GNP-PI figures, we calculate an Inflation Adjustment Factor of 1.030 through October 1993. 10. Because of these errors, we conclude that Harron has failed to demonstrate that its prices for the CPS tier were not unreasonable. We will therefore set prices for this tier, incorporating the adjustments discussed above. These adjustments have the effect of reducing the maximum permitted monthly CPS tier price for CUID No. MI0065 from $15.95 to $15.81 and for the other franchise areas which are the subject of this Order from $15.40 to $14.97. Conclusions 11. Upon review of the record herein, we conclude that Harron's showing supports maximum reasonable CPS tier prices of $15.81 (plus franchise fee) for CUID No. MI0065 and $14.97 (plus franchise fee) for the other franchise areas which are the subject of this Order for the period from the filing of the earliest complaint in each franchise area (as set forth on Appendix A) to May 14, 1994. We further determine that we will order appropriate refunds pursuant to Section 76.957 of the Commission's Rules, 47 C.F.R.  76.957, in order to reimburse subscribers for the amount they paid in excess of a reasonable price. 12. We further conclude that Harron must reflect in its FCC Form 1200 rate filings for the period after May 14, 1994 the fact that Harron's prices during the earlier period were unreasonable. We reserve the right to make further adjustments to Harron's prices for the period after May 14, 1994, upon completion of our review of Harron's FCC Form 1200 rate filings. 13. We further conclude that Harron has submitted in good faith timely optional supplemental filings in response to our Public Notice. We will relieve Harron of its obligation to obtain advance Commission approval of adjustments to its CPS prices for one year following the release of this Order. 14. Accordingly, IT IS ORDERED, pursuant to Section 0.321 of the Commission's Rules, 47 C.F.R.  0.321, that the July 20, 1994 motion to dismiss filed by Harron Communications Corp. against the amended complaint filed on June 27, 1994 by the City of St. Clair IS GRANTED. 15. IT IS FURTHER ORDERED that the amended complaint filed on June 27, 1994 by the City of St. Clair IS DISMISSED. 16. IT IS FURTHER ORDERED that the complaints referred to in Appendix A against the cable programming service prices charged by Harron Communications Corp. in the City of Port Huron, Michigan, CUID No. MI0065; the Charter Township of Harrison, Michigan, CUID No. MI0540; the City of St. Clair, Michigan, CUID No. MI0549; the City of Memphis, Michigan, CUID No. MI0626; the City of Richmond, Michigan, CUID No. MI0789; Richmond Township, Michigan, CUID No. MI1052; the Village of Armada, Michigan, CUID No. MI1055; and Casco Township, Michigan, CUID No. MI1793, and all other complaints in these franchise areas related to the same prices, ARE GRANTED TO THE EXTENT INDICATED HEREIN. 17. IT IS FURTHER ORDERED that the benchmark filings submitted by Harron Communications Corp. with respect to the City of Port Huron, Michigan, CUID No. MI0065; the Charter Township of Harrison, Michigan, CUID No. MI0540; the City of St. Clair, Michigan, CUID No. MI0549; the City of Memphis, Michigan, CUID No. MI0626; the City of Richmond, Michigan, CUID No. MI0789; Richmond Township, Michigan, CUID No. MI1052; the Village of Armada, Michigan, CUID No. MI1055; and Casco Township, Michigan, CUID No. MI1793, for the period beginning with the filing of the first valid complaint in each franchise area (as set forth in Appendix A) and ending on May 14, 1994 justify the maximum price of $15.81 (plus franchise fee) in the City of Port Huron, Michigan, CUID No. MI0065 and the maximum price of $14.97 (plus franchise fee) in each other franchise area for Harron Communications Corp.'s cable programming service tier. 18. IT IS FURTHER ORDERED, pursuant to Section 76.961 of the Commission's Rules, 47 C.F.R.  76.961, that Harron Communications Corp. shall refund to subscribers that portion of the amounts paid for cable programming service for the period from the filing of the first valid complaint in each franchise area (as set forth on Appendix A) to May 14, 1994 which exceeded $15.81 (plus franchise fee) per month in the City of Port Huron, Michigan, CUID No. MI0065, and exceeded $14.97 (plus franchise fee) per month in each other franchise area which is the subject of this Order and was thus unreasonable, plus interest to the date of the refund. 19. IT IS FURTHER ORDERED that Harron Communications Corp. shall promptly determine the overcharges to CPS subscribers for the stated periods, and shall within 30 days of the release of this Order file a report with the Chief, Cable Services Bureau, stating the cumulative refund amount so determined (including franchise fees and interest), describing the calculation thereof, and describing its plan to implement the refund within 60 days of Commission approval thereof. 20. IT IS FURTHER ORDERED, pursuant to Section 76.922(b)(4)(C) of the Commission's rules, 47 C.F.R.  76.922(b)(4)(C), that Harron Communications Corp. shall, within 30 days of the release of this Order, revise its Form 1200 filings with respect to the City of Port Huron, Michigan, CUID No. MI0065; the Charter Township of Harrison, Michigan, CUID No. MI0540; the City of St. Clair, Michigan, CUID No. MI0549; the City of Memphis, Michigan, CUID No. MI0626; the City of Richmond, Michigan, CUID No. MI0789; Richmond Township, Michigan, CUID No. MI1052; the Village of Armada, Michigan, CUID No. MI1055; and Casco Township, Michigan, CUID No. MI1789, for the period beginning May 15, 1994, to reduce the monthly charge per tier as of March 31, 1994 for Tier 2 (Line A6b) to equal $15.81 (plus franchise fee) for the City of Port Huron, Michigan, CUID No. MI0065, and to equal $14.97 (plus franchise fee) for each other franchise area which is the subject of this Order. 21. IT IS FURTHER ORDERED that Harron Communications Corp. shall place into effect, within 30 days after its submission of the revised Form 1200 filings required above, prices that reflect the reductions in the CPS rates determined in this Order. 22. IT IS FURTHER ORDERED, pursuant to Section 76.960 of the Commission's rules, 47 C.F.R.  76.960, that Harron Communications Corp. shall not be required to obtain advance approval of adjustments to its CPS prices in the franchise areas addressed herein for one year following the release of this Order. FEDERAL COMMUNICATIONS COMMISSION Meredith J. Jones Chief, Cable Services Bureau Appendix A CUID No. Date First Complaint Date Complaint Filed with FCC Served 0065 10/15/93 10/12/93 0540 10/27/93 10/6/93 0549 10/13/93 10/6/93 0626 2/8/94 1/20/94 0789 10/25/93 10/20/93 1052 10/12/93 10/6/93 1055 10/13/93 10/6/93 1793 10/29/93 10/25/93