FOR FCC RECORD ONLY $/ORDER remanding local rate order of Cincinnati, Ohio, DA 95-550/$ $/76.922 Basic Tier Rates/$ $/76.933 Franchising Authority Review of basic cable rates and equipment costs/$ $/76.944 Commission Review of Franchising Authority Rate Decision/$ Before The FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matter of ) ) WARNER CABLE COMMUNICATIONS ) DA 95-550 OF CINCINNATI, INC., ) ) Petitioner, ) ) v. ) ) CITY OF CINCINNATI, OHIO, ) ) Respondent. ) ) Appeal of Local Rate Order ) MEMORANDUM OPINION AND ORDER Adopted: March 17, 1995; Released: March 21, 1995 By the Chief, Cable Services Bureau: I. INTRODUCTION 1. On July 1, 1994, Warner Cable Communications of Cincinnati, Inc. ("Warner") filed an appeal of the local rate order, adopted on June 2, 1994, by its franchising authority, the City of Cincinnati, Ohio ("City"). In the local rate order, the City established regulated rates for basic cable service and associated equipment, provided by Warner, as allowed by the Cable Television Consumer Protection and Competition Act of 1992 ("1992 Cable Act"). The local rate order establishes a new schedule of basic service and equipment rates and directs Warner to issue refunds to subscribers for all payments made in excess of the rates set forth in the local order for the period September 1, 1993 through July 14, 1994. The City opposes Warner's appeal. 2. In the local rate order, the City required Warner to calculate its rates on a "community-by-community" basis; replaced the inflation index figure of 121.8 that Warner used in its Form 393 with a more recent, revised figure of 122.5; prevented Warner from counting a local ABC affiliate twice for purposes of calculating its per-channel rate; and disallowed Warner's treatment of its monthly "community service fee" as a franchise fee. Warner contends that those City actions were improper and in violation of our rules. Warner also claims that the procedures used by the City in adopting its local rate order violated the Commission's due process rules. 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. COMMUNITY-BY-COMMUNITY RATE CALCULATION 1. BACKGROUND 4. Warner first claims that the City erred by requiring it to base its FCC Form 393 rate calculations on what the City referred to as a "community-by-community" basis. In preparing its FCC Form 393, Warner computed the rates and charges for its basic service and associated equipment using system-wide data. The pleadings do not clarify what the City meant by requiring data on a "community-by-community" basis, e.g., whether it is referring to areas designated by Community Unit Identification ("CUID") numbers assigned by the Commission, or individual franchise areas, or some other community level area. Warner claims that at the time it set the rates reflected in the FCC Form 393, in the summer of 1993, system-wide data was the best and only information available and that Warner was only recently able to obtain more particularized data at the community level. While Warner states that it used community specific information when preparing its FCC Form 1200, Warner argues that it should not be required to retroactively adjust the rates on its FCC Form 393 to reflect community data because when those rates were set, they were based on the best information then available, which was system-wide data. The City claims that Warner was never given, nor did it request, permission to submit information on a system- wide basis. 2. DISCUSSION 5. The instructions to FCC Form 393 state that "[w]hen completing this form, except where noted, you [the operator] should use data from the community unit involved." The form does indicate, however, that system-wide data may be used if all relevant factors -- program service and equipment rates, channel line-ups and franchise fees -- are identical and if the local franchise authority permits the use of such data. In their pleadings, the parties use several different terms to refer to the form of the data used to calculate Warner's rates (e.g., City specific, franchise specific and community-by-community), but do not define what any of those terms mean. On the basis of the pleadings, we are unable to determine exactly what kind of information Warner actually submitted and what kind of information the City actually used. Therefore, we cannot rule on whether the information submitted conformed with the requirements of the Commission's rules and FCC Form 393. However, unless Warner qualified to use system-wide data under our rules and, in turn, the City gave its permission to Warner to use system-wide data, Warner was obligated to submit its FCC Form 393 on a community-unit basis. We remand this issue to the City for further proceedings consistent with this order. B. CHANNEL COUNT 1. BACKGROUND 6. Warner next contends that the City erred in not allowing it to count the same ABC affiliate twice in establishing its "per-channel" rates. Warner carries the ABC affiliate in question on two separate channels on its system and the programming on those channels is therefore identical. Warner claims that it carries the station on two channels in response to customer demand related to the technical limitations of its system. Warner also contends that not allowing it to count the station twice violates Commission rules which prevent channels from being excluded from per-channel rate calculations because of their content. The City responds that it is not excluding the channel because of its content and that Warner should not be allowed to count the station twice because of its system's technical limitations. 2. DISCUSSION 7. Warner has carried the local ABC affiliate (WKRC-TV, Channel 12) on two different channels, 12 (A-7) and 25 (B-2) since November 1990. Warner claims this is due to the fact that its system is a dual-cable system. Odd numbered channels are carried on one cable, and even numbered channels are carried on the second cable. Two other local network affiliates (CBS and NBC) have odd-numbered off-air channel numbers: channel 9 (WCPO-TV) and channel 5 (WLWT-TV). Warner carries these stations on their off-air channel positions on its cable system. Because of Warner's dual-cable system, subscribers using a direct connection to their VCRs must use an A/B switch to tape programming from the separate cables. Warner claims that subscribers often set their VCRs to tape an ABC program and a program from one of the other broadcast networks in sequence. If a subscriber is not at home, however, he or she cannot switch between the two cables. Due to this technological shortcoming in its system, Warner also carries the ABC affiliate on the odd-numbered cable, where the NBC and CBS affiliates are carried, and claims it does so to facilitate VCR taping between these channels. 8. The record in this proceeding is not sufficient to permit us to determine whether the City acted reasonably in making its findings on this issue below. The record implies that Warner was required to carry the ABC affiliate on its off-air position (12) because of the channel positioning requirements of our must-carry rules, which permit a broadcast license to demand that its station be carried by a cable operator on its off-air channel position under certain circumstances. This requirement, when coupled with the technological limitations of a dual-cable system could have justified counting the ABC channel twice. If such a situation exists here, and if more than a de minimis number of subscribers benefit from the dual carriage, then it could be unreasonable for the City to disallow Warner's double-count of the ABC affiliate. This issue is therefore remanded to the City for further proceedings consistent with this order. C. COMMUNITY SERVICE FEE 1. BACKGROUND 9. Since January, 1990, Warner has been charging subscribers what it refers to as a monthly "community service fee." By charging subscribers this community service fee, Warner claims it is recouping substantial expenses incurred in complying with new obligations imposed by the City when the parties modified their franchise agreement in 1989. From the pleadings and the record below, the expenses appear to be costs associated with providing public, educational and governmental ("PEG") access channels and an institutional network for the City. Warner argues that this fee should be considered a part of its franchise fee which, as an external cost, would allow Warner to continue to charge subscribers for the fee as a separate item on their bills, as it did until the City passed the local rate order at issue here. Warner claims that it did not treat the community service fee as an internal cost (i.e., included in the per-channel rates derived in Worksheets 1 and 2 of Form 393) in deriving its maximum permitted rate for its basic tier service because it had traditionally treated the fee as an external cost. As an external cost, Warner added and itemized the fee on subscribers' bills in the same manner as its franchise fees. In the alternative, Warner argues that if the Commission finds that its community service fee cannot be treated as an external cost, then Warner must be allowed to treat the fee as an internal cost in calculating its per-channel rates on FCC Form 393. The City's rate order did not allow Warner to recover the fee by any means. 10. The City responds by stating that Warner fails to recognize the difference between franchise "requirements," which is what the City asserts the community service fee at issue is, and franchise "fees." Although the 1981 franchise agreement required Warner to establish PEG access and an institutional network, the City argues that the 1989 franchise modification agreement ended that obligation by requiring a lump sum payment from Warner to the City. The City further claims that if Warner prevails on its appeal, Warner would collect revenue twice for the same PEG channels since it would be allowed both to externalize PEG costs when determining original maximum basic service rates and to continue to count PEG channels among the number of basic service channels used to establish maximum rates. 2. DISCUSSION 11. Franchise fees are accorded external cost treatment under our rules. A cable operator's permitted per-channel charges for regulated programming services may be adjusted for changes in external costs, which are defined by the Commission's rules. While our regulations provide that an operator may only adjust its charges to the extent that certain external cost increases exceed the rate of inflation, franchise fees can be fully recovered without regard to the treatment of inflation on Form 393. All other "external" costs must be internalized in an operator's initial rate calculations. Franchise fees are defined in the Communications Act as "any tax, fee, or assessment of any kind imposed by a franchising authority . . . on a cable operator or cable subscriber . . . solely because of their status as such." The same provision of the Communications Act, however, specifically excludes from that definition "payments . . . made by the cable operator . . . for, or in support of, the use of, public, educational, or governmental [PEG] access facilities." The "community service fee" at issue is in the nature of a payment made in support of PEG access facilities, which excludes it from the definition of franchise fee. The distinction is evident on Warner's subscriber bills, where it separately itemizes the franchise and "community service fee," thus recognizing the separate identity of each. Therefore, the "community service fee" is not entitled to external cost treatment. 12. In the alternative, Warner argues that if the community access fee is not considered a part of its franchise fee, then the fee should be included in its rate calculations on Form 393. Our regulations provide that the operator may adjust its permitted per channel charges for regulated programming services to the extent that certain external cost increases exceed the rate of inflation. Among those costs are payments to local franchising authorities for PEG access. Except in the case of franchise fees, however, the operator should include these external costs in its initial rate calculations on FCC Form 393. PEG access fees and external costs other than franchise fees should be included in the per-channel rates calculated in Worksheets 1 and 2 of a cable operator's FCC Form 393. Thereafter, any future changes in external costs greater than the rate of inflation should be allowed as adjustments to an operator's permitted charges. Adjustments to Warner's permitted charges should be made according to the Commission's rules for the treatment of external costs. Warner may not bill for the costs separately as it is currently doing. This issue is therefore remanded to the City for further proceedings consistent with this opinion. D. INFLATION INDEX 1. BACKGROUND 13. Warner next contends that the City erred by replacing the August, 1993 inflation index figure of 121.8, which Warner used in its Form 393 calculations, with the revised inflation index figure of 122.5, which the United States Department of Commerce published after Warner set its rates in the fall of 1993. Warner claims, citing our rules, that since the inflation index it used was accurate at the time the rates in question were set, it should not be required to use the more recent figure. The City counters that, since the City required Warner to recalculate its rates based on community data, Warner should have used the most recent inflation index in those recalculations. 2. DISCUSSION 14. Our rules do not require operators to change their rates to reflect more current data when the rates in question were calculated with old data that was accurate at the time. If, however, the rates were calculated with old or incorrect data that was not accurate at the time, then the operator must correct its inflation adjustment with current data. On remand, if the City determines that Warner should be permitted to double count the local ABC affiliate in establishing its per-channel rates, Warner may rely on its original inflation index figure. If, however, the City determines that Warner may not double count the ABC affiliate, Warner must revise its inflation figure. Warner's appeal on this issue is therefore remanded to the City for further proceedings consistent with the terms of this order. E. DUE PROCESS 1. BACKGROUND 15. Finally, Warner contends that the City violated the Commission's due process rules in adopting the local rate order. Specifically, Warner states that our rules were violated by the City's actions in passing separate ordinances, one regarding the community service fee and the other on basic cable service and equipment rates; failing to provide Warner adequate opportunity to comment on the proposed ordinances; and conducting a hearing on the ordinances as if it were a legislative rather than an adjudicatory proceeding. Warner also claims that the City's public statement regarding the hearing reported "blatant untruths" about the hearing. The City responds by stating that Warner was given ample opportunity to participate in the rate-making process and that the Commission's due process rules were followed in all other respects. The City states that it had numerous informal meetings with representatives from Warner during the rate making process, exchanged several letters with Warner related to its Form 393, conducted a public hearing on Warner's Form 393 at which representatives from Warner were in attendance and passed its local rate order at a public meeting of the City Council. 2. DISCUSSION 16. Our rules require that a franchising authority must provide a reasonable opportunity for consideration of the views of interested parties. Our rules also require the franchising authority to issue a written report if it disallows the operator's proposed rates. The written report must affirmatively demonstrate why the operator's proposed rates are unreasonable and why the prescribed rates are reasonable. There is no requirement that the franchising authority embody its rate order into a single document, rather than passing separate rate orders, as the City did here. We do not require evidentiary hearings; although certainly if circumstances dictate, such hearings would be permitted. However, we deem it sufficient for the local authority to consider the written views of interested persons on issues raised about the operator's proposed rates. Here, the City met with Warner representatives on numerous occasions, exchanged written correspondence on issues raised by Warner and had two public meetings related to Warner's Form 393, one at which its Form 393 was the exclusive item considered. The rate orders also set forth and affirmatively demonstrate the City's findings with regard to the issues that had been discussed previously. It is clear from the record below that the City conducted its review of Warner's Form 393 in compliance with the procedural safeguards established by the Commission. We conclude that, in considering Warner's Form 393 and in adopting local rate orders reflecting that consideration, the City acted reasonably and met our procedural requirements. III. ORDERING CLAUSES 17. Accordingly, IT IS ORDERED that Warner's appeal of Cincinnati's local rate order, regarding the inflation index and external treatment of the community access fee and due process issues, IS DENIED. 18. IT IS FURTHER ORDERED that Warner's appeal, regarding the community-by-community rate calculations, channel count issue and inclusion of the community service fee in Warner's initial rate calculations on FCC Form 393, IS REMANDED to the local franchising authority for further proceedings consistent with this opinion. 19. IT IS FURTHER ORDERED that Warner's petition for a stay pending review of its appeal IS DISMISSED as moot. 20. 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