FOR RECORD ONLY $//Appeal ORDER, Time Warner, Brooklyn and Queens, NY, DA 95-630//$ $/76.922 Rates for the basic service tier/$ $/76.923 Rates for equipment and installation/$ $/76.944 Commission Review of Franchising Authority Decisions/$ Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matter of: ) DA 95-630 ) TIME WARNER CABLE OF ) NEW YORK CITY AND QUEENS ) INNER UNITY CABLE SYSTEMS ) ) Appeal of Local Rate Order ) of the City of New York, NY ) (Brooklyn, CUID No. NY1280) ) (Queens, CUID No. NY1281) ) (Queens, CUID No. NY1340) ) (Queens, CUID No. NY1402) ) MEMORANDUM OPINION AND ORDER Adopted: March 27, 1995 Released: March 29, 1995 By the Chief, Cable Services Bureau: I. INTRODUCTION 1. On September 30, 1994, Time Warner Cable of New York City and Queens Inner Unity Cable Systems (collectively, "Time Warner"), the franchisees in the above matter, filed an appeal of a local rate order adopted by the City of New York (the "City") on August 31, 1994. On October 17, 1994, the City filed an opposition to Time Warner's appeal urging the Commission to reject Time Warner's appeal and to allow the City's rate order to go into effect unchanged. Time Warner filed a reply on October 27, 1994. In its rate order, the City established rates for basic tier service and associated equipment and installations in four franchise areas and required Time Warner to refund overcharges to subscribers. 2. Time Warner raises three issues in its appeal. First, Time Warner asserts that the City, in reviewing Time Warner's FCC Form 393 filing, impermissibly and arbitrarily reduced its entry on Line 104 (i.e., equipment and installation revenues) to match its entry on Line 301 (i.e., equipment and installation costs) in Part II of its Form 393, resulting in a reduction of Time Warner's permitted rate for the basic service tier. Second, Time Warner claims that the City's rate order improperly sets Time Warner's rates for the basic service tier at a lower level than allowed by the Commission's rules because it incorporates a rounding error made by the City's consultant in preparing its report. Third, Time Warner argues that the per-channel rate adopted in the City's rate order is based on an incorrect number of basic service tier channels. 3. In response, the City asserts that it was reasonable in modifying Time Warner's entry for Line 104 because the Commission has stated that these numbers should be equal if an operator has restructured its equipment and installation rates to comply with the Commission's rules. The City also disputes Time Warner's allegations that the City's consultant committed a rounding error and that it used an incorrect number of basic service tier channels to compute permissible rates. Instead, the City asserts that the rates it set for Time Warner's regulated service comport with the Commission's rules and should not be adjusted. The City also argues that Time Warner should be barred from raising these claims at this juncture because it failed to raise these claims before the City's rate order was issued. 4. Under the Commission's rules, appeals of franchising authorities' local rate orders are reviewed by 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. II. DISCUSSION 5. 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 equipment and installation costs and 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. 6. 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 level is below the applicable benchmark rate, then the operator's rate level is deemed reasonable, but it must remain at its current level. If its current per-channel rate level exceeds the benchmark rate, the operator must then compare its September 30, 1992 per-channel rate level to the applicable benchmark rate. If its September 30, 1992 per-channel rate level is above the benchmark rate, it must reduce this rate level to the benchmark rate or by 10%, whichever reduction is less. After computing the permitted rate level in this manner (whether based on current rates or September, 1992 rates), monthly equipment and installation costs are removed to derive the maximum permitted programming rates. Maximum permitted rates for equipment and installation are based on actual cost and are separately calculated in Part III of the Form 393. A. SUBSTITUTION OF LINE 301 FOR LINE 104 7. Time Warner contends that the City, in its review of Time Warner's rate filing, improperly substituted Time Warner's Line 301 entry for its Line 104 entry in Part II of its FCC Form 393, resulting in an inappropriate reduction of its permitted rate for the basic service tier. Time Warner argues that entries for Lines 104 and 301 will, almost by definition, differ slightly because Line 301 requires a "historical" figure while Line 104 requires a "representative" monthly figure. Time Warner claims that an operator's entry for Line 301 should represent a monthly average of past equipment costs while its entry for Line 104 "will fluctuate depending on which month is chosen as 'representative.'" In response, the City argues that the Commission has previously stated in a Public Notice that an operator's entries for Lines 104 and 301 should be the same. Because it found that Time Warner's entry for Line 104 was seven percent greater than its entry for Line 301, the City concluded that the entries were substantially different and that, as a result, it was justified in making the substitution in accordance with the Commission's guidelines. 8. We affirm the City's decision. In the above-mentioned Public Notice, we discussed the issue of the relationship between Lines 104 and 301 on FCC Form 393. The instructions for completing Worksheet I Line 104 of FCC Form 393 specify that equipment revenues for the year preceding that date shall be used in computations of the current rate per channel which is to be compared to the benchmark. Revenues for the previous years may not be sufficiently representative where the operator has already unbundled and instituted cost- based pricing in accordance with our requirements. This answer clarifies that in completing Line 104 operators must use equipment revenues that will be representative of the equipment rates that were in effect as of the initial date of regulation. Where available, actual revenues should be used. Where operators have restructured equipment rates as of September 1, 1993 in accordance with our regulations, we would anticipate that in most cases, absent special circumstances, operators will enter on Line 104 the same, or nearly the same, number as on Line 301. Line 301 is the anticipated revenues based on equipment rates derived in accordance with FCC rate regulations. It appears that Time Warner restructured its rates prior to the date it filed its initial Form 393 with the City. Consequently, absent special circumstances, it was reasonable for the City to presume that Time Warner's entries for Lines 104 and 301 on its Form 393 should be the same. Time Warner has not alleged any such special circumstances. Therefore, the City was reasonable in substituting Time Warner's entry for Line 301 onto Line 104. 9. In fact, the potential consequences that could stem from Time Warner's interpretation of the term "representative" month lend further support to this conclusion. It was not our intent to allow operators to pick and choose any month as a "representative" month to alter the impact on its permitted rate level. If an operator has restructured its rates in compliance with the Commission's rate regulations, the most appropriate figure to determine an operator's average month's equipment revenue generally would appear to be its equipment cost figure in Line 301. B. ROUNDING ERROR 10. Time Warner also alleges that, based on its review of a chart in the report prepared by the City's consultant, the City's consultant made a crucial rounding error when the consultant revised Time Warner's Form 393. Specifically, Time Warner claims that the City simply reduced the permitted per-channel rate calculated by Time Warner by $.003 to account for the adjustment the City made to Line 104, resulting in a new permitted per- channel rate of $.296. Time Warner claims that the City subtracted the $.003 figure from an incorrectly rounded per-channel rate of $.299. Time Warner asserts that the base rate it calculated was actually $.2999, which the City should have rounded up to $.300. Consequently, Time Warner argues that even if it loses its appeal with regard to the substitution of Line 104, the permitted per-channel rate derived by the City should be adjusted to $.297 ($.300 - $.003). 11. In response, the City states that Time Warner mischaracterizes the methodology used by the City to calculate Time Warner's permitted rates. The City asserts that it did not simply reduce the rate calculated by Time Warner by $.003 to derive the permitted per-channel rate. According to the City, it calculated a new per-channel rate by incorporating its changes to Time Warner's data in an amended Form 393. The City claims that, although the $.003 figure cited by Time Warner appears in a chart prepared by its consultant, that chart was simply an attempt to illustrate the numerical difference between the per-channel rate calculated by Time Warner and the per-channel rate calculated by the City's consultant, which was the rate ultimately adopted by the City. In its reply, Time Warner claims that it was not provided a copy of the City's recalculated Form 393 before the City issued its rate order, and, as a result, it was improperly denied an opportunity to analyze and comment on the City's methodology. 12. We reject Time Warner's arguments. We believe Time Warner's rounding argument misses the point. Time Warner attempts to use a consultant's chart, which was prepared for illustrative purposes only and had nothing to do with the actual calculation of the rate, to argue that the City's rate determination was unreasonable. The City has explained that the rate that it adopted as Time Warner's permitted per-channel rate was not derived by subtracting $.003 from the per-channel rate calculated by Time Warner. Instead, the City calculated the permitted per-channel rate by substituting its changes onto Time Warner's Form 393 and recalculating the Form based on these modifications. 13. Although the City is required to provide an explanation of its calculations in its rate order, it is not required to provide Time Warner with a copy of a recalculated Form 393. In this instance, the City provided Time Warner with a written decision as well as copies of many of the documents it relied upon in issuing its decision, including its consultant's report. It appears from the submissions that the City has made extensive efforts to inform Time Warner of the reasons for its actions. To confirm the City's results, Time Warner itself could have recalculated its own Form 393 based on the modifications that the City had announced that it had made. Significantly, Time Warner does not argue that, when the City's modifications are used to recalculate Time Warner's Form 393, the resulting permitted rate should be different than that rate derived by the City. Based on all of this, we conclude that Time Warner had enough information to understand the logic and to recognize the factual bases of the City's decision. C. CHANNEL COUNT 14. Time Warner also alleges that the City incorrectly calculated its permitted basic service tier rate based on 35 channels rather than 35.3 channels. Time Warner justifies its use of fractional channels by claiming that it submitted its rate filing on a system- wide basis, comprising four separate franchise areas, rather than by each individual franchise area. In three of the four franchise areas it had 35 channels, and in the remaining franchise area it had 36 channels. Time Warner claims that it entered 35.3 channels on Line 101 of Part II of the Form 393 spreadsheet to represent the average number of channels in each franchise area affected by the rate filing. However, the print-out version of Time Warner's Form 393 computer spreadsheet only displayed 35 channels on Line 101 of Part II. Even though 35.3 channels was not actually displayed in Line 101 of the print-out version of its Form 393, Time Warner suggests that its use of 35.3 channels, rather than 35 channels, in the computer spreadsheet version of the Form should have been evident to the City when the City conducted its review of Time Warner's filing. In response, the City argues that it reasonably relied on Time Warner's revised Form 393 that listed 35 channels on Line 101 of Part II. Furthermore, the City claims that Time Warner never suggested that the proper figure should be 35.3 channels. 15. It is clear that Time Warner made a single system-wide filing covering these four franchise areas. System-wide filings may only be made when, inter alia, channel line- ups are the same for each franchise area covered by the filing. Time Warner is not permitted to submit a single rate filing using system-wide data for four franchise areas where one of the four franchise areas has a different channel line-up. As a result, Time Warner may not use fractional channels to account for services that vary by franchise area. Time Warner must submit a separate filing for the franchise area with a different channel line-up. Consequently, we remand this issue to the City for resolution in accordance with the terms of this Order. III. ORDERING CLAUSES 16. Accordingly, IT IS ORDERED that the appeal filed by Time Warner Cable of New York and Queens Inner Unity Cable Systems with respect to the reasonableness of the City of New York's substitution of Time Warner's entry on Line 301 for its entry on Line 104 on its Form 393 IS DENIED. 17. IT IS FURTHER ORDERED that Time Warner's and Queen Inner Unity's appeal regarding the effect of a purported rounding error on its permitted rate for the basic service tier IS DENIED. 18. IT IS FURTHER ORDERED that Time Warner's and Queen Inner Unity's appeal regarding the appropriate number of basic service tier channels relied on by the City in issuing its rate order IS REMANDED to the City for proceedings consistent with the terms of this Order. 19. 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