FOR RECORD ONLY $//Consolidated Appeal ORDER, in Ashland, CT, et al, DA 95-720//$ $/76.922 Rates for the basic service tier/$ $/76.923 Rates for equipment and installation/$ $/76.944 Commission Review of Franchising Authority Decisions/$ Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 DA 95-720 In the Matter of: ) ) CROWN MEDIA, INC. ) d/b/a CROWN CABLE ) Appeal of Local Rate Order ) Ashland, CT Lebanon, CT (Docket No. 93-12-09) of ) Brooklyn, CT Mansfield, CT the State of Connecticut ) Canterbury, CT Pomfret, CT Department of Public ) Chaplin, CT Scotland, CT Utility Control; and ) Columbia, CT Thompson, CT ) Coventry, CT Willington, CT ) Eastford, CT Windham, CT ) Hampton, CT Woodstock, CT Appeal of Local Rate Order ) Bethlehem, CT Newtown, CT (Docket No. 93-12-10) of ) Bridgewater, CT Roxbury, CT the State of Connecticut ) Brookfield, CT Sherman, CT Department of Public ) Kent, CT Southbury, CT Utility Control ) Monroe, CT Trumbull, CT ) New Fairfield, CT Washington, CT ) New Milford, CT Woodbury, CT CONSOLIDATED ORDER Adopted: April 3, 1995 Released: April 5, 1995 By the Chief, Cable Services Bureau: I. INTRODUCTION 1. By this Order, the Commission consolidates and resolves two separate appeals filed by Crown Media, Inc. ("Crown") concerning two separate local cable rate orders issued by the State of Connecticut Department of Public Utility Control ("DPUC"). Crown's first appeal was filed on September 26, 1994 and involves the rate order issued by the DPUC on August 24, 1994 in its Docket No. 93-12-09. Crown's second appeal was also filed on September 26, 1994 and involves the rate order issued by the DPUC on August 17, 1994 in its Docket No. 93-12-10. On October 6, 1994, the DPUC filed oppositions to each of Crown's appeals. Crown did not file replies to either of the DPUC's oppositions. We have determined that the proceedings are sufficiently similar to justify the joint resolution in a single consolidated order of all of the issues raised by the parties. 2. In each local rate order, the DPUC approved Crown's maximum permitted rates for the basic service tier, but found that Crown's rates for equipment, hourly service charge and installation were above the maximum permitted rates. The DPUC ordered Crown to reduce its rates for equipment, hourly service charge and installation to no more than the maximum permitted levels. The DPUC also ordered Crown to issue refunds or credits to subscribers for the overcharges levied since September 1, 1993. 3. Crown raises two issues in its appeals. First, Crown challenges the DPUC's decision to reject Crown's valuation of capital costs for equipment and installation. Crown argues that the DPUC inappropriately applied cost-of-service principles in reviewing Crown's rates for equipment and installation. Second, Crown argues that the DPUC's disallowance of Crown's "inventory allocation" is contrary to instructions in FCC Form 393. 4. In response, the DPUC maintains that it applied the Commission's benchmark guidelines in reviewing Crown's rates for basic service and related equipment. The DPUC argues that it adjusted Crown's capital costs for equipment using an asset valuation method commonly referred to as "original cost" in order to comply with the Commission's rule that equipment and installation rates be based on "actual costs." With respect to the inventory allocation disallowance, the DPUC asserts that Crown did not meet its burden of proof in supporting the significant addition to Crown's equipment costs. II. DISCUSSION 5. 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 the 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. 6. 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 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 of review. 7. The operator's maximum permitted rates are derived by completing Parts II and III of 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 figure 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. 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 installations 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 under the 1992 Cable Act. A. Valuation of Capital Costs 8. As required by Form 393, Crown completed Part III Schedule A (Capital Costs of Service Installation and Maintenance of Equipment) and Schedule C (Capital Costs of Leased Customer Equipment). Both of these schedules require information regarding certain capital costs. Crown provided the required capital cost information using gross book valuations as recorded on Crown's books. In the local rate orders, the DPUC adjusted Crown's reported gross book values in order to reflect instead the original cost of the assets. The DPUC's adjustments reduced Crown's capital costs of service installations and maintenance and of leased customer equipment. 9. On appeal, Crown argues that it was inappropriate for the DPUC to adjust Crown's capital costs to reflect original cost. Crown argues that this action is improper where an operator has elected to justify rates using the benchmark approach. Crown asserts that the DPUC inappropriately relied on the Commission's Cost Order, which established rules applicable to cost-of-service proceedings, as authority to support calculating Crown's capital costs based on original cost. Crown maintains that as long as Crown's financial acquisition records reflect the acquired assets at fair market value and those records are maintained in accordance with generally accepted accounting principles, its valuation data should be used by the DPUC in calculating Crown's capital costs for equipment and installation on Schedules A and C. 10. In response, the DPUC maintains that it did not transform the review of Crown's Form 393 from a benchmark proceeding into a cost-of-service proceeding. The DPUC claims that it analyzed Crown's rates for basic service and related equipment under the Commission's guidelines for benchmark proceedings. The DPUC contends that it used original cost data rather than Crown's fair market valuation in order to satisfy the requirement, established by the Section 623(b)(3) of the 1992 Cable Act and by the Commission's rules, that equipment and installation rates be based on "actual cost." The DPUC argues that while the Cost Order discusses the advantages of original cost valuation in the context of cost-of-service proceedings, that discussion is also applicable in the benchmark context because rates for regulated equipment and installation are required to be based on actual costs. 11. Pursuant to the 1992 Cable Act, the Commission was required to establish standards and procedures to prevent unreasonable charges for regulated equipment. In doing so, we were to ensure that the rate justification methods we permit operators to use are consistent with the 1992 Cable Act and contain principles that will result in reasonable rates at lower cost for subscribers and with the least administrative burden. The 1992 Cable Act also directs the Commission to establish standards for setting, on the basis of actual cost, the rates for installation and lease of equipment used by subscribers to receive the basic service tier. 12. In establishing a framework for regulating basic service as required under the 1992 Cable Act, the Commission adopted two distinct regulatory methods to allow cable operators to justify the reasonableness of their rates: the benchmark and cost-of-service methods. The benchmark approach serves as the primary regulatory mechanism for setting initial regulated rates and for governing rates on a going forward basis. As a backup, a cable operator may use a cost-of-service approach if it believes that the maximum rate under the benchmark formula would not enable the operator to recover costs that it reasonably incurred. With respect to the rules we established for the benchmark approach, we stated in the Rate Order: [W]e will require the local franchising authorities to follow the detailed guidelines we now adopt for identifying the costs to be recovered through equipment and installation rates and for calculating those rates. We believe that our guidelines satisfy the statutory requirements, and thus, a local franchising authority's proper use of [the guidelines] to determine reasonable rate levels cannot form the basis of a cable operator's complaint to the Commission. As part of the guidelines we established for setting rates, we required cable operators electing the benchmark approach to submit FCC Form 393. 13. The general instructions to Form 393, Part III ("Worksheet for Calculating Equipment and Installation Charges") state that the operator "should complete this form using financial data from the company's general ledger and subsidiary records maintained in accordance with generally accepted accounting principles." The instructions to Part III, Schedule A (Annual Capital Costs Associated with Maintenance and Installation of Cable Facilities and Service) direct operators to enter in Column B for the equipment categories in Column A "the gross book value for the categories listed in Column A as of the date you last closed your books." The instructions to Part III, Schedule C (Capital Costs of Customer Equipment) direct operators to enter in Column B "the gross book value of the listed equipment." Crown followed these instructions in completing Schedules A and C, and consequently included as the gross book values information recorded on Crown's general ledger and subsidiary records as of the date it last closed its books. 14. In requiring Crown to report as its gross book values the original cost of the assets, the DPUC disregarded the instructions to Form 393, Part III directing operators to use "financial data from the company's general ledger and subsidiary records maintained in accordance with generally accepted accounting principles" and to use data "as of the date you last closed your books." The DPUC's reliance on the more general statement in the General Instructions to Form 393 that equipment and installation rates must be based on "actual cost" is inappropriate in light of the specific instructions directing the use of the general ledger data. Because the specific instructions to Part III tell operators which information to use, local franchising authorities do not have the authority to further interpret the term "actual cost" as used in the 1992 Cable Act, in our Rate Order, and in the general instructions to Form 393. Form 393 is an integral part of the Commission's guidelines and therefore local franchising authorities are required to follow Form 393's requirements. B. Inventory Allocation 15. In addition to the original cost adjustment discussed above, the DPUC in Docket No. 93-12-10 made another adjustment to Crown's reported gross book values of leased customer equipment (in Part II, Schedule C). Specifically, before making the original cost adjustment, the DPUC disallowed from Crown's reported equipment gross book values that portion of the gross book values attributable to what Crown refers to as an "inventory allocation." On Schedule C, Crown had reported the gross book value of converters, remotes and tuners as $3,796,706. However, in a pleading Crown later filed with the DPUC, Crown stated that the fair market value of the converters, remotes and tuners was $2,674,001. In response to a DPUC interrogatory Crown indicated that the additional $1,222,706 included in the cost of leased customer equipment on Schedule C was due to "inventory allocation." The DPUC noted in its Order that Crown explained in its written exceptions to the City's revised draft decision only that the inventory allocation was appropriate because "'substantial amounts of equipment are required in inventory to provide continued service to existing customers' while the system is undergoing a significant rebuild/upgrade." The DPUC stated in its Order: The Company did not explain how this $1.2 million increase to inventory could take place overnight or why the number of units did not increase along with the increase in inventory value. The Department agrees that costs associated with a reasonable level of inventory are properly included in the equipment basket. In this case, however, the Company has not met its burden of proof in justifying this $1.2 million addition to inventory. The DPUC therefore disallowed the $1,222,706 from Crown's reported gross book value of leased equipment. 16. In its Appeal, Crown maintains that it followed the instructions to Part III, Schedule C in including in its equipment costs inventory "attributable to equipment kept for new customers and as replacement for broken equipment." Crown also states that "the dollar amounts allocated to Schedule C were higher than normally would be expected due to the system being rebuilt." In its Opposition to Crown's appeal, the DPUC maintains that it disallowed Crown's "inventory allocation" on the ground that Crown "had simply failed to make an adequate showing of why the value of equipment was increased." The DPUC argues that Crown did not support the claim that substantial amounts of inventory were necessary to provide service during the rebuild and upgrade. The DPUC argues that "such an unusually high proportion of equipment costs allocated to inventory requires a showing more than the simple, unsupported assertion of need offered by Crown." 17. In rate regulation proceedings, the cable operator, not the local franchising authority, bears the burden of proof. The determination of whether a cable operator should be allowed to recover the costs of allegedly excess inventory in its rates is an issue to be left to the discretion of the local franchising authority, and we will not disturb the findings of local franchising authorities if there is a reasonable basis for its decision. Based on the record before us, we do not find that it was unreasonable for the DPUC to adjust Crown's equipment costs to remove the "inventory allocation." Crown had notice of the City's concern about the inventory allocation and had ample opportunities through its exceptions to the City's draft order, and again to the revised draft order, to provide an adequate explanation of the amount at issue. Crown's arguments on appeal fail to identify or even suggest any basis for finding it unreasonable for the DPUC to have required additional information or for the DPUC to have found Crown's explanation insufficient. We believe that the DPUC was within its authority to require Crown to provide a detailed explanation of the increase to equipment values. The DPUC was also within its authority to find Crown's explanation insufficient and therefore to disallow the amounts attributable to the "inventory allocation." Accordingly, we reject Crown's arguments that the "inventory allocation" must be included in calculating Crown's leased equipment capital costs. III. ORDERING CLAUSES 18. ACCORDINGLY, IT IS ORDERED that the appeals of local rate orders filed by Crown Media, Inc., with respect to the issue of the valuation of Crown's capital costs, are REMANDED to the State of Connecticut Department of Public Utility Control for resolution in accordance with the terms of this Order. 19. IT IS FURTHER ORDERED that the appeals of local rate orders filed by Crown Media, Inc., with respect to the issue of the disallowance of the inventory allocation are DENIED. 20. IT IS FURTHER ORDERED that, in light of the resolution of its appeals herein, the requests for stay filed by Crown Media, Inc. ARE DISMISSED as moot. 21. 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