NOTICE ********************************************************* NOTICE ********************************************************* This document was originally prepared in Word Perfect. If the original document contained-- * Footnotes * Boldface & Italics --this information is missing in this version The document format (spacing, margins, tabs, etc.) is changed too. If you need the complete document, download the Word Perfect version. For information about downloading documents (FTP) see file pnmc5021. File pnmc5021 (.txt & .wp) is in directory \pub\Public_Notices\Miscellaneous. ***************************************************************** ******** Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matter of: ) DA 95-737 ) UNITED ARTISTS CABLE ) OF BALTIMORE ) ) Appeal of Local ) Rate Order of City of ) Baltimore, MD ) ORDER Adopted: April 4, 1995 Released: April 6, 1995 By the Chief, Cable Services Bureau: I. INTRODUCTION 1. On July 29, 1994, United Artists Cable of Baltimore ("UACB"), the franchisee in the above matter, filed an appeal of a local cable rate order adopted on June 29, 1994 by its franchising authority, the City of Baltimore, Maryland ("the City"). The City submitted an opposition to the appeal on August 15, 1994. The rate order establishes a new regulated rate schedule for UACB's basic service tier rates and associated equipment. Specifically, the City's rate order requires UACB to implement certain rate reductions and to issue refunds to subscribers, dating back to September 1, 1993. 2. UACB raises three issues on appeal. First, UACB challenges the provisions in the City's rate order regarding franchise fees as improper and violative of the Commission's rules. In reply, the City asserts that UACB has been underpaying its franchise fee obligations to the City. Second, UACB challenges the City's rate order setting rates for UACB's A/B switches and VCR connections. The City replies that because subscribers use both A/B switches and VCR connections to receive basic service, they are subject to local regulation. Third, UACB argues that the rate order improperly restricts its choice over how to pay refunds to subscribers. The City counters that there is nothing in the rate order restricting UACB's choice between the two refund methodologies allowed by the Commission's rules. The City further asserts that the rate order simply requires UACB to submit its refund plan to the City so that the City can be certain that UACB's plan is consistent with its rate order and the Commission's rules. 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 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. 4. 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. A. Franchise Fee Itemization 5. UACB argues that the City's rate order erroneously concludes that "the Company is unlawfully itemizing franchise fees on subscriber bills in violation of FCC Rules." UACB notes that while the City's rate order does not explain UACB's mistake, the City, prior to its rate decision, did provide UACB with examples of what it termed "proper" and "improper" franchise fee itemization. The City's "proper" example shows a lower total rate than the accompanying "improper" example because the total amount in the "proper" example includes the franchise fee, while the "improper" example does not include the franchise fee in the total amount. UACB argues that the City's "proper" itemization example erroneously suggests that the cable operator should absorb franchise fee costs and that franchise fees can be identified only in a footnote to the total bill, and not as a separate line item on the bill itself. 6. Under the Section 622(c) of the Cable Act, cable operators may identify as a separate line item of each regular subscriber bill the amount of the total bill assessed as a franchise fee, as well as the identity of the franchising authority to which the fee is paid. Operators are not restricted to utilizing a footnote to the total bill as a means of identifying franchise fees. Commission staff addressed the question of franchise fee itemization on consumer bills in the April 26, 1994 Public Notice, in which we stated the following: The 1992 Cable Act allows cable operators to identify as a separate line item on their bills the amount of the total bill assessed as a franchise fee and the identity of the franchising authority to which the fee is paid. The Commission has determined that the separate billing of such fees would burden consumers unnecessarily by requiring them to remit separate payments. Even listing such charges "below the line" would tend to confuse customers as to what is part of their bill. Thus, any bill may require only one payment for the operator's services, the total for which must include franchise fees itemized. The Commission otherwise has declined to dictate how a cable operator, choosing to itemize, may format its bill.[] Local franchising authorities may adopt regulations consistent with the Commission's regulations on this matter.[] Any regulations adopted by a local franchising authority regarding bill itemization must be consistent with the Commission's regulations. If franchising authorities choose to adopt regulations on this matter, we underscore that it would "frustrate the intent of the statute if a franchising authority imposed burdensome additional itemization on an operator choosing to avail himself of the rights bestowed by [Section 622(c)], or otherwise attempted to nullify the effect of a Section 622(c) itemization through local regulations." Therefore, a local franchising authority cannot dictate how a cable operator, choosing to itemize, formats such itemization. We find that UACB's method of itemizing franchise fees in subscriber bills is not inconsistent with the Commission's regulations and that it should be allowed to employ this method. Accordingly, we remand this issue to the City so that it can reform its order and make it consistent with these findings. B. Franchise Fee Calculation 7. Franchise fees are taxes imposed by local franchising authorities on the earnings of cable operators. At its discretion, however, an operator may add any franchise fees to the monthly rate billed to subscribers. Payment of franchise fees provides cable operators the right to provide cable service to subscribers in a given community. The amount of franchise fees imposed by a local franchising authority on a cable operator is generally set by the franchising authority and the fees are generally used by the franchising authority for the regulation of the basic service tier and associated equipment. The franchise fee specificed in the franchise agreement between the City and UACB is five percent of UACB's "gross revenues." The City argues that UACB's method of itemization has resulted in the City receiving less than five percent of the amount that UACB collects from subscribers. The City contends that "the franchise fee must equal 5 percent of the total amount that a subscriber pays; it is not a 5 percent charge on top of what the subscriber would otherwise pay." In its Opposition, the City proposes several methods that UACB can use in calculating franchise fees. In its proposed method of calculating franchise fees, it is the City's understanding that an operator's "gross revenues" include the franchise fee it collects on behalf of the franchising authority. In essence, the City asserts that it should be able to assess from UACB as part of the franchise fee a percentage of the franchise fees. We disagree. 8. To clarify the proper method of calculating franchise fees, we must first define a cable operator's "gross revenues" under the Communications Act. We note that the Act does not state that any franchise fee collected by a cable system is to be included in totalling its gross revenues. The Act does, however, impose a limit on how much cable operators may be charged in franchise fees. Franchise authorities are permitted to assess a fee on an operator's gross revenues, but "[f]or any twelve-month period, the franchise fees paid by the cable operator with respect to any cable system shall not exceed 5 percent of such cable operator's gross revenues derived in such period from the operation of the cable system." Consequently, if we allowed the franchise fee itself to be subject to a franchise fee, as the City urges, and if the franchise agreement required a five percent assessment -- the maximum under the law -- a cable operator could end up paying more than the maximum franchise fee permitted under the Act. Furthermore, under the Act, a cable operator's gross revenues are revenues derived "from the operation of the cable system." Franchise fees, on the other hand, are not revenues derived "from the operation of the cable system," but rather are a charge levied by the franchising authority and, therefore, should not be included in totalling an operator's gross revenues. Therefore, we find that an operator's "gross revenues" do not include the franchise fees it collects from subscribers. We are remanding this franchise fee calculation issue to the City so that it can enter a ruling consistent with these findings. C. A/B Switches and VCR Installations 9. UACB argues that the City, in its rate order, incorrectly determined that A/B switches should be regulated. We have previously held that switches are not devices directly related to the delivery of basic cable service and therefore their price should remain unregulated. Regulated equipment consists of equipment in the subscriber's home that is used to receive regulated cable service. A/B switches are used by subscribers to switch off cable services and to receive, instead, over-the-air broadcast signals. Since the switches are not "equipment used by subscribers to receive the basic service tier" within the meaning of Section 3(b)(3) of the 1992 Cable Act, their price is not subject to regulation. 10. We disagree with UACB that the regulatory treatment accorded to A/B switches should be accorded to VCR installations as well. We have previously held that, since VCRs are used "to receive the basic service tier," they are subject to our rate regulations. UACB had established two different charges to install a subscriber's VCR by connecting the VCR to the subscriber's cable service. One charge applied to the operator's installation of the VCR during the subscriber's initial installation of cable service. A second, and higher, charge applied to the operator's installation of the subscriber's VCR if a separate trip by the cable technician were required. The 1992 Cable Act directed us to establish rate standards for "installation and lease of equipment used to receive the basic service tier." Our rules provide that regulated equipment consists of all equipment in a subscriber's home used to receive basic service. Rates for installation of such equipment must be based on actual costs and must be "unbundled" or priced separately. When basic service is installed through a subscriber's VCR, the VCR is used "to receive the basic service tier." Since VCRs are, indeed, used "to receive the basic service tier," UACB's charges for VCR installations are subject to our rate regulations. Those charges must comport with the actual cost standard of our rules. D. Refund Plans 11. The Commission's rules permit a cable operator, at its discretion, to implement a refund under one of two methodologies: (1) by returning overcharges to those subscribers who actually paid the overcharges, or (2) by giving a prospective percentage reduction on future bills to those subscribers who actually paid the overcharges. In this case, UACB has chosen the second method of giving refunds. UACB contends, however, that the City, by requiring UACB to submit its refund methodology for approval, is in effect restricting an operator's discretion to select which refund methodology it wants to use. The City counters that there is nothing in the rate order that restricts UACB's selection of a refund method from the two refund methodologies allowed by the Commission's rules. According to the City, the rate order simply requires UACB to submit its refund plan to the City so the City may assess its consistency with the Commission's rules. 12. One way in which a franchising authority may be assured that an operator is in compliance with a refund order is by reviewing and, thereafter, approving the cable operator's proposed refund plan. We agree with the City that the conditions imposed on UACB by the challenged provision in the rate order -- i.e., that UACB identify the basis for calculating its refunds, that UACB identify the applicable interest rate and how it was calculated, and that UACB explain how rate refunds will be implemented -- do not restrict UACB's ability to select a particular rate refund methodology under the Commission's rules. Therefore, the City can require UACB to submit its refund plan to the City to ensure that it complies with the City's rate order and that it is consistent with the Commission's rules. III. ORDERING CLAUSES 13. Accordingly, IT IS ORDERED that United Artists Cable of Baltimore's appeal of the City of Baltimore's local rate order, regarding the issue of UACB's permitted charges for converter boxes and remote controls is DISMISSED as moot. 14. IT IS FURTHER ORDERED that United Artists Cable of Baltimore's appeal of the City of Baltimore's local rate order, regarding the issue of franchise fee itemization and the issue of franchise fee calculation are REMANDED to the local franchising authority for resolution in accordance with the terms of this Order. 15. IT IS FURTHER ORDERED that United Artists Cable of Baltimore's appeal of the City of Baltimore's local rate order, regarding the regulatory status of UACB's A/B switches is REMANDED to the local franchising authority for resolution in accordance with the terms of this Order. 16. IT IS FURTHER ORDERED that United Artists Cable of Baltimore's appeal of the City of Baltimore's local rate order, regarding the regulatory status of UACB's VCR installations is DENIED. 17. IT IS FURTHER ORDERED that United Artists Cable of Baltimore's appeal of the City of Baltimore's local rate order, regarding the issue of refund plans is DENIED. 18. 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