FOR RECORD ONLY $//Appeal CONSOLIDATED ORDER, Cox Cable San Diego, Inc.; Chula Vista, La Mesa, Poway, and San Diego, CA, DA 95-743//$ $/76.922 Rates for the basic service tier/$ $/76.923 Rates for equipment and installation/$ $/76.937 Burden of proof/$ $/76.942 Refunds/$ $/76.944 Commission Review of Franchising Authority Decision/$ Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matter of: ) DA 95-743 ) COX CABLE SAN DIEGO, INC. ) ) Appeal of Local ) Rate Order of City of ) Chula Vista, CA.; ) ) Appeal of Local ) Rate Order of City of ) La Mesa, CA.; ) ) Appeal of Local ) Rate Order of City of ) Poway, CA.; ) ) Appeal of Local ) Rate Order of City of ) San Diego, CA. ) CONSOLIDATED ORDER Adopted: April 5, 1995 Released: April 7, 1995 By the Chief, Cable Services Bureau: I. INTRODUCTION 1. By this order, the Commission consolidates and resolves four separate appeals of local cable rate orders filed by Cox Cable San Diego, Inc. ("Cox") on August 24, 1994. The first appeal involves the local rate order adopted by the City of Chula Vista, California on June 21, 1994, which became effective on July 25, 1994. The second appeal involves the local rate order adopted by the City of La Mesa, California on June 14, 1994, which became effective on July 25, 1994. The third appeal involves the local rate order adopted by the City of Poway, California on June 28, 1994, which became effective on July 25, 1994. The fourth appeal involves the local rate order adopted by the City of San Diego, California on July 25, 1994. The Bureau has determined that the proceedings are sufficiently similar to justify the joint resolution of all of the issues raised by each party in a single consolidated order. We find that this consolidation will not prejudice any of the parties and will serve the interests of administrative efficiency. 2. Each of the local rate orders establishes a new regulated rate schedule for Cox's basic service tier rates and associated equipment. Specifically, each city's local rate order requires Cox to implement certain rate reductions and to issue refunds to subscribers, dating back to September 1, 1993. 3. Cox raises three issues on appeal. First, Cox argues that the Cities have misapplied the Commission's rate regulations by refusing to offset equipment undercharges against programming overcharges in determining its total refund liability. Second, Cox argues that it was improper for the Cities to disallow equipment revenue (in Line 204) attributable to the lease of decoders. Cox asserts that the charges for the decoder that the Cities disallowed were included in the fee it charged customers who subscribed to premium channels, and since that portion of the premium channel fee was, in fact, a fee for lease of regulated equipment, it should be added to Cox's equipment revenue. Third, Cox argues that the Cities erroneously "refreshed" the inflation figures in its FCC Form 393, even though its rates were justified using the old data. 4. In response, the Cities maintain that they properly applied the Commission's regulations in their rate orders in regard to offsets. Alternatively, the Cities argue that, if the Commission decides that a refund offset is applicable in this case, the offset should take into account any overcharges on the cable programming service ("CPS") tiers, and the offset should be made in proportion to the number of channels in use on each tier. With respect to the decoder issue, the Cities argue that they were justified in removing that portion of the equipment revenue attributed to the lease of the decoders since Cox could not prove that it actually charged premium subscribers for them. With respect to the inflation adjustment issue, the Cities argue that they properly adjusted Cox's inflation data in accordance with our rules. 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 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. Refund Offsets 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 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. 7. 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. In reviewing Cox's Form 393, the Cities determined that Cox's rates for basic service exceeded its maximum permitted rate and should be reduced. Cox asserts that while the Cities have ordered Cox to refund the excessive charges for basic service, it did not allow Cox to reduce the amount of the refund by the amount that Cox was undercharging for basic equipment. 8. After setting the various regulated rates that an operator is permitted to charge on a prospective basis, a franchising authority should then determine if the operator is liable for any subscriber refunds. A refund liability can be imposed when an operator's actual charges exceed maximum permitted levels during the applicable period of review. If an operator's aggregate revenues computed from its actual rates exceed its revenues computed from its permitted rates during the period of review, the operator must refund the difference to subscribers. In this proceeding, any refunds to be paid by Cox should be calculated based on this method. 9. While the Commission will sustain the decisions of franchising authorities if there is a reasonable basis for doing so, we expect franchising authorities to adhere to the mathematical principles underlying the benchmark methodology, particularly when calculating an operator's refund liability. In this case, the Cities have directed Cox to reduce its basic service charges to the maximum permitted level and to issue refunds without regard to the fact that some rates for equipment are below the maximum permitted levels. We find that the Cities must offset or reduce any refunds they may order by the difference between the actual equipment and installation rates that Cox charged and the maximum permitted rates that it could have charged during the applicable period of review. We are remanding this issue to the Cities so that they can reconsider their respective rulings in a manner consistent with our findings. 10. The Cities argue that if the Commission decides that a refund offset is applicable in this case, the offset should be apportioned between the basic and CPS service because "the retroactive equipment charge is for equipment used for both tiers," and because "[t]his apportionment method would be consistent with the Form 393 procedures, where the total cost of the equipment basket (Step G Line 34) affects (at Worksheet 3 Line 301) the maximum permitted rate applied to each tier of service." The Cities' argument is unpersuasive. 11. We have previously stated that the rate regulation for basic equipment covers all equipment used by subscribers to receive the basic service tier, even if the equipment is also used for other cable services. Therefore, all rate calculations involving such equipment, including offsets, are properly confined to the basic tier. Apportioning refund offsets between basic and CPS tiers, based on equipment charges, would not be consistent with our regulatory scheme which considers all equipment used to receive basic service as basic equipment. B. Charges for Decoders 12. Each city's rate order reflects the removal of a portion of the equipment revenue that Cox included in Line 204 of its Form 393 filing. According to the Cities, during the applicable period, Cox leased decoders at no charge to those subscribers who also purchased one or more pay services. Cox's decoders, also known as addressable converters, can receive, in addition to basic service and cable programming service tiers, premium channels and pay-per-view services. The Cities further assert that Cox provided these decoders for free in order to induce subscribers to purchase pay services. The Cities also disallowed inclusion of these decoders as equipment revenue because none of the pay service revenue received from these subscribers was booked separately as equipment revenue in Cox's accounting records and, therefore, charges for these decoders could not be verified. According to the Cities, only in preparing its Form 393 did Cox assign some of the pay service revenue to the equipment category and assign a value to the decoders based on what subscribers who did not take any pay services paid for the decoders. 13. Cox argues that it was improper for the Cities to disallow equipment revenue attributable to the lease of decoders. Ordinarily, Cox charged those subscribers who purchased only tiered services a monthly fee of two dollars for the rental of decoder equipment, which Cox included in its Form 393 as part of its equipment revenue. Cox contends that it should also be able to consider as part of its equipment revenue a charge of $2.00 for each subscriber who did not pay separately for a decoder. In support of this proposition, Cox alleges that the price of the decoder was included in the fee it charged subscribers for premium channels, and since that portion of the premium channel fee was, in fact, a fee for lease of regulated equipment, it should be added to Cox's equipment revenues. Cox disputes the Cities' charge that it provided the decoders at no charge as a promotional offering. Cox asserts that it was its standard practice to bundle decoder revenue with the cost of premium services. Finally, Cox argues that the City's reliance on the fact that Cox did not book the decoder revenue as equipment revenue is misplaced. Cox asserts that, prior to rate regulation, cable operators were not required to maintain their books so as to distinguish revenue received for providing premium services from equipment revenue. 14. Because the decoders at issue here are also used to receive the basic service tier, in addition to other tiers of services, they constitute equipment subject to regulation by local franchising authorities. In this case, however, Cox failed to satisfy its burden of proving that it actually charged premium subscribers for the decoders in question and its burden of demonstrating that any charges for the decoders were not already incorporated in its regulated equipment charges. As the Cities point out, Cox did not book any of the pay service revenue received as equipment revenue in its accounting records for the applicable period, and, therefore, charges for the decoders could not be verified by the Cities. Cox does not argue that any of the Cities denied it the opportunity to provide proof of its alleged charges for the decoders, but insists that it should nevertheless be able to charge for the decoders in question. Even after Cox received the rate review reports from the Cities which indicated that decoder charges would be disallowed from equipment revenue, Cox presented no new information that would justify including the decoders as regulated revenue. For the foregoing reasons, it was reasonable for the Cities to disallow in Line 204 of Cox's Form 393 filing that portion of equipment revenue attributable to the lease of decoders. We will, therefore, affirm the Cities' rate orders on this issue. C. Inflation Factor Calculation 15. On the FCC Form 393, the Commission permits an inflation adjustment of the benchmark rate. The inflation adjustment is calculated by comparing the Gross National Product Price Index ("GNP-PI") of September 1992 with the GNP-PI of the initial date of regulation. The GNP-PI is released quarterly by the Department of Commerce and the figure for a specific quarter is subject to later refinement by the Department of Commerce. That refinement can affect the benchmark rate. In order that operators not be penalized for relying on earlier figures provided in good faith efforts to comply with our rules, the Commission has stated that, "[r]ates set in accordance with then-current inflation and other data will not be deemed unreasonable solely on account of subsequent changes in that data." The Commission has also stated, however, that "[w]hen current rates are not justified by analysis using the old data (so that a rate adjustment would be necessary in any event), cable operators will be required to correct their rates pursuant to current data. In these circumstances, the resulting rates must be based on current data." 16. Cox claims that the data used to calculate the inflation factor on its initial FCC Form 393 is correct and should have been accepted by the Cities. Although the inflation data that Cox used in its initial filing was current at the time of that filing, the Form 393 that Cox submitted required changes unrelated to the inflation data. For example, in reviewing Cox's Form 393, the Cities found errors in Cox's calculation of equipment basket data since it omitted rate of return and income tax information, which finding Cox does not challenge. The Cities disallowed Cox's alleged equipment revenue in Line 204 attributable to the lease of decoders to premium channel subscribers. In addition, the cities of Chula Vista, La Mesa, and Poway found errors with respect to Cox's incorrect count of satellite channels. As such, the Cities determined that there were other problems in the Cox filing in addition to outdated inflation factors, and that Cox's rates would not have been justified in any event even if the old inflation data were accepted by the Cities. Therefore, the Cities' determination was correct that the inflation factor must be recalculated using the updated inflation data. D. Declaratory Ruling Regarding Franchise Fees 17. The City of La Mesa, in its Opposition, asks the Commission to issue a declaratory ruling stating that Cox, since October of 1992, has been inappropriately passing through to La Mesa subscribers additional franchise fees in violation of the franchise agreement. This matter, however, is not specifically addressed in the City's rate order, and Cox did not ask the Commission to address this franchise fee matter on appeal. By seeking a declaratory ruling on this matter, the City of La Mesa in essence is asking the Commission to review the City's franchise agreement with Cox, and specifically its own decision on this franchise fee matter, which is inappropriate, given the context of this Commission proceeding, and inconsistent with Section 76.944 of our rules. Therefore, we deny the City of La Mesa's request that we issue a declaratory ruling on this franchise fee matter. III. ORDERING CLAUSES 18. Accordingly, IT IS ORDERED that the following Commission proceedings: (1) the appeal by Cox Cable San Diego, Inc. of the local rate order adopted by the City of Chula Vista, California; (2) the appeal by Cox Cable San Diego, Inc. of the local rate order adopted by the City of La Mesa, California; (3) the appeal by Cox Cable San Diego, Inc. of the local rate order adopted by the City of Poway, California; and (4) the appeal by Cox Cable San Diego, Inc. of the local rate order adopted by the City of San Diego, California, are consolidated into one proceeding. 19. IT IS FURTHER ORDERED that Cox Cable San Diego, Inc.'s appeal of the rate order adopted by the City of Chula Vista, the City of La Mesa, the City of Poway, and the City of San Diego, regarding the refund offset issue is REMANDED to the respective local franchising authorities for resolution in accordance with the terms of this Consolidated Order. IT IS FURTHER ORDERED that the request made by the City of Chula Vista, the City of La Mesa, the City of Poway, and the City of San Diego that any refund offset should be apportioned between basic service and cable programming service tiers is DENIED. 20. IT IS FURTHER ORDERED that Cox Cable San Diego, Inc.'s appeal of the rate order adopted by the City of Chula Vista, the City of La Mesa, the City of Poway, and the City of San Diego, regarding the issue of Cox's decoder charges is DENIED. 21. IT IS FURTHER ORDERED that Cox Cable San Diego, Inc.'s appeal of the rate order adopted by the City of Chula Vista, the City of La Mesa, the City of Poway, and the City of San Diego, regarding the inflation factor calculation issue is DENIED. 22. IT IS FURTHER ORDERED that the City of La Mesa's request that the Commission issue a declaratory ruling regarding franchise fees is DENIED. 23. 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