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. ***************************************************************** ******** FOR RECORD ONLY $//Appeal ORDER in Thousand Oaks, CA, DA 95-1115//$ $/76.922 Rates for the basic service tier/$ $/76.923 Rates for equipment and installation/$ $/76.944 Commission Review of Franchising Authority Decisions/$ $/1.45(d)Request for Stay/$ Before The Federal Communications Commission Washington, D.C. 20554 In the Matter of ) DA 95 - 1115 ) FALCON CABLEVISION, ) ) Petitioner,) ) v. ) ) CITY OF THOUSAND OAKS, CALIFORNIA, ) ) Respondent.) ) Appeal of Local Rate Order of ) City of Thousand Oaks, California. ) ORDER Adopted: May 17, 1995 Released: May 19, 1995 By the Chief, Cable Services Bureau: I. Introduction 1. On September 1, 1994, Falcon Cablevision ("Falcon"), the franchisee in the above matter, filed an appeal of the local rate order. The local rate order was adopted on August 2, 1994 by Falcon's franchising authority, the City of Thousand Oaks, California ("the City"). In the local rate order, the City established regulated rates for basic cable service and associated equipment provided by Falcon, as allowed by the Cable Television Consumer Protection and Competition Act of 1992 ("1992 Cable Act"). The local rate order requires Falcon to implement certain rate reductions and to issue refunds to subscribers for overcharges levied during the period from September 1, 1993 to July 14, 1994. The City opposes Falcon's appeal. 2. In its review of Form 393, Falcon contends, the City improperly reduced its Hourly Service Charge ("HSC"), thereby precluding it from fully recovering its equipment and installation costs. Falcon further contends that because of this misapplication of the Commission's rate regulations, the City has improperly imposed a refund liability that is greater than the level allowed under our 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 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. FCC Form 393 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. 5. 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. B. Hourly Service Charge 6. The issue raised by Falcon relates to the number of labor hours used in calculating Falcon's Hourly Service Charge ("HSC") and Falcon's installation and equipment rates on FCC Form 393, Part III. Falcon asserts that the City improperly denied it full recovery of the costs associated with providing regulated customer equipment and installations by increasing the total number of labor hours in the calculation of the HSC by including, what the parties refer to as, "indirect" and "direct" labor hours, while limiting the number of labor hours in the calculation of regulated customer equipment and installation charges to direct labor only. Falcon contends that if we determine that the City's action in increasing the number of labor hours in calculating the HSC was reasonable, then Falcon must be permitted to account for the indirect hours added by the City in the calculation of its regulated customer equipment and installation charges. 7. Under our rules and Form 393, an operator's regulated customer equipment and installation charges are limited to its actual costs, plus a reasonable profit. The converse is that an operator must be permitted to recover all its costs associated with providing those equipment and installations, including a reasonable profit. These costs are known as the Equipment Basket costs. The charges for installations and equipment derived in Part III of Form 393 are calculated to provide for recovery of these costs. The HSC methodology "uses time spent in related activities as the factor for allocating [installation and equipment maintenance] costs to the various charges." Central to the derivation of the permitted installation and equipment charges is the calculation of the HSC. The HSC is derived by dividing the operator's annual customer equipment maintenance and installation costs by the total number of hours spent on maintenance and installation of customer equipment in the year. An operator may charge customers for installations based on the HSC multiplied by the number of hours spent on a particular installation, or alternatively, it can establish fixed charges for various types of installations by multiplying the HSC by the average time it takes to do each type of installation. An operator's various equipment lease charges are derived by multiplying the HSC by the total number of hours a year the operator spends maintaining and servicing the equipment, plus the annual capital costs for that equipment, and then allocating this total amount over the number of equipment units in service. 8. Neither our rules nor FCC Form 393 specifies a particular method for counting labor hours; the form's instructions require operators only to explain how they derived the figures they report and we have therefore seen a variety of approaches. Using installation service as an example, an operator may count only the time an installer is actually at a subscriber's premises performing the installation (so-called direct hours). Another operator may also include the time spent driving to and from the premises (so-called indirect hours), while another operator may take a different approach by counting an installer's total paid time and dividing by the number of installations performed. Some operators may also include supervisory time. As we explain herein, none of these approaches is necessarily "better" than others, they are simply different ways of allocating costs to services. In reviewing an operator's HSC calculations, the primary concern should be to insure that its Equipment Basket costs are fully recovered, not how the operator counted its labor hours. In order to insure full recovery, an operator must be permitted to use the same method of counting person hours in calculating the HSC as it does in calculating the specific charges for its various installations and equipment. If an operator had to include both direct and indirect labor hours in the HSC but only direct hours in calculating the various installation and equipment charges, the HSC would be smaller than if indirect hours were considered and this smaller HSC would then be multiplied by smaller equipment and installation labor hour amounts than if both direct and indirect hours were included in those calculations. An operator would not recover all its costs if this was the case. 9. Falcon included only direct labor hours in calculating its original HSC. In its review of Falcon's Form 393, the City recalculated the HSC by including indirect labor hours as well as direct hours. Since the City's recalculations apparently did not involve the same method for counting the labor hours for the various installation and equipment charges, they preclude full recovery of Equipment Basket costs and therefore conflict with 47 C.F.R.  76.923(a). We must therefore remand this issue to the City to ensure that the associated indirect labor hours added by the City are also accounted for in the calculation of rates for the various installation and equipment charges. As long as a franchising authority uses the same method for counting both the total number of labor hours in calculating the HSC and the labor hours for the various installation and equipment charges in reviewing an operator's Form 393, then its HSC review will result in proper cost recovery. Moreover, no additional refund liability should result from the franchising authority's decision to include (or exclude) indirect hours in an operator's HSC calculation as long as it employs the same method for counting the labor hours in calculating the HSC as in calculating the various installation and equipment charges. III. Ordering Clause 10. Accordingly, IT IS ORDERED that Falcon's appeal of Thousand Oaks' local rate order is REMANDED, with the above instructions, to the City of Thousand Oaks, California for further action in accordance with this order. 11. 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. FEDERAL COMMUNICATIONS COMMISSION Meredith J. Jones Chief, Cable Services Bureau