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File pnmc5021 (.txt & .wp) is in directory \pub\Public_Notices\Miscellaneous. ***************************************************************** ******** FOR RECORD ONLY $//ORDER in Burnsville and Eagan, MN, et al, DA 95-1246//$ $/76.922 Rates for the basic service tier/$ $/76.923 Rates for equipment and installation/$ $/76.944 Commission review of franchising authority decisions/$ Before the FEDERAL COMMUNICATIONS COMMISSION DA 95-1246 Washington, D.C. 20554 In the Matter of ) ) MEREDITH/NEW HERITAGE STRATEGIC PARTNERS, L.P. ) ) Petitions for Review of the Local Rate Orders of ) The Burnsville/Eagan Cable Communications Commission; ) The City of Columbia Heights, Minnesota; ) The North Central Suburban Cable Communications Commission; ) The North Suburban Cable Communications Commission; and, ) The Quad Cities Cable Communications Commission ) CONSOLIDATED ORDER Adopted: June 6, 1995 Released: June 8, 1995 By the Chief, Cable Services Bureau: I. INTRODUCTION 1. In this Order, we resolve five petitions for review of five local rate orders filed on April 12, 1994 by Meredith/New Heritage Strategic Partners, L.P. ("Meredith"), a cable operator which serves several communities in the State of Minnesota. The five local orders were issued by the Burnsville/Eagan Cable Communications Commission; the City of Columbia Heights, Minnesota; the North Central Suburban Communications Commission; the North Suburban Cable Communications Commission; and the Quad Cities Cable Communications Commission. The rate orders established rates for regulated basic cable service provided by Meredith. Meredith also sought stays of all five of the local rate orders pending our review. The stay requests were unopposed, although the local franchising authorities had opposed Meredith's request that we accept for filing the operator's petitions despite the fact that they were filed late. The local authorities submitted oppositions to Meredith's petitions for review and Meredith replied to those oppositions. 2. On December 9, 1994, Meredith filed a motion to dismiss its petition for review of the North Suburban Communications Commission order. On December 14, 1994 Meredith filed a motion to dismiss its petition for review of the order issued by the City of Columbia Heights, Minnesota. On January 24, 1995, Meredith filed a motion to dismiss its petition for review of the order issued by the Quad Cities Cable Communications Commission. We will grant those unopposed motions and, accordingly, will dismiss the petitions for review of those three local rate orders, as well as the corresponding petitions for stay. The issues presented in the remaining two appeals are identical. In the interests of administrative efficiency, the Bureau has decided that the two proceedings are sufficiently related to each other to justify the resolution of both remaining appeals in this Consolidated Order. II. BACKGROUND 3. The two local rate orders issued by the Burnsville/Eagan and North Central Suburban Cable Communications Commissions reduced Meredith's basic service tier rates and Meredith's hourly service charges. Meredith was ordered to refund to subscribers the overcharges collected for basic service back to September 1, 1993 and to refund to subscribers any overcharges for hourly service incurred since September 1, 1993. Meredith calculates that the total monthly rate reductions to subscribers under these two orders will be $2,567 and that total refunds to subscribers will amount to $17,970. 4. Meredith seeks review of the two local rate orders with respect to three issues. Meredith states that the local orders violate federal law and Commission rules (1) by violating Meredith's due process rights through the failure of the local authorities to provide Meredith with copies of the Form 393 calculations made by the consultant hired by the local franchising authorities, upon which the local authorities based their adjustments of Meredith's initial permitted rates; (2) by disallowing Meredith the full inflation adjustments permitted by Commission rules; and (3) by requiring Meredith to include costs and hours spent disconnecting subscribers from cable service in its Form 393 calculations even though Meredith did not bill subscribers for those activities. 5. The local authorities each respond to the three common challenges to their rate orders by contending that (1) all procedural requirements were complied with; (2) Meredith made last minute requests to correct its own inflation figures which the local authorities properly refused; and (3) disconnection costs are subscriber-related costs incurred by Meredith which should be included in its Form 393 calculations despite Meredith's decision not to charge for such services. 6. 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. III. DISCUSSION 7. The issues raised by Meredith on appeal each involve preparation of FCC Form 393, which 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 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. 8. 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 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 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 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 calculated in Part III of the Form 393. A. Procedural Requirements. 9. Meredith's first contention is that the local franchising authorities failed to provide Meredith with copies of the 393 Forms prepared by the consultant for each local authority, which were used by the authorities as the basis for recalculation of Meredith's permitted rates. Meredith states that, since the local franchising authorities failed to provide it with these computations of the consultant, Meredith has been unable to comment effectively on each of the local decisions. In support of its position, Meredith cites the Report and Order which provides that the franchising authority must give the cable operator notice and an opportunity to comment on rates before they are prescribed. The Report and Order also requires the franchising authority, in a written decision, to affirmatively demonstrate why the prescribed rates are reasonable. Meredith believes that, by refusing to release the consultant's Form 393, the local franchising authorities did not so demonstrate. 10. The local authorities respond to Meredith's contention by stating first, that their consultant did not prepare revised 393 Forms and had no obligation to do so; and second, that the franchising authorities provided opportunities for comment and otherwise exceeded the procedural requirements of the FCC in developing and adopting their rate orders. The local authorities state that they held public meetings each month following submission of Meredith's 393 Forms until final action on the rate requests and that Meredith attended each meeting. In December, 1993, the franchising authorities, through their consultant, developed a preliminary report and submitted numerous questions to Meredith which addressed concerns which became the bases for the findings of fact contained in the local rate orders. The consultant also met with Meredith at this time to review the open issues. The final report of the consultant was released to Meredith in January, 1994, following which the consultant met with Meredith to review each of the issues raised in the report. Additional meetings with Meredith and exchanges of correspondence occurred subsequent to release of the report and prior to adoption of the local rate orders. 11. Our rules require that a franchising authority must provide a reasonable opportunity for consideration of the views of interested parties. Our rules also require the franchising authority to issue a written report if it disallows the operator's rates. The written report must affirmatively demonstrate why the operator's rates are unreasonable and why the prescribed rates are reasonable. There is no requirement that the franchising authority prepare, or have a consultant prepare, a new Form 393. It is sufficient under our rules that the local authority consider the written views of interested persons on issues raised about the operator's proposed rates. Plainly, the local franchising authorities have conducted their review of Meredith's 393 Forms in a responsible manner in compliance with the procedural safeguards established by the Commission. Meredith was given the required notice and opportunity to comment. The local authorities met with Meredith on numerous occasions, exchanged written correspondence on issues raised by the consultant, and gave Meredith at least one opportunity to review the consultant's calculations used to arrive at the maximum permitted rates recommended to the local authorities. The rate orders also set forth and affirmatively demonstrate the findings of each of the local franchising authorities with regard to the issues that had been discussed previously. The local rate orders define eight to 12 issues that the authorities concluded were improperly dealt with by Meredith and made the necessary corrections to Meredith's 393 Forms. We conclude that, in considering Meredith's 393 Forms and in adopting local rate orders reflecting that consideration, both of the local authorities acted reasonably and met procedural requirements. B. Inflation Adjustment. 12. Next, Meredith contends that it mistakenly inserted the wrong number in Line 124 of each of its 393 Forms. This figure, the number of months from September 30, 1992 to the "date [the operator] will submit this form," is used to calculate the inflation adjustment factor. Meredith states that it incorrectly inserted the number 12 rather than 13, which has the effect of reducing the inflation adjustment factor and lowering Meredith's adjusted benchmark rate. Mr. Kevin Griffin, President and General Manager of Meredith, in his affidavit, states that the local franchising authorities were informed of this error at meetings held prior to a public hearing held by Burnsville/Eagan as well as at the hearing itself but that the local authorities failed to make the necessary corrections. The local authorities argue that the inflation adjustment issue was not raised by Meredith until the evening of the public hearing held by Burnsville/Eagan on February 10, 1994. The authorities' consultant states that Meredith did not raise the inflation adjustment issue in any discussions, meetings, or correspondence he had with Meredith representatives prior to the public hearing. 13. Under the Commission's rules, cable operators have the burden of proof in demonstrating the reasonableness of existing or proposed rates for their basic service tier and associated equipment. Determining whether this burden of proof has been met depends on accurate self-reporting by cable operators. It was Meredith's responsibility to raise the issue and point out to the local franchising authorities that the Line 124 figure was wrong. This Meredith did at the public hearing held by Burnsville/Eagan on February 10, 1994 for the stated purpose of gathering information from interested persons. While the local franchising authorities dispute that Meredith raised the Line 124 issue prior to the public hearing, they do not dispute the fact that Meredith did raise the issue at the public hearing. Nor do they dispute the accuracy of the correction. 14. Meredith advised both Commissions at the February 10, 1994 public hearing that it had inserted the incorrect number in Line 124 and that the correct figure for the number of months that had elapsed from September 30, 1992 to mid-November, 1993 was 13, not 12. While that hearing was held by the Burnsville/Eagan Commission, the consultant for Burnsville/Eagan, who was in attendance at that hearing, was also the consultant for North Central Suburban, and was advised of the error at that time. Considerable coordination existed between the two franchising authorities. The consultant, in his affidavit attached to the Response of North Central Suburban, stated that this was the first time the consultant recalled Meredith ever mentioning the Line 124 figure. However, the point is that Meredith raised the issue with Burnsville/Eagan at least at the time of the public hearing on February 10, 1993 and with the representative for North Central Suburban at that time as well. Each of the local rate orders describe the public hearing held by Burnsville/Eagan on February 10, 1994, and the public hearing held shortly thereafter by North Central Suburban on February 16, 1994, as conducted "to ensure that all interested parties had ample opportunity to present information to the Commission." This is just what Meredith did by raising the inflation calculation issue at this time. Burnsville/Eagan approved its rate order that night but subsequently amended it on March 9, 1994. North Central Suburban adopted its rate order on February 16, 1994. The local authorities should have amended Meredith's Form 393s or requested amended Forms, to reflect the change, since it was raised during, and arguably prior to, the public hearing called by Burnsville/Eagan to hear interested parties and to gather information. For us to hold otherwise would promote expediency over accuracy. The local authorities' rejection of the correction was unreasonable. C. Costs of Disconnections. 15. Meredith states that it excluded both the costs and hours associated with its disconnection-of-service activities from the equipment calculations in its 393 Forms and that the decisions of the local franchising authorities to include such costs are improper. Meredith alleges that the local authorities recomputed the equipment calculations with disconnection-related costs and hours included on the theory that disconnections are a form of service tier change, which is specifically identified in the 1992 Cable Act as an activity subject to cost-based rate regulation. Meredith states that it did not include disconnection activities, either costs or hours, in its equipment costs because it does not bill subscribers for the disconnection of service. It considers the costs incurred from disconnection activities to be general operating costs. Meredith argues that disconnection costs have never been specified by the Commission as costs to be included in the equipment basket. Finally, Meredith states that even if such costs are properly included in the equipment basket, the local authorities erred by including costs that were incurred beyond the demarcation point of customer premises. 16. The local franchising authorities reply that Meredith bases its argument, that disconnection costs should not be included in the equipment basket, on grounds that it does not charge subscribers for disconnections. The local authorities state that the fact that an operator does not collect revenue on certain equipment and installations does not change the fact that costs are incurred relative to that equipment and those installations. The local authorities cite an attachment to a public notice issued by the Commission as further proof that disconnection costs are considered by the Commission to be costs that should be included in the equipment basket. The attachments to the public notice, which are offered as guides to Form 393 equipment calculations, include disconnections under the category "Equipment Fees." 17. Part III of Form 393 is used to calculate equipment and installation charges and to determine monthly equipment and installation costs. Permitted equipment and installation charges are based on actual equipment and installation costs. Monthly equipment and installation costs are used in calculating the operator's maximum permitted programming rate. The equipment and installation costs are subtracted from regulated revenues in Worksheet 3. The addition of costs to Part III of Form 393, such as disconnection costs for example, without corresponding additions in revenues, has the effect of lowering the operator's maximum permitted programming rate. This is the source of Meredith's complaint. 18. The elements of cost included or excluded in Form 393 calculations are not based on whether subscribers are billed to cover such costs. Our rule that defines the "equipment basket" states that the basket shall include all "direct and indirect material and labor costs of providing, leasing, installing, repairing, and servicing customer equipment." The rule explicitly excludes general administrative overhead and general marketing expenses. While the rule does not identify costs related to disconnection activities as a part of the equipment basket specifically, it is not unreasonable to consider such activities within the category of "servicing customer equipment." They are so referenced in Form 393. Specifically, revenue from disconnection activities is identified in Form 393 as revenue from equipment services which should be included in the revenue computations of the form. If an operator does not bill subscribers for such activities, as Meredith states is the case here, obviously no revenue will entered. But that does not change the characterization of disconnection activities as "equipment services." If a category of revenues, such as those from disconnection activities, is properly includable on the revenue side of Form 393, corresponding costs, such as those incurred from those same disconnection activities, should be included on the cost side. We therefore find that it is reasonable for a local franchising authority to conclude that operators must include the costs of disconnection activities in the equipment basket. 19. However, if disconnection costs are included in equipment basket computations, local authorities must permit operators to recover those costs from equipment, installation or disconnection charges. Here, the local franchising authorities do not permit Meredith to bill subscribers for such activities. This prohibition does not allow Meredith to establish rates that reflect actual costs. It is inconsistent with the actual cost standard required for equipment and installation rates under the 1992 Cable Act. Accordingly, we are remanding this issue to each of the local franchising authorities for handling consistent with this Order. 20. Meredith also states that even if disconnection costs are properly included in the equipment basket, only those costs incurred inside the demarcation point should be added. Meredith alleges that the local authorities have added disconnection costs incurred from the subscriber drop to the demarcation point to Meredith's equipment costs. The local franchising authorities do not respond to this specific point other than to state that the disconnection issue was fully aired between Meredith and the authorities' consultant. Generally, subscriber drops are considered part of network equipment and may not be included as customer equipment in Form 393. However, when subscriber drops are installed at the time of service installation, we have stated that the time it takes to install such a drop may, at the operator's discretion, be included in the time allocated to service installation. The same rationale applies to disconnection costs. Since equipment costs associated with disconnection activities from the subscriber drop to the demarcation point are considered part of network equipment, they may not be treated as customer equipment. Labor costs for such activities from the subscriber drop to the demarcation point may only be included in the costs allocated to equipment services at the option of the operator. Meredith may choose, and appears from the record to have chosen, to treat both equipment and labor costs associated with activities beyond the demarcation point as general operating costs of the network. Any requirement by the local franchising authorities that Meredith do otherwise is not permissible. The record is not entirely clear whether the local franchising authorities have handled disconnection costs in this manner. Neither is the record clear whether any equipment costs have been incurred in these disconnection activities and whether those equipment costs have been excluded from customer equipment in Form 393. Accordingly, this issue is remanded to each of the local franchising authorities for handling consistent with this order. 21. Finally, Meredith argues that any reduction in the basic tier rate because of the authorities' recalculation of the equipment basket to include disconnection activities must be accompanied by a corresponding upward adjustment in Meredith's equipment rates. The local franchising authorities respond that Meredith requested certain rates for equipment and that Meredith was aware of the authorities' views on the disconnection issue as early as December 2, 1993 and made no request to adjust its requested equipment rates. The franchising authorities claim that, since they took no action relating to Meredith's equipment rates, those rates simply became effective, consistent with Commission rules, at the end of the 90-day tolling period. Therefore, the authorities argue, we cannot now order the local franchising authorities to increase Meredith's equipment rates since there is no decision regarding equipment rates for the Commission to review. In response, Meredith reiterates its earlier arguments and alleges that it did raise the issue of an adjustment in its equipment rates in a written submission to the franchising authorities' consultant on February 16, 1994. 22. Form 393 calculations for equipment and programming are interdependent. If higher equipment costs are subtracted from regulated revenues in Worksheet 3, lower rates for programming services will result. If disconnection costs and hours are added to the Form 393 calculations for purposes of computing the basic tier rate and hourly service charge, those costs and hours cannot be ignored for purposes of calculating the equipment rates themselves. Whether an operator submits a request to the franchising authority to make a corresponding adjustment to its equipment rates is not controlling. If a local franchising authority makes adjustments to the equipment basket and thereby decreases the maximum permitted rates for programming service it must make the appropriate, corresponding adjustments to the remainder of the Form 393 calculations. Therefore, this issue is remanded to each of the local franchising authorities for handling consistent with this Order. IV. ORDERING CLAUSES 23. Accordingly, IT IS ORDERED that the appeals by Meredith/New Heritage Strategic Partners, L.P. of the decisions of the Burnsville/Eagan and North Central Suburban Communications Commissions regarding procedural requirements ARE DENIED. 24. IT IS FURTHER ORDERED that the appeals by Meredith of the decisions of the Burnsville/Eagan and North Central Suburban Communications Commissions with regard to the inflation adjustment and the cost of disconnections ARE REMANDED to those local authorities for further consideration consistent with this opinion. 25. IT IS FURTHER ORDERED that the motions to dismiss the appeals filed by Meredith with respect to the local orders of the City of Columbia Heights, Minnesota and the North Suburban and Quad Cities Cable Communications Commissions ARE GRANTED. 26. 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