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DA 95-1589 In the Matter of ) ) Falcon Holding Group, Inc. ) CUID No. NC0569 (Morganton) ) Benchmark Filing To Support ) Cable Programming Service Price ) Memorandum Opinion and Order Adopted: July 17, 1995 Released: August 16, 1995 By the Chief, Cable Services Bureau: Introduction 1. Here we consider a complaint about the price Falcon Holding Group, Inc. ("Operator") was charging for its cable programming service ("CPS") tier in Morganton, North Carolina, CUID No. NC0569. Operator has chosen to attempt to justify its price through a benchmark showing on FCC Form 393. This Order addresses the reasonableness of Operator's price only through May 14, 1994. At a later time we will issue a separate order addressing the reasonableness of the price after that date. 2. Under the Cable Television Consumer Protection and Competition Act of 1992, and our rules implementing it, 47 C.F.R. Part 76, Subpart N, the Commission must review CPS prices upon the filing of a complete and timely complaint. The filing of a complete and timely complaint triggers an obligation on behalf of the cable operator to file a justification of its CPS prices. Under our rules, an operator may attempt to justify its prices through either a benchmark showing or a cost-of-service showing. In either case, the operator has the burden of demonstrating that its CPS prices are not unreasonable. 3. The Commission's original rate regulations took effect on September 1, 1993. The Commission subsequently revised its rate regulations effective May 15, 1994. Operators with complete and timely CPS complaints filed against them prior to May 15, 1994 must demonstrate that their CPS prices were in compliance with the Commission's initial rules from the time the complaint was filed through May 14, 1994, and that their prices were in compliance with the revised rules from May 15, 1994 forward. Operators attempting to justify their prices for the period prior to May 15, 1994 through a benchmark showing must complete and file FCC Form 393. Generally, to justify their prices for the period beginning May 15, 1994 through a benchmark showing, operators must use the FCC Form 1200 series. Procedural Matters 4. A complete and timely CPS complaint was served on Operator on November 22, 1993. It was received by the Commission on November 29, 1993. Operator did not file an FCC Form 393 until June 24, 1994. 5. Operator states that it restructured its service offerings on September 1, 1993. In addition to its basic tier, Operator began offering eight channels on an individual, or a la carte, basis. These a la carte channels could also be purchased collectively as one eight- channel package. A similar type of restructuring was addressed in our letter of inquiry ("LOI") order released on December 2, 1994, in which we resolved the regulatory status of the ten-channel a la carte package offered by Operator to its subscribers in Southern Shores, North Carolina. In the LOI order, we found that the retiering in Southern Shores constituted an evasion of rate regulation. In addition, we found an evasion of rate regulation in the case of another cable operator who retiered its service offerings on September 1, 1993 to create an eight-channel a la carte package from what would have been regulated channels. In both cases, we concluded that the operator's a la carte package must be treated as a rate-regulated cable programming service tier and that the channels composing it must be counted as rate-regulated channels as of September 1, 1993, for purposes of completing the rate justification forms. Likewise, Operator's eight-channel a la carte package in Morganton must also be treated as a rate-regulated cable programming service tier. Discussion 6. In its June 24, 1994 filing, Operator did not attempt to justify its monthly price of $9.95 for its a la carte package because Operator failed to classify this eight-channel a la carte package as a CPS tier. Upon review, we also determined that Operator miscalculated its maximum permitted per-channel rate, and it is therefore appropriate to make the following adjustments to Operator's calculations in Form 393: a. Operator's calculations for its regulated rates as of the initial date of regulation (Form 393, Part II, Worksheet 1) reflect a rate of $15.99 for the basic tier and $1.00 for the CPS tier. However, these rates were not in effect on the initial date of regulation. The rates effective on the initial date of regulation were those in effect on September 1, 1993, which were set forth in the rate card provided by Operator along with its June 24, 1994 filing. We have therefore changed Part II, Worksheet 1, Line 101, to $16.99 for the basic tier and $9.95 for the CPS tier. b. Operator's calculations for its regulated rates as of the initial date of regulation (Form 393, Part I, and Form 393, Part II, Worksheet 1) reflect 27 regulated channels and 16 satellite channels. These channel counts do not include the eight a la carte channels that were offered as a package. Consistent with our decision to classify the eight-channel a la carte package as a CPS tier, we increased the number of regulated channels to 35 channels and the number of satellite channels to 24 channels. c. In Column G of Schedules A and C of Part III of its Form 393, Operator did not correctly account for its income tax expense. By placing entries in these columns, Operator confirms that it is a tax-paying entity (i.e., a subchapter "C" corporation). However, Operator incorrectly calculated its income tax by simply applying the corporate tax rate to its return on investment. The Commission has stated that tax-paying business entities must gross-up their tax entries in Column G of Schedules A and C (i.e., calculate the tax as a percentage of return on investment plus tax). By understating its tax entries in Column G, an operator reduces its effective rate of return on equipment and installations and thereby could increase its CPS prices. We therefore recalculated Column G of Schedules A and C (and subsequent steps) using correctly grossed-up tax entries. d. Operator's Form 393, Part II, Worksheet 1, Line 104 entry does not represent its current monthly equipment revenue as of the initial date of regulation. Since Operator restructured its rates, including its equipment rates, on September 1, 1993, the current monthly equipment revenue figure it entered on Line 104 should have been close or identical to its equipment cost figure on Part III, Step G, Line 34. However, Operator's entries on these two lines differed substantially. We therefore adjusted Line 104 to equal the amount entered on Line 34, which includes the adjustment made when using correctly grossed-up tax entries. e. Because of these errors, we conclude that Operator has failed to demonstrate that its price for the CPS tier was not unreasonable. We will therefore set a price for this tier, incorporating the adjustments discussed above. In doing so, we must also recalculate the Inflation Adjustment Factor in Form 393, Part II, Worksheet 1 on the basis of the most accurate data currently available for the date Operator was required to file Form 393. On its Form 393, Operator calculated the Inflation Adjustment Factor as of the end of November 1993 using data released on December 1, 1993. On July 29, 1994, the U.S. Department of Commerce released corrected inflation data including GNP-PI figures of 122.3 for the third quarter of 1992 and 125.7 for the third quarter of 1993. Using these GNP-PI figures, we calculate an Inflation Adjustment Factor of 1.032 through November 1993, the base date Operator used in justifying its rate. Conclusions 7. Upon review of the record herein, and having incorporated the adjustments discussed above, we conclude that Operator's showing justifies a maximum reasonable CPS tier price of $5.12 per month (plus franchise fee) for the period starting on November 29, 1993 to May 14, 1994. 8. Accordingly, IT IS ORDERED, pursuant to Section 0.321 of the Commission's Rules, 47 C.F.R.  0.321, that the November 22, 1993 complaint against the cable programming service price charged by Operator in CUID No. NC0569 IS GRANTED TO THE EXTENT INDICATED HEREIN. 9. IT IS FURTHER ORDERED, pursuant to Section 76.961 of the Commission's Rules, 47 C.F.R.  76.961, that Operator shall refund to subscribers in CUID No. NC0569 that portion of the amount paid for cable programming service from November 29, 1993 to May 14, 1994 that exceeded the maximum price of $5.12 per month (plus franchise fee), plus interest to the date of the refund. 10. IT IS FURTHER ORDERED that Operator shall promptly determine the overcharges to CPS subscribers and shall within 30 days of the release of this Order file a report with the Chief, Cable Services Bureau, stating the cumulative refund amount so determined (including franchise fees and interest), describing the calculation thereof, and describing its plan to implement the refund within 60 days of Commission approval thereof. 11. IT IS FURTHER ORDERED, pursuant to Section 76.922(b)(4)(C) of the Commission's Rules, 47 C.F.R.  76.922(b)(4)(C), that Operator shall, within 30 days of the release of this Order, revise its Form 1200 filing for CUID No. NC0569 for the period beginning May 15, 1994, to reduce the monthly charge per tier as of March 31, 1994 (Line A6b) to equal the maximum price of $5.12 (plus franchise fee). 12. IT IS FURTHER ORDERED that Operator shall place into effect, within 30 days after submission of the revised Form 1200 filing required above, a price that reflects the reduction in the CPS rate determined in this Order. FEDERAL COMMUNICATIONS COMMISSION Meredith J. Jones Chief, Cable Services Bureau