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File how2ftp (.txt & .wp) is in directory \pub\Public_Notices\Miscellaneous. ***************************************************************** ******** FOR FCC RECORD ONLY $//MO&O, Coastside Cable TV, DA 95-1820//$ $/76.922 Rates for Cable Programming Services tiers/$ $/cost of service cable rates/$ Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 DA 95-1820 In the Matter of ) ) Coastside Cable TV, Inc. ) ) CUID No. CA0077 ) Cost of Service Showing to Support the) Basic Service Tier Rate ) MEMORANDUM OPINION AND ORDER Adopted: August 17, 1995 Released: August 17, 1995 By the Chief: I. INTRODUCTION 1. On August 26, 1994, Coastside Cable TV, Inc. ("Coastside") filed a cost of service showing with its franchising authority, the City of Half Moon Bay, California, seeking to justify its basic service tier rate. Thereafter, on September 6, 1994, the City of Half Moon Bay petitioned the Commission, requesting assistance in reviewing the basic service tier cost of service showing. The City of Half Moon Bay, a community with a population of approximately 10,000, asserted that it lacked the municipal resources and adequately trained personnel necessary to conduct the cost of service review. The City of Half Moon Bay estimated expenditures of over $25,000 for consultants to perform the review and fiscal year cable franchise fees of approximately $30,000. The Commission granted the City of Half Moon Bay's request on January 27, 1995 and agreed to review Coastside's cost of service showing regarding its basic service tier rates for the City of Half Moon Bay. II. BACKGROUND 2. On May 3, 1993, the Commission adopted rules to implement the cable television rate regulation provisions of the Cable Television Consumer Protection and Competition Act of 1992 ("Cable Act"). In the Rate Order, the Commission adopted a benchmark/price cap methodology, coupled with an opportunity to file cost of service justifications. This framework was designed to strike a balance between the statutory mandate to reduce administrative burdens to subscribers, cable operators, franchising authorities and the Commission while at the same time assuring the reasonableness of cable rates. The Commission determined that a benchmark and price cap approach, designed to approximate the rates a cable operator would offer in a competitive market, should serve as the primary method for regulating basic service tier and cable programming services ("CPS") rates. The Commission also concluded that because the benchmark methodology might not produce fully compensatory rates in all cases, it was appropriate to permit cable operators, as an alternative, to justify rates based on costs, using individual cost of service showings. The cost of service approach was intended to be used only if an operator believed that the maximum rate permitted under the benchmark formula would not enable the operator to recover costs reasonably incurred in providing rate regulated cable services. The Commission established this regulatory framework for both the basic service tier and the cable programming services tiers. 3. On July 16, 1993, the Commission issued a Notice of Proposed Rulemaking which proposed requirements to govern cost of service showings submitted by cable operators seeking to justify rates higher than those determined under the benchmark approach. In February 1994, the Commission adopted interim cost of service rules, setting forth specific regulatory requirements to govern cost of service showings to justify rates above levels determined under its benchmark requirements. The new rules apply to rates charged or to be charged beginning May 15, 1994. 4. Under a benchmark approach to rate regulation the Commission has established a simple formula to derive a rate that would be used to measure the reasonableness of a cable system's per channel rates. The benchmark approach permits a ready means of identifying systems with presumptively unreasonable rates, while at the same time defining a zone of reasonableness that can accommodate a range of existing rate levels below the benchmark. Under cost of service regulation, by contrast, a cable system's rates would be reviewed under traditional rate of return regulation. Cost of service regulation imposes heavy burdens upon regulators and the regulated entity because of the significant administrative and compliance costs associated with this regulatory model. The Commission recognized that some local franchising authorities may have resources and personnel sufficient to conduct a review of the rate-setting justification based on the benchmark approach but not to examine and review a cost of service showing. The Commission also understood that this concern may have discouraged certification by many local franchising authorities. Therefore, it established procedures under which the Commission, if requested by the local franchising authority in a petition for special relief under Section 76.7 of the Commission's rules, will issue a ruling that makes cost determinations for the basic service tier. 5. On August 26, 1994, Coastside, pursuant to Section 76.922(b)(i) of the Commission's rules, filed a cost of service showing with the City of Half Moon Bay. On September 6, 1994, pursuant to Section 76.933(d), the City of Half Moon Bay petitioned the Commission for special relief requesting the Commission's assistance in examining Coastside's cost of service showing. On January 27, 1995, the Commission granted the City of Half Moon Bay's request and agreed to review Coastside's cost of service showing for the basic service tier rate. 6. According to information provided by Coastside in its cost of service showing, its cable system serves approximately 3,537 basic service tier subscribers and 3,288 CPS subscribers in its City of Half Moon Bay franchise. Coastside provides 16 channels on its basic service tier and 18 channels on its CPS tier. 7. Coastside's cost of service showing seeks to establish that its basic service tier rate of $13.71 per month for its Half Moon Bay subscribers is justified based on Coastside's cost of providing basic cable service. In this review process, pursuant to the 1992 Cable Act, we analyze Coastside's cost of service showing to ensure that the rate charged for the basic service tier for the period beginning May 15, 1994, is reasonable and to determine any associated refund liability. III. DISCUSSION 8. In analyzing Coastside's cost of service showing, we considered that the cost of service approach permits rates to be set to allow a company to recover the reasonable costs of providing regulated cable services, including an opportunity to earn a fair return on its investment. If we find that a certain rate base or expense element is not supported, is excessive, or is unrelated to providing regulated cable service, we can disallow that cost in whole or in part. We have evaluated rate base and expense items to determine whether Coastside should be permitted to recover those items in its rates and we have allowed a reasonable rate of return on the rate base. We find that Coastside's basic service tier rate for the period under review is justified. 9. Rate Base and Operating Expenses: Rate base represents the amount of investment the cable company makes in its facilities to provide regulated cable service to its customers. Under traditional cost of service principles, a company is entitled to earn a reasonable rate of return on this investment. As discussed below, Coastside requested an after-tax overall rate of return on investment of 11.25%, which we accept. Cable operators may also recover in rates their reasonable expenses normally associated with providing regulated cable services. In analyzing Coastside's filing, we reviewed the components of Coastside's rate base and operating expenses to determine whether Coastside's current rates are justified under the cost of service showing. We find that Coastside's operating expenses, return on tangible rate base and associated depreciation expense, return on organizational and franchise costs and subscriber lists and associated amortization expense are adequate to support Coastside's current charges for the regulated basic service tier. 10. Rate of Return: A regulated entity is entitled to the opportunity to earn a fair return on investment. That return should be sufficient to ensure confidence in the financial integrity of the enterprise, but should be balanced with our interest in protecting a company's subscribers. In the Rate Order the Commission stated that it would make a case- by-case determination of a reasonable return for submissions made before specific cost rules could be adopted. In the Notice initiating a proceeding to adopt such rules, the Commission discussed its analysis of rate of return generally, and tentatively concluded that an after-tax, overall rate of return in the range of 10% to 14% would reflect a reasonable balancing of subscriber and cable operator interests. Since the release of the Notice, the Commission has adopted a unitary rate of return for cable of 11.25%. The Commission adopted the 11.25% rate of return in the Cost Order, on an interim basis, based on evidence in the record. 11. Coastside's cost of service showing includes an after-tax overall rate of return of 11.25%. We will accept Coastside's application of an 11.25% rate of return for purposes of our review in this proceeding. Coastside's use of 11.25% return is consistent with our findings in the Cost Order. No evidence has been presented to suggest that application of an 11.25% overall rate of return is inappropriate or unreasonable in this case. 12. Revenue Adjustment: Coastside made an advertising revenue adjustment of approximately $100,000 to the CPS tier. The Commission has reallocated $49,000 of that amount to the basic service tier. This allocation more accurately reflects the revenues received for the tiers on which the advertising appeared. 13. Small System Alternative: Finally, because it appears that Coastside may now qualify as a small system, Coastside may wish to seek small system regulatory relief. If Coastside serves fewer than 15,000 subscribers, and is either independent, or owned by a cable company serving fewer than 400,000 subscribers, it may qualify for rate relief as a "small operator." Should Coastside meet the newly-established criteria, it should take the appropriate steps to request special rate relief applicable for small systems. V. CONCLUSION 14. Based on our review of Coastside's cost of service showing for the basic service tier, we find that, as discussed above, Coastside has justified the monthly rate of $13.71 for its basic service tier for the period beginning May 15, 1994. 15. Accordingly, IT IS ORDERED, pursuant to  0.321 of the Commission's rules, 47 C.F.R.  0.321, that the basic service tier rate of $13.71 per month charged by Coastside with respect to the above-referenced community, for the period after May 14, 1994, IS JUSTIFIED, and that no refund liability for the basic service tier will be imposed. 16. IT IS FURTHER ORDERED, pursuant to  76.933(d) of the Commission's rules, 47 C.F.R.  76.933(d), that this ruling is binding on the local franchising authority, the City of Half Moon Bay, and the cable operator, Coastside Cable T.V., and will become effective upon implementation by the City of Half Moon Bay. FEDERAL COMMUNICATIONS COMMISSION William Johnson Acting Chief, Cable Services Bureau