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File how2ftp (.txt & .wp) is in directory \pub\Public_Notices\Miscellaneous. ***************************************************************** ******** $/ORDER remanding local rate order of Wadsworth, Ohio DA 95-1922/$ $/76.922 Basic Tier Rates/$ $/76.923 Rates for equipment and installation/$ $/76.933 Franchising Authority Review of basic cable rates and equipment costs/$ $/76.944 Commission Review of Franchising Authority Rate Decision/$ $/1.45(d)Request for Stay/$ Before The FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matter of ) ) WARNER CABLE ) DA 95-1922 COMMUNICATIONS, INC., ) ) Petitioner, ) ) v. ) ) CITY OF WADSWORTH, OHIO, ) ) Respondent. ) ) Appeal of Local Rate Order ) MEMORANDUM OPINION AND ORDER Adopted: September 6, 1995 Released: September 13, 1995 By the Chief, Cable Services Bureau: I. INTRODUCTION 1. On April 20, 1994, Warner Cable Communications, Inc. ("Warner") filed an appeal of the local rate order, adopted on March 25, 1994, by its franchising authority, the City of Wadsworth, Ohio ("City"). In the local rate order, the City established regulated rates for basic cable service and associated equipment, provided by Warner, as allowed by the Cable Television Consumer Protection and Competition Act of 1992 ("1992 Cable Act"). The local rate order establishes a new schedule of basic service and equipment rates and directs Warner to issue refunds to subscribers for all payments made in excess of the rates set forth in the local order for the period September 1, 1993 through May 14, 1994. The City opposes Warner appeal. 2. Warner raises a number of issues on appeal. Specifically, Warner alleges that, in the local rate order, the City improperly: (1) regulated three channels offered as a tier or individually (a la carte); (2) excluded a home shopping network (QVC) from the basic service tier; (3) required the lowest bulk rate in the franchise area to be the bulk rate charged to all bulk subscribers in the franchise area; (4) found that Warner may have violated the Commission's rate freeze; (5) prevented Warner from selling in-house amplifiers to subscribers; (6) prevented Warner from charging cable programming service tier subscribers a monthly additional outlet fee; (7) prevented Warner from charging subscribers for service calls; (8) disallowed Warner treatment of its monthly "community service fee" as a franchise fee. Warner further claims that the procedures used by the City in adopting its local rate order violated the Commission's due process rules. Warner contends that those City actions were improper and in violation of our rules. We consider each of these issues in turn. Warner also questions the authority of local franchising authorities to require refunds. We have responded to that argument previously and have established rules which authorize the local franchising authority to order refunds for unreasonable basic service tier rates. We will not revisit that issue here. II. DISCUSSION 3. Under our rules, rate orders issued 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. A La Carte Channels 4. Warner objects to the City's decision to calculate maximum initial permitted rates for basic services by treating Warner's a la carte package, consisting of American Movie Classics (AMC), The Discovery Channel (Discovery) and WTBS, as a rate regulated offering. Warner argues that its a la carte package complies with the provisions of the 1992 Cable Act, which it contends encourage cable operators to unbundle programming services from regulated tiers and offer them on a per-channel basis, and that the package complies with the Commission's a la carte rules in effect at the time the package was created. Warner further argues that the City's reliance upon the 15 interpretive guidelines announced by the Commission in March, 1994 to determine the regulatory status of Warner's a la carte channels constituted "retroactive rulemaking." The City responds that it properly applied the Commission's guidelines on a la carte packages and concluded that the channels in the Warner package should be treated as regulated channels. 5. The Warner a la carte package at issue resulted when Warner restructured the service offerings on its Wadsworth system. Warner's restructuring involved offering two channels, AMC and Discovery, that previously had been offered on its former cable programming service tier (Warner "standard" tier) and one, WTBS, previously offered on its former basic cable programming service tier, on an individual basis and also as a package that Warner alleges is not subject to rate regulation. 6. The facts presented in this appeal closely resemble the facts presented in one of our letter of inquiry orders on a la carte packages, Time Warner Cable (Everett, Winthrop and Somerville, Massachusetts), DA 94-1353 (Cab. Serv. Bur., released December 2, 1994). In Time Warner Cable, we found we could not say that it was clear that the a la carte package, identical to the one at issue here, offered by Warner on its Everett, Winthrop and Somerville, Massachusetts system was not a permissible non-rate regulated offering under our rules. We further concluded that in light of the prior confusion over what constituted a permissible non-rate regulated a la carte offering, it would be inequitable to subject Warner to refund liability or to require Warner to restructure its tiers so as to return the channels offered in the a la carte package to regulated tiers. Instead, we found that, on a prospective basis, Warner's a la carte package may be treated as a new product tier under the Commission's Implementation of Sections of the Cable Television Consumer Protection and Competition Act of 1992: Rate Regulation, MM Docket No. 92-266, Sixth Order on Reconsideration, MM Docket No. 92-215, Fifth Report and Order, 10 FCC Rcd 1226 (1995) ("Going Forward Order"). 7. We find that the City's determination in its local rate order that the channels comprising Warner's a la carte package must be included as regulated channels is inconsistent with the action taken in Time Warner Cable. We further find that, in accordance with Time Warner Cable, Warner's a la carte package should not be treated as a rate- regulated tier of service. Accordingly, Warner's appeal on this issue is granted and we remand the local rate order to the City for further proceedings consistent with this ruling. B. Basic Service Tier Channel Addition 8. Warner next contends that the City erred in not recalculating its FCC Form 393 maximum permitted per-channel rate to account for the fact that a regulated channel (QVC) was added to Warner's lineup on November 22, 1993, increasing the number of regulated channels from 15 to 16, after the initial date of regulation. The City counters that on the initial date of regulation, Warner had 15 regulated basic channels and it was therefore proper to base its rate order on that fact. The City also contends that it wasn't notified of the channel addition until December 17, 1993 and that in the materials received on that date, Warner stated that the new channel lineup would not become effective until January 24, 1994. 9. 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. 10. 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. 11. An important variable in calculating an operator's benchmark rate is the number of regulated channels which it offers. In a situation similar to the present one, we concluded that an operator that changed its channel line-up after the initial date of regulation should have two different maximum permitted rates, one rate for the period prior to the channel line-up change, and another rate for the period after the change. We agree with Warner that its channel line-up change should be taken into account in the determination of its maximum permitted basic tier rates. Contrary to the City's assertion, the fact that Warner may have added the channel to the basic tier before it gave proper notice to its subscribers does not preclude recalculation of its per-channel rate. Instead, the timing of Warner's notice determines the period over which the two rates, one prior and one subsequent to Warner's channel line-up change, are calculated and applied in determining refund liability. On remand, the City should determine the date both subscribers and franchising authorities had thirty days notice of the channel line-up change, as required by our rules. That date will then serve as the date Warner channel line-up change became effective for purposes of recalculating its per-channel rate. The rate for the period from September 1, 1993 until the channel line-up change date, will remain the same. The rate for the second period, from the channel line-up change date until May 14, 1994, should be determined by multiplying the increased number of channels on Warner's basic service tier (16) by Warner's maximum permitted per-channel charge, as set forth on Line 600 of Part II of its FCC Form 393. This issue is remanded to the City for further proceedings consistent with this opinion. C. Bulk Rates 12. Warner next contends that the City erred in ordering it to provide the "highest discount" (i.e., the lowest bulk rate) to all Multiple Dwelling Unit ("MDU") bulk customers. The City counters that it took this action only because Warner failed to justify distinctions among its bulk rates charged to MDU customers. While the City may order the rates of MDUs reduced to a lower rate established by Warner for MDUs of the same size and under similar conditions, the City may not simply reduce all bulk rates offered by Warner to the lowest bulk rate. 13. Franchising authorities have the authority to regulate bulk basic rates to ensure compliance with the uniform rate provisions of the 1992 Cable Act. Under our rules, cable operators may offer different bulk rates to MDUs of different sizes and may vary bulk rates based on the duration of the contracts, provided the operator can justify the rate differences based on relative cost savings. Operators must, however, offer the same rates to MDUs of the same size with contracts of similar duration. Accordingly, on remand, the City may order Warner to charge identical rates to all MDUs of the same size with contracts of similar duration. The City may not, however, simply reduce all bulk rates offered by Warner to the lowest bulk rate. This issue is therefore remanded to the City for further proceedings consistent with this order. D. Rate Freeze 14. Warner next contends that the City erred by finding in the local rate order that Warner may have violated the Commission's rate freeze. Warner claims it did not violate the rate freeze and that in any event, the Commission, not the City, has exclusive jurisdiction to enforce the rate freeze. The City counters that it simply found that a freeze violation may have occurred and would consider taking further action in an appropriate forum. Since the City has not attempted to enforce the rate freeze, we have no controversy to resolve and this issue is therefore dismissed. E. In-house Amplifiers 15. Warner next contends that the City erred by prohibiting Warner from imposing charges for in-house amplifiers sold to subscribers. The City counters that it disallowed the charge because Warner failed to sufficiently justify the charge. Warner replies that this equipment is not properly subject to regulation by the City because it is sold to customers, not leased. 16. Under the Commission's rules, rates for equipment, whether leased or sold to subscribers, used to receive basic service are regulated. Our rules provide that regulated equipment consists of all equipment in a subscriber's home used to receive basic service. Regulated equipment ". . . consists of all the equipment in a subscriber's home that is used to receive the basic tier . . .. Such equipment shall include, but is not limited to: (1) converter boxes; (2) remote control units; (3) connections for additional television receivers; and (4) other cable home wiring." This list of equipment is not intended to be an exhaustive list of all possible types of regulated equipment, but all such equipment, at a minimum, "must be used to receive the basic service tier." The Commission has interpreted the phrase "equipment used to receive the basic service tier" so as to comport with Congressional intent. Rates for the sale of regulated equipment must be based on actual costs and must be "unbundled" or priced separately. 17. Amplifiers are devices used to strengthen a cable signal which might otherwise be too weak for a television to process properly. Households with additional outlets "split" the cable signal, thus reducing its strength and its ability to reach a television receiver. Without an amplifier, televisions attached to additional outlets may receive a weakened signal and project a poor quality television picture. Amplifiers may therefore be necessary for some subscribers to receive basic service through their additional outlets and are subject to our rate regulations. The price subscribers are charged for amplifiers must comport with the actual cost standard of our rules. Under this standard, an operator must be permitted to recover the cost of the equipment, including the costs to store and prepare it, plus a reasonable profit. A franchising authority may not arbitrarily set prices for such equipment at zero. Warner's appeal on this issue is therefore remanded to the City for further proceedings consistent with this order. F. Additional Outlet Charges 18. Warner next contends that the City improperly disallowed its additional outlet charge. Warner claims that the charge is assessed to recover additional program supplier costs for the cable programming service (CPS) tier and therefore only subscribers receiving the CPS tier are assessed the additional charge. The City does not dispute Warner's assertion that only CPS subscribers are assessed the charge. Characterizing the charge as related exclusively to programming costs for its CPS tier, Warner further contends that the City lacked jurisdiction to rule on the matter. The City counters that Warner did not adequately justify its claim that the charge was due to additional programming costs for CPS tier subscribers. 19. The jurisdiction of local franchising authorities to regulate cable television rates is limited to those charges and services associated with the basic service tier. Charges associated solely with the CPS tier are under the Commission's jurisdiction. Because most equipment-related charges imposed on the CPS tier are also imposed on the basic tier, local franchising authorities almost always regulate such charges. In rare instances, however, certain equipment-related charges may be related only to the CPS tier, such as additional programming costs for channels only carried on the CPS tier, placing the charges under Commission jurisdiction. The City does not contest Warner's assertion that the additional outlet charges at issue are imposed only on CPS subscribers to recover programming costs associated with the CPS tier. Because the additional outlet charges are imposed only in connection with programming carried on the CPS tier, the Commission, not the City, has jurisdiction over this matter. Under the facts of this case, the City should not have issued a ruling regarding these charges. Since the City did not have jurisdiction to reach the additional outlet charge, we remand this issue to the City so that it may modify its local rate order accordingly. G. Community Service Fee 20. Warner has been charging subscribers what it refers to as a monthly "community service fee" in the amount of $1.63. Warner claims that the community service fee reflects its operating costs associated with meeting public, education and governmental ("PEG") access requirements imposed by the City. Warner argues that this fee should be considered a part of its franchise fee which, as an external cost, would allow Warner to continue to charge subscribers for the fee as a separate item on their bills, as it did until the City passed the local rate order at issue here. As an external cost, Warner added and itemized the fee on subscribers' bills in the same manner as its franchise fees. 21. The City responds that its franchise agreement with Warner was issued before 1984 and the fee is therefore statutorily precluded from being a franchise fee by the 1984 Cable Act. The City believes that Warner is charging the community service fee in an attempt to evade rate regulation. The City further claims that if Warner prevails on its appeal, Warner would collect revenue twice for the same PEG channels since it would be allowed both to externalize PEG costs when determining original maximum basic service rates and to continue to count PEG channels among the number of basic service channels used to establish maximum rates. 22. Franchise fees are accorded external cost treatment under our rules. A cable operator's permitted per-channel charges for regulated programming services may be adjusted for changes in external costs, which are defined by the Commission's rules. While our regulations provide that an operator may only adjust its charges to the extent that certain external cost increases exceed the rate of inflation, franchise fees can be fully recovered without regard to the treatment of inflation on Form 393. All other "external" costs must be internalized in an operator's initial rate calculations. Franchise fees are defined in the Communications Act as "any tax, fee, or assessment of any kind imposed by a franchising authority . . . on a cable operator or cable subscriber . . . solely because of their status as such." The same provision of the Communications Act, however, specifically excludes from that definition "payments . . . made by the cable operator . . . for, or in support of, the use of, public, educational, or governmental [PEG] access facilities." The "community service fee" at issue is in the nature of a payment made in support of PEG access facilities, which excludes it from the definition of franchise fee. The distinction is evident on Warner subscriber bills, where it separately itemizes the franchise and "community service fee," thus recognizing the separate identity of each. Therefore, the "community service fee" is not entitled to external cost treatment and the City's holding was reasonable. Warner's appeal of this issue is denied. H. Due Process 23. Finally, Warner contends that the City violated the Commission's due process rules in adopting the local rate order. Specifically, Warner states that our rules were violated by the City's actions in failing to provide Warner adequate opportunity to comment on the proposed rate order and refund; failing to provide Warner with a copy of the revised Form 393 prepared by the City's consultant; and failing to specifically approve Warner Hourly Service, on which its equipment and installation rates are based. The City responds by stating that Warner was given ample opportunity to participate in the rate-making process and that the Commission's due process rules were followed in all other respects. 24. 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 proposed rates. The written report must affirmatively demonstrate why the operator's proposed rates are unreasonable and why the prescribed rates are reasonable. There is no requirement that the franchising authority share any reports or revised Form 393s that it may have used in its rate review process. We do not require evidentiary hearings; although certainly if circumstances dictate, such hearings would be permitted. However, we deem it sufficient for the local authority to consider the written views of interested persons on issues raised about the operator's proposed rates. Here, after exchanging several letters on issues raised by the parties, the City's Cable TV Commission (CTVC) prepared a recommendation and provided a copy to both the City and Warner. Warner was given an opportunity to submit comments on the CTVC's recommendation. Even though Warner's comments were late, as were several of Warner's responses to City requests for additional information, the comments and responses were accepted and given full consideration by the City. The rate order also sets forth and affirmatively demonstrates the City's findings with regard to the issues that had been discussed previously. It is clear from the record below that the City conducted its review of Warner's Form 393 in compliance with the procedural safeguards established by the Commission. We conclude that, in considering Warner's Form 393 and in adopting its local rate order reflecting that consideration, the City acted reasonably and met our procedural requirements. 25. With respect to Warner's claim that it did not receive a copy of the City's revised Form 393, although franchising authorities are required to provide a written explanation for their rate orders, they are not required to provide operators with a copy of revised Form 393s. Moreover, in this instance, the City provided Warner with the consultant's report, upon which the City relied upon in issuing its rate decision. It appears from the submissions that the parties were in close contact throughout the rate review process, at least through the exchange of several letters, and that the City informed Warner of the City's actions at every stage. We note that Warner was able to present arguments in its appeal addressing very specific and technical aspects of our rules as applied to the City's rate order. Upon review, we therefore conclude that Warner had enough information to understand the logic and to recognize the factual bases of the City's rate decision. III. ORDERING CLAUSES 26. Accordingly, IT IS ORDERED that Warner's appeal of the City's local rate order, regarding the City's authority to order refunds, external treatment of the community access fee and due process issues, IS DENIED. 27. IT IS FURTHER ORDERED that the City's local rate order, regarding the a la carte package, channel addition, bulk rates, in-house amplifiers, and additional outlet issues, IS REMANDED to the local franchising authority for further proceedings consistent with this opinion. 28. IT IS FURTHER ORDERED that Warner's appeal, regarding the satellite channel count, rate freeze and service call charge issues, IS DISMISSED. 29. IT IS FURTHER ORDERED that the stay granted pending review of Warner's appeal IS RESCINDED. 30. 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