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File how2ftp (.txt & .wp) is in directory \pub\Public_Notices\Miscellaneous. ***************************************************************** ******** $//Appeal ORDER, King Videocable Company, El Dorado Hills, CA DA 95-2110/$ $/76.922 Rates for the basic service tier/$ $/76.923 Rates for equipment and installation/$ $/76.944 Commission Review of Franchising Authority Decisions/$ Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matter of: ) ) KING VIDEOCABLE COMPANY - ) PLACERVILLE ) DA 95- 2110 ) Appeal of Local ) Rate Order of El Dorado Hills ) Community Services District, CA ) FCC CUID No. CA1193 ) MEMORANDUM OPINION AND ORDER Adopted: October 3, 1995 Released: October 12, 1995 By the Chief, Cable Services Bureau: I. INTRODUCTION 1. On February 25, 1995, King Videocable Company - Placerville ("King"), the franchisee in the above matter, filed an appeal of a rate order adopted on January 12, 1995 and released on January 25, 1995 by its local franchising authority, El Dorado Hills Community Services District, California (the "District"). On March 10, 1995, the District filed an opposition, urging the Commission to deny King's appeal, to which King filed a reply. In its rate order, the District established rates for basic tier service and associated equipment and installations and required King to refund overcharges to subscribers. 2. The District's rate order applies to King's Form 393 rate filing as well as its Form 1200 and 1205 rate filings. King challenges the rate order on two issues which are applicable to both rate filings. First, King challenges the District's decision to reject King's valuation of capital costs for customer equipment. King contends that the District inappropriately applied cost-of-service principles to a benchmark rate filing in reviewing King's rates for equipment. Second, King asserts that the District inappropriately rejected its proposed rates for certain installations and recalculated them to more closely conform with those rates contained in a survey conducted by the National Association of Telecommunications Officers and Advisors ("NATOA") documenting operator's rates in various regulated systems around the country. 3. In response, the District claims that King did not cooperate with its requests for more information throughout the review process, which impeded its ability to make a fully informed decision. Before issuing its rate order, the District states that it requested that King explain and justify certain figures relating to its equipment basket, including those figures challenged in this appeal. The District contends that King never provided sufficient justification for its installation-related figures. As a result, the District conducted its own independent analysis, which resulted in it making changes to King's rate filing and requiring adjustments to particular rates. The District asserts that it made this decision based on the best information available. 4. 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. 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. II. DISCUSSION 5. 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. FCC Forms 1200 and 1205 are the official forms used to determine whether regulated rates for programming, equipment and installations are reasonable under the revised benchmark rules which apply to operators beginning May 15, 1994 or upon the expiration of the deferral period provided under our rules for operators to comply with our revised rules. Maximum permitted rates for equipment and installations are based on actual cost and are calculated in Part III of the Form 393 and, under the revised rules, in Form 1205. Equipment rates are derived from total capital and maintenance costs per unit of equipment. Installation rates are derived from calculation of an hourly service charge and application of that charge to different types of installations. Under our regulations, the maximum permitted rates are deemed to be reasonable, as required under the 1992 Cable Act. A. Valuation of Capital Costs 6. As required by the Commission's benchmark rules to calculate its rates for regulated equipment and installations, King completed Part III of Form 393 to calculate its permitted equipment and installation rates effective from September 1, 1993 until May 14, 1994 and the entirety of Form 1205 to set its equipment and installation rates thereafter. Both of these forms require an operator to provide information regarding certain capital costs related to equipment and installations. King provided the required capital cost information using gross book valuations as recorded in King's financial records. In the local rate order, the District adjusted King's reported gross book values to instead reflect the original cost of the assets. The District's adjustments reduced King's total capital costs, resulting in a reduction in its rates for certain customer equipment. 7. On appeal, King argues that it was inappropriate for the District to adjust King's capital costs to reflect the original cost of its assets. King argues that this action is improper where an operator has elected to justify its rates using the benchmark approach. King asserts that the District inappropriately relied on the Commission's cost-of-service rules, as authority to support calculating King's capital costs based on original cost. King maintains that so long as King's financial acquisition records reflect the acquired assets at fair market value and those records are maintained in accordance with generally accepted accounting principles ("GAAP"), its valuation data should not be rejected by the District in calculating King's capital costs for equipment. 8. In response, the District maintains that by applying original cost valuation to King's capital costs for equipment and installations it did not transform the review of King's Form 393 and Form 1205 from a benchmark proceeding into a cost-of-service proceeding. The District claims that it analyzed King's rates for basic service and related equipment under the Commission's guidelines for benchmark proceedings, although it asserts that the Commission has stated that there is no difference in establishing rates for equipment and installations using either the benchmark or cost-of-service approach. The District contends that it used original cost data rather than King's fair market valuation in order to satisfy the requirement, established by the Section 623(b)(3) of the 1992 Cable Act and by the Commission's rules, that equipment and installation rates be based on "actual cost." The District argues that the original cost valuation is specifically required by the Commission's cost-of-service rules and that the benchmark rules direct operators to follow the cost allocation principles contained in the cost-of-service rules because rates for regulated equipment and installation are required to be based on actual costs. As a result, the District claims that even under the Commission's benchmark rules, capital costs for equipment should be valued at original cost. 9. Pursuant to the 1992 Cable Act, the Commission was required to establish standards and procedures to prevent unreasonable charges for regulated equipment. In doing so, we were to ensure that operators justify their rates using methods that are consistent with the 1992 Cable Act, rely on principles that will result in reasonable rates for subscribers and create the least administrative burden. The 1992 Cable Act also directs the Commission to establish standards for setting, on the basis of actual cost, the rates for installation and lease of equipment used by subscribers to receive the basic service tier. 10. In establishing a framework for regulating basic service as required under the 1992 Cable Act, the Commission adopted two distinct regulatory methods to allow cable operators to justify the reasonableness of their rates: the benchmark and cost-of-service methods. The benchmark approach serves as the primary regulatory mechanism for setting initial regulated rates and for governing rates on a going-forward basis. As an alternative, a cable operator may use a cost-of-service approach if it believes that the maximum rate permitted under the benchmark formula does not enable the operator to recover costs that it reasonably incurred. With respect to the rules we established for the benchmark approach, we stated in the Rate Order: [W]e will require the local franchising authorities to follow the detailed guidelines we now adopt for identifying the costs to be recovered through equipment and installation rates and for calculating those rates. We believe that our guidelines satisfy the statutory requirements, and thus, a local franchising authority's proper use of [the guidelines] to determine reasonable rate levels cannot form the basis of a cable operator's complaint to the Commission. As part of the guidelines we established for setting rates, we required cable operators electing the benchmark approach to submit FCC Form 393 and subsequently, under our revised rules, Forms 1200 and 1205. 11. The general instructions to Form 393, Part III ("Worksheet for Calculating Equipment and Installation Charges") state that the operator "should complete this form using financial data from the company's general ledger and subsidiary records maintained in accordance with generally accepted accounting principles." The instructions to Part III, Schedule A (Annual Capital Costs Associated with Maintenance and Installation of Cable Facilities and Service) direct operators to enter in Column B for the equipment categories in Column A "the gross book value for the categories listed in Column A as of the date you last closed your books." The instructions to Part III, Schedule C (Capital Costs of Customer Equipment) direct operators to enter in Column B "the gross book value of the listed equipment." 12. FCC Form 1205, which is the successor to Part III of Form 393, includes virtually identical instructions as in Form 393. The General Instructions to Form 1205 state that operators "should complete this Form using financial data from the company's general ledger and subsidiary records maintained in accordance with generally accepted accounting principles." The Instructions for Schedule A" (Capital Costs of Service Installation and Maintenance of Equipment and Plant) direct that for Line B, Gross Book Value, operators enter for each category of equipment and plant listed, the "gross book value as of the date you closed books for the time period covered by the Form." The Instructions for Schedule C (Capital Costs of Leased Customer Equipment) direct that for Line D, Gross Book Value, operators "enter the gross book value of the listed equipment as of the date you closed books for the time period covered by the filing of this Form." King followed these instructions in completing Part III of Form 393 and Form 1205, and consequently included as the gross book values information recorded on King's general ledger and subsidiary records as of the date it last closed its books. 13. In requiring King to report the original cost of the assets as its gross book values, the District disregarded the instructions to Form 393 and Form 1205. Because the specific instructions to Part III of Form 393 and to Form 1205 direct operators to use general ledger data, local franchising authorities do not have the authority to further interpret the term "actual cost" as used in the 1992 Cable Act, in our Rate Order, and in the general instructions to Form 393 and Form 1205. Form 393 and Form 1205 are integral parts of the Commission's guidelines and therefore local franchising authorities are required to follow their requirements. 14. In a supplemental pleading filed after the completion of the official pleading cycle, King claims that an Order recently released by the Bureau addressed this identical issue under similar circumstances. King points out that in this Order, we determined that so long as an operator's financial records reflect its assets valued at fair market value and those records are maintained in accordance with GAAP, valuation of capital assets at book value, rather than original cost, is appropriate. We agree with King that our ruling in Crown Media is dispositive in this case. The result here satisfies the actual cost requirement under the 1992 Cable Act, promotes the establishment of reasonable rates, and minimizes administrative burdens by not requiring operators to adopt new accounting methods. Therefore, we reject the District's argument and reaffirm our decision in Crown Media. B. Installation Rates 15. The District rejected the rates that King had established for various customer installations after the District determined that the rates established by King were higher than national averages supported by a NATOA survey, higher than rates in other franchise areas served by King, and based on what the District considered to be unrepresentative supporting data. In setting King's permitted installation rates, the District relied upon certain averages contained in a survey of cable rates conducted by NATOA. Specifically, the District used national median installation times calculated from the survey results rather than the installation times computed by King. As a result, the District set King's rates for installations at levels lower than those established by King on its rate filing. 16. King contends that the District's decision was result-oriented, rather than based on the best available data. King also argues that, under the Commission's rules, an operator's installation rates must be based on its own particular costs, not on national averages determined by an informal rate survey. King claims that its installation rates were based on reasonable, good-faith estimates and that it provided supporting documentation to the District in a timely manner in accordance with the District's request. King disputes the District's characterization of its request for supporting documentation as one for basic information that should have been easily attainable from King's records. King asserts that the documentation that it provided to the District in response to its request could not be collected from its past records because King did not previously track this information in the normal course of business. 17. In response, the District contends that King did not meet its burden in justifying its rates for various installations and therefore the District was reasonable in rejecting them. The District emphasizes that it requested basic supporting data from King and that it took King over four months to produce any such documentation. Moreover, when King finally provided the documentation to the District at the very end of its review period, the District claims that the data was delivered in conclusory fashion and was unrepresentative because it was based on a study conducted by King over only a 42-day period that overlapped both the Thanksgiving and New Year holidays. Because it found that King's data was not credible, the District instead relied upon a NATOA survey of rates based on Form 393 submissions filed in 143 franchise areas and used the median number of hours for installations calculated from the survey to set King's installation rates. 18. As explained above, except in unusual circumstances, installation rates are to be based on an operator's actual costs. The District claims that it was justified "in setting reasonable rates based on other information available" after it determined that King had not submitted representative data supporting its rates for various installations. We disagree. Although the District could reasonably question the comprehensiveness of King's supporting data, under the facts here the District was not reasonable in relying on the NATOA survey as a substitute basis to set King's installation rates. 19. King has the burden to justify its rates. King attempted to meet this burden by providing documentation in support of its installation rates. Although we recognize that this documentation was submitted rather late in the review process, the District was still obligated at this point to substantively analyze this data or, if unsatisfied with the data, to ask King to supplement it. The District did not do so. Instead, the District rejected King's supporting documentation because King took four months to produce it and because it was based on what it considered to be an unrepresentative study. However, even though the District found that the documentation was unrepresentative, it did not find that it was wholly inaccurate or nonresponsive. While King had the burden to justify its rates, the District was obligated to set its rates based on the best information available. In setting King's installation rates, the District should not have wholly dismissed the information provided by King. This does not mean that our rules prohibit the District from questioning King's supporting documentation or from requesting additional documentation from King. However, the District should have at least used the submitted documentation as a starting point for its analysis, rather than rejecting it outright. The District may have been reasonable in using the NATOA survey for comparative purposes or as a basis for questioning King's rates, but it should not have relied on it alone to set King's rates unless it proved that King would not provide adequate data. As the survey itself indicated, there was a wide disparity in the rates established by the various operators covered by the survey. Although King may have submitted its supporting documentation near the end of the District's review period, the documentation purported to contain King's cost information. Any change in King's rates should have been based on an analysis of that information. We therefore grant King's appeal and remand this issue to the District for resolution in accordance with the terms of this Order. III. ORDERING CLAUSES 20. Accordingly, IT IS ORDERED that the appeal filed by King Videocable - Placerville with respect to the appropriate valuation of its capital assets IS REMANDED to its local franchising authority, El Dorado Hills Community Service District, California, for resolution in accordance with the terms of this Order. 21. IT IS FURTHER ORDERED that King's appeal of El Dorado Hills' local rate order, regarding King's permitted installation rates IS REMANDED to El Dorado Hills for resolution in accordance with the terms of this Order. 22. This action is taken by the Chief, Cable Services Bureau, pursuant to authority delegated by section 0.321 of the Commission's rules. 47 C.F.R.  0.321. FEDERAL COMMUNICATIONS COMMISSION Meredith J. Jones Chief, Cable Services Bureau