NOTICE ********************************************************* NOTICE ********************************************************* This document was originally prepared in Word Perfect. If the original document contained-- * Footnotes * Boldface & Italics --this information is missing in this version The document format (spacing, margins, tabs, etc.) is changed too. If you need the complete document, download the Word Perfect version. For information about downloading documents (FTP) see file how2ftp. File how2ftp (.txt & .wp) is in directory \pub\Public_Notices\Miscellaneous. ***************************************************************** ******** $//[Cablevision of East Hampton, East Hampton, New York], MO&O, DA95-2254//$ $/76.922 Rates for Programming Services tiers/$ $/benchmark ca ble rates/$ Before the Federal Communications Commission Washington, D.C. DA 95-2254 In the Matter of ) ) Cablevision of East Hampton ) CUID No. NY0149 (East Hampton) ) Benchmark Filing To Support ) Cable Programming Service Price ) MEMORANDUM OPINION AND ORDER Adopted: October 30, 1995 Released: November 14, 1995 By the Chief, Cable Services Bureau: 1. Here we consider a complaint about the price that the above-captioned operator ("Operator") was charging for its cable programming service ("CPS") tier in the community referenced above. 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 date 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 valid complaint. The filing of a valid 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 valid 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. 4. The complaint in the franchise area which is the subject of this Order was completed and served on Operator on December 13, 1993 and received by the Commission on December 16, 1993. Operator filed FCC Form 393 in response on June 6, 1994. 5. Operator admits that its monthly CPS tier price is not justified by its benchmark filing because its price is higher than the maximum permitted charge as calculated in its filing. Thus, Operator has failed to demonstrate that its price for the CPS tier was not unreasonable. Furthermore, upon review of Operator's submission, we have found that Operator miscalculated its maximum permitted price, and it is therefore appropriate to make the following adjustments to Operator's calculations in its Form 393: a. In Column G of Schedules A and C of Part III of its FCC Form 393, the 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 "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 price. We therefore recalculate Column G of Schedules A and C (and subsequent steps) using correctly grossed-up tax entries. b. Operator calculated the Inflation Adjustment Factor (Line 127, Worksheet 1, Part II) as of the end of May 1994 using data released by the U.S. Department of Commerce on March 31, 1994. However, Operator's use of May 1994 as the date through which it calculated the inflation adjustment is impermissible. The instructions to FCC Form 393, page 11, require that the Inflation Adjustment Factor be calculated using the "number of whole months from September 30, 1992 to the date you will submit this form." (emphasis added) In general, a cable operator must submit a justification of its rates no more than 30 days after service of the earliest valid complaint. Operator was served with the rate complaint on December 13, 1993. Since Operator was required to file a rate justification no later than January 12, 1994, Operator should have used December 1993 as the base date for calculating the Inflation Adjustment Factor. We must therefore recalculate the Inflation Adjustment Factor on the basis of the most accurate data currently available for the correct base date. On July 29, 1994, the Department of Commerce released corrected inflation data including Gross National Product Price Index ("GNP-PI") figures of 122.3 for the third quarter of 1992 and 126.5 for the fourth quarter of 1993. Using these GNP-PI figures, we calculate 1.034 as the Inflation Adjustment Factor through December 1993, the base date Operator should have used in justifying its rate. 6. Upon review of the record herein, and having incorporated the adjustments discussed above, we conclude that Operator has failed to justify the rate it was charging during the period in question. Operator's showing justifies the maximum reasonable CPS tier price of $15.15 per month (plus franchise fee) for the period from December 16, 1993 to May 14, 1994. 7. Accordingly, IT IS ORDERED, pursuant to Section 0.321 of the Commission's Rules, 47 C.F.R.  0.321, that the complaint referenced herein against the cable programming service price charged by Operator in the franchise area referenced in the caption IS GRANTED TO THE EXTENT INDICATED HEREIN. 8. 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 the franchise area referenced in the caption that portion of the amounts paid for cable programming service for the period from December 16, 1993 to May 14, 1994 which exceeded the maximum permitted price of $15.15 per month (plus franchise fee), plus interest to the date of the refund. 9. IT IS FURTHER ORDERED that Operator shall promptly determine the overcharges to CPS subscribers for the stated period, 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 of the plan. 10. 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 with respect to the franchise area listed herein, for the period beginning May 15, 1994, to reduce the monthly charge per tier as of March 31, 1994 for Tier 2 (Line A6b) to equal the maximum permitted price of $15.15 (plus franchise fee). 11. IT IS FURTHER ORDERED that Operator shall place into effect, within 30 days after its 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