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. ***************************************************************** ******** Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 DA 95-2256 In the Matter of: ) ) TCI OF ILLINOIS, INC. ) MACOMB, ILLINOIS ) ) Appeal of Local ) Rate Order of City of ) Macomb, Illinois ) ORDER Adopted: October 16, 1995 Released: November 8, 1995 By the Chief, Cable Services Bureau: I. INTRODUCTION 1. On September 15,1994, TCI of Illinois, Inc. ("TCI-I") filed with the Commission an Appeal of the local rate order ("local order") adopted on August 16, 1994 by the City of Macomb, Illinois (the "City"). In its local order, the City ordered TCI-I to make refunds to subscribers in the amount of $0.37 per subscriber, per month for the period September 15, 1993 through July 14, 1994. 2. In its appeal, TCI-I challenges the local order on the ground that the City improperly calculated TCI-I's refund liability by failing to offset overcharges on its basic service tier against undercharges for associated equipment and programming on its cable programming services ("CPS") tier. The City, after reviewing TCI-I's Form 393, set TCI- I's maximum permitted rate for its basic service at a level which was lower than the rate TCI-I had been charging subscribers for basic service. The City, in order to compensate subscribers for those overcharges, ordered TCI-I to issue refunds in the amount its current rate exceeded the maximum permitted rate for basic service. While TCI-I does not dispute that it is liable for subscriber refunds, it does dispute the method by which the City calculated TCI-I's overall refund liability, claiming that it is unduly restrictive and results in refunds beyond those allowed by our rules. Specifically, TCI-I argues that the City ordered a $0.37 subscriber refund based on excessive basic service tier rates without allowing an offset or reduction in that refund by the amount undercharged for the CPS tier and by the amount undercharged for equipment. 3. 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 hat decision. The Commission will reverse a franchising authority's decision only if it is determined that the franchising authority acted unreasonably in applying the Commission's rules in rendering its local 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 4. TCI-I objects to the methodology used by the City to calculate TCI-I's refund liability. The City found, upon completion of its review of TCI-I's Form 393, that TCI-I's current charge for its basic service tier was $9.67 and that its maximum permitted rate for that tier was $9.30. The City ordered TCI-I to make refunds in the amount of $0.37 per subscriber for each month of the applicable period. The City calculated TCI-I's refund liability without regard to offsetting overcharges on its basic service tier against undercharges on its CPS tier and undercharges for equipment. The City's calculation of refund liability, TCI-I argues, ignores key mathematical principles underlying the Commission's system of rate regulation. 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 period September 1, 1993 through 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 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 current rates the operator has actually been charging during the period of review. 6. 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, it must reduce this rate level to the benchmark rate or by 10%, whichever 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. 7. After setting the various regulated rates that an operator is permitted to charge on a prospective basis, a local franchising authority should then determine if the operator is liable for any subscriber refunds. Refund liability can be imposed by a local franchising authority when an operator's charges exceed maximum permitted levels during the applicable period of review. If an operator's aggregate revenues exceed its revenues computed from its maximum permitted rates, as derived in Form 393, the operator must refund the difference to its subscribers. For example, cable operators are permitted to offset equipment and installation undercharges against basic service tier overcharges in order to avoid or reduce refund liability. In this proceeding, any refunds to be paid by TCI-I should be calculated based upon this method. 8. The City found that TCI-I had been overcharging subscribers for its basic service tier and ordered a refund in the amount that TCI-I's rates exceeded maximum permitted rates. The City has regulatory authority over TCI-I's rates for basic service and may order refunds of such overcharges under those circumstances. The City must account for all overcharges and undercharges subject to its authority in computing TCI-I's overall refund liability. Almost all equipment charges, even charges for equipment that is used for services in addition to the basic service tier, are subject to the regulatory authority of the local franchising authority and are to be included in calculating refund liability. The City should have offset overcharges for basic service against any undercharges for associated equipment and installation. The record below is unclear as to whether the City determined that TCI-I justified its rates for associated equipment and installation or that they were, as TCI-I alleges, below maximum permitted levels. Accordingly, we are remanding this issue to permit the City to make such a determination. 9. TCI-I, in its appeal, also challenges the City's refusal to offset overcharges on the basic service tier with alleged undercharges on the CPS tier. Under our two-tiered system of rate regulation established by the 1992 Cable Act, local regulators have jurisdiction to regulate rates for basic service while the Commission has jurisdiction to regulate rates for the CPS tier. Pursuant to that authority, we have reviewed the rate filings made by TCI-I to justify the rates charged on its CPS tier. We determined that TCI-I overcharged its subscribers for service on its CPS tier. We further determined, however, that the total overcharge per subscriber was de minimis. We concluded therefore that it would not serve the public interest to order a refund. That rate decision renders the issue raised here of interjurisdictional offsets moot. As a practical matter, we have found that there are no undercharges on the CPS tier against which TCI-I may offset overcharges on its basic service tier. III. ORDERING CLAUSES 10. Accordingly, IT IS ORDERED, that TCI-I's appeal of the local order with respect to offsetting overcharges on its basic service tier with undercharges for associated equipment and installation is hereby REMANDED. 11. IT IS FURTHER ORDERED that TCI-I's appeal of the local order with respect to offsetting overcharges on its basic service tier with alleged undercharges on its CPS tier is hereby DENIED. 12. 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 (1993). FEDERAL COMMUNICATIONS COMMISSION Meredith J. Jones Chief, Cable Services Bureau