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. ***************************************************************** ******** FEDERAL COMMUNICATIONS COMMISSION WASHINGTON, DC 20554 IN REPLY REFER TO: December 12, 1995 DA 95-2461 Released: December 13, 1995 Theodore Case Whitehouse, Esq. Willkie Farr & Gallagher 1155 21st Street, NW Washington, DC 20036-3384 Dear Mr. Whitehouse: This letter responds to your November 3, 1995 letter requesting clarification of six elements of our new annual rate adjustment methodology as set forth in our Thirteenth Order on Reconsideration in MM Docket 92-266 and the corresponding FCC Form 1240. The Order provides for an optional annual adjustment which permits operators to adjust their rates once per year to reflect reasonably certain and reasonably quantifiable changes in external costs, inflation and the number of regulated channels that are projected to occur during the twelve months following the rate change. The Order also provides for a "true-up" mechanism to correct differences between charges the operator has actually collected and charges which reflect costs which were actually incurred by the operator. The annual projection and true-up will be calculated on FCC Form 1240. 1) Your first question asks whether it is reasonable to estimate subscriber number changes based on the most recent twelve month period for which historical subscriber growth information is available when Form 1240 is prepared. We believe that there may be a number of acceptable methods of estimating average subscriber numbers for the projected period. The instructions to Module B of Form 1240 (Subscribership) confirm that one acceptable method for projecting the average number of subscribers is to use historical growth for the most recent twelve months for which actual subscriber data is available. 2) Your second question asks whether the revenue collected during a specific true-up period is calculated by multiplying the average number of subscribers by the actual rate in effect during the period, and then multiplying the resulting figure by the number of months for which the operator is eligible for interest. Lines H1 (Revenue From Period One), H5 (Revenue From Period Two Eligible For Interest) and H9 (Revenue From Period One Ineligible for Interest) of Form 1240 perform the calculation to which you refer. The instructions for these lines direct that the average rate the operator elected to charge during the relevant period be multiplied by the number of months in that period and by the average number of subscribers served during that period. The resulting number represents the revenue collected during the true-up period. 3) Your third request asks whether, when calculating the residual amount for the true-up period (Worksheet 4 to Form 1240), the average actual rate in effect during the true- up period is the base number for entry on Line 1 of Worksheet 4, and is therefore the number from which external costs (Line 2 of the Worksheet) and caps method channel numbers (Line 3) are subtracted when completing Worksheet 4. Line 13 of Worksheet 8 (True-up Rate Charged) is the average actual rate in effect during the true-up period. This figure is calculated by dividing the sum of the actual rates in effect during each month in the true-up period by the number of months in the true-up period. The instructions for Worksheet 4 (Channel Residual) answer your question in the affirmative. The instructions state that, if Worksheet 4 is filled out for the true-up period, the average actual rate in effect during the true-up period ( Line 13 of Worksheet 8) should be entered on Line 1 of Worksheet 4. The average actual rate in effect during the true-up period therefore provides the basis for the residual amount calculation performed on Worksheet 4. 4) Your fourth question asks what "reasonably certain and reasonably quantifiable" changes in programming costs means for purposes of projecting these costs. You state that the Thirteenth Order on Reconsideration indicates that changes in program licensing fees (and retransmission consent fees) are reasonably certain and reasonably quantifiable. You believe the Order allows the operator to include not only changes in the program licensing fees as expressly quantified in programming contracts, but also (1) those changes which are expected to arise from adjustment formulas set forth in programming contracts; and (2) those changes that are reasonably certain to occur based on the historical relationship with a particular programmer. The Order states that program licensing fees (and retransmission consent fees) are reasonably certain and reasonably quantifiable to the extent that programmers and operators have agreed in advance to the amount of programming cost changes and the date the cost changes will take effect. This statement was not intended to exclude from projected costs the expected changes in program license fees which you have described. As we recognize in the Order, most external costs should be projected in order to minimize the need to permit operators to recover accrued costs plus interest. We believe that expected changes in program licensing fees based on previously agreed upon adjustment formulas in programming contracts are reasonably certain and reasonably quantifiable, whether the adjustment is a particular amount or a percentage amount or is changed by a change in inflation. In addition, we believe that historically recognized changes in program license fees which are reasonably certain to occur are also reasonably certain and reasonably quantifiable for purposes of projecting costs. To the extent to which projected cost changes deviate from actual costs, we emphasize that the Order requires operators to rectify errors resulting from overestimations at least annually. While we believe that operators will be able to project these expected cost changes with a high degree of accuracy, subscribers will continue to be protected because overcharges arising from overestimations of costs must be returned to subscribers, with interest. 5) Fifth, you note that certain operators filing Form 1240 for the first time may be required to complete FCC Form 1210 in conjunction with Form 1240. You ask whether these operators should submit Form 1210 along with the Form 1240, or if Form 1210 is to be treated as a separate filing. The filing instructions for Form 1240 specify that the operators that are required to complete Form 1210 should not submit it as a separate filing. Rather, the Form 1210 should be treated as an attachment to Form 1240. 6) Question six asks, when calculating the new maximum permitted rate, whether the true-up for the projected period (Line I8 of Form 1240) is calculated by dividing the total true-up amount by the projected number of subscribers, and then dividing the product of that calculation by the number of months in the projected period. The instructions to Line I8 (True-up Segment for Projected Period) of Module I (New Maximum Permitted Rate) answer this question in the affirmative. The result of Module H (the true-up adjustment, found in Line H14) is a lump sum figure reflecting overcharges or undercharges which occurred during the true-up period. Line I8 instructs that this lump sum be converted into a monthly, per subscriber amount so it can be inserted into the projected period rate. As the instructions state, this is done by dividing Line H14 by the estimated, average subscribership during the projected period (found in Line B3) and then by 12 to account for the number of months in the projected period. I hope this letter has answered your questions. If you have any further questions, please do not hesitate to contact Nancy Stevenson or Alexander Byron at (202) 416-0800. Sincerely, Meredith Jones Chief, Cable Services Bureau