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/Bureaus/Miscellaneous/Public_Notices/ ***************************************************************** ******** FOR THE FCC RECORD ONLY $\\Century Cable, Post-Newsweek Cable, Marcus and Prime Cable,, DA 96-379\\$ $\76.922 Rates for Basic and Cable Programming Service Tier/$ $\Annual Rate Adjustment\$ March 18, 1996 DA 96-379 Released: March 19, 1996 Seth A. Davidson, Esq. Stuart F. Feldman, Esq. Fleischman & Walsh 1400 Sixteenth Street, NW Washington, DC 20036 Steven J. Horvitz, Esq. Cole, Raywid & Braverman, L.L.P. 1919 Pennsylvania Ave., N.W. Washington, D.C. 20006 Dear Sirs: This letter is in response to your letters on behalf of your clients Century Communications Corp. ("Century"), Post-Newsweek Cable, Inc. ("Post Newsweek"), Marcus Cable and Prime Cable. You request a waiver of certain rate adjustment requirements contained in the Thirteenth Order on Reconsideration ("Thirteenth Order"). In the Thirteenth Order, the Commission created a new, annual rate adjustment system for modifying cable services rates regulated pursuant to Section 623 of the Cable Consumer Protection and Competition Act of 1992 ("1992 Cable Act"). Specifically, you request that the initial Form 1240 filing be permitted to include estimated changes in costs, inflation, channels and subscriber information attributable to the period between the last date for which actual cost data is available and the effective date of the new rates. You note that on February 23, 1996, the Bureau released an Order (DA 96- 220) granting Tele-Communications, Inc. and TKR Cable Company a waiver to include this same adjustment in their initial FCC Form 1240 ("Form 1240"). You state that you also need a waiver to include these projected costs because your clients have either imminent plans to file their initial 1240, or have filed their initial Form 1240 recently and need a waiver in order to amend their filings in a timely manner. Accordingly, we grant Century, Marcus Cable, Prime Cable and Post-Newsweek's requested waiver of the requirement that only costs that have actually been incurred may be included in their first true up period. Specifically, Century, Marcus Cable, Prime Cable and Post-Newsweek, in their first Form 1240 filing, will be permitted to include projected changes in costs, inflation, channels and subscriber information attributable to the period between the last full month for which actual cost data is available and the effective date of the new rates. Century, Marcus Cable, Prime Cable and Post-Newsweek must perform these estimated cost adjustments (for the period between the last full month for which actual cost data is available and the effective date of the new rate) in accordance with the guidelines set forth in Appendix A of the attached Order. This waiver applies solely to Century, Marcus Cable, Prime Cable and Post-Newsweek's first Form 1240 filing period; true ups in their subsequent filings will only include actual cost data. Sincerely, Meredith J. Jones Chief, Cable Services Bureau DA 96-220 Befor e the FEDERAL COMMUNICATIONS COMMISSION Washi ngton, D.C. 20554 In the Matter of: ) ) Annual Rate Adjustment System ) for Cable Service Rates ) ) Request for Waiver of Requirements ) Contained in the Thirteenth Order on ) Reconsideration ) ORDER Adopted: February 21, 1996 Released: February 22, 1996 By the Chief, Cable Services Bureau: I. INTRODUCTION 1. On November 22, 1995, Tele-Communications, Inc. ("TCI") and TKR Cable Company ("TKR"), ("operators") requested a waiver of certain rate adjustment requirements contained in the Thirteenth Order on Reconsideration ("Order"). In the Order, the Commission created a new, annual rate adjustment system for modifying cable services rates regulated pursuant to Section 623 of the Cable Consumer Protection and Competition Act of 1992 ("1992 Cable Act"). The Commission received comments regarding the waiver request from the National Association of Telecommunications Officers and Advisors ("NATOA") and from the National Cable Television Association, Inc. ("NCTA"). Tele- Communications, Inc. ("TCI"), filed a reply. II. BACKGROUND 2. Under the 1992 Cable Act, cable rate regulation is undertaken jointly by the Commission and by state and local governments. For purposes of allocating regulatory responsibility over the rates for services offered by cable system operators, the 1992 Cable Act divides regulated cable services into two categories. 3. The first category is the basic service tier ("BST") which includes, at a minimum, the local broadcast signals distributed by the cable operator and any public, educational, and governmental access channels. Regulation of rates for BSTs is the responsibility of certified state and local governments, pursuant to standards and procedures established by the Commission. The second category is the cable programming service tier ("CPST"), which includes all video programming distributed over the system that is not on the BST and for which the operator does not charge on a per channel or per program basis. Under the 1992 Cable Act, CPSTs were subject to regulation by the Commission only if the Commission received a complaint from a subscriber or local regulatory authority regarding an operator's CPST rate. The Telecommunications Act of 1996 requires that the CPST complaint be filed by a franchising authority after it receives subscriber complaints. 4. Pursuant to the 1992 Cable Act's rate regulation requirements, we established a system of rate regulation to set initial BST and CPST rates that ensures subscribers pay reasonable rates for regulated cable services. The Commission also adopted a price cap approach to govern how operators can adjust their rates on a going forward basis following the establishment of initial rates. Under the original price cap approach ("quarterly rate adjustment system"), operators adjust their rates to reflect changes in external costs and changes in the number of regulated channels up to four times per year. Operators make these rate adjustments by filing an FCC Form 1210 pursuant to a streamlined rate review process. 5. After gaining experience with the quarterly rate adjustment system, the Commission adopted a new optional rate adjustment methodology where cable operators make only annual rate changes to their BSTs and CPSTs. The annual rate adjustment has two components. The first component is based on an operator's projected costs and the second component is based on costs which an operator has actually incurred. According to the Order, operators that elect to use this optional methodology will adjust their rates once per year based on a maximum permitted rate that accounts for reasonably certain and reasonably quantifiable changes in external costs, inflation, and the number of regulated channels that are projected for the 12 months following the rate change. In addition, a "true up" mechanism is available to correct differences between the revenues the operator collected and the actual cost changes that occurred during that 12 month period. If an operator has not recovered for the actual costs it incurred, the operator is permitted to add the cost to rates at a later time, with interest. The true up also requires operators to return to subscribers any overcharges that occurred, with interest. 6. The annual projection and true up mechanisms are included on an FCC Form 1240 ("Form 1240"), the new form which the operator uses to justify annual rate increases. Regulated operators using the annual methodology that seek to adjust rates on the BST must file Form 1240 with local franchising authorities a minimum of 90 days before the rate adjustment is scheduled to go into effect, and with the Commission a minimum of 30 days before a CPST rate adjustment is scheduled to go into effect. 7. The Order states that, because the true up examines costs that were actually incurred, it can only include actual costs that were incurred as of the date the Form 1240 is filed. For operators whose BST is regulated, for example, this date will be at least 90 days before the rate adjustment is scheduled to go into effect, because the rules require an operator to file the Form 1240 with a local franchising authority 90 days prior to the proposed effective date. In addition, operators may lack actual cost data for a brief time period preceding the date the Form 1240 is filed because they have not been able to identify or book actual costs. III. WAIVER REQUEST AND OPPOSITION 8. The operators request a waiver, for the first filing of Form 1240, of the Commission's requirement that only costs that have actually been incurred may be included in the non-projected period. Specifically, the operators request that their first Form 1240 filing be permitted to include estimated changes in costs, inflation, channels and subscriber information attributable to the period between the last date for which actual cost data is available and the effective date of the new rates. The operators agree that they will include a separate calculation and explanation of the basis for the costs with their projections. The operators' waiver request applies solely their first Form 1240 filing; the non-projected portion of subsequent filings will only include actual cost data. 9. The operators argue that the current rule creates a cost recovery delay for the time period from the last date for which actual cost data is available until the date the new rates are scheduled to go into effect. The operators state that this period will start at least 90 days prior to the date the new rates are scheduled to go into effect, due to the 90 day regulatory review period after Form 1240 is filed. In addition, the operators argue that this period will likely extend back even further, due to the fact that many cable operators will not have actual cost data for the period immediately prior to the filing of Form 1240. According to the operators, because many operators cannot submit actual cost data, and because the Order does not allow projected data to be used to account for cost increases incurred during the 90 day review period, there will be a delay in cost recovery for cost increases which occur during that time period. 10. NATOA responds that a waiver is unnecessary because the Commission's original approach enables operators to recover cost increases incurred during this time period. NATOA states that operators will not face a permanent delay in cost recovery since operators will be able to include any previously unaccounted for cost increases in their second annual Form 1240 filing. In addition, NATOA argues that operators can minimize the amount of cost increases that occur within the time period for which actual cost data is unavailable, because both the Form 1240 filing date and events (such as channel changes) that may trigger cost changes are largely within the control of the operator. Finally, NATOA contends that granting the waiver request may impose additional and unnecessary burdens on local regulatory authorities. According to NATOA, separate calculations reflecting projected cost changes for the period at issue create a "third layer" of calculations for local authorities to review. 11. In its reply, TCI agrees that the costs incurred during the previous year's regulatory review period (and the period just prior to the Form 1240 filing) can be accrued by the operator and then accounted for in an operators next annual filing. However, TCI states that because these accrued costs will incur interest during the period prior to the next annual filing, subscribers would ultimately bear that interest expense. In addition, TCI states that a permanent cost recovery delay remains because the second filing will, in turn, fail to account for costs incurred during the second regulatory review period (and the period just prior to the second Form 1240 filing). Finally, TCI disagrees that the waiver creates additional burdens on local authorities. TCI responds that no matter when these costs are ultimately recovered, the local regulatory authority will have to review and verify those same costs. TCI states that the waiver does not create a method of cost recovery which is otherwise foreign to the Form 1240 review process. IV. DISCUSSION 12. The 1992 Cable Act directed the Commission to "seek to reduce administrative burdens on subscribers, cable operators, franchising authorities and the Commission" in meeting its mandate of creating regulations that insure that subscriber rates for regulated services are not unreasonable. The Commission created the annual rate adjustment system in order to further streamline the rate review process in a way that benefits subscribers, cable operators and local regulatory authorities. Annual adjustments limit subscriber confusion and frustration because subscribers will not have to contend with numerous rate adjustments each year. Regulatory authorities also benefit because the annual system minimizes the amount of rate adjustments reviewed each year. In addition, the Commission intended the annual system to address concerns raised by cable operators that the quarterly adjustment system resulted in delayed cost recovery. 13. The Commission would not have wanted its true up rules to create significant delays in cost recovery. However, as both NATOA and TCI agree, as a result of those requirements, the costs incurred before the effective date of an operator's first annual filing (during the period beginning with the last date for which actual cost data is available and ending on the effective date of the new rates) generally would not be recoverable until the effective date of the rates justified by an operators second annual filing. We believe that this delay in cost recovery could act as a disincentive for the operators to begin using the annual rate adjustment methodology, and the potential benefits of the new streamlined system would go unrealized. 14. However, we disagree with TCI that this initial delay becomes a permanent impediment to full cost recovery. TCI's contention that costs incurred just prior to an operator's subsequent annual rate adjustment (during the same period for which actual cost data was not yet available) are not recoverable until the following filing, fails to recognize that costs incurred during this period would have been includible (if reasonably certain and reasonably quantifiable) in the operator's projections in its previous filing. Thus, recovery based on these projections would have already been permitted. In the absence of the waiver, such recovery is only precluded in an operator's first annual filing because there is no previous filing that would have permitted the operator to project and account for these costs. Therefore, we believe that this cost recovery delay is a one time event for companies that are transitioning to the annual system, and that incur costs during the period just prior to the first annual rate adjustment for which actual cost data was not yet available. 15. We believe that the proposed waiver would only add incrementally to any burden the operators' local franchising authorities would experience when reviewing the new form. Any additional burden the waiver creates initially is outweighed by the benefits the waiver offers to both subscribers and operators. With the waiver, the operators will not be in a position of having to absorb and accrue cost increases that occur during the period in question. Local franchising authority review of projected cost data is already a component of the Form 1240 for cost increases expected to occur after the date the 1240 is filed. Furthermore, we note that the waiver request is for a one time exception to the requirement that only actual cost data can be used to perform a true up calculation. Thus, we do not believe that allowing the operators' first Form 1240 filings to include data based on projected costs in their first true up calculation will produce significant additional burdens on their local franchising authorities. Finally, consumers will be protected because, as NCTA notes, any rate adjustment based on projected costs must be trued up during the second rate adjustment period. As stated in the Order, any overcharges must be returned to subscribers, with interest. 16. To some extent, we agree with NATOA that operators can minimize the amount of cost increases which occur within the time period just prior to the date the rates are scheduled to go into effect (for which actual cost data is not available). Increases in programming costs, for example, often occur in the course of annual contract renewal between operators and programmers. However, the timing of other external cost increases may not be as predictable as programming cost increases. In addition, we note that while operators are permitted to select the filing date for the Form 1240, local franchising authorities are permitted to reject this date with good cause. If a mutually acceptable alternative filing date can not be agreed upon, the franchising authority may set the filing date up to 60 days later than the date chosen by the cable operator. Accordingly, even if the operators could always predict the timing of cost increases, the operators still would not have full control over the filing date of the Form 1240. 17. Therefore, we grant TCI and TKR's requested waiver of the requirement that only costs that have actually been incurred may be included in their first true up period. Specifically, TCI and TKR, when filing their first Form 1240, will be permitted to include projected changes in costs, inflation, channels and subscriber information attributable to the period between the last full month for which actual cost data is available and the effective date of the new rates. TCI and TKR must include a separate calculation and explanation of the basis for the costs with their projections. This waiver applies solely to TCI and TKR's first Form 1240 filing; true ups in their subsequent filings will only include actual cost data. V. ORDERING CLAUSES 18. Accordingly, IT IS ORDERED that the Tele-Communications, Inc. and TKR Cable Company waiver request IS GRANTED. 19. 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 /Signed by Gregory Vogt for/ Meredith J. Jones Chief, Cable Services Bureau Appendix A In order for the operators to implement the Commission's waiver of the requirement that only actual cost data may be included in the operator's first annual rate adjustment filing (for the time period just prior to the effective date of the new rate), the operators must adhere to the following guidelines. In order to use the cost estimations permitted by the waiver in the first annual Form 1240 filing, the operator may incorporate the calculations directly into its Form 1240, or the calculations may be reflected in an alternative manner, provided the calculations are performed in conformance with the "General Guidelines" as set forth in Section 1 below, and provided the appropriate regulatory authority agrees to the manner in which the alternative showing is made. Section 2 below sets forth the steps necessary to incorporate the calculations into the operators' first Form 1240 filing. 1) General Guidelines. In the initial filing of the Form 1240, the period of time for which actual data is available (the "Actual True-Up Period") must be separated from the period of time for which actual data is not available (the "Estimated True-Up Period"). A separate Maximum Permitted Rate for the True-Up Period should be calculated for each of these periods. This is done so that when the system files its second Form 1240 and performs a true-up on the Estimated True-Up Period a second time, the effects of the true-up performed in the initial filing can be taken into account. There are two elements of the first filing which must be accounted for in the second filing. First, the Inflation Segment for the Estimated True-Up Period in the first filing must be removed from the Base Rate of the second filing. Second, the adjustment calculated in Module H of the form (and the interest earned on that adjustment) for the Estimated True-Up Period must be removed from the Total True-Up Adjustment in the second filing. Below are a set of instructions describing how to use the existing Form 1240 in conjunction with this waiver. If a system is using an alternative method for performing a true-up on the Estimated True-Up Period, it should make sure that it follows the same general procedures. 2) Guidelines for Operators that use Form 1240. The following instructions are to be used by the operators that choose to take advantage of the waiver by using Form 1240 instead of an alternative method. Initial Filing of Form 1240: Module E: Timing Information When completing Form 1240, Module E is used to define which parts of True Up Periods 1 and 2 are eligible to receive interest. This information is then entered into the formulas in Module H. In a standard filing, True-Up Period 2 is only used if True-Up Period 1 is longer than 12 months, and the instructions are written with that assumption. Systems filing in accordance with this waiver may have a True-Up Period 1 which is less than 12 months long. Therefore, Module E should be completed following the methodology used in the following example. An operator intends to file on March 1, 1996 to set a new rate starting on June 1, 1996 with an Actual True-Up Period running from July 1, 1995 to December 31, 1995 (six months) and an Estimated True-Up Period running from January 1, 1996 to May 31, 1996 (five months). Lines E2, E3, E4, and E5 should be all be completed. Line E1 should be left blank. Line E2 (the length of the Actual True-Up Period) should equal 6. Line E3 (the length of time between the end of the Actual True-Up Period and the beginning of the Projected Period, which is another way of saying the length of the Estimated True-Up Period) should equal 5. Line E4 (the portion of the Estimated True-Up Period eligible for interest) should also equal 5. Because all of the Estimated True-Up Period is eligible for interest, line E5 should be 0. Modules F and G: Maximum Permitted Rate for the True-Up Period Complete Module F (which is normally used to calculate the Maximum Permitted Rate for True-Up Period 1) for the Actual True-Up Period. Complete Module G (which is normally used to calculate the Maximum Permitted Rate for True-Up Period 2) for the Estimated True-Up Period. Module H: True-Up Adjustment Calculation In Module H (which calculates the Total True-Up Adjustment), complete to Lines H1 through H8 and lines H12 through H14 of Module H. The instructions for lines H1, H2, and H4 set forth two formulas; the first formula should be used for each of those three lines. Lines H1 through H4 calculate the total amount by which subscribers were over or undercharged (and the interest on that amount) during the Actual True- Up Period. Lines H5 through H8 calculate the total amount by which subscribers were over or undercharged (and the interest on that amount) during the Estimated True-Up Period. Second Filing of Form 1240: Three numbers from the initial filing of Form 1240 are needed for the second filing. These numbers are found in the initial filing of the form on lines G6 (Inflation Segment for True-Up Period 1), H7 (True-Up Period 2 Adjustment Eligible For Interest), and H8 (Interest on Period 2 Adjustment). Assuming the second filing occurred on March 1, 1997, the True-Up Period would run from January 1, 1996 to December 31, 1996, overlapping the Estimated True-Up Period from the first filing. To avoid any overlap, complete the two steps described below. 1) Module F will calculate an Inflation Segment which covers the same period included in the Inflation Segment calculated for the Estimated True-Up Period. Since the Inflation Segment calculated the second time is based on actual data and is the correct figure, the value in line G5 from the first filing should be subtracted from line D8 on the second filing. 2) When the system completes Module H in the second filing, the resulting Total True-Up Adjustment will include the amount already claimed in the first filing. To correct for this, the sum of lines H7 and H8 from the first filing should be subtracted from line H13 of the second filing. The Spreadsheet Version of Form 1240 It is important to note that the spreadsheet versions of Form 1240 have some automated formulas which may make it difficult to perform some of these calculations (particularly in Module H and in the worksheets). Therefore, these calculations may have to be shown separately, and the results of the calculations entered into the spreadsheet by hand.