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 pnmc5021. File pnmc5021 (.txt & .wp) is in directory \pub\Public_Notices\Miscellaneous. ************************************************************************* Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of: ) ) Annual Rate Adjustment System ) ) ) Request for Waiver ) FCC Form 1240 ) ORDER Adopted: October 31, 1996 Released: November 1, 1996 By the Deputy Chief, Cable Services Bureau: INTRODUCTION 1. On November 22, 1995, Tele-Communications, Inc. ("TCI") and TKR Cable Company ("TKR") 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. On December 13, 1995, the Commission put TCI and TKR's waiver requests on public notice. The Commission received comments regarding the waiver request from the National Association of Telecommunications Officers and Advisors ("NATOA"), the National Cable Television Association, Inc. ("NCTA"), and TCI filed a reply. On February 22, 1996, the Bureau released an Order ("Waiver Order"), granting the requested waiver to TCI and TKR cable companies. Subsequent to the Waiver Order, several other cable companies requested and received waivers for the same purpose. Because of the general applicability of the requested relief to cable operators, regardless of their particular circumstance, we hereby grant a waiver that can be used by any cable operator in conjunction with its first FCC Form 1240 filing. BACKGROUND 2. Under the Cable Consumer Protection and Competition Act of 1992 ("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 services tier(s) ("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. CPSTs are subject to regulation by the Commission only if the Commission receives a complaint from a local regulatory authority regarding an operator's CPST rate. 4. Pursuant to the 1992 Cable Act's rate regulation requirements, we designed a system of rate regulation that ensures subscribers pay reasonable rates for regulated cable services. Under our rules, we required most regulated cable operators to either reduce their regulated rates to a level that represented their September 30, 1992 regulated revenues reduced by a 17% "competitive differential" (adjusted for annual inflation increases, changes in external costs and changes in the number of programming channels) or submit a cost-of-service showing supporting higher rates. The 17% "competitive differential" represented the average difference that the Commission determined existed between the rates of competitive and noncompetitive systems. 5. We 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. 6. After gaining experience with the quarterly rate adjustment system, we found that the process creates incentives for operators to file for multiple rate adjustments during each year. This process can be costly for operators and regulators. In addition, multiple rate adjustments in one year may create subscriber confusion. Multiple rate adjustments also impose administrative burdens on regulatory authorities because they must review each proposed rate adjustment. 7. We also found that under the quarterly rate adjustment framework, some operators are delayed when attempting to recover their costs because they are not permitted to file for recovery of external cost increases and additions of new channels until the quarter after costs are incurred or channel changes are made. Operators may experience further delay while regulatory authorities review the proposed adjustments. Moreover, operators are never able to recover costs between the date they are incurred and the date a rate adjustment is permitted. 8. In order to address these concerns, we adopted an optional rate adjustment methodology where cable operators are permitted to make annual rate changes to their BSTs and CPSTs. According to the Order, operators that elect to use the methodology will 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 for the 12 months following the rate change. We have permitted operators to estimate cost changes that will occur in the 12 months following the rate filing in order to limit delays in recovering costs that operators may experience under the quarterly system. Any incurred cost that is not projected may be accrued with interest and added to rates at a later time. If actual and projected costs are different during the rate year, a "true up" mechanism is available to correct differences between the revenues the operator collected with actual cost changes. The true up requires operators to decrease their rates or alternatively, permits them to increase their rates to make adjustments for over- or under- estimations of these cost changes. 9. The annual projection and true-up is reflected on an FCC Form 1240. 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. 10. The Order states that, because the true-up examines costs which were actually incurred, it can only examine costs as of the date the Form 1240 is filed. For basic service tier regulated operators, 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 short time period preceding the date the Form 1240 is filed. DISCUSSION 11. As noted above, we have previously waived, for certain cable operators, the Commission's requirement that only costs that have actually been incurred may be included in the true-up period of an operators first Form 1240 filing. Specifically, we permitted the operators' initial Form 1240 filings to include projected changes in costs, inflation, channels and subscriber information attributable to the period between the last date for which historical cost data is available and the effective date of the new rates. The waivers stipulated that these projections must be accompanied by a separate calculation and explanation of the basis for the costs. 12. The operators that initially requested the waiver argued that the Order created a cost recovery delay for the time period from the last date for which historical cost data is available until the date the new rates are scheduled to go into effect. The operators stated 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 FCC Form 1240 is filed. In addition, the operators argued that this period will likely extend back even further, due to the fact that many cable operators will not have historical cost data for the period immediately prior to the filing of Form 1240. According to the operators, because many operators cannot submit this historical 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. 13. In the Waiver Order, we stated that our requirement that only costs that have actually been incurred be used for true-up periods was not intended to create significant delays in cost recovery. As both NATOA and TCI agreed, however, as a result of the requirement, costs incurred before the effective date of an operator's first annual filing (during the period beginning with the last date for which historical 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 operator's second annual filing. We found that this delay in cost recovery could act as a disincentive for operators to begin using the annual rate adjustment methodology, and that the potential benefits of the new streamlined system would go unrealized. 14. In the Waiver Order, we stated that we believed that the waiver, if granted, would only add incrementally to any burden placed on the operators' local franchising authorities when reviewing Form 1240. We noted that any additional burden the waiver initially creates is outweighed by the benefits the waiver offers both subscribers and operators. With the waiver, operators will not be in the 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 Form 1240 is filed. In addition, we noted that the waiver request is for a one time only exception to the requirement that only actual cost data can be used to perform a true-up calculation. We found that allowing first time filers of Form 1240 to include data based on projected costs in their first true-up calculation would not produce significant burdens on local regulatory authorities. Furthermore, we noted that consumers would be protected because 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. 15. Subsequent to the release of the Waiver Order, we have received requests from several cable operators requesting the same relief granted to TCI and TKR. Without a similar waiver, operators using our annual rate adjustment method would be unable to include the costs at issue in their first annual filing, and the benefits to operators and subscribers as described above would not be realized. Accordingly, we hereby grant, for all operators' initial Form 1240 filing, a waiver of the requirement that only costs that have actually been incurred may be included in the true-up period. Specifically, an operator's initial Form 1240 filing may include projected changes in costs, inflation, channels and subscriber information attributable to the period between the last date for which historical cost data is available and the effective date of the new rates. These projections must be accompanied by a separate calculation and explanation of the basis for the costs (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. This waiver applies solely to an operator's first Form 1240 filing; true-ups in subsequent filings will only encompass the period for which actual cost data is available. ORDERING CLAUSES 16. Accordingly, IT IS ORDERED that the waiver IS GRANTED. 17. This Order contains a modified information collection. As part of its continuing effort to reduce paperwork burdens, pursuant to the Paperwork Reduction Act of 1995, Pub. L. No. 104-13, the Bureau will publish a notice in the Federal Register soliciting public comment on the modified information collection requirement in order to obtain OMB approval. 18. This action is taken by the Deputy 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 John E. Logan Deputy 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 G6 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.