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INTRODUCTION  X-x1.` ` On June 21, 1995, TeleMedia of Western Connecticut ("TeleMedia"), the  X -franchisee in the above matter, filed an appeal of two local rate orders.j_ " X=#-ԍ The DPUC filed an opposition to TeleMedia's appeal on July 3, 1995, and TeleMedia filed a reply on July 12, 1995. In addition, on August 24, 1995, TeleMedia filed a Request  X%-for Emergency Stay which the Commission granted on November 15, 1995. TeleMedia Company of Western Connecticut, DA 952296 (Cab. Ser. Bur., released Nov. 15, 1995). On December 15, 1995, TeleMedia filed a Petition for Reconsideration of Escrow/Bond Requirement in Grant of Stay. The DPUC did not file a response to this petition. Because we decide the merits of the appeal in this order, and reverse some portions of the local rate"(0*0*0*("  X-orders at issue, the stay granted in this case is vacated, and TeleMedia's petition for reconsideration is rendered moot.j The local rate orders" b0*0*0*" were both adopted on May 17, 1995 by TeleMedia's local franchising authority, the Connecticut Department of Public Utility Control ("DPUC"). In the local rate orders, the DPUC established regulated rates for basic cable service and associated equipment and installations, provided by TeleMedia, as allowed by the Cable Television Consumer  X-Protection and Competition Act of 1992 ("1992 Cable Act").;b" X-#Xj\  P6G;yoXP#э Under the 1992 Cable Act and the Commission's implementing regulations, local franchising authorities may regulate rates for basic cable service and associated equipment.  X -See Cable Television Consumer Protection and Competition Act, Pub. L. No. 1002385, 106  Xt -Stat. 1460 (1992); Communications Act,  623(b), as amended, 47 U.S.C.  543(b) (1992).  X_ - As discussed more fully in paragraph 5, infra, our rules permit operators to base their rate  XJ -filings on either a benchmark or a costofservice approach. See Implementation of Sections of the Cable Television Consumer Protection and Competition Act of 1992: Rate Regulation, MM Docket No. 92266, Report and Order and Further Notice of Proposed Rulemaking, 8  X-FCC Rcd 5631, 579495 (1993) ("Rate Order") ; see 47 C.F.R.  76.922. The local orders require TeleMedia to implement certain rate reductions and to issue refunds for overcharges to subscribers for the time period from September 1, 1993 to May 15, 1994, and the period from May 15, 1994 to May 17, 1995.  X1-x2. ` ` In the DPUC rate proceedings, TeleMedia elected to use the costofservice approach to justify its rates. The local franchising authority's first order covers the time period from September 1, 1993 through May 14, 1994 ("Phase 1"), during which rate justifications are governed by traditional costofservice principles for utility rate regulation. The second order covers the time period from May 15, 1994 through May 17, 1995 ("Phase  X -2"), governed by our Cost Order. e " X-ԍ  See Cost Order, Report and Order and Further Notice of Proposed Rulemaking, MM  X-Docket No. 93215, 9 FCC Rcd 4527 (1994) ("Cost Order"). In these orders, the DPUC found that TeleMedia's basic service rates exceeded the company's costs, and ordered the company to reduce its rates and refund to subscribers the overcharges levied since September 1, 1993. The DPUC set TeleMedia's basic service tier rate at $7.16 for Phase 1 and $7.24 for Phase 2. TeleMedia claims these rates are nearly $7.00 (or 50%) below what its benchmark rate would have been and will require TeleMedia to refund $8.6 million for the period from September 1, 1993 through August 1, 1995 and to accept a revenue reduction of $360,000 per month once the reduced rates are implemented. TeleMedia asserts that it does not have access to the capital necessary to make the mandated refunds. Further, TeleMedia states that the loss in revenue caused by the ordered rate reductions could force TeleMedia into bankruptcy.  X-x3.` ` TeleMedia raises eight issues on appeal. TeleMedia argues that the DPUC erred when it: 1) reduced TeleMedia's tangible and intangible asset valuation; 2) increased the depreciable lives of TeleMedia's assets; 3) refused to include TeleMedia's prior year losses in its ratebase; 4) reduced TeleMedia's rate of return; 5) used a channelbased cost"~0*0*0*" allocation method instead of the usagebased cost allocation method proposed by TeleMedia; 6) reduced TeleMedia's maximum permitted equipment charges for remote control units; 7) required TeleMedia to "crosssubsidize" by offsetting any revenue shortfall due to the rate orders by increasing cable programming service tier rates or by obtaining revenue from other TeleMedia entities; and 8) improperly applied costofservice rate justification principles. We address each issue in turn.  Xv-  X_-x4.` ` Under our rules, rate orders adopted by local franchising authorities may be  XH-appealed to the Commission.]H X -ԍ  See 47 C.F.R. 76.944 (1993). ] In ruling on appeals of local rate orders, the Commission will  X1-not conduct a de novo review, but instead will sustain the franchising authority's decision as  X -long as there is a reasonable basis for that decision. { XH -ԍ  See Rate Order, 8 FCC Rcd 5631, 5731(1993); Implementation of Sections of the Cable Television Consumer Protection and Competition Act of 1992: Rate Regulation, MM Docket  X-No. 92266, and BuyThrough Prohibition, MM Docket No. 92262, Third Order on  X-Reconsideration, 9 FCC Rcd 4316, 4346 (1994) ("Third Recon. Order"). ÿ The Commission will reverse a franchising authority's decision only if it determines that the franchising authority acted  X -unreasonably in applying the Commission's rules in rendering its local rate order.A  X-ԍ  Id. A 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  X -case consistent with the Commission's decision on appeal.9  X-ԍ Id. 9  X{- II.xBACKGROUND  XM-x5.` ` On May 3, 1993, the Commission released its Rate Order establishing rules to  X8-implement the cable television rate regulation provisions of the 1992 Cable Act. In the Rate  X#-Order, the Commission determined that a benchmark approach should serve as the primary method for regulating equipment and installations and basic and cable programming service tier rates. The Commission also concluded that because the benchmark methodology might not produce fully compensatory rates in all cases, it was appropriate to permit operators, as an  X-alternative, to justify rates based on costs, using individual costofservice showings.{Q  X"-ԍ  Rate Order  , 8 FCC Rcd at 579495; see 47 C.F.R.  76.922.{ The costofservice approach was intended to be used only if an operator believed that the maximum rate permitted under the benchmark formula would not enable the operator to recover costs reasonably incurred in providing rate regulated cable services.  XV-x6.` ` The Commission found, however, that the record before it at the time of the"V 0*(("  X-adoption of the Rate Order did not provide sufficient information on which to develop  X-detailed costofservice rules for the cable industry.T  Xd-ԍ Rate Order, 8 FCC Rcd at 579899.T On July 16, 1993, the Commission therefore issued a Notice of Proposed Rulemaking which proposed requirements to govern costofservice showings submitted by cable operators seeking to justify rates higher than  X-those determined under the benchmark approach.X { X-ԍ  See Implementation of Sections of the Cable Television Consumer Protection and Competition Act of 1992: Rate Regulation, MM Docket No. 93215, Notice of Proposed Rulemaking, FCC 93353 (released July 16, 1993), 58 Fed. Reg. 40762 (July 30, 1993)  X -("Notice"). X The Commission indicated in the Notice,  X-as it did in the Rate Order, that general costofservice principles would apply to costof X|-service filings submitted prior to the adoption of specific rules.z | X-ԍ Id. at 40763; Rate Order, 8 FCC Rcd at 579899, 5854 n.859.z In April 1994, the  Xe-Commission adopted its Cost Order, establishing interim costofservice rules, effective May 15, 1994. The local rate orders on appeal in this case involved rates proposed for the preadoption period, i.e., the time period from September 1, 1993 through May 14, 1994, and the postadoption period, i.e., the time period after May 15, 1994.  X - III.xDISCUSSION  X -x A.` ` Asset Valuation  X-x7.` ` In its appeal, TeleMedia argues that the DPUC improperly reduced the value  X-of the assets included in its ratebase.  X-ԍ In its appeal, TeleMedia also argues that the DPUC improperly reduced its hourly service charge (HSC). Since that reduction was directly related to the DPUC's reduction of TeleMedia's total net assets, which we address and remand for further analysis, we need not  X-separately address the issue of TeleMedia's HSC in this Order. Î The DPUC excluded $6.1 million of TeleMedia's net tangible assets, which TeleMedia reported at approximately $20 million, and also reduced TeleMedia's net intangible assets from TeleMedia's proposed $38.4 million to zero. TeleMedia argues that its method of asset valuation is reasonable. Rather than simply excluding all or most intangibles, TeleMedia states that since the Commission was concerned that ratepayer not fund an operator's expectation of monopolistic profits, a more reasonable asset valuation method is to base asset valuation on cash flows since they are the primary basis for cable system valuations in the business world. To the degree that a particular purchase price of a cable system reflected an expectation of monopoly profits, TeleMedia continues, that expectation would be limited by the cash flow of the particular system. Because the usual ratio of revenues to cash flows for cable systems is 2 to 1, TeleMedia urges that the same ratio be applied to determine that part of a system purchase price that might reflect an expectation of monopoly profits. Under Commission regulations, the competitive differential,"m 0*((" i.e., the difference in rates between comparable systems facing effective competition and those not facing effective competition is 17 percent. Under this approach, the average 17% benchmark rate reduction would dictate a disallowance of 34% of acquisitionrelated intangibles. TeleMedia therefore claims that the maximum amount of acquisition intangibles attributable to monopoly profits is 34%, or conversely, that 66% of TeleMedia's intangible asset value should be included in its ratebase.  X_-x8.` ` The DPUC responds that TeleMedia's tangible assets were improperly based on fair market value rather than original cost. The DPUC also contends that TeleMedia failed to meet its burden of proving that the claimed intangibles should be included in the  X -ratebase. The DPUC states that for the time period prior to adoption of our Cost Order, it considered traditional utility costofservice principles and determined that inclusion of intangibles in the ratebase was dependent on a showing of subscriber benefit. The DPUC  X -states that this conclusion is consistent with the Cost Order because those intangible assets  X -that are presumptively included in the ratebase under the Cost Order organizational costs, franchise costs and customer lists are costs that ordinarily benefit subscribers. Notwithstanding the presumption to include these items, the DPUC found that none of TeleMedia's claimed intangibles met the benefittosubscribers standard. Furthermore, excluding intangibles, the DPUC argues, ensures that subscribers are not funding TeleMedia's expectations of monopoly profits. TeleMedia replies that some if not all of its intangible costs should be included in its ratebase because they represent assets that are valuable to the company and used and useful in providing services to its subscribers.  X-x9.` ` The Commission's Phase 1 and Phase 2 rules on asset valuation were premised on the goal of eliminating from the ratebase that portion of assets, primarily intangible assets,  X-attributable to the expectation of monopolistic profits. In the Cost Order, the Commission distinguished between intangible assets which benefit subscribers to regulated services, including organizational costs, franchise costs and customer lists, which operators presumptively were entitled to include in their ratebase, and intangible assets associated with  Xm-monopolistic profits which operators presumptively could not include in their ratebase.O m X-ԍ See Cost Order at 457677. O In its order, the DPUC excluded all of TeleMedia's intangible assets, including the presumptively included ones. This action is not adequately supported by the record, and does not adhere to Commission rules. The DPUC's decision to set TeleMedia's intangible assets  X-at zero was unreasonable in the circumstances of this case.M{ X="-ԍ  See Novato Cable Company (Novato, California), DA 95629 (Cab. Ser. Bur., released March 28, 1995) (Bureau decision holding that though local franchising authority could have  X$-recalculated operator's rates, setting rates at zero was unreasonable).  M  X-x10.` ` TeleMedia's proposed method of asset valuation, presented before the DPUC and on appeal, is reasonable and also accomplishes the Commission's goal of ensuring that" 0*((" cable subscribers not fund operators' expectations of monopoly profits. However, TeleMedia proposed to apply its method only to intangible assets. Because cable operators derive revenues from the use of both tangible and intangible assets, TeleMedia's asset valuation method arguably should be applied to the entire purchase price of the cable system including tangibles, not just to the portion of the price allocable to intangibles as the operator proposed. Under this methodology, 34% of the purchase price of a system is presumed to be attributable to the expectation of monopoly profits in an unregulated environment. For explanatory purposes, assume a cable operator with an expectation of monopoly profits buys a system for $1,000, based on a system valuation of ten times cash flow. This means that the operator anticipates an annual cash flow of $100 and annual revenues of $200 based on an assumption  X -of a 2:1 ratio between revenues and cash flow.  X -ԍ An analysis of the financial data published by Paul Kagan Associates in the 19811994 Cable TV Financial Databook reveals that, on average, a cable system's operating revenues are generally about twice cash flow. According to the Commission's benchmark  X -survey, 17% of annual revenues reflects a system's monopoly revenues. K X-ԍ The full $17 in monopoly rents is attributable t o cash flow, since by definition it is being exacted solely because of the system's monopoly status, not cover system expenses. We have confidence in the reliability of the competitive differential, as it is the basis for the Commission's primary regulatory scheme and has been found reasonable upon judicial review.  X-See Time Warner Entertainment Co., L.P. v. FCC, 56 F.3d 151, 16471 (D.C. Cir. 1995). Thus, in our example, $34 of the $200 would be deemed to reflect the operator's monopoly revenues. Therefore, because expenses should remain the same before and after rate regulation and since it is assumed that monopoly revenues would flow straight to cash flow, $24, or 34% of the operator's $100 annual cash flow would be comprised of monopoly revenues. Under this methodology the 34% adjustment must be applied to the entire purchase price, both tangible assets and intangible assets, because cable operators derive revenues, including monopoly revenues, from the employment of both categories of assets. Thus, had there been effective competition, the system would be expected to generate only $66 in annual cash flow. If, as we have assumed in the example, the acquisition price is ten times cash flow, then it can be concluded that the system would have been purchased for $660 in a competitive environment, not the $1,000 paid based on its monopoly status. Therefore, $340 of the actual purchase price, or 34% is attributable to monopoly expectations. Utilization of this method greatly simplifies the asset valuation process by eliminating the need to assess the value of each individual asset. Moreover, it meets the Commission's objective of excluding the amount of the operator's investment which reflects its expectation of monopoly profits. Because the DPUC's action in setting TeleMedia's intangible assets at zero was unreasonable, this issue is remanded to the DPUC for further proceedings. On remand, the DPUC should consider what tangible and intangible assets should be included in the ratebase, recognizing that TeleMedia's proposed method for doing so is reasonable when applied to the entire purchase"N 0*(("  X-price.Fv Xy-ԍ TeleMedia's alternative argument regarding the amortization of excluded tangible assets is rendered moot by our resolution here and is inconsistent with Commission cost rules and generally accepted accounting principals ("GAAP"), in part because tangible assets are not subject to amortization. Our resolution also renders moot TeleMedia's argument concerning its revaluation of tangible assets due to certain tax events, based on Statement of Financial Accounting Standards ("SFAS") No. 109. These issues will therefore be dismissed.F  X-x B.` ` Depreciation  X-  X-x11.` ` TeleMedia next argues that the DPUC improperly increased the depreciable lives of TeleMedia's assets, and adopted an improper method of depreciation. Specifically, the DPUC increased TeleMedia's building and building improvements lives from 20 years to 31.5 years; its distribution plant life from 10 years to 15 years; and its converter life from 5 years to 7 years. TeleMedia argues that the company had developed its depreciation schedules prior to rate regulation, by relying upon its own best estimates of useful lives. TeleMedia contends that it used a 20year life for buildings and building improvements in light of the fact that its buildings were constructed as early as 1972 and were extensively renovated in later years. TeleMedia maintains that the DPUC imposed a 31.5year life on buildings and building improvements based on depreciable lives for tax purposes, and that this figure is not supported by the record. Regarding the depreciation life for distribution plant, TeleMedia argues that its proposed 10year life is appropriate. According to TeleMedia, the DPUC's 15year life exceeds both the Commission presumption of a 12year life for distribution plant and the 7year tax life. TeleMedia also argues that the DPUC's decision to increase the depreciable life for converters from the 5 years proposed by the company to 7 years is improper. TeleMedia contends that its proposed life conforms with GAAP, and that the DPUC's longer depreciation life does not account for the fact that converters are prone to a high degree of technological obsolescence. In addition, the company contends that the DPUC erred by adopting an improper method of calculating depreciation. The DPUC calculated depreciation by taking the remaining net investment (original investment less net salvage, less accumulated depreciation) in 1993, and depreciating the result over the remaining useful life. TeleMedia argues that this "forwardlooking" depreciation method fails to apply the increased depreciable lives schedules retroactively and thereby reduces depreciation expense, and the net book value of ratebased assets during the period of rate regulation. TeleMedia argues that the DPUC's reduction of their depreciation expense violates general costofservice principles which permit an operator to recover an appropriate allowance for the consumption of capital due to depreciation.  X -x12.` ` In its opposition, the DPUC argues that the depreciation schedules stated in the local rate orders for buildings and building improvements, distribution plant, and converters were reasonable. The DPUC argues that TeleMedia did not provide any evidence supporting its estimated book life for buildings and building improvements. The DPUC argues that Tele"0*(("ԫMedia submitted book life and tax life figures for the buildings of 20 years and 31.5 years, respectively. Contending that tax life is a better estimate of depreciation than book life, the DPUC adopted the 31.5year life for buildings and building improvements for its depreciation schedule. Regarding distribution plant, the DPUC maintains that it evaluated the coaxial cable and electronic equipment composing TeleMedia's distribution plant, and determined that it had a depreciable life of 15 years, a period greater than the 10year life proposed by TeleMedia, and the 7year tax life. For converters, the DPUC maintains that its adoption of the 7year life for converters was based on the asset's tax life. The DPUC also contends that its forward looking method of depreciation is reasonable. The DPUC maintains that this method has been adopted by the Commission, and allows the company a reasonable return on its investment, while protecting subscribers by preventing the company from earning a double recovery.  X -x13.` ` Commission rules regarding depreciation prescribe that regulators will monitor industry depreciation practices and carefully review depreciation showings in individual cost  X -proceedings to assure that these depreciation practices are reasonable.O  X -ԍ  See Cost Order at 4603.O The record does not indicate that the DPUC considered industry practices before developing its depreciation schedules. Indeed, the DPUC has not demonstrated adequately that the cable industry considers tax lives in calculating depreciation, nor has it explained fully the basis for establishing a 15year life for distribution plant. Because the DPUC failed to demonstrate that it followed Commission rules, the DPUC's decision to increase the depreciable lives of Tele X-Media's assets was unreasonable.  Moreover, TeleMedia's proposed depreciable lives were within the ranges of standard industry practice, and should have been considered reasonable  X-by the DPUC.{ X-ԍ  See, e.g., Simplification of the Depreciation Prescription Process, CC Docket No. 92296, Second Report and Order, FCC 94174 (released June 28, 1994). However, the DPUC's adoption of a forwardlooking depreciation method is reasonable if applied to the depreciable lives proposed by TeleMedia. Accordingly, we remand TeleMedia's appeal, with respect to the issue of depreciation for further action consistent with our findings.  X-  X|-xC.` ` Prior Year Losses  XN-x14.` ` TeleMedia next argues that the DPUC improperly refused to consider its prior year losses, which the operator claims exceeded $32 million. TeleMedia contends that the DPUC's action ignores the Commission's rule which presumptively permits an operator to include two years of accumulated startup losses as a component of the ratebase. In addition, TeleMedia contends that it should be able to recover losses it incurred even beyond the two year presumptive period because a portion of these losses were incurred in the company's efforts to complete the system (by providing service to more rural areas) and to make improvements, after the company acquired the system."!0*(( "Ԍ X-ԙx 15.` ` The DPUC responds that TeleMedia did not raise the issue of prior losses until after the time for submitting evidence had passed. Notwithstanding TeleMedia's alleged failure to follow proper procedure, the DPUC considered TeleMedia's prior year losses and concluded that TeleMedia failed to demonstrate that it was entitled to include any of the  X-claimed losses in its ratebase. X-ԍ Because the DPUC reached the merits of TeleMedia's argument, thereby waiving any alleged procedural irregularities, we will reach the merits here as well. TeleMedia replies that both traditional costofservice  X-principles and the Cost Order require the DPUC to permit inclusion of TeleMedia's prior year losses in its ratebase.  XJ-x16.` ` In the Cost Order, consistent with traditional costofservice principles, we analyzed the issue of prior year losses and adopted the Statement of Financial Accounting  X -Standards No. 51, Financial Reporting by Cable Television Companies ("FASB 51").N b X1-ԍ Cost Order, at 4563. N FASB 51 permits cable operators to include accumulated startup losses occurring during a "prematurity period" which is defined as two years. Cable operators may rebut the presumption of the two year prematurity phase by demonstrating that losses beyond this period were reasonably necessary to develop the cable system and to provide cable service  X -and, thus, benefitted current subscribers.5  Xq-ԍ Id.5  X}-x17.` ` As the DPUC noted in reaching its decision, the losses claimed by TeleMedia are well beyond the presumptive prematurity or startup period. The retained earnings indicate that the prior owner was producing an operating profit at the time TeleMedia acquired the system. Presumptively, any startup losses the previous owner had at that time were accounted for in the price TeleMedia paid for their system. Permitting TeleMedia to include startup losses in its ratebase would result in its subscribers paying for the losses twice once in the rates paid under the previous owner and again in the rates charged by TeleMedia. The DPUC's decision to exclude TeleMedia's claimed twoyear startup losses was therefore reasonable. TeleMedia's claim that after acquiring the system, it spent considerable capital to "complete" the system and to make improvements does not entitle the company to account for these expenses as start up losses. Instead, the portion of TeleMedia's "startup" losses that were caused by its extension of the system after acquisition should have been included as expenses in its ratebase, with the tangible assets being depreciated over their useful life. Because the record indicates that TeleMedia already accounted for these losses in this way, TeleMedia's appeal of this issue is denied.  X -x D.` ` Rate of Return x  X-x18.` ` TeleMedia next argues that the DPUC improperly reduced TeleMedia's rate of return. The DPUC set TeleMedia's overall weighted rate of return at 11.48% for Phase 1" 0*((" and at 12.38% for Phase 2. TeleMedia contends that these rates are inadequate because they do not permit the company to realize its actual rate of return or to compensate its investors. Furthermore, TeleMedia claims that these proposed rates of return would cause the company to default under its credit agreement. TeleMedia argues that to maintain its financial integrity, it requires a rate of return of 16.17%. In its appeal, TeleMedia describes its current financing agreements including a stock purchase agreement with Brazas Communications, Inc. ("Brazas") and a loan from Canadian Imperial Bank of Commerce ("CIBC"), both of which  X_-allegedly demand a higher rate of return than the rates ordered by the DPUC.G7_ X-ԍ  See Appeal at 79. According to TeleMedia, pursuant to their Stock Purchase Agreement, Brazas is entitled to a 15% return on the preferred stock of $30 million and a 15% preferred return on the Class B stock of $4 million. Brazas required rate of return exceeds 15%, however, because its ownership of the $4 million of Class B common stock also entitles it to the remaining economic value of TeleMedia, after the company satisfies the 15% return to Brazas on the $34 million of preferred and common stock and provides a fixed  XP-amount to the Class A and C stockholders of the company. Id. TeleMedia argues that the loan from CIBC also requires a 16.17% rate of return because it carries an interest rate of  X$-10.25%. Id. at 7980.G TeleMedia argues that in June 1994, the DPUC approved the terms of TeleMedia's financing agreements. Thus, the company contends that it is not appropriate for the DPUC to reduce TeleMedia's rate of return and thereby prevent TeleMedia from fulfilling its contractual financial obligations  X -x19.` ` In its opposition to TeleMedia's appeal, the DPUC maintains that the 11.48% and 12.38% rates that it established are reasonable and consistent with the Commission's presumptive rate of 11.25%. According to the DPUC, calculation of the proper rate of return was complicated by TeleMedia's complex financial status and structure. More specifically, TeleMedia's credit and stock agreements cover the majority of capital invested in the company and include specific entitlements for common stockholders under certain events. In addition, the DPUC maintains that although TeleMedia is incorporated, its financing indicates that it is, for all practical purposes, a partnership. The DPUC alleges that this structural ambiguity made it difficult to determine the extent to which component capital costs should be relied upon in setting the weighted capital cost. The DPUC ultimately decided that the record supported treating TeleMedia as a corporation. The DPUC argues that TeleMedia's request for a rate of return of 16.17% reflects the company's lack of understanding of its own financing agreements. More specifically, the DPUC maintains that TeleMedia's 16.17% figure assumes that its investors expected a sufficient return on common equity so that the combined return on common and preferred stock would be 25%. However, the DPUC claims that the agreement contained no explicit mention of the expected return value. The DPUC contends that as part of its review, it determined TeleMedia's cost of equity as a corporation by relying on the findings of its review of the cost of equity in the cable industry and on the"N 0*((|"  X-findings of the Commission. Based on its analysis,na Xy-ԍ In its analysis, the DPUC determined that the cost of equity for regulated cable services falls in the range of 13% to 15%. Applying a 15% equity cost to Tele-Media's capital structure of 59.61% debt, 35.27% preferred stock and 5.11% equity, along with debt costs of 9.09% in Phase 1 and 10.61% in Phase 2 (because of higher prime rates to which Tele-Media's interest rate in the credit agreement) and preferred equity costs of 15%, the DPUC calculated a final weighted rate of return of 11.48% in Phase 1 and 12.38% in Phase  X-2.  See Opposition at 36.n the DPUC calculated a weighted cost of capital of 11.48% in Phase 1 and 12.38% in Phase 2.  X-x20.` ` In its opposition, the DPUC also responds to other arguments raised by TeleMedia in its appeal concerning the rate of return issue. First, the DPUC contends that the higher cost of equity claimed by TeleMedia can only be justified if the company is treated as a partnership and receives the corresponding tax treatment. According to the DPUC, this approach is not supported by Commission rules or the record. Furthermore, the DPUC argues that its proposed rate of return would not be the cause of TeleMedia's default. The DPUC explains that the weighted capital cost allowed was specifically designed to cover debt, preferred and common equity costs. Thus, the DPUC argues that default would potentially arise only if TeleMedia has paid a price for its franchise that reflected monopolistic profits and was greater than can be reasonably recovered from subscribers.  X -x21.` ` Under Commission rules and general costofservice principles, the rate of return is the composite, weighted cost of the various classes of capital (debt, preferred stock, and common equity) used by the company. The weighting reflects the proportion each class of capital is of the total capital. The calculation of the rate of return is designed to provide a return sufficiently large to maintain the financial integrity of a company and to allow it to  XK-attract new capital when necessary.LK X-ԍ See Cost Order at 4620. L In the Cost Order, the Commission adopted a  X6-presumptive rate of return of 11.25%.C6  X<ԍ Id.at 4612.C In its costofservice filing, TeleMedia claimed a rate of return of 16.17%. Based on our analysis of the record, we find that in terms of capital structure, the DPUC allowed TeleMedia more equity than its balance sheet shows and a  X-slightly higher cost of debt than the minimum interest required to service its debt. Moreover, the DPUC allowed TeleMedia a rate of return on equity to cover the specific return requirement of its preferred stock shareholders. Because the DPUC's analysis was reasonable, TeleMedia's appeal with respect to the issue of rate of return is denied.  X~-x E.` ` Allocation Method x  XP-x22.` ` TeleMedia next argues that the DPUC improperly refused to adopt the usagebased method for allocating property, plant and equipment costs relied upon by TeleMedia,"9 W 0*(("  X-and adopted instead a channelbased method.A Xy-ԍ TeleMedia does not challenge the DPUC's determination that the appropriate allocator for customer service, selling and general and administrative expenses is the number of  XK-customers subscribing to each tier of service. See Opposition at 31 n.1A According to TeleMedia, the Commission has rejected a requirement of strict channel ratio allocation methodology. TeleMedia argues that the Commission provided cable operators with broad discretion in determining appropriate cost allocation methodologies. The company claims that Commission rules do not specify the means of showing the costcausative linkage for joint and common costs and that the company's method of cost allocation adheres to the Commission's requirement that joint and common costs be allocated on a costcausative basis. TeleMedia maintains that it concentrates most of its marketing, management and administrative efforts on the basic service tier because this tier is the one most utilized by subscribers. TeleMedia claims that most of its costs were incurred to meet expenses of the basic service tier and that it should be able to utilize a usagebased allocation methodology to allocate a higher proportion of its costs to this tier. TeleMedia contends that the usagebased cost allocation methodology that it has employed has been traditionally used in other regulated services, including the telephone industry, and is appropriate for the cable industry.  X -x23.` ` In its opposition, the DPUC contends that its own selection of the channelbased method for allocating property, plant and equipment costs among TeleMedia's service tiers is reasonable. The DPUC challenges TeleMedia's assertion that Commission rules preclude the DPUC's use of the channelbased method. According to the DPUC, the Commission has not rejected the channelbased method, but instead has chosen not to adopt  X4-any specific allocation method as part of its Cost Order. Moreover, the DPUC contends that the Commission has expressly stated that per channel allocations are permissible. The DPUC also argues that the record does not support the use of the usagebased allocation method selected by TeleMedia. As the DPUC explains, TeleMedia's method is based on the number of customers multiplied by the number of channels per tier. Calculations based on this method results in a relatively higher portion of the company's costs being allocated to the basic tier. The DPUC contends that the number of channels per tier does not indicate the time subscribers will spend using a tier, and that even if it did, the company has testified that its costs are not affected by subscriber viewing time. Thus, the DPUC determined that TeleMedia failed to demonstrate that its allocation method relied on a costcausative linkage. The DPUC also rejects TeleMedia's argument that the usagebased method is appropriate in this case, because this method is employed in the telephone industry. The DPUC notes that the telephone industry, unlike the cable industry, has demonstrated a significant linkage between fixed costs and customer usage.  X-x24.` ` The Commission's Cost Order established general allocation rules that encourage direct assignment of costs where possible, but also allow for operator flexibility in" M0*(("  X-determining specific allocators and allocation schemes.I Xy-ԍ  See Cost Order at 4653.I The general propositions upon which we base our cost allocation requirements are as follows: (1) costs shall be directly assigned among the equipment basket and service cost categories whenever possible; (2) costs that cannot be directly assigned and as to which no allocator has been specified by the Commission are to be allocated based on direct analysis of the origin of the costs, and where allocation based on direct analysis is not possible, operators must attempt to make a cost causative linkage to other costs directly assigned or allocated to the service cost categories and the equipment basket; and (3) for costs that cannot be directly assigned and for which no indirect measures of cost allocation can be found, such costs shall be allocated to each service cost category based on the ratio of all other costs directly assigned and attributed to a service cost category over total costs directly or indirectly assigned and directly or indirectly  X -attributable.< { X/-ԍ Id. < Although the Commission rules permit flexibility in cost allocation, the method selected must adhere to Commission guidelines regarding the demonstration of cost causative links. The Commission has not specifically endorsed the channelbased method, although it has expressly sanctioned its use. Generally, the burden of proof in demonstrating the  X -reasonableness of proposed rates for the basic service tier lies with the operator.R . X-ԍ  See  47 C.F.R.  76.937.R Based on the record in this case, TeleMedia has not adequately demonstrated the validity of its reliance on the usagebased method. In contrast, the Commission has expressly sanctioned use of the  Xb-channelbased allocation method adopted and applied by the DPUC.Vb X-ԍ See Cost Order at 4653, n.475.V Thus, the DPUC's decision here was reasonable, and TeleMedia's appeal with respect to the issue of the cost allocation method is denied.  X-x F .` ` Maintenance of Remote Control Units x  X-x25.` ` TeleMedia next argues that the DPUC improperly reduced the permitted costs for the company's maintenance of remote control equipment. As part of its equipment costs, TeleMedia had included costs of $190,000 for the repair and maintenance of remote controls. In its order, the DPUC reduced this figure to $35,000, based on its calculation of the costs of replacing rather than repairing the remote controls. In its appeal, TeleMedia contends that despite the fact that it may be less expensive to replace remote control units than to repair them, the company had adopted a policy of repair rather than replacement for ecological reasons. TeleMedia argues that the DPUC may not require that TeleMedia alter company policy, and instead must permit the company to recoup its actual costs. In its opposition, the DPUC claims that it reduced TeleMedia's allocation for remote control equipment maintenance because TeleMedia's decision to repair remote control units rather than replace them is not economically reasonable. " 0*((;"Ԍ X-ԙx26.` ` The Commission's costofservice rules permits operators to recover operating expenses and a fair return on investment, while protecting subscribers from unreasonably high  X-rates.I  XK-ԍ  See Cost Order at 4539.I An operator's "equipment basket" includes all costs associated with providing  X-customer equipment and installation.!{ X-ԍ  See 47 C.F.R. 76.923(c). Equipment basket costs are limited to the direct and indirect material and labor costs of providing, leasing, installing, repairing and servicing customer  X-equipment. Id. Because the equipment basket figure is a component of the operator's hourly service charge, the amount of the equipment basket directly affects  X-subscribers' rates.J" X@ -ԍ  See 47 C.F.R. 76.923(d).J In its appeal, TeleMedia argues that it incurs costs of $190,000 for the repair of remote control units. The DPUC has determined that the cost of repairing remote control units is more than five times as much as the cost of providing subscribers with new remote control units, and TeleMedia does not question the accuracy of DPUC's calculation. Because TeleMedia has not provided any substantiation for its ecological rationale, TeleMedia has not met its burden in demonstrating that the DPUC's decision was unreasonable. Accordingly, TeleMedia's appeal with respect to the issue of the maintenance of remote control units is denied.  X -x G.` ` CrossSubsidization  X-x27. ` ` TeleMedia next argues that the DPUC improperly required TeleMedia to crosssubsidize its basic service tier by offsetting any revenue shortfall resulting from the DPUC's rate orders by increasing cable programming service ("CPS") tier rates or by  XK-obtaining revenue from other TeleMedia entities.#K X-ԍ  In the rate orders, DPUC states, "TeleMedia is part of a larger CATV network. Accordingly, TeleMedia may obtain resources to cope with any rate reduction or refund order  X-from this larger network, or apply to FCC for a hardship proceeding." See Phase 1 Decision at  Xn-6; Phase 2 Decision at 6. É TeleMedia claims that its own financial structure as one of a group of independently owned entities using a common management company, prevents the company from taking such actions. In its opposition, the DPUC argues that it has not demanded that TeleMedia engage in unlawful crosssubsidization.  X-x28. ` ` A review of the record in this case indicates that the DPUC's orders were not overreaching. In its orders, the DPUC simply reminded TeleMedia that the company is part of a larger cable network and that this network may be able to offer its resources to the  X-company.B$#  Xg&-ԍ  Id. B Contrary to TeleMedia's assertions in its appeal, the record does not indicate that the DPUC demanded that the company crosssubsidize any losses incurred as a result of the"| $0*((2" regulation of basic service with CPS tier revenues. As a result, no real controversy exists in this case regarding the validity of the claim about crosssubsidization. Accordingly, this issue is not ripe for review, and TeleMedia's appeal with respect to the issue of crosssubsidization is dismissed.  X-x H.` ` CostofService Principles  X_-x29.` ` Finally, TeleMedia contends that the DPUC has failed to follow costofservice principles. However, in raising this issue, TeleMedia makes only general arguments. The operator's specific complaints regarding the DPUC's application of costofservice principles are addressed elsewhere in its appeal. Indeed, TeleMedia's discussion of this issue does not refer to any independent controversy. Therefore, TeleMedia's appeal with respect to the issue of the application of costofservice principles is dismissed.  X - IV. ORDERING CLAUSES  X-x30.` ` Accordingly, IT IS ORDERED that TeleMedia's appeal with respect to the  Xy-issues of asset valuation and depreciation IS GRANTED IN PART AND DENIED IN  Xb-PART , and the local rate orders ARE REMANDED for resolution in accordance with this order.  X-x31.` ` IT IS FURTHER ORDERED that TeleMedia's appeal with respect to the  X-issues of prior year losses, rate of return, cost allocation and remote control maintenance IS  X- DENIED .  X- x32.` ` IT IS FURTHER ORDERED that TeleMedia's appeal with respect to the issues of TeleMedia's Hourly Service Charge, amortization of excluded tangible assets, revaluation of tangible asses due to certain tax events, crosssubsidization and application of  X|-costofservice principles IS DISMISSED .  XN-x33.` ` IT IS FURTHER ORDERED that the stay granted previously in this  X7-proceeding IS VACATED .  X -x34.` ` IT IS FURTHER ORDERED that TeleMedia's Petition for Reconsideration  X-of Escrow/Bond Requirement in Grant of Stay IS DISMISSED .  X -x35.` ` 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. x` `  hhFEDERAL COMMUNICATIONS COMMISSION "#'$0*((%"Ԍx` `  hhMeredith J. Jones  X-x` `  hhChief, Cable Services Bureau