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                            Before the
                Federal Communications Commission
                      Washington, D.C. 20554

                                 
                                )
                                )
In the Matter of                )
                                )
TCI CABLEVISION OF OREGON, INC. )
                                )
Appeal of Local Rate Order      )
of the Mt. Hood Cable           )
Regulatory Commission           )
                                )
Multnomah County, Oregon        )
                                )
                                )


                  MEMORANDUM OPINION AND ORDER

      Adopted:  June 16, 1997Released:  June 18, 1997

By the Chief, Cable Services Bureau:

                         I.  INTRODUCTION

      1.On July 19, 1995, TCI Cablevision of Oregon, Inc. ("TCI"), the franchisee in the
above matter, filed an appeal of a local rate order adopted on June 19, 1995 by its local franchising
authority, the Mt. Hood Cable Regulatory Commission ("the MHCRC").  The rate order establishes
a new regulated rate schedule for TCI's basic service tier and associated equipment and installations
for Multnomah County and the City of Portland.  The MHCRC filed an opposition to TCI's appeal
on August 3, 1995.  TCI did not file a reply.   

      2.In the local order, the MHCRC reduced the rate increase that TCI proposed in its
Form 1210.  The MHCRC accepted the incremental rate changes proposed by TCI but found that
TCI had erred by basing the Form 1210 rate change on a previously rejected Form 1200 rate, thereby
rendering the proposed rate unacceptable.  More specifically, the MHCRC found that TCI
incorrectly used as its baseline rates, the rates the operator proposed in its Form 1200 submission
in August 1994, rather than the corrected rates adopted by the MHCRC in the franchising authority's
December 12, 1994 rate order.  TCI appealed the December 12, 1994 rate order on January 11,
1995.  On May 8, 1995, the Commission granted TCI's request for an emergency stay of the local
rate order pending resolution of the appeal.  TCI's appeal was resolved by an order released by the
Commission on November 20, 1995, which vacated the stay, and granted the appeal in part ("TCI
Remand Order").  In addition, in its local order, the MHCRC found that TCI had incorrectly
included in its rate calculations for Form 1205, certain costs described by the operator as overhead
expenses for converter units.  TCI had included in its Form 1205, $20 in capital costs for each of
its converters.  

      3.TCI seeks review of the MHCRC's local rate order with respect to two issues.  TCI
argues that the local order violates federal law and Commission rules (1) by preventing TCI from
basing its Form 1210 rates on its disputed Form 1200 rates, causing a loss of revenue for the operator
that cannot be recouped; (2) by excluding labor costs of installing and retrieving converters,
operating costs of managing converter inventory and material costs for converters from Schedule C,
and thereby reducing TCI's equipment rates.

      4.Under our rules, rate orders made by local franchising authorities may be appealed
to the Commission.  In ruling on appeals of local rate orders, the Commission will not conduct a
de novo review, but instead will sustain the franchising authority's decision as long as there is a
reasonable basis for that decision.  The Commission will reverse a franchising authority's decision
only if it determines that the franchising authority acted unreasonably in applying the Commission's
rules in rendering its local rate order.  If the Commission reverses a franchising authority's decision,
it will not substitute its own decision but instead will remand the issue to the franchising authority
with instructions to resolve the case consistent with the Commission's decision on appeal.

                         II.  DISCUSSION

               A.  Baseline Rates for FCC Form 1210

      5.The first issue raised by TCI on appeal concerns the preparation of FCC Form 1210. 
Form 1210 is the official form an operator uses to justify adjustments in the rates it computed on its
FCC Form 1200, which is used to establish an operator's initial maximum permitted rates, or to
adjust rates on a previously filed Form 1210.  In the Form 1200, an operator calculates its
provisional rates and its full reduction rates.  An operator's initial maximum permitted rates are the
higher of the two.  An operator may file a Form 1210 to adjust its rates to reflect changes in external
costs, channel additions and deletions, and inflation.  External costs include the following
categories of costs:  state and local taxes specifically applicable to the provision of cable television
service; franchise fees; costs of complying with franchise requirements; retransmission consent fees
and copyright fees incurred for the carriage of broadcast signals; other programming costs; and
Commission regulatory fees.  An operator may file for changes in external costs for the period
beginning at the end of the last quarter for which an adjustment was previously made through the
end of the quarter that has most recently closed preceding the filing of the Form 1210.  An operator
may file a Form 1210 quarterly, but must file in the quarter following a decrease in costs due to
channel deletions and within a year following a decrease in other costs.  An operator must file for
a rate increase within a year of the cost increase in order to recover those costs in its rates.  

      6.In its rate order, the MHCRC rejected the rate increase proposed by TCI in its Form
1210, filed on March 17, 1995.  Although the MHCRC approved the percentage increment of the
increase proposed by TCI, it rejected as too high the baseline rates used by TCI.  In its Form 1210
submission, TCI used as its baseline rates the Form 1200 rates that had been disallowed by the
MHCRC in the local franchising authority's December 12, 1994 rate order.  The MHCRC's June
19, 1995 Form 1210 rate order stated that TCI should use its corrected Form 1200 rates, i.e., the rates
adopted by the MHCRC in its December 12, 1994 Form 1200 rate order, as the baseline rates for its
Form 1210, rather than using the rates that the operator had proposed in its August 1994 Form 1200
submission and that the MHCRC had already rejected.  In its appeal, TCI argues that the Form
1200 rates that it initially proposed in August 1994 were the appropriate baseline rates for its Form
1210 rate increase.  TCI notes that the rates proposed in August 1994 were the subject of an appeal
pending with the Commission at the time the March 1995 Form 1210 was filed, and that on May 8,
1995, the Commission granted TCI's request for stay of the local rate order pending resolution of its
appeal.  TCI claims that the Commission granted the stay in part to prevent the irreparable
economic harm to the operator that would result if the operator were unable to recoup any losses that
occurred as a result of its compliance with the rate order while its appeal of the order was pending. 
TCI argues that its Form 1210 rates must be based on the Form 1200 rates that were in effect during
the period of the stay to prevent the same sort of economic harm.  In its opposition, the MHCRC
contends that it would be unreasonable for the Commission to require a franchising authority to
approve a rate increase based on a rate that the franchising authority has already disapproved. 
Moreover, the MHCRC argues that TCI overstates the Commission's reasons for granting a stay. 
According to the MHCRC, the Commission granted a stay to prevent potential, rather than actual,
economic harm.

      7.Under our rules, cable operators must obtain prior approval for rate increases. A
proposed rate goes into effect if the local franchising authority expressly approves it or fails to act
within the statutory period.  In this case, TCI proposed rate increases in its Form 1210 based on the
rates in its Form 1200.  The Form 1200 rates were disapproved by the MHCRC in its local rate
order adopted on December 12, 1994, but the Commission granted a stay of the local order,
permitting TCI to continue charging the disapproved rates pending resolution of its appeal. 
Subsequently, the Commission resolved TCI's appeal in favor of the franchising authority in some
respects and in favor of TCI in others, and it vacated the stay.

      8.We conclude that TCI was correct to base its Form 1210 rate increase on the rates in
TCI's Form 1200 then in effect, rather than MHCRC's approved base rates, subject to refund and
adjustment once the Form 1200 rates were resolved.  The MHCRC's order on the Form 1200 base
rates was stayed before TCI was required to comply with it and before the MHCRC issued its Form
1210 order.  Accordingly, TCI's appeal is granted with respect to this issue.

      9.Although TCI was correct to use its own Form 1200 base rates when it filed its Form
1210, TCI should have revised and re-filed its Form 1200 and its Form 1210 and implemented
revised rates in response to the TCI Remand Order, subject to the MHCRC's right to review the
revised rate filings.  In the TCI Remand Order, the Commission dissolved the stay of the MHCRC's
order, denied TCI's appeal with respect to the issues of additional outlets and refund liability,
dismissed as moot the question of whether TCI could increase rates that were less than the maximum
permitted level, and remanded the local rate order to the MHCRC with respect to the issues of
equipment rates, the regulatory status of installation charges for A/B switches, and TCI's inside
wiring plan.  Because the TCI Remand Order upheld portions of the MHCRC's Form 1200 order
and vacated the stay, TCI could not lawfully continue to charge rates that were based on its filed
Form 1200 rates.  Our rulings on each of the Form 1200 issues were clear and unambiguous.  TCI
could have and should have re-calculated and re-submitted its Form 1200 and Form 1210 rates, and
it should have implemented the revised rates, subject to the MHCRC's right to review them, without
waiting for the MHCRC to issue an order on remand.

      10.Because the pleading cycle in the instant appeal proceeding was concluded before we
issued the TCI Remand Order, the record does not indicate whether TCI, in fact, re-calculated and
re-filed its rates in response to the remand.  Accordingly, if TCI has not already revised its Form
1210 rates appropriately, we hereby direct TCI to re-calculate and re-file its Form 1210 rates in
response to this Order to incorporate revised Form 1200 rate calculations that reflect the MHCRC's
ruling in response to the TCI Remand Order, if the MHCRC has issued such a ruling.  If the
MHCRC has not yet done so, then TCI should re-calculate and re-file its Form 1200 and Form 1210
rates to reflect the rulings in the TCI Remand Order, and it should implement the revised rates,
without waiting for the City to issue an order on remand.  TCI's revised rates and revised Form 1210
should also reflect our ruling in this Order with respect to the capitalization of certain converter
costs, which is discussed below.  The MHCRC shall have the right to review TCI's filings in
accordance with the Commission's rules.  TCI may not charge rates in excess of the rates supported
by its revised filings.

          B.  Capitalization of Certain Converter Costs

      11.The other issue raised by TCI on appeal involves preparation of FCC Form 1205. 
The portions of Form 1205 that are relevant to TCI's appeal are Schedule B, Annual Operating
Expenses of Service Installation and Maintenance of Equipment and Plant, and Schedule C, Capital
Costs of Leased Customer Equipment.  Form 1205 is the official form used by regulators to
determine whether an operator's regulated rates for equipment and installations are reasonable under
the revised benchmark rules which apply to operators beginning May 15, 1994.  Pursuant to the
Cable Television Consumer Protection and Competition Act of 1992 ("1992 Cable Act"), the
Commission has established standards for setting, on the basis of actual cost, the rates for installation
and lease of equipment used by subscribers to receive the basic service tier.  Equipment rates are
derived from total capital and maintenance costs per unit of equipment.  Installation rates are derived
from a calculation of an hourly service charge and an application of that charge to different types of
installations.  The maximum permitted rates for installation and lease of equipment calculated
pursuant to these Commission regulations as determined on Form 1205 are deemed to be reasonable,
and are, therefore, lawful under the 1992 Cable Act.  Under Commission rules, cable operators
have the burden of proof in demonstrating the reasonableness of existing or proposed rates for their
basic service tier and associated equipment.

      12.In its appeal, TCI raises arguments concerning the treatment in Form 1205 of labor
costs of installing and retrieving converters, operating costs of managing converter inventory and
material costs for converters.  TCI included $20 in capital costs per converter in its Form 1205 to
account for all of these costs.  TCI had derived the $20 figure by adding the following capital costs:
$7 per converter for the labor costs of installation, $7 per converter for the labor costs of retrieving
a unit from a customer's home, $3 per converter for inventory management costs and $3 per
converter for material costs, including cable jumpers, fittings and splitters.  By capitalizing its
converter costs, i.e., including these costs in Schedule C, Capital Costs of Leased Customer
Equipment, of Form 1205, TCI had calculated a lease rate of $2.04 per month for addressable
converters in Portland and $2.03 per month for addressable converters in Multnomah County. 
TCI's proposed rates for standard converters were $0.88 per month in Portland, and $0.87 per month
in Multnomah County.  In its rate order, the MHCRC disallowed TCI's capitalization of converter
costs for the following five reasons: (1) the costs are inconsistent with the Commission's definition
of "annual purchase costs"; (2) capitalization of the costs is inconsistent with generally accepted
accounting principles ("GAAP"); (3) material and labor costs associated with installation of
converters are incorporated in installation charges in Schedule B of Form 1205; (4) labor or other
operating costs associated with converter disconnects and converter inventory management are
already incorporated in programming service rates; and (5) the proposed capital costs for converters
are not based on records from the local system.  The MHCRC excluded the $20 per unit capital cost
from Form 1205, thereby reducing TCI's lease rates for addressable and standard converters to $1.69
and $0.76 per month, respectively, in both Portland and Multnomah County.   In its appeal, TCI
challenges each of the MHCRC reasons for disallowing its inclusion of $20 of capital costs per
converter.

      13.In response to the City's argument regarding whether or not TCI's capital converter
costs can be included as part of annual purchase costs, TCI cites Commission rules which allow for
recovery of incidental costs as part of annual purchase costs.  TCI acknowledges that none of the
costs at issue are among those listed in the rule describing incidental costs of annual purchase costs,
but the operator argues that this list is not exclusive.  TCI contends that its $20 of "overhead" costs
per converter are incidental costs that must be included in Schedule C in order to ensure that
converters are priced at actual cost.  TCI also contests the MHCRC's claim that TCI should not be
permitted to capitalize its converter costs because such costs are not capitalized under GAAP. 
According to TCI, the Commission should focus on whether an operator's accounting treatment
meets the Commission's regulatory objective of establishing actual costs for converters rather than
on whether or not the operator is adhering to GAAP.  In support of this claim, TCI cites 47 C.F.R.
 32.1 which states that the Commission's accounting rules are based on GAAP only "to the extent
regulatory considerations permit."  Contending that the converter costs at issue are actual costs,
TCI maintains that regulatory considerations of establishing converter rates at actual cost outweigh
the importance of adhering to GAAP in this instance.  Thus, TCI claims that it should be allowed
to recover these costs.  TCI also disputes MHCRC's assertion that the converter costs at issue are
already recovered through existing installation and programming service rates.  According to TCI,
the MHCRC has failed to identify exactly where these costs have already been included. 
Moreover, TCI argues that its own failure in the past to seek recovery for these actual costs should
not prevent the operator from recovering them now through its present filing.  Finally, TCI
challenges the MHCRC's assertion that the $20 in capital costs per converter should be rejected
because the $20 figure was not based on the records of the local system.  TCI admits that the $20
figure is based on national, rather than system-specific information.  However, the operator
contends that because its accounting system had not been designed with current regulatory demands
in mind, certain analyses now required by Commission rules were unduly complicated.  Thus,
according to TCI, it made more sense for the operator to derive cost figures based on a national cost
survey rather than to develop system-specific figures.

      14.In addition to disputing the reasons offered by the MHCRC for disallowing the $20
of capital costs per converter, TCI also presents affirmative reasons for including these costs in
Schedule C of Form 1205.  TCI contends that placement of these costs in Schedule C enables the
operator to comply most effectively with the Commission's instructions to base its rates on actual
costs.  TCI claims that the actual cost of installing and retrieving converters and managing converter
inventory cannot be recouped through one-time charges.  In addition, TCI argues that its material
costs for converters should be capitalized because these costs have always been reflected in its
capital accounts.  TCI maintains that it recently reviewed its distribution capital accounts and
reassigned "certain direct, in-home converter-related costs," i.e., the material costs at issue, to a
converter capital account.  TCI contends that these capital costs must be included in Schedule C
of Form 1205 so that they will be recovered through its converter rental charges.

      15.In its opposition to TCI's appeal, the MHCRC restates the five reasons it provided
in its rate order for disallowing TCI's capital costs.  The MHCRC argues that Commission rules only
allow for capitalization of costs that are incidental to annual purchase costs.  Citing 47 C.F.R. 
76.923(f), the MHCRC claims that the costs that TCI capitalized are not among those costs that the
Commission defines as incidental to converter purchase costs.  The MHCRC argues that the costs
at issue are, instead, operating costs recovered through a separate non-capital procedure in Schedule
B of Form 1205.  The MHCRC notes TCI's admission that capitalizing these converter costs
amounts to a deviation from GAAP.  The MHCRC argues that TCI has not adequately justified its
departure from GAAP, especially in light of the fact that the instructions for Form 1205 expressly
direct operators to complete the Form "using financial data . . . maintained in accordance with
generally accepted accounting principles."  The MHCRC also argues that TCI is attempting to
recover costs that it has already recovered through other regulated rates and charges.  The MHCRC
asserts that TCI already recovers labor costs of installing and retrieving converters, costs of
managing converter inventory and material costs for converters through direct installation charges
and programming service rates, and that these costs, therefore, cannot be included in Schedule C of
Form 1205.  In response to TCI's claim that the MHCRC has failed to identify where these costs
are already included, the MHCRC cites Commission rules which place the burden of proof in
demonstrating the reasonableness of  rates on the operator, and not on the local franchising
authority.  Finally, arguing both that TCI is seeking double recovery for the costs at issue, and that
the operator has not offered any system-specific justification for its proposed costs, the MHCRC
maintains that TCI did not provide the MHCRC with any evidence indicating that the operator
actually incurs an additional $20 of capital costs per converter.

      16.The Commission rule defining the "equipment basket" states that the basket shall
include all "direct and indirect material and labor costs of providing, leasing, installing, repairing,
and servicing customer equipment."  Pursuant to the 1992 Cable Act, material and labor costs
included in the equipment basket must be recoverable by the operator.  The costs of installing and
retrieving converters, the costs of managing the converter inventory, and the material costs of
converters are clearly related to providing and installing equipment, and are properly classified as
part of the equipment basket.  Thus, TCI must be permitted to recover the labor costs of installing
and retrieving converters, the costs of managing converter inventory, and the material costs of
converters.

      17.TCI does not adequately justify its reasons for treating the labor costs of installing
and retrieving converter costs as capital costs and including them in Schedule C.  Indeed, TCI does
not clearly distinguish these costs from the operating expenses and labor costs that are ordinarily
included in Schedule B.  Instead, TCI argues that it should include these costs in Schedule C because
it has not listed them elsewhere in Form 1205. The Commission's instructions for completing
Schedule B specifically provide that operators include "all annual operating expenses . . . for
installation and maintenance of all cable facilities" on Schedule B.
Moreover, operating expenses incurred specifically to maintain and install customer equipment are
referenced expressly.  Thus, the Commission's instructions for Form 1205 clearly indicate that TCI
should include the labor costs of installing and retrieving converters on Schedule B rather than on
Schedule C.  Such costs are thereby included in installation charges or in the maintenance element
of the equipment lease charges.  They may not be included on Schedule C which is used only to
"compute the annual capital costs of equipment leased to customers."

      18.TCI states that certain costs in question are related to inventory management and
claims that such costs are incidental costs that may be included as annual purchase costs.  We agree
that certain costs of managing converter inventory may be capitalized and therefore included on
Schedule C as converter costs.  Pursuant to Commission rules, purchase costs that are capitalized
and reported on Schedule C as converter costs would include "acquisition price and incidental costs
such as sales tax, financing, and storage up to the time [the converter] is
provided to the customer.  While the list of incidental costs in 76.923(f) is not exhaustive, the
costs at issue, i.e., labor costs of retrieval and reinstallation of converters, the cost of inventorying
such items, and the material supplies associated with their reinstallation, are not incidental to the
activities associated with placing new converters into service.  The rules define incidental costs as
costs incurred up to the time the equipment is provided to the customer.  The converter installation
and retrieval costs that TCI seeks to capitalize appear to be incurred after the initial converter
installation.  The rules do not provide for the capitalization of the costs of retrieval, reinstallation and
re-inventorying of converters.

      19.Further, TCI does not clearly explain the basis for including the material and
equipment costs in question on Schedule C. Certain materials and supplies associated with
equipment installations may be capitalized. Where such material and supplies have been capitalized
as part of the converter cost, it would be proper to include such costs on Schedule C and recover
them in the converter lease charge.   Alternatively, incidental material and supplies could be
expensed, included on Schedule B, and recovered in installation charges or in the maintenance
element of the appropriate lease charge.  The accounting treatment, under GAAP, would determine
which schedule is used.  If Schedule C is appropriate, the accounting would determine which asset
group it should be included with on this schedule.  Thus, if the operator capitalizes certain
converter installation materials and supplies in the converter account, it would be proper to report
the costs on Schedule C for converters.  It is not clear from the record in this case, however, where
all of the materials and supplies in question have been recorded.  It appears that the costs involved
are material and supplies that either are not capitalized or have been capitalized in accounts for
equipment for which TCI is not establishing a separate regulated charge.  In either case, we find
nothing in the record to indicate that they may be included with the converter costs on Schedule C. 

      20.We find that TCI has not provided any support for its $20 figure for converter capital
costs, aside from its assertion that the figure is based on a national survey.  Therefore, TCI failed to
meet its burden under Commission rules to demonstrate the reasonableness of its rates.  We
conclude, therefore, that, TCI's appeal with respect to the costs of  installing and retrieving
converters, the material costs of converters and the costs of managing converter inventory is denied.
                      III.  ORDERING CLAUSES

      21.Accordingly, IT IS ORDERED that the appeal by TCI Cablevision of Oregon, Inc.,
of the local rate order of the MHCRC, with respect to the proposed increase in rates, IS GRANTED.

      22.IT IS FURTHER ORDERED that the appeal by TCI Cablevision of Oregon, Inc.,
with respect to the capitalization of the labor costs of installing and retrieving converters, the
operating costs of managing converter inventory, and material costs of converters, IS DENIED.

      23.IT IS FURTHER ORDERED that within 60 days of the date of this Order, TCI is
directed to revise and re-file its rate forms with the MHCRC and, subject to the MHCRC's right to
review the rate filings, implement revised rates to reflect the rulings discussed herein and in the TCI
Remand Order or in the MHCRC's order in response to the TCI Remand Order if it has issued one.

      24.This action is taken by the Chief, Cable Services Bureau, pursuant to authority
delegated by  0.321 of the Commission's rules.

     FEDERAL COMMUNICATIONS COMMISSION



     Meredith J. Jones
     Chief, Cable Services Bureau