******************************************************** NOTICE ******************************************************** This document was converted from WordPerfect to ASCII Text format. Content from the original version of the document such as headers, footers, footnotes, endnotes, graphics, and page numbers will not show up in this text version. All text attributes such as bold, italic, underlining, etc. from the original document will not show up in this text version. Features of the original document layout such as columns, tables, line and letter spacing, pagination, and margins will not be preserved in the text version. If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** July 18, 1997 DA 97-1518 CSB-ILR 97-6 Mr. Richard D. Treich Released: July 18, 1997 Vice President, Franchising and Regulatory Affairs TCI Communications, Inc. 5619 DTC Parkway Englewood, CO 80111-3000 Dear Mr. Treich: This is in response to your letter of June 3, 1997, in which you request guidance on the interest formula to be used in conjunction with the annual rate adjustment reflected on FCC Form 1240. Specifically, you ask for clarification as to the method that should be used to calculate the interest on the "True-Up" portion of FCC Form 1240. You state that you have calculated the interest based on the FCC Form 1240 instructions, but that alternative methods of calculating the interest have been proposed based on language in the Thirteenth Order on Reconsideration ("Thirteenth Order"). In general, the annual rate calculation reflected in FCC Form 1240 consists of two parts, a Projected Period for which an operator calculates future maximum rates charged based on projected future costs, and a True-Up Period for which an operator corrects its previous projection of maximum rates based on the costs that actually occurred. The True-Up Period may be longer than a year depending on the length of time between FCC Form 1240 filings. Operators do not lose the right to make rate increases at a later date if they choose not to implement a rate change at the beginning of the next rate year. However, an operator must file at the end of the rate year if it has overcharged subscribers, and must return any overcharges to subscribers, with interest. As your letter notes, the instructions to FCC Form 1240 state that: "The purpose of the true-up process is to compare the revenue you collected during the True-Up Period with the amount of the revenue you should have been able to collect. If the sum is less than what should have been collected, then you are allowed to collect the difference during the later rate periods. If the sum collected is more than what should have been collected, then you must lower your rates in future rate periods to compensate subscribers for the difference. In both cases, interest can be earned on the true-up sum." The FCC Form 1240 instructions further specify that: " . . . the accrual of interest is cut off at the end of the most recent Projected Period (except for first time filers of Form 1240). For example, if, on your most recent Form 1240, you defined the Projected Period as running from January 1 to December 31, your next true-up has the accrual of interest stopping at the end of December 31." The FCC Form 1240 instructions also explain in detail how to perform the true-up calculation itself. In general, the true-up is performed by first calculating the maximum rate you should have been able to charge for the previous year. This is done by correcting for any differences between the projected costs used in the previous FCC Form 1240 filing and the actual costs that occurred during the rate year. This number is then compared to the amount of revenue collected from subscribers in the last rate year. As noted above, the interest is calculated on the difference between these two numbers, and ceases to accrue at the end of the most recent projected period. As you note in your letter, the Thirteenth Order states that: "Although interest will cease to accrue, operators will be permitted to recover for the accrual of costs between the date such costs are incurred and the date the operator actually implements the rate adjustment to recover for such costs. This policy will give operators the flexibility to delay rate increases without losing the opportunity to recover interest on costs that accrued due to circumstances beyond their control. At the same time, this policy insures that where an operator makes a business decision to delay a rate increase, subscribers are not required to pay for the cost of the delay." You state that while the first two sentences of the above quoted language are not inconsistent with the language regarding interest in the FCC Form 1240 instructions, the last sentence of the above language could allow for other interpretations of the calculation of interest. We do not believe that this is the case. In the Thirteenth Order as well as in the FCC Form 1240 Instructions, we state that if an operator elects not to recover accrued costs plus interest on the date the operator is entitled to make its next annual rate adjustment (i.e., one year after the operator's last annual rate adjustment) the interest will cease to accrue as of this date, but the operator will not lose the ability to recover such costs and interest. The language from the Thirteenth Order quoted above merely explains the policy behind this statement, and does not conflict in any way with the above quoted language from the FCC Form 1240 Instructions. In both cases, the interest is calculated on the difference between the corrected maximum rate (based on the costs which actually occurred during the previous rate year) and the amount of revenue the operator actually collected during the previous rate year, with the accrual of interest ceasing at the end of the most recent projected period. Sincerely, JoAnn Lucanik Chief, Policy and Rules Division Cable Services Bureau