******************************************************** 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. ***************************************************************** Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of ) ) Paragon Cable ) CUID No. OR0241 (Portland) ) Complaints Regarding ) Cable Programming Services Tier Rates) ) ) ORDER Adopted: August 26, 1997 Released: August 29, 1997 By the Chief, Cable Services Bureau: 1. In this Order we consider a complaint against the rates charged by the above-referenced operator ("Operator") for its cable programming services tier ("CPST") in the community referenced above. We have already issued a separate order in which we found that Operator's rates in effect prior to May 15, 1994 were reasonable. Subsequently, we issued an Order approving a Social Contract which Operator entered into with the Federal Communications Commission ("Commission"). That Order resolved all complaints then pending against the Operator. Accordingly, this Order addresses only the reasonableness of Operator's CPST rates in effect subsequent to the Social Contract. 2. Under the Communications Act, the Commission is authorized to review the CPST rates of cable systems not subject to effective competition to ensure that rates charged are not unreasonable. The Telecommunications Act of 1996 ("1996 Act") and our rules implementing the new legislation ("Interim Rules"), require that complaints against the CPST rates be filed with the Commission by a local franchising authority ("LFA") that has received more than one subscriber complaint. The filing of a valid complaint triggers an obligation on behalf of the cable operator to file a justification of its CPST rate. If the Commission finds a rate to be unreasonable, it shall determine the correct rate and any refund liability. 3. The LFA for the community referenced above filed a complaint with the Commission on June 19, 1997, against Operator's January 1, 1997 rate increase for the community referenced above. The LFA verified that it received more than one subscriber complaint for the community set forth above. The first valid complaint for the community set forth above was received by the LFA on January 2, 1997. The filing of a complete and timely complaint triggers an obligation upon the cable operator to file a justification of its CPST rates. The Operator has the burden of demonstrating that the CPST rates complained about are reasonable. 4. To justify rates for the period beginning May 15, 1994 through a benchmark showing, operators must use the FCC Form 1200 series. Operators are permitted to make changes to their rates on a quarterly basis using FCC Form 1210. Operators may alternatively justify adjustments to their rates on an annual basis using FCC Form 1240 to reflect reasonably certain and quantifiable changes in external costs, inflation, and the number of regulated channels that are projected for the twelve months following the rate change. Any incurred cost that is not projected may be accrued with interest and added to rates at a later time. 5. The Commission has allowed Operator to use a modified format of FCC Form 1240 to reflect the adjustments required under the Social Contract. Operator seeks to justify its CPST rates with multiple FCC Form 1240s. The Social Contract requires Operator to create a low cost "Lifeline" Basic Service Tier ("BST") on systems serving at least 85% of Operator's total subscribers. The Social Contract permits Operator to reduce the BST rate by 10% and increase the CPST rate to recoup the reduction in revenues caused by the BST rate reduction. LFAs have the option of "opting-out" of the Lifeline BST. We note that the LFA for the community referenced above has elected to opt out of the provision of the Social Contract that permits Operator to reduce the BST rate and implement a corresponding increase to the CPST. As required by the Social Contract, the LFA provided notice to the Operator and the Commission of its election to opt out of the rate restructuring associated with the creation of the Lifeline BST. We permitted Operator to implement the Lifeline Tier and corresponding CPST rate adjustment on January 1, 1996. Operator was required to rescind the Lifeline adjustment to both the BST and CPST retroactive to January 1, 1996 because of the LFA's election to opt out of the BST and CPST revenue neutral rate restructuring. Our review reveals that Operator did not implement a Lifeline BST and CPST rate restructuring in the community referenced above because of the rescission. 6. Because the LFA believes that the Social Contact preempts its jurisdiction over Operator's installation charges and equipment rates, it has requested that we review Operator's FCC Form 1205 which establishes Operator's equipment rates and installation charges. Although under the Social Contract we determine whether Cable Operators comply with our regional averaging methodology for calculating equipment charges and installation rates, LFAs have the authority to enforce our standards and require cable operators to issue refunds or order rate roll-backs, as appropriate. Upon review, we find that Operator's FCC Form 1205 is in compliance with our regional methodology for the calculation of equipment charges and installation rates. The LFA has the authority to enforce our findings regarding Operator's equipment charges and installation rates. 7. The LFA contends that Operator's revised FCC Form 1240 for the projected period January 1, 1996 through December 31, 1996, improperly contains an inflation adjustment for the period ending June 30, 1995. The LFA argues that because Operator is a transition system, Operator should reduce its inflation pursuant to our Public Notice of November 9, 1995, if Operator seeks to recover inflation for the period ending June 30, 1995. According to the LFA, Operator's revised FCC Form 1240 for the projected period January 1, 1996 through December 31, 1996 contains a revised maximum permitted rate ("MPR") which Operator uses as the starting rate on Line A1 of its subsequent FCC Form 1240 for the projected period January 1, 1997 through December 31, 1997. 8. Upon review of Operator's FCC Form 1240 for the projected period January 1, 1996 through December 31, 1996, we find that Operator has correctly calculated its MPR of $12.66. Because Operator has entered into a Social Contract with the Commission, the starting rate on Line A1 is determined by the terms of the Social Contract. Our review reveals that Operator's rate of $12.99 exceeds its MPR of $12.66. Consequently, we find that Operator's rate of $12.99, effective January 1, 1996 is not justified and is unreasonable. However, because there is not a valid complaint against this rate, Operator incurs no refund liability against this overcharge. 9. Upon review of Operator's FCC Form 1240 for the projected period January 1, 1997 through December 31, 1997, we find that Operator has not correctly calculated its MPR. In particular, Operator made true-up adjustments through to the effective date of the rate increase. This is incorrect. The annual adjustment afforded by FCC Form 1240 allows operators to project changes in external costs, inflation, and the number of regulated channels. This structure avoids the delay some operators experienced in recouping costs through multiple rate adjustments throughout the year. Because projections will not reflect the costs that actually occur, the Commission provided, as part of the annual adjustment, a "true-up" to correct projected cost changes with the actual cost changes. However, the Commission has noted that, as FCC Form 1240 must be filed 90 days before an increase is to take effect, the period for the true-up will not coincide with the previous year's projections. The true-up data is intended to indicate real, not projected data. This policy is reflected in the instructions accompanying FCC Form 1240. 10. Based on this instruction and considering evidence in the filing, reasonable time for closing accounts and completing forms, we have adjusted Operator's true-up period from 12 months to 9 months. This adjustment required that we refresh Operator's inflation factors to 2.22 for the second quarter of 1996 and to 2.21 for the third quarter of 1996 and adjust Worksheet 1 accordingly. As a result, the true-up inflation factor in Module C, Line C1 for the 9 month period was corrected to 1.0171 instead of the 1.0239 used by the Operator for a 12 month period. We have adjusted Module E, and have corrected the number of months on Line E2 to 9 months and Line E3 to 3 months. We have also adjusted the inflation segment in Module F, Line F5 to reflect the corrections made in Line C1. This has resulted in a corresponding adjustment on Line F9 (MPR for True-Up Period 1). 11. The reduction in the length of the true-up period also results in a reduction in Line H2 (Revenue From MPR for Period 1). This results in a corresponding reduction in Line I8 (True-Up Segment for the Projected Period). In total, our adjustments to Operator's FCC Form 1240 result in a reduction of the MPR for the Projected Period to $13.87 (Line I9). Thus, Operator has failed to demonstrate that its January 1, 1997 rate of $13.91 was not unreasonable. We determine, however, that the total overcharge per subscriber is de minimis. Therefore, it would not serve the public interest to order a refund. To the extent that external costs from the three months disallowed from Operator's true-up period have been averaged into the rates charged in the nine months allowed in Operator's true-up period, and have not been removed by our adjustments, we will order Operator to make a month-by-month accounting of such external costs. Such accounting shall allow a comparison of the actual external costs for the permitted nine-month true-up period with the recovery of external costs afforded by the external cost segment for that period as calculated on Worksheet 7. We will order the removal of any over-recovery, plus interest, identified thereby in Operator's next FCC Form 1240 filed with the Commission. Any such over-recovery of external costs shall be added to the amount otherwise reportable on Line H1 of Operator's next FCC Form 1240 rate calculation. 12. Accordingly, IT IS ORDERED, pursuant to Section 0.321 of the Commission's rules, 47 C.F.R.  0.321, that the CPST rate of $13.91, effective January 1, 1997 charged by Operator in the community referenced above, IS UNREASONABLE. 13. IT IS FURTHER ORDERED, pursuant to Section 0.32l of the Commission's rules, 47 C.F.R. Section 0.321, that the complaint referenced herein against the CPST rate increase effective January 1, 1997 charged by Operator in the community set forth above, IS GRANTED TO THE EXTENT INDICATED HEREIN. 14. IT IS FURTHER ORDERED, that Operator's FCC Form 1205 is in compliance with the Social Contract. 15. IT IS FURTHER ORDERED, pursuant to Section 0.321 of the Commission's rules, 47 C.F.R.  0.321, that Operator take into account our FCC Form 1240 adjustments when performing the true- up calculation on its next FCC Form 1240 and that Operator attach to its next FCC Form 1240 filing a month-by-month accounting of its external costs from Operator's nine-month true-up period as found on Operator's Worksheets. 16. IT IS FURTHER ORDERED, pursuant to Section 0.321 of the Commission's rules, 47 C.F.R.  0.321, that Operator shall reduce its CPST rate to an amount not to exceed its maximum permitted rate and shall within 30 days of the release of this Order, file a corrected FCC Form 1240. FEDERAL COMMUNICATIONS COMMISSION Meredith J. Jones Chief, Cable Services Bureau