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??US2*vlKKάIWFG Letter HeadingWFG Letter Headingv"i~'^5>I\\>>>\g0>03\\\\\\\\\\33gggQyyrg>Frgygrr>3>T\>Q\Q\Q>\\33\3\\\\>F3\\\\QX%Xc>0cT>>>0>>>>>>>>\3QQQQQwyQrQrQrQrQ>3>3>3>3\\\\\\\\\\Q\Z\\\g\QQQyQyQycyQtrQrQrQrQ\\\c\c\>3>\>>>\gcc\r3rIr>r>r3\l\\\\y>y>y>gFgFgFgcrMr3rT\\\\\\crQrQrQ\r>\gFr>\t0\\=!=WxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxNBnnBT\>Q\\\\\3;\7;\7>>QQ\??n\\pBnnBmgg>Q\7"yyyy\njc\gnn\"i~'^5>g\\>>>\g0>03\\\\\\\\\\>>ggg\yyrF\yrgyy>3>j\>\gQgQ>\g3>g3g\ggQF>g\\\QI(I_>0_j>>>0>>>>>>\>g3\\\\\QyQyQyQyQD3D3D3D3g\\\\gggg\\g\\\\pg\\\QQ_QyQyQyQyQ\\\_\gjF3FgF>Fgg__gy3ySy>yIy3ggg\\QQQgFgFgFg_y^y>yjgggggg_yQyQyQgy>ggFy>\0\\=2=WxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxNBnnBa\>\\\\\\7>\7>\7>>\\\??n\\pBnnBsgg>\\7"yyyy\nlc\gnn\\5hC:,%Xh*f9 xr G;XX2N\\ K K}y.X80,X\  P6G;P~7jC:,9Xj\  P6G;XP7nC:,|Xn4  pG;Xy.\80,T\4  pG;W!@(#,h@\  P6G;hPH5!,i,5\  P6G;,P\{,W80,%0W*f9 xr G;X2a=5,&a\  P6G;&P 2e=5,&e4  pG;&P:% ,J:\  P6G;JP"i~'^ %,77\V%%%7>%7777777777>>>0eOIIOD>OO%*ODaOO>OI>DOOgOOD%%37%07070%777V7777%*77O77055;%;3%%%%%%%%%%%7O0O0O0O0O0aHI0D0D0D0D0%%%%O7O7O7O7O7O7O7O7O7O7O0O7O6O7O7O7>7O0O0O0I0I0I;I0OED0D0D0D0O7O7O7O;O7O;O7%%7%%%7M>;;O7DD,D%D%DO7AO7O7O7O7aOI%I%I%>*>*>*>;D.DD3O7O7O7O7O7O7gOO;D0D0D0O7D%O7>*D%O7E77%%WMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxN(BB(37%07777j7#TT7!#TT7T!%%007n&&Bn77lCTn(nBB(A\\>>n%07\n!"IIIITTenn7TnB@;7>lBBn7"i~'^5>M\\>>>\}0>03\\\\\\\\\\>>}}}\rryrr>Qygyrr\grrggF3FM\>\\Q\Q3\\33Q3\\\\FF3\QyQQFI3Ic>0cM>>>0>>>>>>\>\3r\r\r\r\r\yyQrQrQrQrQ>3>3>3>3y\\\\\\\\\gQr\\\\gQ\r\r\r\r\yQyQycyQnrQrQrQrQ\\\c\c\>3>\>>>\\ccyQg3gBg>g;g3y\jy\y\\\yrFrFrF\F\F\FccgBg3gM\\\\\\ygcgFgFgF\g>y\\Fg>g\n0\\=(=WddddddddddddddddddddddddddddddddddddddddNBnnB_\F\\\\\\3;\7;\7>>gg\??n\\pBnnBb\\>g\7"yyyy\njc\}nn\2^޼}y.X80,X\  P6G;P~7jC:,9Xj\  P6G;XP7nC:,|Xn4  pG;Xy.\80,T\4  pG;W!@(#,h@\  P6G;hPH5!,i,5\  P6G;,P\{,W80,%0W*f9 xr G;X2a=5,&a\  P6G;&P 2e=5,&e4  pG;&P:% ,J:\  P6G;JP\0_=5,%&_*f9 xr G;&X             yO- X   ) S-  #&a\  P6G;&P#Federal Communications Commission`}(#DA 972032 ă  yxdddy )v3 Before the Ċ Ã Federal Communications Commission  yO} Washington, D.C. 20554 ă  yOX-T #C\  P6QP# ă  S -#&a\  P6G;&P#36#=#Xj\  P6G;9XP#3 x` `  hh@)  S-In the Matter of hh@)hCUID No. PA2499 (Doylestown)  S-x` `  hh@)hpp  S-Suburban Cable TV, Inc.hh@)hpp  S-x` `  hh@)hpp  SX-Complaint Regarding hh@)hpp  S0-Cable Programming Services Tier Rates@)hpp  S -xand` `  hh@)hpp  S -Petition for Reconsiderationhh@) x` `  hh@)  Sh - PORDER ON RECONSIDERATION &EAND  S-)RATE ORDER ă   S-X` hp x (#%'0*,.8135@8:of charges for both cable services and cable equipment by competitive cable systems; and, as such, it  S- x\provides a surrogate method of allowing for full cost recovery for cable operations.^2 {O-ԍ See Rate Order at paras. 199, 205207, 21315.^ The benchmark  xjmethodology is predicated on cost normalization, i.e., the development and use of average cost schedules  S- xjbased on the average September 30, 1992 rates of systems subject to effective competition.Xp 2 {O!-ԍ See 58 Fed. Reg. 29,736; 29,742 (1993).X Consistent  x with the Commission's reliance on the average rates charged by operators subject to competition is a  Sx- xpersuasion that these rates permit a full recovery of the average costs incurred by those operators,  SP- xincluding a reasonable return on investmentkZP 2 {O%- xԍ See First Reconsideration Order at para. 13 ("[W]hen the Commission bases benchmark calculations on the  xJrates charged by firms subject to effective competition, it effectively accounts for the costs of providing service for  xZthose systems, and also the need for any viable company to earn a 'normal' or 'competitive' rate of return.") and"',p(p('"  {O-at n.80; see also Communications Act  623(b)(2)(C), as amended, 47 U.S.C.  543(b)(2)(C) (1996).k and taxes payable.PZ2 {O"-ԍ See Rate Order at para. 254; see also First Reconsideration Order at paras. 5859, 103105. The surveyreported charges for service"P,p(p(88"  xinstallation and customer equipment were bundled in with the charges for cable services in determining  S-the benchmark rates.~2 {Od-ԍ #X\  P6G;P#See Rate Order at App. E, paras. 1721.~  S- ` x9.` ` Because the benchmark rates are equipmentbundled averages, they are expected to provide  S`- xkadequate recovery of an operator's total revenue requirement needed to cover all capital and operating  xcosts, including the full recovery of costs associated with service installation and customer equipment.  xOnce the proper benchmark rate for full recovery of cable services costs and equipment costs is  xdetermined for a system, the operator's equipment portion is unbundled based on its actual cost for  S- x.installation and customer equipment.F~2 yO - xԍ We determined in the initial rulemaking proceeding that established the rate regulatory framework for cable  {O- xprogram services, that an actual cost standard should be applied to equipment used for the CPST. See Id. at paras.  {Op- x406407. We determined that equipment used to receive cable programming services should be subject to the same  yO:- xactual cost standard applied to basic tier equipment. Our basis for doing so was that it would be less burdensome  xithan applying different standards to each. We believed that using an actual cost plus a reasonable profit standard  x-for equipment and installations would best protect subscribers and would enable operators to charge at least what  {O- xZthey could charge in a competitive market. Id. and at paras. 408412. See also 47 C.F.R.  76.923(b), both the  yO\-current, 1996 version and as initially promulgated in 1993.#Xj\  P6G;9XP#ѕ The result is that the full benchmark is effectively broken down  xfor each operator into two separate elements one for services and one for equipment. The total recovery  xexpected from the unbundled charges for services plus the actualcostdetermined unbundled charges for  xequipment and installation is exactly the same as would be expected from the operator's benchmark rate before unbundling.  S - ` ox10.` ` Failure to unbundle all of the costs of customer equipment would effectively result in a  xMportion of such costs remaining in the rates for cable services. Accordingly, our review of CPST rate  S - xsubmissions requires the complete unbundling of the equipment costs from the benchmark rates. 2 {O- xԍ Rate Order at paras. 408412; 47 C.F.R.  76.923(b), both the current, 1996 version and as initially  yOv-promulgated in 1993.#Xj\  P6G;9XP#  xOperators may price their equipment to include all of such costs, including our provision for income taxes  xusing the grossedup statutory income tax rate, or they may choose to charge less than that amount. In either case, we believe that the entire cost must be unbundled from the service rates.  S- ` x11.` ` We addressed the issue of normalized tax obligations when we first issued guidelines for  S- xcompleting FCC Form 393.5$2 {O#- xZԍ See Cable Television Rate Regulation Questions and Answers Relating to FCC Form 393, Question No. 15  yO#- x;at 5 (released July 30, 1993). We stated that even if "an operator currently pays no taxes and anticipates no future  xtax liability, and would pay no taxes even without accelerated tax depreciation," ... "the amount included ... is to be  {Op%-based on the "grossedup" statutory rates, not the tax rate actually paid." 5 Those guidelines specifically addressed the question of whether taxpaying  Sh- xentities such as corporations were required to calculate income tax expense based on the statutory rate. "h,p(p(88s"  S- xUpon reconsideration of our Rate Order, we affirmed the applicability of that standard."2 {Oh- xԍ See First Reconsideration Order at 1197, para 59. We stated that "[t]he provision for income taxes is made  xto compensate the business entity for a cost of doing business and to allow it thereby to earn a fair aftertax return  xon investment . . . . For corporations with income tax obligations, the amount included ... is based on the "grossed yO-up" statutory rates, not the tax rate actually paid."  Operator's  x>argument implies that it should be permitted to choose between normalized and actual cost reporting  xdepending on which proves more advantageous. We reject this notion. Indeed, it would be capricious,  xarbitrary and inconsistent if the Commission were to build normalized taxes into the pricing of tier  xofferings, yet unbundle actual taxes attributable to equipment costs. Since operators may recover the full  xzequipment cost portion, such amounts when added in with the unbundled benchmark service rate will provide for full recovery of operating costs.  S- ` px12.` ` The application of the full income tax provision in the manner allowed is a standard  x!approach under ratemaking methodology to provide for income taxes on a normalized basis. Tax  xnormalization is a common practice throughout regulated industries and has extensive historical precedent.  x>The approach effectively recognizes that the incurring of an income tax liability and the timing of the  S" - xpayment are often not the same./ " 2 yOt- xԍ Such timing differences are often attributable to the use of different asset depreciation methodologies for book  xpurposes than for income tax purposes. This results in deferred income taxes. Using normalization provides for a  xmore equitable distribution of the tax liability associated with the use of the asset over all ratepayers benefitting from  yO-the use of the asset, regardless of when the liability is actually paid. / Moreover, operators vary widely in their accounting for interest and  S - xtaxes. 2 yO4- xԍ For instance, the tax implications are completely different for corporations that report all of their debtrelated  xfinancing at the corporate level and corporations that allocate interest expenses to systems and franchises. More  xdifferences arise from the myriad of methods employed to allocate debtrelated costs. Again, tax reporting may differ  xamong operators that rely on accelerated depreciation practices. Many operators pay no taxes for reasons that have nothing to do with the profitability of their cable operations. Accounting for all of these considerations by permitting actual tax reporting would produce erratic  xresults. The outcome would be at odds with the benchmark objective of consistent pricing for comparable services.  SZ- ` x13.` ` Tax normalization applied in the aggregate, i.e. for the purpose of calculating channel and  S4- x=equipment rates, allows debtladen cable operators higher tax allowances than they would receive absent  x=tax normalization. This led the majority of commentators to advocate a preference for tax normalization  S- x during our rulemaking comment period.J 2 {O- xԍ See Implementation of Sections of the Cable Television Consumer Protection and Competition Act of 1992:  {O - xRate Regulation, MM Docket No. 93215, Report and Order and Further Notice of Proposed Rulemaking, FCC 94 {Ob!- xJ39, 9 FCC Rcd 4527 (1994) ("Cost Order"). The Commission's advocacy of normalized tax data under an otherwise  xactualcost based methodology such as costofservice suggests a clear preference for normalized tax data under the normalized benchmark methodology as well. To allow operators to arbitrarily substitute actual tax data  S- xsimply because they perceive a benefit would unduly complicate the rate setting process.Z\2 {O\%- xLԍ As we stated in the Cost Order, in response to comments concerning the application of the grossedup  xstatutory corporate tax rate regardless of actual business form, "... we believe that the regulatory ease provided by  xapplication of a uniform income tax rate outweighs this concern. We reject [the] suggestion that operators be"&,p(p('"  xxallowed to include only taxes actually paid, not an amount based on the statutory tax rate, because that approach  {OX- xwould not be consistent with principles of tax normalization as traditionally applied to regulated industries." Cost  {O"-Order at n.298. Operator's",p(p(88"  xargument that the recalculation of Operator's equipment basket results in a greater revenue reduction than  xcontemplated by the Commission's benchmark rate methodology mistakenly relies upon an assertion of  S- xzero actual tax expense. For the purposes of benchmark rate setting, Operator's actual tax experience is  S- xirrelevant. The benchmark rate methodology contemplates the unbundling of normalized taxes. For all of these reasons, we reject Operator's argument.  S- ` ox14.` ` In its Petition, Operator also argues that the recalculation of inflation was arbitrary and  xcapricious because its result would differ depending on the time of review. As stated above, we  xrecalculated the inflation adjustment factor using corrected inflation data released by the Department of  x>Commerce on July 29, 1994. This issue was raised by Cencom Cable Income Partners II, L.P. in the  Sp- xCommission's Decision in Cencom Cable Income Partners II, L.P. ("Cencom").p2 {O -ԍ In the Matter of Cencom Cable Income Partners II, L.P., FCC 97205 (Released June 13, 1997). In Cencom, the Commission explained its policy regarding refreshing inflation:  XxThe Commission is charged with protecting subscribers from paying unreasonable CPST  rates, while also providing system operators with a fair return. Accurate information,  oincluding accurate inflation information, is central to setting an initial regulated rate that  meets the standard. Thus, the Commission requires that data used in setting a rate be  refreshed with the most current data available when an operator's rates become regulated  S2- and are justified.2~2 {OP- x,ԍ See Third Order on Reconsideration, 9 FCC Rcd at 434950; FCC Form 393 at 11 Instruction for Line 122 xGNPPI (Current) (Aug. 1993). The Bureau has explained the requirement to use current data in Cable Operators'  xwRate Justification Filings, Sections 76.945, 76.946 of the Commissions rules, 9 FCC Rcd 7752, 775455  3(8) (Cab.  {O- x>Serv. Bur. 1994) ("Rate Filings"); Nov. 10, 1993 Public Notice, Answer to Question No. 6 (in filing rate  x,justifications, operators must refresh data used in initial rates with most current information as of the date of initial regulation); July 30, 1993 Public Notice, Answer to Question 10. Because final inflation data for the period addressed in rate  Bjustifications may not be available when a justification is filed, the Commission directs  operators to estimate inflation by using the most recently available inflation data published  S- on an interim basis in the Commerce "Survey of Current Business" at Table 7.3, Line 5.~ 2 {OT-ԍ See FCC Form 393 at 11 Instruction for Line 122GNPPI (Current) (Aug. 1993).~  The Bureau practice when reviewing rate justifications is to verify that the operator has  used this inflation data. The Bureau also determines whether the other information in the  rate justification is correct, and on the basis of the inflation and other information in the  Sform, including any corrections, whether the operator's rate meets the statutory  requirement that the rate not be unreasonable. The Bureau does not find a rate  #unreasonable solely because more accurate inflation data has become available by the time  it makes its review. This would churn rates, causing significant administrative expenses  to operators and confusion to subscribers. However, if a rate is unreasonable on its face  Bor has to be adjusted for reasons other than the availability of a more accurate inflation  5figure, e.g., because the operator failed to provide correct information in its rate  justification or failed to complete its rate justification form correctly, the Bureau" ,p(p(88M"  recalculates the maximum permitted rate using the most accurate inflation information  S- available, rather than earlier estimates. 2 {O@- x<ԍ See Public Notice, Cable Services Bureau Announces Policy Regarding Inflation Adjustment on FCC Form  x-393, DA 95999 at 2 (Cab. Serv. Bur. May 2, 1995). The Bureau gave operators the opportunity to review and  xcorrect errors in their benchmark rate filings. Operators who had not previously correctly calculated the inflation  xKadjustment factor were directed to use the accurate factors through June 30, 1994. Public Notice, Cable Services  xhBureau Announces Optional Procedures with Respect to Pending PreMay 15 Benchmark Cases, DA 941556 at 34 (Dec. 29, 1994). The Public Notice listed the inflation adjustment factors through June 30, 1994. This practice is consistent with 47 C.F.R.  76.922(b)(9)(iii), which provides:   S-  ` (XxX` ` [I]f the rates charged by a cable operator are not justified by an analysis  ` based on the data available at the time it initially adjusted its rates, the  ` Ucable operator must adjust its rates in accordance with the most accurate data available at the time of the analysis.x` Xx[footnotes in original]   SH - ` `x15.` ` Because we find that our action in our Prior Order is consistent with the Commission's  S - xholding in Cencom, we reject Operator's argument regarding the adjustment of the Inflation Adjustment  S - xFactor. In accordance with the Commission's decision in Cencom, however, we will adjust Line 124  S -(Adjustment Time Period) of Operator's FCC Form 393 from thirteen to fifteen months.G! B2 {O-ԍ See Cencom at para. 17.G  S - ` x16.` ` Finally, Operator argues that we should reconsider our calculation of the MPR based on  x[22 CPST channels. Operator submitted additional information and we accept that information and make  xthe change accordingly. The adjustments to the inflation time period and the channel count resulted in  S - xya revised MPR of $11.35h" 2 yO-ԍ Our Prior Order determined a maximum permitted rate of $11.04.h rather than Operator's MPR of $11.50. Because Operator's actual CPST rate  x.of $12.15, effective September 1993, exceeds its revised MPR of $11.35, we find Operator's actual rate of $12.15, for the period December 14, 1993 through May 14, 1994, to be unreasonable.  Sl- ` x17.` ` Upon review of Operator's FCC Form 1240 for the projected period April 1, 1997 through  xMarch 31, 1998, we corrected Operator's inflation factor at Worksheet 1 and Line C3 to 1.0171 and at  x@Line C5 to 1.0222 to reflect the inflation factor for the second quarter of 1996 released by the  S- xCommission in November 1996.#d 2 {O - xԍ See Public Notice, "Inflation Adjustment Figures for Cable Operators Using FCC Forms 1210 and 1240 Now Available", DA 961986 (November 27, 1996). This adjustment resulted in a revised maximum permitted rate ("MPR")  xof $16.65 rather than Operator's MPR of $16.68. Because Operator's actual CPST rate of $16.65,  x[effective April 1, 1997, does not exceed its revised MPR, we find Operator's actual CPST rate of $16.65  S|-to be reasonable.$X | 2 yO%- xԍ These findings are based solely on the representations of Operator. Should information come to our attention  xYthat these representations were materially inaccurate, we reserve the right to take appropriate action. This Order is  xnot to be construed as a finding that we have accepted as correct any specific entry, explanation or argument made"j'#,p(p('"  xby any party to this proceeding not specifically addressed herein. Information regarding the specific adjustments  xmade to Operator's filings can be found in the public file for CUID No. PA2499, which is available in the Cable  x,Services Bureau's public reference room, or through the Commission's copy contractor, International Transcription Services (ITS), 1919 M Street N.W., Washington, DC, 20554, or by calling ITS at (202) 8573800."|$,p(p(88"Ԍ S- ` ԙx18.` ` Accordingly, IT IS ORDERED, pursuant to Section 1.106 of the Commission's rules, 47  xC.F.R.  1.106, that the Petition for Reconsideration filed by Operator is GRANTED IN PART AND DENIED IN PART TO THE EXTENT INDICATED HEREIN.  S`- ` 3x19.` ` IT IS FURTHER ORDERED, that In The Matter of Suburban Cable TV Co., Inc., 10  xFCC Rcd 6498 (1995) IS VACATED IN PART AND AFFIRMED IN PART TO THE EXTENT INDICATED HEREIN.  S- ` x20.` ` IT IS FURTHER ORDERED, that the Stay, granted in The Matter of Battlefield Cable  xTV Co., et al., 10 FCC Rcd 10591 (1995), to the extent it pertains to the franchise area referenced above, IS TERMINATED.  S - ` x21.` ` IT IS FURTHER ORDERED, pursuant to Section 0.321 of the Commission's rules, 47  x[C.F.R.  0.321, that the CPST rate of $12.15, charged by Operator in the franchise area referenced above  S - x"during the period December 14, 1993, the initial date of regulation, through May 14, 1994, IS UNREASONABLE.  SX- ` x22.` ` IT IS FURTHER ORDERED, pursuant to Section 0.321 of the Commission's rules, 47  xC.F.R.  0.321, that the CPST rate of $16.65, charged by Operator in the franchise area referenced above, effective April 1, 1997, IS REASONABLE.  S- ` x23.` ` IT IS FURTHER ORDERED, pursuant to Section 76.961 of the Commission's rules, 47  x C.F.R.  76.961, that Operator shall refund to subscribers in the franchise area referenced above that  xportion of the amount paid in excess of the maximum permitted CPST rate of $11.35 per month (plus  xfranchise fees), plus interest to the date of the refund, for the period December 14, 1993 through May 14, 1994.  S- x  S- `  x24.` ` IT IS FURTHER ORDERED that Operator shall promptly determine the overcharges to  xCPST subscribers for the stated periods, and shall within 30 days of the release of this Order, file a report  xkwith the Chief, Cable Services Bureau, stating the cumulative refund amount so determined (including  xfranchise fees and interest), describing the calculation thereof, and describing its plan to implement the refund within 60 days of Commission approval of the plan.  S-  6#= "$,p(p(88"  S- `  6#= x25.` ` IT IS FURTHER ORDERED, pursuant to Section 0.321 of the Commission's rules, 47  xzC.F.R.  0.321, that Operator take into account our FCC Form 1240 adjustments when calculating its  S-maximum permitted rate and performing the trueup calculation on its next FCC Form 1240. 0  6#=   S`- `  6#= x26.` ` IT IS FURTHER ORDERED, pursuant to Section 0.321 of the Commission's rules, 47 C.F.R.  0.321, that the complaint against the April 1, 1997 rate increase IS DENIED. x` `  hh@FEDERAL COMMUNICATIONS COMMISSION x` `  hh@Meredith J. Jones x` `  hh@Chief, Cable Services Bureau