******************************************************** 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 ) ) Charter Communications ) CUID No. LA0058 (City of Hammond) ) Complaint Regarding ) Cable Programming Services Tier Rates) ORDER Adopted: September 26, 1997 Released: September 29, 1997 By the Chief, Financial Analysis and Compliance Division, Cable Services Bureau: INTRODUCTION 1. In this Order we consider a complaint about the rate the above-captioned operator ("Operator") was charging for its cable programming services tier ("CPST") in the community referenced above. Operator has chosen to justify its CPST rates in effect on September 1, 1993 through a cost of service showing on FCC Form 1220. We find that the CPST rates implemented by Operator beginning September 1, 1993 are not unreasonable. 2. Under the Communications Act, the Federal Communications Commission ("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 Cable Television Consumer Protection and Competition Act of 1992 ("1992 Cable Act"), and our rules in effect at the time the complaint was filed, required the Commission to review CPST rates upon the filing of a valid complaint by a subscriber. The filing of a valid complaint triggers an obligation on behalf of the cable operator to file a justification of its CPST rates. If the Commission finds the rate to be unreasonable, it shall determine the correct rate and any refund liability. 3. The Commission's original rate regulations took effect on September 1, 1993. The Commission subsequently revised its rate regulations effective May 15, 1994. Cable operators with valid CPST complaints filed against them prior to May 15, 1994 must demonstrate that their CPST rates were in compliance with the Commission's initial rules from the time the complaint was filed through May 14, 1994, and that their rates were in compliance with the revised rules from May 15, 1994 forward. Cable operators attempting to justify their rates for the period prior to May 15, 1994 using a benchmark showing must complete and file FCC Form 393. Operators must use the FCC Form 1200 series to justify their rates for the period beginning May 15, 1994 using a benchmark showing. Cable operators may also justify rate increases based on the addition and deletion of channels, changes in certain external costs, and inflation, by filing FCC Form 1210. FCC Form 1210 must be filed at least 30 days before new rates are scheduled to go into effect where the Commission has found the cable programming service rate to be unreasonable less than one year prior to the filing, or where there is a pending complaint against the CPST rate. 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. ADJUSTMENTS 4. In reviewing Operator's FCC Form 1220, we evaluated its cost of service showing to determine whether the Operator should be permitted to recover its investments and expenses as filed. Where a certain rate base or expense element was not justified under our rules, such cost was disallowed in whole or in part. Where a reported cost was disallowed, we have made appropriate adjustments. Even with our adjustments and disallowances, however, we find that the Operator's monthly CPST rates in effect on September 1, 1993 have been justified and are reasonable. The following adjustments were made to Operator's filing: a) Capitalized Start-Up Losses reported on Form 1220, Worksheet A, Line 14 were based on the cumulative retained earnings deficit of the previous owner of the franchise as of December 31, 1990. As specified in the Final Cost Rules at paragraph 71, Capitalized Start-Up Losses may be included in rate base by build and hold operators to the extent that they represent reasonable incurred cumulative net losses plus unrecovered interest expenses connected to funding a regulated rate base. Since the Hammond franchise was acquired by Operator, the losses claimed by Operator do not fit this definition. Moreover, our rules do not allow losses incurred by original system owners to be included in rate base by subsequent purchasers. The acquisition premium paid by Operator when the system was purchased, i.e. the purchase price less the net value of tangible assets acquired, effectively reimbursed the prior owner's losses. For Operator to claim Capitalized Start-Up Losses based on the prior owner's cumulative losses plus the acquisition premium as Franchise Cost on Form 1220, Worksheet A, Line 12, then, is redundant and inappropriate. Consequently, we excluded all $19,102,565 in Capitalized Start-Up Losses reported by Operator. However, as detailed in paragraph 59 of the Final Cost Rules, Operator is entitled to acquisition- related intangibles reduced by 34% of the system purchase price. Operator reported a system purchase price of $45,821,540 on Form 1220, Worksheet C, Item 8, of which $37,765,344 was reported as Intangible Assets. We subtracted 34% of the purchase price, or $15,579,324, from reported Gross Intangible Assets. We then adjusted the Accumulated Amortization and Amortization Expense accounts proportionately. After these adjustments, the value of Net Intangible Assets totaled $15,015,267, or $9,581,445 less than originally reported by Operator. b) Operator allocated the majority of its common costs based on subscriber ratios, i.e. the number of tier subscribers divided by total subscribers, and weighted channel ratios, i.e. the number of tier subscribers times the number of tier channels divided by total subscribers time total channels. We find that both of these methods cause biased allocations of common costs to regulated service tiers, and overlook the cost causative relationship between plant usage and the number of channels supported. For these reasons, we redistributed Operator's common costs based on channel ratios, i.e. the number of tier channels divided by total channels. c) Home Shopping revenues recorded on Form 1220, Worksheet A, Line 52 were assigned directly to an unregulated tier. However, Operator offered Home Shopping only to its CPS subscribers. Since Operator's Home Shopping-related expenses were assigned to the CPS tier, we reassigned Operator's Home Shopping revenues to the CPS tier in conformity with the matching principle under generally accepted accounting principles. CONCLUSION 5. In total, our adjustments reduced Operator's MPR on its FCC Form 1220 from $43.11 to $21.15. Therefore, we find that Operator has justified its CPST rate of $14.30, effective September 1, 1993 to August 31, 1995. We also find that Operator has justified its CPST rate of $15.80, effective September 1, 1995. 6. Accordingly, IT IS ORDERED, pursuant to Section 0.321 of the Commission's rules, 47 C.F.R.  0.321, that the monthly CPST rate of $14.30 charged by Operator in the community referenced above, from September 1, 1993 to August 31, 1995 IS NOT UNREASONABLE. 7. IT IS FURTHER ORDERED, pursuant to Section 0.321 of the Commission's rules, 47 C.F.R.  0.321, that the monthly CPST rate of $15.80 charged by Operator in the community referenced above, effective September 1, 1995 IS NOT UNREASONABLE. 8. IT IS FURTHER ORDERED, pursuant to Section 0.321 of the Commission's rules, 47 C.F.R.  0.321, that the complaint referenced herein against the CPST rates charged by Operator in the community referenced above IS DENIED. FEDERAL COMMUNICATIONS COMMISSION Elizabeth W. Beaty Chief, Financial Analysis and Compliance Division Cable Services Bureau