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LOUIS, INC.R) R) Appeal of Local Rate Order of theR) City of St. Louis, MissouriR)  S -  MEMORANDUM OPINION AND ORDER TP  S -X` hp x (#%'0*,.8135@8: -ԍId.1 If the Commission reverses a franchising authority's decision, it will not substitute its own  xdecision but instead will remand the issue to the franchising authority with instructions to resolve the case  S-consistent with the Commission's decision on appeal.ZFW X-ԍId. #Xj\  P6G;9XP# Z  SJ - I II. DISCUSSION  S" -  S - ` x4. ` ` Pursuant to the Cable Television Consumer Protection and Competition Act of 1992  S - x("1992 Cable Act"), the Commission established standards for setting, on the basis of actual cost, the rates  S - xfor installation and lease of equipment used by subscribers to receive the basic service tier.f W yOA-ԍCommunications Act,  623(b)(3), 47 U.S.C.  543 (b)(3).f Under  xCommission rules, cable operators have the burden of proof in demonstrating the reasonableness of  SZ- xMexisting or proposed rates for their basic service tier and associated equipment.K Z W {O-ԍSee 47 C.F.R.  76.937(a).K Equipment rates are  xderived from total capital and maintenance costs per unit of equipment. Installation rates are derived from  S - x^a calculation of an hourly service charge and an application of that charge to different types of  S- xinstallations.  W yO- xԍTo calculate the hourly service charge ("HSC"), an operator adds its expenses for equipment necessary for the  xmaintenance of customer equipment and for the installation of basic tier service to its annual capital costs, excluding  xthe capital costs of customer equipment. The operator then divides the total by the total number of personhours  xspent in those activities over the past year. The HSC is used as a factor in developing charges for installation and  {O -monthly lease of individual pieces of equipment. See Form 1205 at 14. Form 1205 is the official form used by regulators to determine whether an operator's  xregulated rates for equipment and installations are reasonable under the revised benchmark rules which  S- xapply to operators beginning May 15, 1994. W {O#- xԍSee Second Order on Reconsideration, Fourth Report and Order, Fifth Notice of Proposed Rulemaking in MM  {O$-Docket 92266, 9 FCC Rcd. 4119 (1994) ("Second Order on Recon."). Schedule B of Form 1205 is the schedule operators are  Sj- xjrequired to use for their annual operating expenses for service installation and maintenance of equipment. "j' ,>(>(II"  S- xThis schedule collects total annual operating expenses for installation and maintenance of cable facilities.E W {Oh-ԍSee FCC Form 1205 at 3.E  xkSchedule C of Form 1205 is the schedule operators are required to use for their capital costs of leased  x/customer equipment. This schedule computes the annual capital costs for each model or category of  S- x.customer premises equipment that the operator offers in connection with regulated service.1 ZW {O-ԍId.1 Maximum  xpermitted rates for installation and lease of equipment calculated pursuant to Commission regulations and  S8-Form 1205 are deemed to be reasonable, and are, therefore, lawful under the 1992 Cable Act.j8W {O -ԍSee Communications Act,  623(b), 47 U.S.C.  543 (b).j  S- ` x5. ` ` Form 1205 may be submitted along with Form 1200, which is used to establish initial  xprogramming service rates to determine initial rates for regulated cable services. Alternatively, Form 1205  xmay be used to update permitted regulated equipment and installation charges based on equipment basket  xycosts. Forms 1200 and 1205 establish a direct linkage between programming service rates and equipment  xand installation costs and charges. Using Form 1200, the operator calculates its total revenue requirement  xper subscriber for all regulated services. The operator then subtracts or "unbundles" costs associated with  xthe equipment basket. The result is that the costs of providing regulated services that are not included  xin the equipment basket are included in the rates for programming services. Therefore, for example, Form  x1205 calculations resulting in lower equipment basket costs should lead to higher programming service  x rates and correspondingly lower equipment and installation rates. Similarly, calculations resulting in  SX- xhigher equipment basket costs should lead to lower programming rates and correspondingly higher equipment and installation rates.  S-  S-xA. Capitalization of Certain Converter Costs  S-  S- ` `x6. ` ` In its appeal, TCISL raises several arguments concerning the treatment, in Form 1205,  xjof labor costs of installing and retrieving converters, operating costs of managing converter inventory and  x\material costs for converters. TCISL included $20 in capital costs per converter in its Form 1205 to  S- xaccount for all of these costs.>~W {O6-ԍSee Appeal at 4.> TCISL derived the $20 figure by adding the following capital costs: $7  xper converter for the labor costs of installation, $7 per converter for the labor costs of retrieving a unit  xfrom a customer's home, $3 per converter for inventory management costs, and $3 per converter for  S- xmaterial costs, including cable jumpers, fittings and splitters.=W {OP -ԍId. at 7.= By capitalizing its converter costs, i.e.,  xincluding these costs in Schedule C, Capital Costs of Leased Customer Equipment, of Form 1205, TCISL  xcalculated a lease rate of $3.06 per month for addressable converters and $1.98 per month for standard  S(- xconverters.(W {Oj$- x,ԍSee TCISL's Request for Partial Stay of Local Rate Order ("Request for Partial Stay") at Attachment C, City's Addendum to the Staff Report at 2. The City disallowed TCISL's capitalization of converter costs for the following five  xreasons: (1) the costs are inconsistent with the Commission's definition of "annual purchase costs;" (2)  xcapitalization of the costs is inconsistent with generally accepted accounting principles ("GAAP"); (3)" ,>(>(II["  x=material and labor costs associated with installation of converters are already incorporated by TCISL in  x\its installation charges in Schedule B of Form 1205; (4) labor or other operating costs associated with  xzconverter disconnects and converter inventory management are already incorporated by TCISL in its  xprogramming service rates; and (5) the proposed capital costs for converters are not based on the books  S`- xand records of the local system.p`W {O-ԍSee City of St. Louis Staff Report ("Staff Report") at 78, 1621.p The City excluded the $20 per unit capital cost from Form 1205,  xMthereby reducing TCISL's lease rates for addressable and standard converters to $1.87 and $0.85 per  S- x/month, respectively.TZW {O -ԍSee Addendum to the Staff Report at 2.T In its appeal, TCISL challenges each of the City's reasons for disallowing its  S-inclusion of $20 of capital costs per converter.  S- ` x7. ` ` In TCISL's challenge of the City's finding that the converter costs cannot be included  x[as annual purchase costs, TCISL cites Commission rules which allow for recovery of incidental costs as  SH - xpart of annual purchase costs.|H W {O-ԍId. at 4 (citing 47 C.F.R.  76.923(f)). Section 76.923(f) states: x   !xMonthly charges for rental of a . . . unit shall consist of the average annual unit purchase costs . . .  xincluding acquisition price and incidental costs such as sales tax, financing and storage up to the time it is provided to the customer. . . .  {O-xSection 76.923(f) applies to converter boxes. Id. TCISL acknowledges that none of the costs at issue are among those  xlisted in the rule describing incidental costs of annual purchase costs, but the operator argues that this list  xyis not exclusive. TCISL contends that its $20 of "overhead" costs per converter are incidental costs that  S - xjmust be included in Schedule C in order to ensure that converters are priced at actual cost.D 0 W {O-ԍSee Appeal at 5.D TCISL also  x<contests the City's claim that TCISL should not be permitted to capitalize its converter costs because such  S - xcosts are not capitalized under GAAP.2 W {O-ԍId. 2 According to TCISL, the Commission should focus on whether  xkan operator's accounting treatment meets the Commission's regulatory objective of establishing actual  S0- xcosts for converters rather than on whether the operator is adhering to GAAP.70T W {O$-ԍId. at 5.7 In support of this claim,  xTCISL cites a Commission rule that states that the Commission's accounting rules are based on GAAP  S- x.only "to the extent regulatory considerations permit."PW {Of!-ԍId. See 47 C.F.R.  32.1.P Contending that the converter costs at issue are  S- xactual costs, TCISL maintains that regulatory considerations of establishing converter rates at actual cost  xoutweigh the importance of adhering to GAAP in this instance. Thus, TCISL claims that it should be  Sh- xallowed to recover these costs.khxW {O%-ԍSee Appeal at 5.#x6X@`7 iX@#k Finally, TCISL challenges the City's assertion that the $20 in capital  S@- xcosts per converter should be rejected because the $20 figure was not based on the records of the local"@ ,>(>(II"  S- xsystem. TCISL admits that the $20 figure is based on national, rather than systemspecific information.7W {Oh-ԍId. at 6.7  xHowever, TCISL contends that, because of the discrepancy between TCISL's accounting system and the  xregulatory demands now placed upon that accounting system, it made more sense for TCISL to derive  S-cost figures based on a national cost survey rather than to develop systemspecific figures.7ZW {O-ԍId. at 7.7  S8- ` _x8. ` ` In its opposition to TCISL's appeal, the City cites the five reasons it provided in its staff  xreport for disallowing TCISL's capital costs and argues that TCISL's appeal fails "to present any  S- xgrounds for considering the City's decision irrational."W {Ot -ԍSee Opposition of the City of St. Louis, Missouri, To TCI's Appeal of Local Rate Order ("Opposition") at 18. The City argues that, as stated in the staff report,  x.components of TCISL's $20 overhead amount must be excluded pursuant to Commission rules because  S- xthey are incurred after the time the converter is provided to the customer."]~W {O-ԍId. at 19. See 47 C.F.R.  76.923(f).] The City notes that TCISL  xdoes not dispute that the Commission's rules exclude such costs, but that TCISL argues in favor of  xchanging those rules. The City argues that it cannot be found to have acted unreasonably because it  S - xfollowed the Commission's rules rather than rewriting them as TCISL would wish.E W {O-ԍSee Appeal at 19.E The City argues  xthat the costs at issue may have been recovered in current equipment and installation charges based on  S - xTCISL's Form 1205, Schedule B cost entries.8 W {O-ԍId. at 20.8 The City further argues that, to the extent that TCISL  xyhas included the entire, predepreciation cost of assets in its $20 estimate, some or all of the alleged costs  S - xmay also have been recovered in other charges paid by subscribers prior to rate regulation.1 4 W {OT-ԍId.1 The City  xnotes that TCISL's response, in its appeal, appears to misstate the burden of proof, alleging that the City  xhas not shown that the costs at issue are otherwise incorporated in TCISL's equipment charges. The City  xMpoints out that, under the Commission's rules, it is TCISL's burden, not the City's, to show that the  S- xdisputed costs are not otherwise included.1! W {OF-ԍId.1 The City argues that TCISL's appeal fails to provide any  xlreason to consider irrational the City's finding that TCISL had failed to carry its burden of proof.  x=Finally, arguing that TCISL has not offered any systemspecific justification for its proposed costs but  xhas merely repeated its original claim that the $20 figure attributed to St. Louis was at the low end of a  xrange of nationwide estimates, the City maintains that TCISL did not provide the City with any evidence  S- xindicating that the operator actually incurs an additional $20 of capital costs per converter.8"X W {O$-ԍId. at 21.8 The City  S- xmaintains that TCISL has failed to meet its burden of proof with respect to these costs. Accordingly, the"",>(>(IIa"  x/City argues that TCISL has failed to present a basis upon which to conclude that the City's finding,  S-denying TCISL's claim of $20 per converter for overhead costs, was irrational.1#W {O@-ԍId.1  S- ` x9. ` ` The Commission rule defining the "equipment basket" states that the basket shall include  xzall "direct and indirect material and labor costs of providing, leasing, installing, repairing, and servicing  S8- x0customer equipment."H$8ZW {O2-ԍSee 47 C.F.R.  76.923.H Pursuant to the 1992 Cable Act, material and labor costs included in the  S- xequipment basket must be recoverable by the operator.%$W {O - xԍSee Communications Act,  623(b), 47 U.S.C.  543(b). Section 623(b)(3) of the Communications Act requires  {Of - xthat rates for equipment and installation reflect their actual costs. See also First Order on Reconsideration, Second  xReport and Order, and Third Notice of Proposed Rulemaking, MM Docket 92266, 9 FCC Rcd. 1164, 11901201 (1993). The costs of installing and retrieving converters,  xthe costs of managing the converter inventory, and the material costs of converters are clearly related to  xproviding and installing equipment, and are properly classified as part of the equipment basket. Thus,  xTCISL 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.  S - ` ox10. ` ` TCISL, however, does not adequately justify its reasons for treating the labor costs of  xinstalling and retrieving converters as capital costs and including them in Schedule C of Form 1205.  xLIndeed, TCISL does not clearly distinguish these costs from the operating expenses and labor costs that  x]are ordinarily included in Schedule B. Instead, TCISL argues that it should include these costs in  xSchedule C because it has not listed them elsewhere in Form 1205. The Commission's instructions for  SX- xcompleting Schedule B specifically provide that operators include "all annual operating expenses . . . for  S0- xinstallation and maintenance of all cable facilities" on Schedule B.<&0W yO-ԍFCC Form 1205 at 11.< Moreover, operating expenses  S- xincurred specifically to maintain and install customer equipment are referenced expressly.'h W {O-#X\  P6G;P#эId.#X\  P6G;P# Thus, the  xCommission's instructions for Form 1205 clearly indicate that TCISL should include the labor costs of  S- xzinstalling and retrieving converters on Schedule B rather than on Schedule C.( W {OR- x<#X\  P6G;P#эThe issue raised in this case is analogous to one discussed in ML Media Partners L.P., trading as Multivision  {O- xCable TV (Fairfield, CA), 11 FCC Rcd. 1017 (1995) ("Multivision"), where the operator sought to capitalize the labor  {O- xcosts associated with inside wiring in its preparation of FCC Form 393. In Multivision, we held that, "Cable  xoperators may not capitalize labor costs associated with inside wiring . . . . [Such costs] are properly included in the  {Ox!-charges for the installation of inside wiring." Multivision at 1024. #X\  P6G;P# Such costs are thereby  S- x=included in installation charges or in the maintenance element of the equipment lease charges. They may  xknot be included on Schedule C, which is used only to "compute the annual capital costs of equipment  S@-leased to customers.")@W {O%-#X\  P6G;P#эSee FCC Form 1205 at 12.#X\  P6G;P#є "D),>(>(IIb"Ԍ S- ` x11. ` ` TCISL states that certain costs in question are related to inventory management and  xclaims that such costs are incidental costs that may be included as annual purchase costs. We agree that  S- xcertain costs of managing converter inventory may be capitalized and therefore included on Schedule C  xas converter costs. Pursuant to Commission rules, purchase costs that are capitalized and reported on  x Schedule C as converter costs would include "acquisition price and incidental costs such as sales tax,  S8- xfinancing, and storage up to the time [the converter] is provided to the customer.K*8W {O-ԍSee 47 C.F.R.  76.923(f).K Although the list of  x!incidental costs in 76.923(f) is not exhaustive, the costs at issue, i.e., labor costs of retrieval and  xreinstallation of converters, the cost of inventorying such items, and the material supplies associated with  xytheir reinstallation, are not incidental to the activities associated with placing new converters into service.  xlThe rules define incidental costs as costs incurred up to the time the equipment is provided to the  xcustomer. The converter installation and retrieval costs that TCISL seeks to capitalize appear to have  xybeen incurred after the initial converter installation. The rules do not provide for the capitalization of the costs of retrieval, reinstallation and reinventorying of converters.  S - ` bx12. ` ` Further, TCISL does not clearly explain the basis for including the material and  xequipment costs in question on Schedule C. Certain materials and supplies associated with equipment  xinstallations may be capitalized. Where such material and supplies have been capitalized as part of the  x[converter cost, it would be proper to include such costs on Schedule C and recover them in the converter  xlease charge. Alternatively, incidental material and supplies could be expensed, included on Schedule B,  xand recovered in installation charges or in the maintenance element of the appropriate lease charge. The  x|accounting treatment, under GAAP, would determine which schedule is used. If Schedule C is  xlappropriate, the accounting would determine which asset group it should be included with on this  S- xschedule.E+ZW {O-ԍSee FCC Form 1205 at 3.E Thus, if the operator capitalizes certain converter installation materials and supplies in the  xzconverter account, it would be proper to report the costs on Schedule C for converters. It is not clear  xfrom the record in this case, however, where all of the materials and supplies in question have been  xrecorded. It appears that the costs involved either are not capitalized or have been capitalized in accounts  xfor equipment for which TCISL has not established 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.  Sx- ` 2x13. ` ` We find that TCISL has not provided any support for its $20 figure for converter capital  xcosts, aside from its assertion that the figure is based on a national survey. The instructions to Form 1205  xstate, in part, that "data may be identified at the level of organization at which the records are kept, e.g.,  S- x.systemwide."E,W {O -ԍSee FCC Form 1205 at 4.E As noted above, although TCISL concedes that the City correctly notes that it "relied  xon national, rather than systemspecific, information to calculate the $20 figure," it contends that because  S- x0of conflicts between its bookkeeping and regulatory demands, "it made far more sense to derive a  x>conservative figure based on a national cost survey than trying to develop numerous systemspecific  S`- xfigures."7-`~W yO~%-ԍAppeal at 7 8.7 Moreover, TCISL continues, the $20 figure is at the lowest end of its sampled range and it"`-,>(>(II"  S- xfound "no reason to believe that local conditions in St. Louis warrant a lower figure."7.W {Oh-ԍId. at 7.7 The onus is not upon the City to accept TCISL's proposed $20 figure and reasons in support  x{thereof, but rather, on TCISL to provide the City with data collected and maintained on the same  xorganization level at which TCISL keeps its other records. We are not persuaded by TCISL's  S`- xjustifications to deviate from that requirement./`ZW yOZ-ԍFor example, actual data from St. Louis may reveal that TCISL's $20 figure is too high (or too low). We find, therefore, that TCISL has failed to meet its  S8- xburden under Commission rules to demonstrate the reasonableness of its rates.n08W yO -ԍ47 C.F.R.  76.937(a).#x6X@`7 iX@#n Accordingly, we deny  xTCISL's appeal with respect to the labor costs of installing and retrieving converters, the operating costs  S-of managing converter inventory, and the material costs of converters.1zW {O - xԍOur decision with respect to this issue is consistent with that reached in In re TCI Cablevision of Nevada, Inc., 11 FCC Rcd. 14378, 1438384  1213 (1996), which is currently on reconsideration.  S-x B. Unfunded Deferred Taxes  Sp-  SH - ` x14. ` ` In its FCC Form 1205 filing, TCISL included an amortization of what it termed  x"unfunded deferred taxes." TCISL explains that in traditional rateregulated industries, deferred taxes are  S - xviewed as "subscriber provided" funds.>2 W {Ol-ԍSee Appeal at 8.> But according to TCISL, the problem with applying the  S - xztraditional regulatory approach is that the subscribers never provided the funds for TCISL's deferred  x>taxes. Prior to the implementation of rate regulation in 1993, TCISL states it operated on a cash (or  x["flow through") method of cost recovery rather than an accrual (or "full normalization") method. Under  x.this cash method, TCISL did not attempt to account for the effect of deferred taxes in setting rates and,  S0- xtherefore, its deferred taxes were "unfunded" because subscribers did not provide the funds.X30f W {O6-ԍ#X\  P6G;P#Id.X TCISL  S- xstates that Form 1205 initially credits subscribers with the benefit of TCISL's deferred taxes by including  S- xa deduction from the rate base in Schedules A and C.74 W {Ox-ԍId. at 9.7 Because the subscribers had not previously funded  S- x[these deferred taxes, however, TCISL claims it represents a subscriber windfall in this situation.5 W {O- 1. 1. 1. a.(1)(a) i) a) 1. 1. 1. a.(1)(a) i) a)#Xj\  PG;9XP#X` hp x (#%'0*,.8135@8:(>(IIa"Ԍ S- ` x15. ` ` The City responds that TCISL failed to show that "unfunded deferred tax balances"  S- xLrepresents a valid equipment cost.C7W {O@-ԍSee Opposition at 22.C The City argues that such figures do not represent costs to TCISL  xat all, but rather tax benefits TCISL obtains by treating assets differently for tax purposes than it does  x=on its own books. The City points out that if deferred taxes were considered additional costs, the result  S`- xwould be that TCISL would recover more than the actual cost of its assets.18`ZW {OZ-ԍId.1 Deferred taxes are taken  x.into account on the Commission's rate forms to adjust the presumed effective tax rate, but are otherwise  xconsidered costs under the Commission's rules. The City's staff report found that TCISL failed to carry  xits burden of proof to justify any extraordinary treatment beyond the Commission's rules for deferred  S- xtaxes.R9W {OL -ԍId. citing Staff Report at 8, 1314.R The City points out that TCISL does not claim that the Commission's rules permit deferred taxes as costs.  SH - ` x16. ` ` FCC Form 1205 is used to determine the costs associated with related equipment and  x\installation for the basic service tier. On this Form, we require operators to reduce their net rate base  x(investment in property, plant, and equipment used for regulated services) by the deferred tax balance  S - xyassociated with the investment.E: ~W {O-ԍSee FCC Form 1205 at 7.E The requirement to reduce the rate base by this amount is premised on  xthe assumption that the operator has included the tax expense in its rates even though the amount was not  xpayable to taxing authorities. In these instances, since the operator has use of these "no cost funds"  xprovided by the rate payer, an adjustment is made to the rate base for an appropriate reduction to the  xrevenue requirement. TCISL claims, however, that it did not recover these amounts from rate payers,  xand consequently, the deferred tax balance is unfunded. TCISL, therefore, included an amortization of  xthe amount in its depreciation provision on Form 1205. There is no provision in our rules or in the  x=instructions to include the amortization of the deferred tax balance in the depreciation provision on FCC Form 1205.  S@- ` x17. ` ` Previously, we required operators to reduce the regulated rate base by the total deferred  S- xtaxes associated with the rate base investment. Subsequently, we modified this rule to require that the rate  xbase be reduced by associated deferred taxes accrued only since the date the operator became subject to  S- xjregulation.;\W {Ox- x#X\  P6G;P#эSee Implementation of Sections of the Cable Television Consumer Protection and Competition Act of 1992,  xMM Docket No. 92266, Second Report and Order, First Order on Reconsideration, and Further Notice of Proposed  {O !-Rulemaking, 11 FCC Rcd. 2220 (1996) ("Second Report and Order") at  62. We believe that this action by the Commission adequately addresses TCISL's concern. As  S- xprovided in our Second Report and Order, TCISL may reduce its deferred tax balance by any pre Sz- xregulation amounts before reducing the rate base for deferred taxes.1<z4 W {ON$-ԍId.1 Our rules do not provide for the  xamortization provision that TCISL included in its depreciation expenses on FCC Form 1205. Because  xTCISL's methodology was improper, we find that the City was correct in disallowing that amount in TCI xSL's equipment rates. The computation proposed by TCISL allows it to recover more than its acquisition" <,>(>(IIz"  xcosts of the assets providing regulated services. TCISL should be allowed to defer taxes as provided in  S- xkour Second Report and Order, but only as of the Order's effective date. Accordingly, we remand this issue for resolution consistent with the terms of this Order.  Sb- xC. Insurance Costs  S- ` x18. ` ` TCISL seeks to include insurance costs in the actual cost calculations for the installation  xand maintenance of customer premises equipment. TCISL appeals the City's rate order that denied TCI S- xmSL the recovery of insurance costs through its equipment rates because such costs "are general  S- xjadministrative costs not includable in the equipment basket."`=W {O -ԍSee Appeal at 10, citing Staff Report at 23.` The insurance expenses include a number  x.of separate insurance policies: liability, property loss, auto and workmen's compensation, as well as the  SJ - xparent company's self insurance expenses.?>J ZW {OD -ԍSee Appeal at 10.? TCISL claims the "insurance costs included are inextricably  S" - xlinked to the installation and maintenance of equipment.";?" W {O-ԍId. at 1011.; TCISL states the City incorrectly relied on  x.Commission rules prohibiting general overhead from the equipment basket. According to TCISL, these  xcosts are easily distinguished from general overhead because insurance costs are directly attributable to  S -the provision of customer premises equipment.8@ ~W {O-ԍId. at 11.8  SZ- ` `x19. ` ` In its opposition, the City maintains that the insurance costs are general administrative  S2- xoverhead costs, which the Commission's rules clearly exclude from the equipment basket.FA2W {O-ԍSee Opposition at 2425.F Moreover,  xthe City argues that even if TCISL's proposed insurance costs may be included in the equipment basket,  S-TCISL failed to satisfy its burden of justifying these costs.8BW {O$-ԍId. at 25.8  S- ` x20. ` ` Under Commission rules, equipment basket costs are limited to the direct and indirect  Sj- xmaterial and labor costs of providing, leasing, installing, repairing, and servicing customer equipment.KCj4 W {O>-ԍSee 47 C.F.R.  76.923(c).K  xkWe agree with TCISL that insurance costs are distinguished from general overhead because insurance  xjcosts can be attributable to providing customer service equipment. Worker's compensation, for example,  x=is generally part of the cost of labor. Similarly, hazard protection and liability coverage on vehicles used  S- xfor maintenance of equipment could be properly included in Schedule B of Form 1205.D W yO0$- xxԍWe caution that where insurance payments are made for unusual or significant losses, the amounts should be  {O$- x;disclosed and spread over future periods in a manner that avoids rate spikes.  See Implementation of Sections of the  xCable Television Consumer Protection and Competition Act of 1992: Rate Regulation, MM Docket No. 92266, First  xOrder on Reconsideration, Second Report and Order, and Third Notice of Proposed Rulemaking, 9 FCC Rcd. 1164  {OR'-(1993) ("First Order on Recon.") at  66. When TCISL" zD,>(>(II$"  x/filed Form 1205, in 1994 and 1995, TCISL did not include these insurance costs in its calculation of  xequipment basket costs. These costs, therefore, were recovered in program service rates. In assigning  xthese costs now to its equipment basket, TCISL should have deducted them from its program service  xzrates, otherwise TCISL would be recovering these costs twice. TCISL had these costs at the time it  x[unbundled its rates, but only now identifies these costs as ones that should be included in the equipment  xjbasket, thereby revealing that TCISL's original unbundling was inadequate. TCISL did not, as it should  x0have done, propose equitable adjustments to programming service rates on a going forward basis. Accordingly, we deny TCISL's appeal with respect to this issue.  S-x D. Security Devices  SH - ` x 21. ` ` TCISL also appeals the City's rate order on the ground that it improperly reduces TCI xSL's claimed equipment costs by rejecting costrelated security devices, other than converters. The  xsecurity devices, or traps, block the delivery of certain programming services to nonsubscribing  xcustomers, and function along with converters to ensure signal delivery security. TCISL acknowledges  xthat traps are located outside subscribers' homes on utility poles but argues that it "defies logic to establish  S - xan entirely different regulatory treatment (and preclude cost recovery) for this customerspecific signal  SX- x.security device depending on whether it happens to be located inside or outside the customer's home."?EXW {O-ԍSee Appeal at 12.?  S0-Without the traps, TCISL states the cost of converters would be materially higher.8F0ZW {O*-ԍId. at 11.8  S- ` ox22. ` ` The City counters that TCISL should not be allowed to include the cost of traps in its  xForm 1205 for purposes of calculating the rate for converters because such traps are outside the  xdemarcation point set by the Commission and hence are not customer premises equipment at all, but rather  Sh- xnetwork components.pGZhW {O- x<ԍSee Opposition at 26, citing Implementation of Sections of the Cable Television Consumer Protection and  yO- x;Competition Act of 1992, Rate Regulation, MM Docket 92266, Report and Order and Further Notice of Proposed Rulemaking, 8 FCC Rcd. 5631 at  282 n.666 (May 3, 1993).p Moreover, the City contends that traps are not associated with converters in any  xobvious fashion and are not integral or necessary to the functioning of converters. A subscriber may have  x\one or more traps with or without a converter, and may have one or more converters with or without  x\traps. Therefore, the City argues, TCISL's approach, even if it were not otherwise forbidden by the  xCommission's rules and methodology, would impose the cost of traps inequitably only on those  xsubscribers with converters. In addition, the City points out that traps are not used to receive the basic  Sx- xtier. Rather, traps are used to prevent unauthorized subscribers from receiving services they have not paid  x0for. Accordingly, the City argues that traps cannot be included as regulated equipment under the  S(-Commission's rules.H\(W {O"- xԍSee Opposition at 27, citing SBC Media Ventures, Inc., Appeal of Local Rate Order of Montgomery County,  {O#- x-Maryland, DA 941251, Consolidated Order at  17 (Nov. 22, 1994) (A/B switches are not regulated equipment because they are not used to receive basic service but, rather, are used to receive offtheair broadcast signals).  S-" 2 H,>(>(II\"Ԍ S- ` }x23. ` ` TCISL acknowledges that traps are not the same as, but function along with, converters.?IW {Oh-ԍSee Appeal at 12.?  xTraps are, in essence, security devices, they either block or allow unscrambled signals to reach a  S- xsubscriber.nJZW yO-ԍReport and Order, MM Docket 92262, 8 FCC Rcd. 2274, 2276 n.13 (1993).n TCISL has an obligation to prevent certain programming from reaching nonsubscribers,>KW yO:-ԍ47 C.F.R.  76.227.>  xand has an interest in preventing subscribers from receiving programming other than that to which they  xare entitled. Under current Commission rules, there are three primary types of subscriber premises  S8- xequipment: converter boxes, remote controls, and inside wiring.L8zW {OR -ԍSee FCC Form 1205, Instructions for Schedule C Capital Costs of Leased Equipment at 12. Subscriber drops up to the Commission xdefined cable network demarcation point at the customer's premises are considered network equipment  S- x/and may not be included as subscriber equipment on Schedule C.1M W {O-ԍId.1 The subscriber's premises begins  S- xtwelve inches outside of where the cable wire enters the premises.KNW {O-ԍSee 47 C.F.R.  76.5 (mm).K TCISL proffers no justification,  xother than cost, for us to conclude that traps should be regarded as subscriber premises equipment. Accordingly, we deny TCISL's appeal on this issue.  S - IV. SANCTIONS  S -  S - ` x24. ` ` The City, in its Opposition, is requesting that the Commission sanction TCISL for  S - xallegedly attempting to evade the Commission's rules.CO 0 W {Ox-ԍSee Opposition at 28.C We do not find that sanctions are warranted. As  x.TCISL notes in its reply, cable operators are entitled to complete the benchmark forms consistent with  xtheir interpretation of the governing rules, and local franchising authorities are entitled to review those  xforms to determine if the operator has completed them correctly. If the local franchising authority  S- xmandates a reduction in a proposed rate, the cable operator is entitled to seek review at the Commission.FP W {Oj-ԍSee TCISL's Reply at 2.F  xIn addition, the City is requesting sanctions against TCISL for allegedly implementing rate increases prior  S- xto the 90day review period established by Commission regulations.HQT W {O -ԍSee Opposition at 2930. H TCISL sent its Form 1240 and  xkForm 1205 to the City of St. Louis on March 1, 1996; the City received TCISL's forms on March 4,  Sh- x1996. TCISL then implemented its rate increase on June 1, 1996.1RhW {O#-ԍId.1 We do not find that these  xcircumstances warrant the imposition of sanctions. Accordingly, the City's request for sanctions is denied.  S- :#]Y " xR,>(>(II"  S- V. ORDERING CLAUSES  S- ` x 25. ` ` Accordingly, IT IS ORDERED that the appeal by TCI Cablevision of St. Louis, Inc., of  S- xthe local rate order of the City, with respect to the capitalization of the labor costs of installing and  xretrieving c onverters, the operating costs of managing converter inventory, and material costs of  S8-converters, IS DENIED .  S- ` x26. ` ` IT IS FURTHER ORDERED that the appeal by TCI Cablevision of St. Louis, Inc., of  S- x-the local rate order of the City, with respect to the inclusion of unfunded deferred taxes IS REMANDED to the City for resolution in accordance with the terms of this Order.  SH - ` x27. ` ` IT IS FURTHER ORDERED that the appeal by TCI Cablevision of St. Louis, Inc., of  S - xthe local rate order of the City, with respect to the inclusion of insurance costs in equipment rates, IS  S - DENIED .  S - ` x28. ` ` IT IS FURTHER ORDERED that the appeal by TCI Cablevision of St. Louis, Inc., of  S - xzthe local rate order of the City, with respect to the inclusion of the costs of security devices, traps, in  SX-equipment rates, IS DENIED .  S- ` x29. ` ` IT IS FURTHER ORDERED that the request for sanctions by the City of St. Louis  S-against TCI Cablevision of St. Louis, Inc. IS DENIED .  S- ` x30. ` ` This action is taken by the Chief, Cable Services Bureau, pursuant to authority delegated  Sh-by  0.321 of the Commission's rules.=ShW yO-ԍ47 C.F.R.  0.321.=  x` `  hhFEDERAL COMMUNICATIONS COMMISSION x` `  hhMeredith J. Jones x` `  hhChief, Cable Services Bureau  X-#Xj\  P6G;9XP#