******************************************************** 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 ) ) ) U.S. Cable Television Group, L.P. ) CUID No. FL0373 (City of Gulf Breeze)) ) ) ) ) Complaint Regarding ) Cable Programming Services Tier ) Rate Increases ) ) ORDER Adopted: October 1, 1997 Released: October 7, 1997 By the Chief, Financial Analysis and Compliance Division, Cable Services Bureau: 1. In this Order we consider a complaint concerning the rates of the above-captioned operator ("Operator") for its cable programming services tier ("CPST") in the community referenced above. Operator has attempted to justify its CPST rates through a cost of service showing on FCC Form 1220. 2. The Communications Act, authorizes the Federal Communications Commission ("Commission") 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 CPST rates be filed with the Commission by a local franchising authority ("LFA") that has received subscriber complaints. An LFA may not file a CPST rate complaint unless it receives more than one subscriber complaint within 90 days after such increase becomes effective. If the Commission finds the rate 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. The Commission has determined that a benchmark and price cap approach should serve as the primary method for regulating basic service tier ("BST") and CPST rates. Because the benchmark methodology might not produce fully compensatory rates in all cases, the Commission permits operators, as an alternative, to justify rates using cost of service showings. The cost of service approach is intended to be used only if an operator believes that the maximum rate permitted under the benchmark formula would not enable the operator to recover costs reasonably incurred in providing rate regulated cable services. On December 15, 1995, the Commission adopted the Second Report and Order, First Order on Reconsideration, and Further Notice of Proposed Rulemaking ("Final Cost Order") setting forth its final rules to govern cost of service filings. 4. On July 24, 1997, the LFA filed a complaint against Operator's April 14, 1997 rate increase. The LFA certified that it has complied with the Interim Rules. Operator filed an FCC Form 1220 to justify its CPST rate of $15.80, effective April 14, 1997. Upon review of Operator's FCC Form 1220, we found that Operator allocated Local Origination Costs (Worksheet A, Line 7) to the service tiers based on a relative ratio of tier channels. Because these costs relate only to BST offerings, however, we reassigned reported costs directly to the BST. Similarly, we reassigned corresponding accumulated depreciation directly to the BST on Line 10. 5. We also found that Operator improperly reported Other Intangible Assets (Worksheet A, Line 16) based on losses that had accumulated from 1988 through 1996, as detailed in Attachment 9 to the filing. Since the system of which the franchise for the above-referenced community is a part was acquired rather than built by Operator, a subscribership was already in place to provide a steady stream of revenues. Moreover, the Net Losses reported by Operator, valued at $40,521,000 at the system level, were not sufficiently detailed to permit review. For these reasons, we rejected Operator's reporting of Other Intangible Assets. 6. Operator, however, is entitled to acquisition-related intangibles reduced by 34 percent of the system purchase price. Operator reported a system purchase price of $131,500,000 on Worksheet C, Item 8, $80,888,700 of which Operator reported as Intangible Assets. After subtracting 34 percent of the purchase price, or $44,710,000, from Gross Intangible Assets purchased, we allowed Operator $36,178,700 of Gross Intangible Assets in the rate base. We then adjusted the Accumulated Amortization account to reflect eight years of amortization for the time elapsed from the purchase date until the end of the test year based on a 15-year amortization period. This change resulted in an adjusted Accumulated Amortization balance of $19,295,307. Lastly, we restated Amortization Expenses as 1/15 of adjusted Gross Intangible Assets. This restatement increased system Amortization Expenses by $480,619. 7. We found further that Operator allocated the advertising expenses and advertising revenues recorded on Lines 33 and 51, respectively, of Worksheet A to the service tiers based on a relative ratio of tier channels. Because, however, advertising time available on the BST and pay channels is very limited, and to conform with the matching principle under Generally Accepted Accounting Principles, we reassigned costs for both of these categories directly to the CPST. We found additionally that Operator allocated Home Shopping revenues (Worksheet A, Line 52) to the service tiers based on a relative ratio of tier channels. Operator's Home Shopping offerings were limited to the CPST, however. Accordingly, we reassigned Operator's Home Shopping revenues directly to the CPST. 8. In total, our adjustments to Operator's FCC Form 1220 result in a maximum permitted rate ("MPR") of $18.67, rather than Operator's MPR of $21.52. Because Operator's actual CPST rate is only $15.80, however, we find that Operator's CPST rate, effective April 14, 1997, is not unreasonable. 9. Accordingly, IT IS ORDERED, pursuant to Section 0.321 of the Commission's rules, 47 C.F.R.  0.321, that Operator's CPST rate of $15.80 effective April 14, 1997, in the community referenced above, IS NOT UNREASONABLE. 10. 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 rate charged by Operator in the franchise area referenced in the caption IS DENIED. FEDERAL COMMUNICATIONS COMMISSION Elizabeth W. Beaty Chief, Financial Analysis and Compliance Division Cable Services Bureau