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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 ) ) Marcus Cable Associates, L.P. ) CUID No. CA0180 (City of Glendale) ) Complaints Regarding ) Cable Programming Services Tier ) Rate Increase ) ORDER Adopted: December 18, 1997 Released: December 19, 1997 By the Deputy Chief, Cable Services Bureau: 1. In this Order we consider complaints against the June 1, 1997 rate increase of the above- referenced operator ("Operator") for its cable programming services tier ("CPST") in the community referenced above. Operator has attempted to justify its CPST rates through a benchmark showing on FCC Forms 1240 and 1235. We have already issued an order which found that Operator's CPST rates in effect before May 15, 1994 ("1994 Order") were unreasonable. In this Order we consider the refund plan ("1994 Refund Plan") filed in response to our 1994 Order. On May 9, 1997, we released another order which found that Operator's CPST rates in effect from May 15, 1994 through May 31, 1996 were unreasonable, but that Operator's CPST rate increase effective June 1, 1996, was not unreasonable ("1997 Order"). On June 6, 1997 Operator filed a Petition for Reconsideration ("Petition") of our 1997 Order and a refund plan ("1997 Refund Plan") as required by the 1997 Order. On July 2, 1997, the local franchising authority ("LFA") filed a letter response ("Response") to the Operator's Petition and 1997 Refund Plan. In this Order we address Operator's Petition and 1997 Refund Plan, and the LFA's response. 2. We first address Operator's 1994 Refund Plan. Our review of Operator's 1994 Refund Plan reveals that the refund plan does not comply with the requirements of our 1994 Order. In its 1994 Refund Plan, Operator raises three issues which Operator believes require a calculation of the refund amount which differs from the calculation prescribed in our 1994 Order. Operator did not file a petition for reconsideration or an application for review of the 1994 Order. Consequently, Operator is now attempting to raise in its refund plan an issue that it failed to properly place before the Commission in accordance with the Commission's Rules. A refund plan is not a substitute for the reconsideration and review process and issues raised in refund plans will not be considered. The Operator's 1994 Refund Plan does not meet the appropriate standard. Operator has failed to comply with the 1994 Order. Operator shall have thirty days from the release of this Order to resubmit a refund plan which complies with this Order and with the 1994 Order. 3. We next address Operator's Petition in which Operator raises three issues. First, Operator contends that the 1997 Order errs in its franchise fee deduction and, consequently, repeatedly overstates Operator's actual CPST rate by understating the Operator's franchise fee cost. In support of its contention, Operator submitted a rate card, effective July 14, 1994, demonstrating that its actual rate CPST rate, after subtracting the franchise fee, was $8.89 and not $9.83 as stated in the 1997 Order. In addition Operator submitted a rate card, effective June 1, 1996, supporting its contention regarding the calculation of Operator's franchise fee cost. Upon review of Operator's Petition, and supporting documentation, we find that Operator's representation on this issue is correct. Accordingly, we will grant Operator's Petition with respect to this issue. 4. The second issue raised by Operator in its Petition concerns the finding in our 1997 Order, paragraph 7, that Operator was "charging a CPST rate of $9.83" for the time period from May 15, 1994 through March 31, 1995. In its Petition, Operator contends that it was actually charging a CPST rate of only $8.89 and requests that our 1997 Order be adjusted to reflect this rate. The rate card submitted by Operator in support of its Petition reflects that Operator's actual CPST rate, after subtracting the franchise fee, was $8.89, but only effective as of July 14, 1994. Operator's FCC Form 1200 filed with the Commission on August 15, 1994, shows that Operator's CPST rate, after subtracting the franchise fee, was $9.80 as of May 14, 1994. This CPST rate is also set forth in the rate card which Operator attached to its FCC Form 1200 filing. In its Supplement to Petition for Reconsideration and Refund Plan ("Supplement"), Operator confirmed that it was charging an actual CPST rate, without franchise fees, of $9.80. Operator states that "these rates were implemented in June 1993 and remained in effect until the Benchmark II rates were implemented in July 1994." Accordingly, we will grant Operator's Petition in part and deny it in part with respect to this issue. Upon reconsideration, we find that Operator was charging an actual CPST rate of $9.80 from May 15, 1994 through July 13, 1994 and was charging an actual CPST rate of $8.89 from July 14, 1994 through March 31, 1995. In its Petition, Operator has not disputed the determination in our 1997 Order that Operator's maximum permitted rate ("MPR") from May 15, 1994 through March 31, 1995 was $8.33. Consequently, we affirm the finding in our 1997 Order that the CPST rate in effect from May 15, 1994 through March 31, 1995 is unreasonable. 5. As noted in our 1997 Order, we have not received a deferral of refund liability request from the Operator. Operator has not disputed our finding on this issue in its Petition. In its Supplement, Operator states that it is Operator's "belief that the Glendale cable system was not obligated to implement Benchmark II rates until July 15, 1994, because the prior owner sensibly elected the 'refund deferral' option." The Commission's rules provide for a refund liability deferral period, if timely requested by Operator, beginning May 15, 1994 and ending July 14, 1994, for any overcharges resulting from Operator's calculation of a new MPR on FCC Form 1200. However, Operator states, in its Supplement, that it has been unable to date to locate a copy of the prior owner's notification to the FCC, but it has located a contemporaneous letter advising the LFA of the deferral election. Upon reconsideration, we will accept the letter to the LFA as a deferral election. Therefore, Operator's liability from its FCC Form 1200 does not begin until July 15, 1994. 6. This deferral of refund liability, however, does not apply to refund liability that may have occurred because Operator's March 31, 1994 rates for its CPST subject to regulation were higher than levels permitted under the Commission's rules in effect before May 15, 1994. Accordingly, while the liability period for Operator's overcharges associated with its FCC Form 1200 filing does not begin to run until July 15, 1994, Operator does incur refund liability for any CPST rates charged between May 15, 1994 and July 14, 1994 which were above the MPR approved by the Commission on Operator's FCC Form 393. As determined in our 1994 Order, our adjustments to Operator's FCC Form 393 resulted in an MPR of $8.57 per month (plus franchise fees) for the period from the filing of the earliest valid complaint to May 14, 1994. Operator was charging an actual CPST rate, without franchise fee, of $9.80 from June 1993 until July 13, 1994. Because Operator's actual CPST rate was $9.80 while its MPR, pursuant to its FCC Form 393 filing, was only $8.57, we affirm the finding in our 1997 Order that Operator's CPST rate for the period beginning May 15, 1994 was unreasonable. 7. We also find that Operator has failed to account for the refund for the period beginning on May 15, 1994 through July 14, 1994 in its 1997 Refund Plan. In addition, Operator submitted a letter with its 1997 Refund Plan in which Operator requests that it be allowed to offset its overcharges on the CPST against its alleged undercharges for its basic services tier ("BST"). The Commission's jurisdiction to regulate cable rates has been limited to the review of CPST rates. In order to accomplish this review, the Commission has promulgated rules which allow the Commission to fairly review and establish reasonable CPST rates. The Commission has addressed this issue in Cencom Cable Income Partners ("Cencom"). In Cencom, the Commission determined that such inter-tier offsets are "inconsistent with the Commission's conclusion in the [Implementation of Sections of the Cable Television Consumer Protection and Competition Act of 1992, Rate Regulation, MM Docket 92-266, Report and Order and Further Notice of Proposed Rulemaking] that cable operators should not balance low BST rates with CPST rates that exceed the maximum permitted rate for the tier." Based on the Commission's holding in Cencom we reject Operator's request. Accordingly, we will deny Operator's 1997 Refund Plan and order Operator to refile its 1997 Refund Plan. 8. The third issue raised by Operator is that our 1997 Order errs in paragraph 9 by asserting that line A1 of the FCC Form 1240 should be adjusted from $9.05 to $8.85. Operator contends that this adjustment is inconsistent with our finding in the immediately preceding paragraph of the 1997 Order. The preceding paragraph established a "maximum permitted" rate of $8.94. Operator contends that it is the maximum permitted rate of $8.94 that should be entered on line A1 of the subsequent FCC Form 1240. Upon review of our 1997 Order, we find that the correct maximum permitted rate is $8.94 and that the rate of $8.85 discussed in paragraph 9 of our 1997 Order was a typographical error. The correct maximum permitted rate of $8.94 was the rate that the Commission entered on line A1 on its revised FCC Form 1240. Accordingly, we will grant Operator's Petition with respect to this issue. 9. On July 2, 1997, the LFA filed its Response to Operator's Petition. In its Response, the LFA objects to the Operator's 1997 Refund Plan and Petition arguing that the Commission's "decision is moot." The LFA states that on October 31, 1995, the LFA approved the transfer of its cable franchise from Sammons Communications to Marcus Cable Associates, L.P., the Operator referenced above. As a condition of said transfer, "Sammons agreed to credit subscribers with a refund intended to satisfy all rate refund liability for regulated rates as of October 31, 1995 including the complaint filed in [the Commission's 1994 Order]." The LFA states that "Sammons certified to the [LFA] that it had in fact paid refunds to subscribers pursuant to a mutually agreed-upon refund plan." 10. Any cable operator that has been ordered by the Commission to pay refunds of CPST overcharges must certify to the Commission that such refunds have been paid. Neither the LFA nor the Operator or its predecessor has filed the refund plan referred to by the LFA with the Commission for approval. Because neither this refund plan nor a certification has been filed with the Commission for its consideration, we reject the LFA's position that we dismiss this action. 11. The LFA also states that on February 6, 1996, it "withdrew any pending complaints regarding Sammons' compliance with the rate orders of the City for any period through October 31, 1995." The LFA contends that because it "withdrew its complaint, the FCC has no standing or jurisdiction to rule on any refund plan that arises from the complaint." On July 11, 1997, Operator filed a Reply to Response to Petition for Reconsideration ("Reply"). In its Reply, Operator states that although Operator "does not agree with all aspects of the City's letter, it does concur with the City on the issue of mootness." Operator contends that "[w]ith the City's withdrawal of all complaints predating January 1997, the Commission lacked jurisdiction to review earlier periods." 12. The parties' contention that the Commission lacked jurisdiction is incorrect. The Commission made a finding in the 1994 Order that Operator's CPST rates up to May 14, 1994 were unreasonable. In the 1994 Order, the Commission stated it would issue a separate order at a later date addressing the reasonableness of the Operator's CPST rate after May 14, 1994. Pursuant to the Cable Television Consumer Protection and Competition Act of 1992 ("1992 Cable Act"), the Commission was required to review Operator's CPST rates subsequent to May 14, 1994. In addition to the LFA's complaint, the Commission received a valid complaint on August 4, 1994, against Operator's CPST rates in effect on July 14, 1994, which was not withdrawn. The Commission clearly has jurisdiction to review Operator's CPST rates after May 14, 1994 despite the LFA's withdrawal of its complaints. 13. With regard to the June 1, 1997 rate increase, 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. If the Commission finds the rate unreasonable, it shall determine the correct rate and any refund liability. The Telecommunications Act of 1996 ("1996 Act") and our rules implementing the new legislation, require that complaints against the CPST rates be filed with the Commission by a LFA that has received subscriber complaints. An LFA may not file a CPST rate complaint unless, within 90 days after such increase becomes effective, it receives more than one subscriber rate complaint. 14. To justify rates for the period beginning May 15, 1994 through a benchmark showing, operators must use the FCC Form 1200 series. Operators may 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. If actual and projected costs are different during the rate year a "true-up" mechanism is available to correct estimated costs with actual cost changes. The "true-up" requires operators to decrease their rates or alternatively permits them to increase their rates to make an adjustment for over or under estimations of these cost changes. 15. FCC Form 1235 is an abbreviated cost of service filing used in cases of network upgrades. It allows cable operators to justify rate increases related to significant capital expenditures used to improve rate-regulated services. This option is extended only in cases of significant upgrades requiring added capital investment, such as bandwidth capacity and conversion to fiber optics, and for system rebuilds. For an operator to receive rate increases justified on an FCC Form 1235, the Commission requires: (1) that the upgrade be 'significant' and require added capital investment, such as expansion of bandwidth capacity, conversion to fiber optics or system rebuilds; (2) that the upgrade actually benefit subscribers through improvements in the regulated services subject to rate increase; (3) that the upgrade rate increase not be assessed until the upgrade is complete and providing benefits to subscribers of regulated services; (4) that the operator demonstrate its net increase in costs, taking into account current depreciation expense, projected changes in maintenance and other expenses, and changes in other revenues; and (5) that the operator allocate its costs to ensure that only costs allocable to subscribers of regulated services are imposed upon them. Normal improvements and expansions of service will remain subject to the usual rate adjustments allowed by filings of FCC Forms 1210, 1220 and 1240. Cable operators that incur increases in operating costs associated with a significant network upgrade will be permitted to charge additional rates as justified by their FCC Form 1235 filing. 16. The 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, within 90 days after such increase becomes effective, it receives subscriber complaints. The LFA in the above-referenced community filed an FCC Form 329 Complaint with the Commission on September 22, 1997. The LFA has certified that it has complied with the Interim Rules. The valid complaint from the LFA triggers an obligation on behalf of the cable operator to file a justification of its CPST rates with the LFA. Thus, in this case, Operator is required to justify the increase in its CPST rate which is the subject of the LFA's complaint. As required by our rules, Operator filed FCC Forms 1240 and 1235 with the LFA as justification for this rate increase. 17. Accordingly, we have reviewed Operator's FCC Form 1240, for the projected period June 1, 1997 to May 31, 1998, and found that Operator has not correctly calculated its MPR. We have adjusted Module A, Line A1 to reflect the MPR of $10.51 calculated in the previous FCC Form 1240. In addition, Operator made true-up adjustments through to the effective date of the rate increase. This is incorrect. The annual adjustment afforded by the 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. 18. 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 requires that we adjust Worksheet 1 accordingly by removing Operator's figures on Lines 110, 111 and 112. We have adjusted Module E, and have corrected the number of months on Line E2 (True- Up Period 1) to 9 months. We have also adjusted Module F which has resulted in a reduction on Line F9 (MPR for True-Up Period 1) to $12.29. 19. The reduction in the length of the true-up period also results in a reduction in Line H13 (Total True-Up Adjustment) and Line H14 (Amount of True-Up Being Claimed This Projected Period). 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 $15.28 (Line I9). Thus, Operator has failed to demonstrate that its June 1, 1997 MPR rate of $16.55 for its CPST was justified. 20. 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. 21. Operator's rate increase reflects not only the annual increase as reported on FCC Form 1240 but also the recovery of costs for its network upgrade as reflected on Operator's FCC Form 1235 dated April 30, 1997. Operator elected to apply all of its FCC Form 1235 allowable basic service tier and CPST increases to its CPST MPR. Upon review of Operator's FCC Form 1235 we made certain adjustments. Operator allocated its revenue and income adjustments to its tiers based on ratios of tier channels to total channels. However, all of Operator's revenue and income adjustments represented advertising revenues that will accrue under the upgrade. Because nearly all advertising time is concentrated on the CPST, and to properly match the revenues with corresponding expenses in accordance with the matching principle under Generally Accepted Accounting Principles ("GAAP"), we reassigned Operator's revenue and income adjustments directly to the CPST. After adjustment, the CPST upgrade increase justified by Operator was $3.03, or $0.10 less than Operator's calculated MPR of $3.13. 22. Therefore, when the FCC Form 1240 MPR of $15.28 is combined with the FCC Form 1235 MPR of $3.03, and the previous FCC Form 1235 MPR of $2.84 (as determined in the 1997 Order), the combined MPR is $21.15. Operator was actually charging a combined rate of $16.46. We conclude that the CPST rate of $16.46 is reasonable for the upgraded system. 23. Accordingly, IT IS ORDERED, pursuant to Section 1.106 of the Commission's rules, 47 C.F.R.  1.106, that the Petition for Reconsideration seeking corrections to Marcus Cable Associates, L.P., DA 97-983 (released May 9, 1997) IS GRANTED IN PART AND DENIED IN PART. 24. IT IS FURTHER ORDERED, pursuant to Section 76.962 of the Commission's rules, 47 C.F.R.  76.962, that Operator's 1994 and 1997 Refund Plans ARE NOT ACCEPTED. 25. IT IS FURTHER ORDERED, pursuant to Section 76.961 of the Commission's rules, 47 C.F.R.  76.961, that Operator revise its 1994 and 1997 Refund Plans as detailed herein and resubmit its plans to the Chief, Cable Services Bureau, within thirty days of the release of this Order. 26. IT IS FURTHER ORDERED, pursuant to Section 0.321 of the Commission's rules, 47 C.F.R.  0.321, that the CPST rates charged by Operator in the above-referenced community from May 15, 1994 through May 31, 1996 ARE UNREASONABLE. 27. IT IS FURTHER ORDERED, pursuant to Section 0.321 of the Commission's rules, 47 C.F.R.  0.321, that the CPST rates charged by Operator in the above-referenced community from June 1, 1997 to the present ARE REASONABLE. 28. IT IS FURTHER ORDERED, pursuant to Section 76.961 of the Commission's rules, 47 C.F.R.  76.961, that Operator shall refund to subscribers in the community referenced above that portion of the amount paid in excess of the maximum permitted CPST rate of $8.57 per month (plus franchise fees), plus interest to the date of the refund, for the period from October 18, 1993 through July 14, 1994. 29. IT IS FURTHER ORDERED, pursuant to Section 76.961 of the Commission's rules, 47 C.F.R.  76.961, that Operator shall refund to subscribers in the community referenced above that portion of the amount paid in excess of the maximum permitted CPST rate of $8.33 per month (plus franchise fees), plus interest to the date of the refund, for the period from July 15, 1994 through March 31, 1995. 30. IT IS FURTHER ORDERED, pursuant to Section 76.961 of the Commission's rules, 47 C.F.R.  76.961, that Operator shall refund to subscribers in the community referenced above that portion of the amount paid in excess of the maximum permitted CPST rate of $9.07 per month (plus franchise fees), plus interest to the date of the refund, for the period from April 1, 1995 to March 31, 1996. 31. IT IS FURTHER ORDERED, pursuant to Section 76.961 of the Commission's rules, 47 C.F.R.  76.961, that Operator shall refund to subscribers in the community referenced above that portion of the amount paid in excess of the maximum permitted CPST rate of $8.94 per month (plus franchise fees), plus interest to the date of the refund, for the period from April 1, 1996 to May 31, 1996. 32. IT IS FURTHER ORDERED, that Operator shall promptly determine the overcharges to CPST subscribers for the stated periods, and shall within 30 days of the release of this Order, file a report with the Chief, Cable Services Bureau, stating the cumulative refund amount so determined (including franchise fees and interest), describing the calculation thereof, and describing its plan to implement the refund within 60 days of Commission approval of the plan. 33. IT IS FURTHER ORDERED, pursuant to Section 0.321 of the Commission's rules, 47 C.F.R.  0.321, that Operator revise the calculations of its maximum permitted CPST rates in its next FCC Form 1240 filing in accordance with this order. 34. IT IS FURTHER ORDERED, pursuant to Section 0.321 of the Commission's rules, 47 C.F.R.  0.321, that the referenced complaints regarding Operator's June 1, 1997 CPST rate increase in the community referenced above ARE DENIED. FEDERAL COMMUNICATIONS COMMISSION John E. Logan Deputy Chief, Cable Services Bureau