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(1) (a) (i) 1) a)D )DDDFrfQq "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\"i~'^09]SS999S]+9+/SSSSSSSSSS99]]]Sxnxxng?Snxgx]nxxxxn9/9aS9S]I]I9S]/9]/]S]]I?9]SxSSIC%CW9+Wa999+999999S9]/xSxSxSxSxSxxInInInInI>/>/>/>/x]SSSSx]x]x]x]xSxSx]SSxSxSf]xSxSxSxIxIxWxIx{nInInInISSSWS]a?/?]?9?]]WW]n/nKn9nCn/x]xx]x]SSxxIxIxI]?]?]?]WnUn9nax]x]x]x]x]x]xxWnInInIx]n9x]]?n9xSz+SS8-8WuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxNthe expectation of monopolistic profits. The Cost Order, with its detailed rules on intangible assets,  S<- d(#applies to rates charged from May 14, 1994 to March 9, 1996, when the Commission's Second Cost Order  S- d(#or final rules took effect. {O - d(#wԍAs a refinement to the Cost Order's approach, the Second Cost Order adopted the final rules governing costof {Oj -service filings. Second Cost Order, 11 FCC Rcd 2220, 2298 (1996) . However, if the local franchising authority had not issued a final order prior  S- d(#to the effective date of the final rules, the operator can elect to have its costofservice filing decided  S-under either the interim rules or the final rules.WF {O-ԍSecond Cost Order, 11 FCC Rcd at 229899.W   Sv- 6.` ` Under Commission rules, cable operators may elect to have their regulated rates reviewed  d(#.pursuant to either the benchmark or costofservice regime. Falcon's filing of the Form 1220 constitutes  S& - d(#=its election of the costofservice regime to justify its rates that took effect July 14, 1994. &  yO- d(#ԍThe Commission has developed forms and instructions and published commentary to guide the costofservice  d(#determination. The necessary data and computations are to be included on the Form 1220 (including requested  d(#supplemental data). The City's regulatory jurisdiction covers the basic service tier (Form 1220) and equipment and installation charges (Form 1205).  Pursuant to  d(#this election, Falcon is required to reveal its actual costs for its Florence cable system and assumes the  S - d(#risk that its rates could be set at levels below that determined under the benchmark approach.b  {O6- d(#ԍRate Order, 8 FCC Rcd at 5799; Cost Order, 9 FCC Rcd at 4534. The costofservice rules seeks to assure  d(#that, in any individual case, rates based on actual cost data will be reasonable for both operators and subscribers.  d(#KIn balancing these often competing interests, the local franchising authority is justified to use actual cost data to  {O- d(#reduce rates below the benchmark in appropriate cases. See Rate Order, 8 FCC Rcd at 5793, Cost Order, 9 FCC Rcd at 4534.b Indeed,  S - d(#the City's rate order established Falcon's maximum permitted rate at a level lower than the benchmark.% t yO- d(#wԍUnder the benchmark approach, Falcon's maximum permitted rate would have been set at $16.62. Consultant's  {O-Report at 6. The City's adjusted costofservice filing set Falcon's maximum permitted rate at $11.20. Id.%  d(#The City's review of Falcon's 1220 filing was guided by the interim costofservice rules established in  S^- d(#the Cost Order, since those rules were in effect when the City issued its final order.^ yO"- d(#xԍThe Commission structured its costofservice rate reviews into three distinct periods: phase I, phase II, and  d(#;final. Rates in effect during phase I September 1, 1993 through May 14, 1994 are governed by the general cost  {O\$- d(#of service rules. Rate Order, 8 FCC Rcd at 579899, 5854 n.859. Rates in effect during phase II May 15, 1994  {O&%- d(#through March 9, 1996 are governed by the interim cost of service rules. Cost Order, 9 FCC Rcd at 4532. Rates  {O%- d(#in effect after March 9, 1996, are governed by the final cost of service rules. Second Cost Order, 11 FCC Rcd 2220.  d(#However, in cases still pending when the final rules became effective, the operator has the election to have its cost  {O'-showing determined pursuant to the final rules. 5, supra; see Second Cost Order, 11 FCC Rcd at 229899. In accordance with"^,`(`(88K"  d(#]our standard of review, our review of this appeal solely examines the reasonableness of the City's application of the interim rules to Falcon's costofservice filing.  S`- IV .DISCUSSION  S- A.` ` Intangible Assets   S- 7.` ` Falcon asserts that the City's exclusion of certain intangible asset values from its ratebase  S- d(#is inconsistent with the Commission's rules.1 {O -ԍId.1 Falcon acquired the cable system serving the City in 1990,  d(#and recorded the cost of the intangible assets on its books pursuant to Generally Accepted Accounting  SH - d(#NPrinciples (GAAP).6H Z yOB -ԍPetition at 4.6 In its Form 1220, Falcon attempted to include in its ratebase the following  d(#intangible assets (the values in parantheses constitute the gross costs Falcon assigned to such asset): cable  d(#T.V. franchise ($5,195,744); organizational costs ($66,773); franchise renewal costs ($9,020); customer  S - d(#>lists ($180,050); and goodwill ($2,146)._  {OZ-ԍConsultant's Report at 2; see Petition at 1018. _ Falcon contends that it is entitled to full recovery of these  S - d(#intangible assets.6 | yO-ԍPetition at 4.6 The City accepted Falcon's organizational costs, franchise renewal costs, customer  d(#lists, and goodwill as part of Falcon's ratebase, but rejected the intangible asset identified as "cable T.V.  SX-franchise".  X  yO- d(#ЍConsultant's Report at 3. Falcon listed intangible assets had a combined value of $5,453,733, of which  d(#x$5,195,744 (95.27%) constituted the "cable T.V. franchise" asset. It is not entirely clear if the City accepted or  d(#xrevised the valuation Falcon assigned to each of the other intangible assets when it recalculated Falcon's ratebase.  d(#The City's Consultant's Report states, ". . . we tentatively have not excluded the 'customer lists' value that Falcon  d(#included in the rate base, even though we do not believe [it] . . . is fully consistent with what the FCC intended .  {O- d(#. . [w]e also have tentatively not excluded certain organizational costs and a small amount of goodwill."  Id.  yO- d(#wMoreover, the City indicated that it reserved the right to make further adjustment to these intangibles, because it did  d(#not necessarily concur with Falcon's assigned valuation. Falcon's Petition simply states that the City excluded 95%  {OF-of its intangibles, and the City did not file an Opposition to explain its actions. See Petition at 4.    S-  8.` ` Falcon disputes the City's exclusion of the cable T.V. franchise from its ratebase. Falcon  d(#explains that the value assigned to the cable T.V. franchise is derived from the following intangibles:  d(#operating rights; advertising interconnection agreements; programming contracts; licenses; access  S- d(#zagreements; management and operating systems; software; service marks; and assembled workforce.O yO#-ԍPetition at 1018, Exhibit E at 1620. O  d(#Falcon argues that the value of these intangibles is properly included in its ratebase, since these intangibles  S@- d(#yprovide benefit to Falcon's subscribers and are essential for the provision of cable services.1@p {OP&-ԍId.1 In addition,  S- d(#Falcon argues that the Cost Order's use of presumptive tests for the inclusion of a certain limited number",`(`(88b"  S-of intangibles "violates equitable principles, as well as sound regulatory practice." {Oh- d(#=ԍId. at 5. Falcon raises a number of policy and legal arguments regarding the Commission's presumptive  d(#exclusion of these other categories of intangible assets and, as support for its position, references a report prepared  {O- d(#xby Barakat & Chamberlain (a consultancy hired by Falcon). See Petition at 518, Exhibit E. Falcon raised these  {O- d(#xconcerns in the reconsideration proceeding to the Cost Order and the Commission considered Falcon's arguments  {O- d(#Jin the context of that proceeding.  See Second Cost Order, 11 FCC Rcd 2220. We will not revisit those issues here.   S- o9.` ` In disallowing the cable T.V. franchise asset from Falcon's ratebase, the City concluded  d(#that the value assigned to this asset was essentially excess acquisition cost and represented monopoly  S`- d(#Lpower "an expectation of a future return greater than the competitive norm." `H yOH - d(#ԍConsultant's Report at 3 (The assigned value is the excess of the purchase price over the sum of the values assigned to other assets when Falcon purchased the system in 1990). The City contends that  S8-excluding the cable T.V. franchise from Falcon's ratebase is consistent with the Commission's rules.1!8 {Ox-ԍId.1  S- 10.` ` In the Cost Order, the Commission distinguishes intangible assets that ordinarily benefit  d(#subscribers and are presumptively included in the operator's ratebase from intangible assets that are  S- d(#>associated with monopolistic profits and are presumptively excluded from the ratebase.S"2  {Ol-ԍSee Cost Order, 9 FCC Rcd at 457677.S The assets  d(#presumptively included in the operator's ratebase organizational costs, franchise rights, and customer  SJ - d(#lists are defined in the Cost Order.#J  {O- d(#.ԍCost Order, 9 FCC Rcd at 457778. These intangibles which are presumptively included in the ratebase  {Ox-represent costs that ordinarily benefit subscribers.  See Cost Order, 9 FCC Rcd at 457677. The assets presumptively excluded from the ratebase constitute  S$ - d(#"excess acquisition costs".$$  {O- d(#ԍCost Order, 9 FCC Rcd at 4579. Excess acquisition costs is defined as that portion of the purchase price that  d(#Zexceeded the original costs or the book value of the purchased cable system's tangible assets. We note that cable  d(#systems acquired prior to the 1992 Cable Act often included inflated purchase prices. To the extent that these  d(#;inflated or excess prices reflected capitalized supracompetitive profits, they should be excluded from the operator's  {O-ratebase. Id. at 458081. This result is consistent with the purpose of the 1992 Cable Act.  The City concluded that the entire value of the cable T.V. franchise  d(#represented expectations of monopolistic profits which deserve exclusion from the ratebase. While the  d(#/Commission agrees with the City that an operator should not expect to recover monopolistic profits  d(#through its ratebase, we cannot support the City's decision to exclude the entire value of the cable T.V.  d(#.franchise. The intangibles Falcon included in its valuation of the cable T.V. franchise are subject to only  d(#>a presumption that they will be excluded from the ratebase. The City appears to have rejected these  d(#intangibles out of hand. Accordingly, we remand the issue of Falcon's intangible asset valuation to the City for further proceedings.  S- 11.` ` On remand, the City should use the asset valuation approach followed in Telemedia  S- d(#Company of Western Connecticut ("Telemedia")f% {O '-ԍTelemedia, 11 FCC Rcd 3161 (Released February 26, 1996).f and Falcon Cablevision,s&f {O-ԍFalcon Cablevision, 11 FCC Rcd 10511 (Released September 10, 1996).ssince the facts presented in"Z&,`(`(88"  S- d(#Lthis appeal are substantially similar to these prior costofservice cases.O'ZZ {O- d(#ԍThe operators in Telemedia and Falcon Cablevision, as the operator in this case, acquired their systems prior  d(#to the adoption of rate regulation. Thus, the acquisition price of these systems is presumed to include expectations of monopoly profits. O In both Telemedia and Falcon  S- d(#Cablevision, we found the local franchising authority's rejection of intangibles to be unreasonable under  S- d(#the interim costofservice rules. We have reached a similar conclusion here. The Telemedia and Falcon  S- d(#Cablevision approach achieves a fair balance between the operator's interests for reasonable recovery of investment and the local franchising authority's interest in setting reasonable cable rates.  S- `12.` ` In Telemedia and Falcon Cablevision, the Commission explained an acceptable method  S- d(#to calculate the operator's ratebase. Pursuant to Telemedia, an operator should include in its ratebase 66%  S- d(#of a system's entire purchase price, including tangible and intangible assets.(| {O -ԍTelemedia, 11 FCC Rcd at 316263; Falcon Cablevision, 11 FCC Rcd at 1051417. Conversely, 34% of the  d(#entire purchase price should be excluded from the ratebase, for this amount is attributable to the  S|- d(# expectation of monopoly profits in an unregulated environment.[)| {O*-ԍFalcon Cablevision, 11 FCC Rcd at 1051617. [ The determination of 34% is best  d(#explained through example. If a cable operator with an expectation of monopoly profits buys a system  d(#for $1,000, based on a system valuation of ten times cash flow, that operator anticipates an annual cash  d(#flow of $100 and annual revenues of $200, based on an assumption of a 2:1 ratio between revenues and  S - d(#cash flows.k*  {O-ԍPaul Kagan Associates, Cable TV Financial Databook (198194).k According to the Commission's benchmark survey, 17% of an operator's annual revenues  S - d(#reflects a system's monopoly revenues.+ 2  {O-ԍSee Time Warner Entertainment v. F.C.C., 56 F.3d 151, 164171 (D.C. Cir. 1995).   Thus, in the example given, $34 of the $200 annual revenues  d(#would be deemed to reflect the operator's monopoly revenues. Therefore, because expenses should remain  d(#the same before and after rate regulation and because it is assumed that monopoly revenues would flow  d(#straight to cash flow, $34 or 34% of the operator's $100 annual cash flow would constitute monopoly  d(#revenues. Under this methodology the 34% adjustment must be applied to the entire purchase price, both  d(#intangible and tangible assets, because cable operators derive revenues, including monopoly revenues, from  d(#.the employment of both categories. Thus, had there been effective competition, the system would have  d(#[been expected to generate only $66 in annual cash flow. If the acquisition price for a system is ten times  d(#cash flow, then it can be concluded that the system in the example would have been purchased for $660  d(#jin a competitive environment, not the $1,000 paid based on its monopoly status. Therefore, $340 of the  S&- d(#actual purchase price, or 34% is attributable to monopoly expectations. This approach of excluding 34%  d(#kof the entire purchase price satisfies the Commission's objective of preventing recovery of monopoly  S- d(#profits through the ratebase. Moreover, this approach greatly simplifies the asset valuation process by  S-eliminating the need to characterize and assess the value of each individual asset.,  yO%- d(#ZԍWe note that Falcon failed to provide the purchase data for the Florence system as required on Form 1220, Worksheet C, Item 8. Nonetheless, this failure should not preclude Falcon from using this methodology.   S- "^,,`(`(88"Ԍ S- B.` ` Cost Allocations  S- C13.` ` Falcon contends that the City erred in rejecting Falcon's use of a "weighted channel  S- d(#Mfactor" for allocating joint and common costs for provision of cable services.7- yO-ԍPetition at 18.7 The weighted channel  d(#zfactor multiplies the number of channels by the number of subscribers for each respective category of  d(#service (e.g. basic, cable programming service, and premium) and then apportions costs based on the  S- d(#zrelative percentage of the total weighted count represented by the weighted count for each category.A.X yO -ԍConsultant's Report at 3.A  d(#Falcon argues that the use of the weighted channel factor best achieves the Commission's goal that joint  S- d(#and common costs, which are not directly assignable, should be allocated on a cost causative basis.d/ {OH -ԍPetition at 19. See Cost Order, 9 FCC Rcd at 465255.d  d(#Nonetheless, the City adopted a straight channel count methodology for allocating such joint and common  d(#=costs. A straight channel count methodology apportions costs per tier based on number of channels per  SH - d(#ztier, without weighting the allocation by the number of subscribers.0"H z yOb- d(#;ԍWith a straight channel count methodology, if an operator provides programming over a total of 40 channels,  d(#J32 of which are BST and CPST channels and 8 of which are premium and payperview channels, the operator must  {O- d(#allocate 80% of its plant in service to regulated cable service and 20% to unregulated service.  Second Cost Order, 11 FCC Rcd at 2238. According to Falcon, the City's  d(#kstraight channel count allocation method focuses solely on plant capacity but ignores the cause of the  d(#costs. Falcon further alleges that the City's allocation method does not recognize relative usage and  S - d(#ultimately results in an underallocation of costs to the BST.:1 d  yO-ԍPetition at 1819.: Falcon also acknowledges that a "pure cost d(#causative" allocation would result in an overallocation of costs to the BST, based on the premise that the  d(#majority of plant related costs are incurred in order to provide the BST. Falcon opted for the weighted  d(#channel allocation which it characterizes as the middle ground approach that results in a proper allocation of costs to the BST.  S- 14.` ` The City rejected Falcon's weighted channel factor and opted instead for channel counts  d(#yas the most reasonable and appropriate method to allocate joint and common costs, in this case primarily  S- d(#plant and plant related resources.A2  yO$-ԍConsultant's Report at 4.A The City states that channel counts, unweighted by the number of  d(#subscribers, bear a direct relationship to costs, since they represent relative physical usage of the plant  d(#capacity. Falcon's weighted channel factor rests on the assumption that the cost of plant related resources  d(#zvaries with the number of subscribers. The City takes issue with this assumption and argues that the  d(#?number of subscribers for any particular service is generally not "cost causative" for plant related  d(#resources. The City states that the amount required to build a given mile of plant is approximately the  S- d(#>same whether there are ten or one hundred subscribers to any given channel or package of channels.13  {O%-ԍId.1  d(#The City advocates that the channel count method best satisfied the Commission's mandate that costs should be allocated on a costcausative basis."P3,`(`(88"Ԍ S- `ԙ15.` ` The Commission's Cost Order established general allocation rules that encourage direct  d(#assignment of costs where possible, but also allow for operator flexibility in determining specific allocators  S- d(#yand allocation schemes.P4 {O-ԍSee Cost Order, 9 FCC Rcd at 4653.P The general propositions upon which we base our cost allocation requirements are as follows:  `XX` ` (1) costs shall be directly assigned among the equipment basket and  `service cost categories whenever possible; (2) costs that cannot be directly  `assigned and as to which no allocator has been specified by the  `Commission are to be allocated based on direct analysis of the origin of  `the costs, and where allocation based on direct analysis is not possible,  `operators must attempt to make a cost causative linkage to other costs  `directly assigned or allocated to the service cost categories and the  `equipment basket; (3) for costs that cannot be directly assigned and for  `which no indirect measures of cost allocation can be found, such costs  `shall be allocated to each service cost category based on the ratio of all  `other costs directly assigned and attributed to a service cost category over  `total costs directly or indirectly assigned and directly or indirectly  SZ-attributable.~5ZZ {OT-ԍTelemedia, 11 FCC Rcd at 316566; See Cost Order, 9 FCC Rcd at 4653.~ x`  d(#Although the Commission rules permit flexibility in cost allocation, the method selected must adhere to  d(#Commission's guidelines requiring the demonstration of cost causative links. We have previously found  d(#the channelbased method, upon the facts and justifications submitted, reasonable. Generally, the operator  S-carries the burden of proof in demonstrating the reasonableness of proposed rates for the BST.G6 {O-ԍSee 47 C.F.R. 76.937.G  SB-  16.` ` We find that the City's decision to use a channel count allocation was reasonable and  d(#Mconsistent with our rules. This case involves the allocation of various joint and common costs (plant  d(#related assets, plant related operating expenses, administrative costs) that were otherwise not directly  d(#.assignable. The Commission requires that allocation of such joint and common costs adhere to the cost d(#.causative principle. We agree with the City's conclusion that the Commission's allocation objectives are  d(#best achieved through the straight channel count, rather than the weighted channel factor. The straight  d(#channel count methodology bears a direct relationship to costs, since the methodology represent the  d(#relative physical usage of their plant. The weighted channel factor fails to demonstrate such a relationship, as the common and joint costs at issue do not substantially vary with the number of subscribers.  S- 17.` ` The Commission has rejected the propriety of the weighted channel allocation.7B~ {O#-ԍWe addressed the issue of weighted channel allocation in the Second Cost Order:  XWhile we agree . . . that the Commission should continue to take a flexible approach to cost  {O*&- ^allocation based on our Cost Order, we decline to adopt the "weighted channel" approach . . . The  Oweighted channel approach . . . creates a bias towards the [BST] when, in fact, plant usage is most"&6,`(`(''"  often directly attributable to the number of channels supported. . . . The number of subscribers does  not impact costs in most cable equipment categories. Accordingly we believe that in most cases,  a straight channel ratio would be a reasonable approach to the allocation of plant costs amongst service baskets.   {Ox- d(#Second Cost Order, 11 FCC Rcd at 2270. Although the Second Cost Order was not promulgated when the City  d(#ireviewed Falcon's cost of service submission, it lends further support to the City's decision to adopt an allocation based on a channel count rather than weighted channel factor. The" 7,`(`(88"  d(#=reasons for doing so are several. First, the magnitude of channel numbers and subscriber numbers on the  d(#>regulated tiers are such that, when multiplied, their product dwarfs those of the unregulated tiers and  S- d(#Nunduly skews common cost distributions to regulated tiers.8 yO" - d(#xԍRegulated tiers meaning, basic service tier (BST) and cable programming service tiers (CPST), as opposed to premium or payperview channels which are not regulated. Second, cable plant and supporting  d(#equipment are designed around the transmission of channels to subscribers. The greater the number of  d(#channel offerings, the larger the plant and the more costly the supporting equipment. The causation is  d(#kclear in this example. Conversely, incremental increases in plant are seldom attributable to subscriber  S- d(#Lgrowth. There is no costcausative link to support subscriber based allocations of plant assets.9*  yO- d(#hԍAlthough Falcon agreed the costcausative principle applied to the allocating of joint and common costs in this case, its use of the weighted channel approach failed to achieve it. Third,  d(#because plant asset costs should be allocated based on channel ratios then, too, should their corresponding  S- d(#.expenses.N:  {O-ԍSee 47 C.F.R. 76.924(b)(1). N Fourth, plantrelated expenses, including depreciation, generally account for the majority of  d(#\common expenses. In terms of materiality, the potential propriety of weighted channel allocations is  d(#limited at best. For the foregoing reasons, we uphold the City's decision to employ channel counts on cost allocation matters.  S - C.` ` Revenue Offsets  S - 18.` ` Falcon claims that the City erred when it treated home shopping commissions and  S - d(#[advertising revenue as an offset against subscriber revenue requirements.;   yO4- d(#ԍPetition at 21. The term "revenue requirement" constitutes that amount of revenue necessary to sustain an  d(#<operator's regulated cable services. Under the Commission's rules and consistent with traditional rate regulation,  d(#the operator is required to offset, i.e. deduct, revenues received from the provision of regulated service from its revenue requirement calculations. Falcon's argument is twofold.  d(#First, the revenue offset should not apply to home shopping commissions, since the Form 1220 does not  S0- d(#require it, and such an offset is inconsistent with the Commission's rate regulations.<^0 {O"- d(#ԍSixth Order on Reconsideration, Fifth Report and Order, and Seventh Notice of Proposed Rulemaking, MM  {O#- d(#Docket 92266, MM Docket No. 93215, 10 FCC Rcd 1226 (1995) ("Going Forward Order"); see Twelfth Order  {O`$-on Reconsideration, MM Docket No. 92266, MM Docket 93215, 11 FCC Rcd 785 (1995) ("12th Recon. Order"). Falcon interprets  S- d(#the Going Forward Order, as modified by the 12th Recon. Order, as permitting rate increases from the  d(#1addition of home shopping channels without the calculation of an offset from home shopping" "<,`(`(88"  S- d(#commissions, i.e. revenues.Y=Z {Oh- d(#ԍSee Going Forward Order, 10 FCC Rcd at 1253, fn. 27*. Cable operators receive commissions based on the  d(#Zsales generated from their home shopping channels. Under our rate regulations, these commission payments are simply treated as revenues received from programmers.Y Second, Falcon argues that the Commission's policy requiring that  S- d(#advertising revenue be offset is "misguided and counterproductive."7> yOb-ԍPetition at 22.7 Falcon acknowledges that Form  S- d(#1220 instructs operators to treat advertising revenue as an offset against subscriber revenue requirements.?z yO- d(#ԍSpecifically, Form 1220 requires operators to list revenues earned for cable advertising operations on Worksheet  d(#hA, Line 51. These revenues are included on Worksheet A, Line 56, Total Revenue & Income Adjustments and then  {OZ - d(#.carried over to Line 5 of Part I, Revenue Requirement Computation.  See Form 1220 Instructions at 14. In  d(#calculating its Revenue Requirement for Part I, the operator adds its computed return on its rate base, income tax  d(#allowance, and total operating expenses. The operator then subtracts out its total revenue and income adjustments to calculate its total revenue requirement.   d(#=Falcon also acknowledges that the City properly followed the Commission's rules. Nonetheless, Falcon  d(#raises several arguments that challenge the efficacy of our rules requiring the offset of advertising revenue.  d(#!In its local rate order, the City stated that its treatment of both home shopping commissions and advertising revenues was consistent with our rules that require the offsets.  S- P19.` ` Cable operators who submit costofservice filings are permitted recovery of all operating  S- d(#expenses normally incurred in the provision of regulated cable service.L@  {O,-ԍCost Order, 9 FCC Rcd at 4598.L Pursuant to general costof d(#service principles and the interim rules, however, the expenses a company incurs are offset against  SH - d(#revenues.AH  {On- d(#iԍSee In the Matter of Media General Cable of Fairfax County, VA, 11 FCC Rcd 3655, 3660 (released January  {O8- d(#26, 1996); In the Matter of TeleMedia Company of Western Conn., 11 FCC Rcd 3153 at 3156 (released February  d(#26, 1996). The rationale for offsetting expenses with advertising revenue, as well as home shopping commissions,  {O-is discussed at  22, infra.  The Form 1220 instructions at the time of the interim rules required the offsetting of revenues  d(#derived both from cable advertising operations and from the use of cable plant and resources. The phrase  S -"use of cable plant and resources" encompasses home shopping commissions.B < {O- d(#ԍThe Second Cost Order explicitly adopts this interpretation. Second Cost Order, 11 FCC Rcd at 2270.  See  {O-also In the Matter of TeleMedia Company of Western Conn., 11 FCC Rcd at 3156.  S - 20.` ` Falcon's reliance on the Going Forward Order is misplaced. The Going Forward Order  d(#=provided cable operators a mechanism to revise their rates previously established under their benchmark  SZ- d(#{or costofservice filings to account for the addition of new programming on their regulated tiers.VCZ {O#-ԍGoing Forward Order, 10 FCC Rcd at 1230.V  S2- d(#=Specifically, the Going Forward Order provided incentives for operators to add channels to their CPST"2 *C,`(`(88;"  S- d(#channel lineups.KDZ {Oh- d(#ԍGoing Forward Order, 10 FCC Rcd at 1252. Under the Going Forward Order, operators could increase rates  d(#.by up to 20 cents, plus programming costs, for each channel added to the CPST on and after May 15, 1994 (effective date of the interim rules).K It has no application to an initial rate justification. As the instant appeal concerns  S- d(#[Falcon's attempt to justify its initial rates for its BST channel lineup, neither the Going Forward Order  S-nor the 12th Recon. Order has any application.vE {O<- d(#ԍSee Going Forward Order, 10 FCC Rcd at 124954. The costofservice filing at issue involves the rate  d(#justification for Falcon's BST for which the local franchising authority, such as the City, has initial jurisdiction. If  d(#Ythe cable operator decides to appeal the local franchising authority's decision, only then will the Commission review  {O - d(#xcost of service submissions for the BST. The Commission directly reviews rate justifications for the CPST.  See  {O` -fn.2, supra.v   Sd- a21. ` ` Falcon's argument that advertising revenue should not be offset against costs is also  d(#[unavailing. We note that Falcon does not challenge the City's interpretation and application of our rules.  d(#Rather, Falcon contends that our policy and rules are misguided and counterproductive and submits  d(#various reasons to support its position. The rationale behind the Commission's offset rules is that, while  d(#<the operator's production of advertising does not benefit subscribers, revenues from subscribers help defray  d(#=the operator's cost of production. Revenues received from advertising must offset subscriber revenue to  d(#prevent subscribers from funding an activity from which they do not receive a benefit. Falcon alleges that  d(#zsubscribers do, in fact, receive a benefit from advertisinglocal informationand that the Commission  d(#should change its offset policy. This appeal is not the appropriate forum for Falcon to present its policy  S - d(#and legal arguments for changing our rules.F  {O<- d(#ԍSee  3, supra. We also disagree with Falcon's analysis. Our rules are consistent with GAAP's matching  d(#principle that revenues must correspond to expenses. We note that operators are able to recover in their ratebase  d(#operating expenses incurred in the provision of regulated cable services. To the extent Falcon obtains revenues from such regulated services, those revenues must be offset against such operating expenses.  If Falcon disagrees with the Commission's rules regarding  S - d(#advertising offsets, it should submit such arguments in the context of a rulemaking.G" R  {O- d(#ԍ47 C.F.R. 1.401.  See also United States Telephone Association v. Federal Communications Commission, 28  d(#-F.3d 1232 (D.C. Cir. 1994) (court overturned F.C.C. forfeiture guidelines, because the guidelines constituted rule  d(#changes that were adopted without the requisite notice and comment period as mandated by the Administrative Procedures Act). Based on the  d(#foregoing, we sustain the City's treatment of Falcon's home shopping commissions and advertising revenue as offsets against subscriber revenue requirements.  S - D.` ` Rate of Return  S-  22.` ` Falcon next argues that the City improperly set its overall weighted rate of return at  d(#11.25%, the Commission's presumptive rate. Falcon contends that this rate is inadequate, because it does  d(#not permit the company to realize its actual rate of return or to properly compensate its investors. Falcon  d(#jargues that a rate of return of 13% is necessary to maintain its financial integrity. Falcon provided to the"D <G,`(`(88T"  S- d(#yCity general data on its cost of capital to support its higher rate.H {Oh- d(#ԍSee Petition at Exhibit D at 7. Falcon also challenges the assumptions on which the Commission based its  d(#ipresumptive rate of return at 11.25%, as not being valid for the industry in general and Falcon in particular. We  {O- d(#note that these arguments had been previously raised in Falcon's response to the Commission's Cost Order. In its  {O- d(#resulting Second Cost Order, however, the Commission reviewed Falcon's comments which raise the very same  {O- d(#concerns and decided to retain the presumptive rate of return of 11.25%. See Second Cost Order, 11 FCC Rcd at 225456. In formulating its presumptive rate of  d(#return of 11.25%, the Commission adopted the average equity return of the S&P 400, determined to be  d(#in the 12% to 15% range. According to Falcon's data, its cost of equity significantly exceeds this range,  S- d(#with investors' expectations at a minimum of 20% for their equity return.7IH yOp -ԍPetition at 26.7 Further, the Commission's  d(#=presumptive rate assumed the cost of debt at 8.5%. According to Falcon's data, however, its actual cost  S8- d(#Mof debt is 10.67%.8J8 {O -ԍId. at 27.8 Based on the stated equity and debt requirements, Falcon claims that its cost of  d(#.capital reasonably falls within the range of 15% to 18%. Falcon believes its actual experience more than  d(#[justifies a rate of return of 13%, the amount requested in its costofservice filing. In its local rate order,  d(#the City found Falcon's arguments unpersuasive to overcome the presumptive rate. The City set Falcon's rate of return at the presumptive 11.25%.  SH -  23.` ` Under the Commission's rules and general cost of service principles, the rate of return is  d(#composed of a company's weighted cost of its various classes of capital. The weighting reflects the  d(#\proportion of each class of capital to total capital. The calculation of the rate of return is designed to  d(#provide a return sufficiently large to maintain the financial integrity of a company, as well as to allow it  S - d(#yto attract new capital when necessary.PK j  {O-ԍSee Cost Order, 9 FCC Rcd at 4620.P In the Cost Order, the Commission adopted a presumptive rate  S - d(#jof return of 11.25%.:L  {O-ԍId. at 4612.: Under the Commission's rules the cable operator bears a heavy burden of proving  SZ-the reasonableness of a higher rate of return.<MZ  {O-ԍId. at fn.327.<  S - 24.` ` We find Falcon's arguments unpersuasive. Based on our own review of the information  d(#provided on appeal, Falcon has not met its burden of proving the reasonableness of a higher rate of return.  d(#The language and legislative history of the 1992 Cable Act demonstrate a primary concern with preventing  S- d(#cable operators with undue market power from setting supracompetitive rates.fN  yOR"-ԍS. Conf. Report No. 10292, 102s Cong., 1st Sess. 811 (1991).f Thus, to the extent share  d(#prices or shareholder expectations for equity returns reflect such supracompetitive elements, they are  d(#=disregarded under our rate regulation. Moreover, the courts have made clear, "the FCC has no obligation"B N,`(`(88"  S-to maintain the current market value of investors' property."OO\ {Oh- d(#hԍIllinois Bell v. FCC, 988 F.2d 1254, 1262 (1993); accord Hope Natural Gas Co. v. Federal Power Commission  {O2- d(#et. al., 320 U.S. 591, 601 (1944); Jersey Central Power & Light Co. v. FERC, 810 F.2d 1168, 1175 (D.C. Cir. 1988). O  S- 25.` ` Falcon's case for a higher cost of debt is equally unpersuasive. Falcon's representations  S- d(#Lregarding its cost of debt are based on companywide data and do not reflect the financing specific to the  d(#[purchase of the Florence system alone, which was likely financed primarily by debt. In addition, Falcon  d(#has not presented any unique characteristics of its debt/equity structure to substantiate a higher rate of  d(#Zreturn. Falcon essentially seeks a synchronization of interest expenses, based on companywide rather than  d(#franchisespecific financing, and a higher rate of return than the presumptive rate. The City permitted  d(#Falcon an 11.25% rate of return and an income tax allowance based on synchronized interest expenses.  S- d(#This result is consistent with both the Cost Order and Second Cost Order.[P {O$ -ԍSee Second Cost Order, 11 FCC Rcd at 225556.[ The City's decision to adopt the presumptive rate of return is sustained.  S - E.` ` Equivalent Billing Unit  S -  26.` ` Falcon submits that the City erred in not permitting Falcon to use equivalent billing units  d(#L("EBUs") to calculate the number of subscribers on the Form 1220. Following a common practice in the  d(#/cable industry, Falcon has entered into bulk service agreements at discounted rates with operators of  d(#.multiple dwelling units ("MDUs"). Falcon recognized the bulk discounts for these MDUs by reporting  d(#subscriber numbers on an EBU basis, which is calculated by dividing total revenue from the MDUs by  d(#>the standard residential rate. Falcon believes that its use of the EBU methodology for calculating the  S- d(#number of subscribers in MDUs is consistent with Commission policy.Q~ yO- d(#xԍCable Television Rate Regulation Questions and Answers Relating to FCC Form 393, Public Notice (released July 30, 1993), question #5. Falcon states that the  d(#LCommission approved the use of EBUs in the calculation of permitted rates using Forms 1200 and 1210  Sj- d(#where the number of subscribers is unknown.Rj yO- d(#ԍQuestions and Answers on Cable Television Rate Regulation, Public Notice (released July 27, 1994), question #1. Although Falcon tracks the total number of residential  d(#subscribers and the total number of MDUs involved, Falcon claims to not know its total number of  S- d(#.subscribers.7S.  yO -ԍPetition at 30.7 Falcon explains that it can offer discounted rates for bulk and commercial subscribers due  d(#.to the lower capital and operating costs imposed by such subscribers. The City rejected Falcon's use of  d(#.the EBU methodology to determine subscriber count based on the belief that it causes regular residential  S-subscribers to subsidize bulk accounts.AT  yO%-ԍConsultant's Report at 5.A  SR- 27.` ` The Commission has permitted the use of the EBU methodology in cases where the"RN T,`(`(88"  S- d(#yoperator does not have an actual count of its total number of subscribers.U" yOh- d(#ԍQuestions and Answers on Cable Television Rate Regulation, Public Notice (released July 27, 1994), question  {O0- d(#,#1; see In the Matter of Intermedia Partners, 11 FCC Rcd 12592, 12597 (Released June 20, 1996) (The use of EBU  d(#;methodology permitted for costofservice filing for CPST, where operator did not have actual subscriber count and where the discounted rate was properly supported by economic and cost showings). In this case, the total number  d(#of subscribers is known, despite Falcon's assertions to the contrary. At the City's request, Falcon  d(#provided the City with a list of bulk subscriber accounts, showing "1,397 bulk subscriber units billed,  S- d(#!compared to the 445 EBU count that Falcon reported on its basic subscriber count."BV yO-ԍConsultant's Report at 6. B With this  d(#-information, the City substituted the actual bulk subscriber count for the EBU figure, and adjusted the total  d(#basic subscriber count to show 4,961, compared to 4,009 that Falcon reported. Because Falcon has an  d(#=actual count of its total subscribers, bulk and residential, it fails to meet the threshold requirement and is  S- d(#lprecluded from using the EBU methodology.W"B yO - d(#ԍFalcon asserts that "although [it] tracks the total number of residential subscribers and the total number of MDU  d(#xunits served, it does not know the total number of subscribers." Petition at 30. This claim is contradicted by the  {OZ- d(#KCity's Consultant's Report. Consultant's Report at 6. Falcon does not address this point in its pleadings. See 47 C.F.R.  76.937. Consequently, we do not reach Falcon's economic  d(#?justifications which support the use of EBU methodology or the City's concerns regarding cross S- d(#subsidization.X ,  yOd- d(#ZԍAlthough we have permitted the EBU methodology for calculating subscriber count in limited situations, we  d(#have previously expressed concern that regular subscribers not subsidize the rates that bulkrate subscribers pay.  d(#iQuestions and Answers on Cable Television Rate Regulation, Public Notice (released July 27, 1994), question #1.  We sustain the City's action to recalculate Falcon's Form 1220 using an actual subscriber count instead of a EBU count.  S - V.ORDERING CLAUSES  S - 28.` ` Accordingly, IT IS ORDERED that Falcon Cable System's appeal of the City of  d(#lFlorence, Oregon, local rate order of August 5, 1995, regarding the issue of the City's treatment of  SX- d(#Falcon's intangible assets is REMANDED to the City for resolution in accordance with the terms of this Memorandum Opinion and Order.  S- m29.` ` IT IS FURTHER ORDERED that Falcon Cable System's appeal of the City of Florence,  d(#Oregon, local rate order of August 5, 1995, regarding the issue of the City's allocation of costs based on  S-channel counts is DENIED .  S@- m30.` ` IT IS FURTHER ORDERED that Falcon Cable System's appeal of the City of Florence,  d(#Oregon, local rate order of August 5, 1995, regarding the issue of the City's use of Falcon's home  d(#^shopping channel commissions and advertising revenue as an offset against subscriber revenue  S-requirements is DENIED .  Sx- m31.` ` IT IS FURTHER ORDERED that Falcon Cable System's appeal of the City of Florence,  d(#MOregon, local rate order of August 5, 1995, regarding the issue of the City's reduction of Falcon's rate"PX,`(`(88"  S-of return from 13 percent to the presumptive 11.25% is DENIED .  S- m32.` ` IT IS FURTHER ORDERED that Falcon Cable System's appeal of the City of Florence,  d(#Oregon, local rate order of August 5, 1995, regarding the issue of the City's substitution of actual basic  S`-subscriber count for Equivalent Billing Unit is DENIED.  S8-  S- 33.` ` IT IS FURTHER ORDERED that the stay granted previously in this proceeding is  S- VACATED .  S- 34.` ` This action is taken by the Chief, Cable Services Bureau, pursuant to authority delegated by Section 0.321 of the Commission's rules. 47 C.F.R. 0.321. ` `  hhCqFEDERAL COMMUNICATIONS COMMISSION ` `  hhCqMeredith J. Jones ` `  hhCqChief, Cable Services Bureau  S0-#&a\  P6G;&P#