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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: ) ) TCI OF SOUTHEAST ) CUID MS0056 MISSISSIPPI ) File No. CSB-A-0128 ) Appeal of Local Rate Order ) of the City of Ocean Springs, Mississippi ) ORDER ON RECONSIDERATION Adopted: May 5, 1998 Released: May 8, 1998 By the Acting Chief, Cable Services Bureau: I. INTRODUCTION 1. In this Order, we address the Petition for Reconsideration of TCI of Southeast Mississippi ("TCI"), filed on September 14, 1995. TCI requests partial reconsideration of the Memorandum Opinion and Order of the Cable Services Bureau in TCI of Southeast Mississippi (Ocean Springs, MS) ("Ocean Springs"), which concerns TCI's appeal of a local rate order issued by the City of Ocean Springs, Mississippi. The City has not filed an opposition to TCI's petition. 2. In its rate order, the City disallowed TCI's charges for the maintenance and repair of home wiring. Specifically, the City rejected TCI's optional monthly inside wiring maintenance fee and its hourly rate charged for each wire maintenance visit to the subscriber's premises. The Bureau remanded the local rate order for further action on several issues. Among other things, the Bureau found that the resolution of the inside wiring issues would turn on facts regarding the ownership of the wiring. The Bureau determined that the City should allow TCI to clarify these facts and directed the City to reconsider its disallowance of TCI's inside wiring charges in light of the additional facts and the guidance provided in the Bureau's order. 3. TCI claims in its petition that the Bureau erred in holding that the ownership of inside wiring is relevant to the regulatory treatment of inside wiring maintenance fees. For the reasons stated below, we deny TCI's petition. II. BACKGROUND 4. The Cable Television Consumer Protection and Competition Act of 1992 ("1992 Act") provides that where competition is absent, cable rates are to be regulated to protect subscribers. The 1992 Act and the Commission's rules require that regulated equipment and installation services, including inside wiring, be offered to subscribers at rate levels that reflect operators' actual costs. Operators initially were required to unbundle their charges for equipment and installation from their rates for programming services to ensure that their equipment and installation rates reflected actual costs. Charges that were bundled with programming rates prior to regulation should now appear as separately calculated and itemized charges. 5. As we explained in Ocean Springs, the Commission has held that the regulatory treatment of inside wiring and the costs associated with its maintenance depends on who owns the wiring. If an operator installs inside wiring and retains ownership of it, the operator must establish a rate for the lease of the wiring. As computed on Forms 393 and 1205, the lease rate includes a component for maintenance and repair, and the operator therefore is not permitted to charge a separate wire maintenance fee or other service charge to subscribers who pay the lease rate. If the operator sells the equipment to a subscriber, then no lease rate would apply, but the operator may offer a service contract for the repair and maintenance of such equipment. Section 76.923(i) of our rules states that the cost for such a service contract shall equal "the HSC [hourly service charge] times the estimated average number of hours for maintenance and repair over the life of the equipment." If subscribers own their inside wiring, an operator may also charge a rate based on the operator's HSC for installation-related activities, provided that the HSC was properly unbundled from its programming rates. The operator may charge that hourly rate for each visit the operator makes to a subscriber's premises. 6. In its appeal of the City's local rate order, TCI objected to the City's disallowance of TCI's optional monthly inside wiring maintenance fee and its hourly rate charged for each wire maintenance visit to a subscriber's premises. Prior to rate regulation, TCI explained, wire maintenance service was included in its rates for programming and equipment and was provided to all subscribers at no extra cost. TCI stated that it began charging for the maintenance and repair of inside wiring to comply with the requirement that cable operators unbundle equipment and installation rates from the rates for the basic service tier ("BST"). According to TCI, customers could choose from the following four options for the maintenance and repair of inside wiring: (1) paying the regulated HSC for each wire maintenance visit, (2) fixing the problem themselves, (3) contracting an outside party to do the work, or (4) paying a monthly wire maintenance fee. III. THE BUREAU'S ORDER 7. In Ocean Springs, we concluded that the inside wiring issues raised by the City's rate order could not be resolved without additional information about the ownership of the inside wiring in question. We ruled that if TCI owned the inside wiring, it could not charge its subscribers a separate wire maintenance fee because the lease rate for operator-owned wiring would already include a component for maintenance and repair. If, on the other hand, TCI's subscribers owned their inside wiring, no lease rate would apply, and TCI could offer a separate wire maintenance service, but the rates would be subject to review by the City and must be determined in accordance with the Commission's regulations for pricing equipment service contracts and hourly rates for as-needed service. 8. We held that the City could not disallow TCI's use of a properly calculated hourly service charge for the maintenance of subscriber-owned inside wiring, prohibit TCI from establishing a regulated monthly wire maintenance fee for subscriber-owned wiring, or restrict its ability to offer both options as mutually exclusive methods to recoup the costs associated with the repair and maintenance of subscriber- owned inside wiring. We remanded the local rate order to the City to allow TCI to provide the required ownership information, and we directed the City to reconsider its order in light of the regulatory requirements. IV. TCI'S PETITION FOR RECONSIDERATION 9. In its petition for reconsideration, TCI argues that the Bureau erred in ruling that (1) operators may not offer inside wiring maintenance plans to subscribers that use operator-owned inside wiring, and (2) such plans may be offered to subscribers that own their own wiring only on a regulated basis. TCI notes in its petition that its subscribers own their inside wiring but maintains that this is immaterial to the permissibility and regulatory status of its inside wiring maintenance plan. TCI states that "[t]he Bureau's approach is inconsistent with the principles and goals underlying cable rate regulation." 10. With respect to its first issue, TCI asserts that cable operators should be allowed to unbundle inside wiring lease rates to create separate charges for subscribers' use of the wiring and for maintenance service, so that it could give subscribers a choice of maintenance options. TCI argues that the Bureau's concerns about potential double-recovery of costs where operators charge both a lease rate and a separate maintenance rate should be addressed on a case-by-case basis and should not be used as the basis to prohibit this type of unbundling. 11. Addressing its second issue, TCI contends that the Bureau erred by ruling that inside wiring maintenance plans are a regulated service offering, even where an operator offers another regulated option, such as the as-needed HSC-based charge. TCI asserts that the Commission has determined in analogous circumstances that otherwise regulated services may be offered on an unregulated basis if the services in question are optional and (1) there is a comparable regulated alternative, or (2) there are "competitive" alternatives from sources other than the cable operator. V. DISCUSSION A. Unbundling of Inside Wiring Lease Rates 12. TCI objects to the Bureau's conclusion that it may offer inside wiring maintenance plans only to subscribers that own their inside wiring. TCI contends that it also should be permitted to offer the service to customers that lease their inside wiring from TCI provided the lease rate does not include a component for maintenance and repair service. TCI argues that such "unbundling" of the lease rate into separate use and maintenance rates is consistent with the Commission's goal of increasing subscribers' options. 13. TCI's approach is not consistent with the Commission's rules regarding equipment lease rates. In adopting rate regulations pursuant to the 1992 Act, the Commission determined that equipment rates should be unbundled from programming service rates to ensure that equipment rates reflect actual costs. Equipment lease rates are to include the costs of maintenance and repair. Operators may not charge separately for these services. 14. We do not agree with TCI's argument that the type of unbundling it advocates is necessary to increase subscribers' service options regarding the maintenance and repair of inside wiring. Under existing Commission rules, subscribers benefit from reasonable rates for the equipment and service they receive and from the simplicity of paying a single rate for the use of the equipment and for all necessary maintenance and repair. A rule permitting operators to lease inside wiring to subscribers without also providing them with maintenance and repair service as part of the lease rate would eliminate an existing option that is available to subscribers. If an operator wishes to give subscribers additional options for the maintenance and repair of inside wiring, the operator can offer to sell the inside wiring to its subscribers, as TCI apparently has done in this case. It can then offer maintenance and repair services to subscribers through a cost-based wire maintenance plan that is priced according to Commission rules or through an as-needed HSC-based repair option. Subscribers also would be permitted, as the owners of the equipment, to maintain and repair it themselves or to contract with an outside vendor for these services. B. Regulation of Inside Wiring Maintenance Plans 15. TCI argues against regulation of its inside wiring maintenance plan for subscriber-owned wiring. TCI contends that the pricing rule for equipment service contracts set forth in Section 76.923(i) of the Commission's rules is inapplicable because TCI offers a regulated alternative, i.e., the as-needed, HSC-based option, and because subscribers also can obtain inside wiring maintenance services from third- party contractors or perform the maintenance work themselves. According to TCI, unregulated treatment of its inside wiring maintenance plan would be consistent with the Commission's determinations in other matters. In support of its argument, TCI relies first on the Commission's determination that equipment sales are not subject to price regulation under Section 76.923(i) when the same equipment is offered under a regulated lease rate. TCI next asserts that the Commission's rationale for permitting market-based pricing of new product tiers ("NPTs") also justifies a finding that its inside wiring maintenance plan should not be regulated. Finally, TCI finds support for its position in the Bureau's decision not to regulate A/B switches in SBC Media Ventures, Inc. ("SBC"). 16. The 1992 Act required the Commission to establish standards to ensure that equipment would be available on the basis of actual cost. The legislative history concerning the home wiring provisions in the 1992 Act indicates that Congress wanted the Commission to "adopt policies that will protect consumers against the imposition of unnecessary charges, for example, for home wiring maintenance." In establishing initial rate regulations pursuant to the 1992 Act, the Commission implemented the law by establishing standards governing operators' rates for equipment service plans when operators sell equipment to subscribers. The statutory directive to ensure that equipment rates reflect actual costs and the specific reference to "home wiring maintenance" in the legislative history of the 1992 Act give premise to the Commission's responsibility to ensure that the rates for inside wiring maintenance plans reflect the law's standard. This includes circumstances in which another form of service, such as an HSC-based charge, is available. Inside wiring maintenance fees in excess of actual cost are the type of "unnecessary charges" Congress sought to prevent. The Commission's cost-based pricing formula for equipment service contracts is directed to fulfilling the law's mandate. 17. We do not agree that the exemption from price regulation for certain equipment sales justifies a similar exemption for inside wiring maintenance plans. The Commission determined in adopting its rate regulations that the sale of equipment to subscribers will be exempt from price regulation under Section 76.923(i) if the same equipment is available from the operator on a leased, i.e., regulated, basis. In such cases, the subscriber would have a comparable regulated alternative to the unregulated equipment sale. A service contract for the maintenance and repair of equipment is not comparable to an as-needed maintenance fee based on a regulated HSC. A maintenance agreement is similar to an insurance contract. It is designed to protect subscribers from incurring essentially unquantifiable costs for service provided on an as-needed basis. Subscriber purchase of equipment, in contrast, is a close substitute for a lease rate. By multiplying the lease rate by the number of months the subscriber plans to use the equipment in question and comparing the result to the sales price and the estimated life of the equipment, the subscriber can readily ascertain the relative costs and benefits of leasing versus purchasing the equipment. Comparing the relative costs and benefits of purchasing an inside wiring maintenance plan versus relying on the HSC is a difficult, if not amorphous, task. The analysis requires a subscriber to make assumptions about future events that even the cable operator may be unable to predict reliably for a particular subscriber, such as the capability of the wire to withstand a number of elements. The two forms of maintenance service are not comparable. It cannot be said that a regulated, HSC-based charge parallels the unregulated inside wiring maintenance plan. 18. TCI's reliance on the regulatory treatment of NPTs in support of its argument that inside wiring maintenance plans should not be regulated is misplaced. NPTs are cable programming service tiers ("CPSTs") subject to the statutory requirement that rates not be unreasonable. Because NPTs compete for subscribers against the BST and other CPSTs, the Commission determined that, if certain conditions are met, market forces would operate to ensure that NPT rates would be consistent with the statutory standard. The conditions are specified in the Commission's rules. In contrast, equipment rates are to be cost-based. TCI acknowledges that its maintenance plan is not, and is not intended to be, based on the actual cost of the service. TCI has not shown how competitive pressures from the service alternatives it references will ensure that an inside wiring maintenance plan will be offered in compliance with the statutory standard. 19. TCI argues that the existence of competitive alternatives to its inside wiring maintenance plan justifies an exemption from the Commission's rule governing service contract rates. TCI essentially proposes that we apply an effective competition test to the market for inside wiring maintenance services. Citing SBC, TCI states that an effective competition rationale supported the finding that the sale of A/B switches should not be subject to price regulation. 20. SBC does not support TCI's argument. The decision in SBC turned on an analysis of the nature of the equipment and the statutory definition at issue. We concluded that the sale of A/B switches is not subject to price regulation because A/B switches are not equipment "that is used to receive the basic service tier." Rather, they are equipment used to turn off the basic service tier and instead receive over- the-air broadcasts. They do not fall within the scope of Section 76.923 of the Commission's rules, and, more broadly, Section 623 of the Communications Act of 1934, which impose price regulation only on equipment that is used to receive the basic service tier. While we observed in SBC that alternative sources of A/B switches existed, the conclusion that A/B switches are not subject to price regulation was premised on the finding that A/B switches are not within the scope of Section 76.923 of the Commission's rules. 21. Our cost-based formula for equipment rates, which includes a reasonable profit, results in rates that are "comparable to those that would exist in a competitive environment." Cost-based pricing of equipment service contracts is appropriate regardless of whether an operator also offers to perform maintenance and repair work on an as-needed basis at an hourly rate equal to the HSC. Even if competitive alternatives to TCI's inside wiring maintenance plan were to be considered, there is no basis on the record to deregulate the rates for TCI's service offering. TCI has not provided persuasive evidence that its proffered alternatives--the rate-regulated, as-needed HSC option; the third-party option; and the self-repair option--will provide competitive pressures affecting the price of TCI's inside wiring maintenance plan and ensuring that the price will be consistent with the statutory requirement that equipment rates be based on actual cost. VI. CONCLUSION AND ORDERING CLAUSES 22. In view of the foregoing, we affirm that operators may not charge subscribers separately for the repair and maintenance of leased inside wiring. Further, we affirm that rates for inside wiring maintenance plans for subscriber-owned wiring must be determined in accordance with Commission regulations and are subject to local franchising authority review and approval. 23. Accordingly, IT IS ORDERED that the Petition for Reconsideration of TCI of Southeast Mississippi IS DENIED. 24. This action is taken by the Acting Chief, Cable Services Bureau, pursuant to authority delegated by Sections 0.321 and 1.106 of the Commission's rules. FEDERAL COMMUNICATIONS COMMISSION John E. Logan Acting Chief, Cable Services Bureau