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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 ) File No. CSB-A-0532 Chatham County / NC0468 ) File No. CSB-A-0533 Orange County / NC0276, NC0256 TIME WARNER CABLE ) File No. CSB-A-0534 Apex / NC0067 ) File No. CSB-A-0536 Garner / NC0069 Appeals of Local Rate Orders ) File No. CSB-A-0537 Wake Forest / NC0341 MEMORANDUM OPINION AND ORDER Adopted: May 20, 1998 Released: May 26, 1998 By the Acting Chief, Cable Services Bureau: I. INTRODUCTION 1. Pursuant to Section 76.944(b) of the Commission's rules, Time Warner, a franchised cable operator in North Carolina, has filed five Appeals from local rate orders adopted by five local franchising authorities ("LFAs"). The issue is whether the LFAs could update Time Warner's Form 1240 inflation figure after Time Warner filed its 1998 rate proposals. None of the LFAs have filed an opposition to the Appeals. We resolve all five Appeals in this Order in the interest of administrative efficiency and because they raise the same issue. II. DISCUSSION 2. Under the Communications Act, the Commission reviews appeals of rate orders issued by LFAs. When considering an appeal, the Commission will not conduct a de novo review, but instead will sustain an LFA's decision as long as it did not act unreasonably in applying Commission regulations. If the Commission reverses an LFA's decision, it will not substitute its own judgment, but will remand the case to the franchising authority with instructions to resolve it consistent with the decision. 3. Once initial basic service tier ("BST") rates are established, cable operators may adjust their rates for inflation, changes in external costs, and changes in the number of regulated channels. Operators may elect the annual rate adjustment methodology, using FCC Form 1240, to project changes occurring in the twelve months after their rate changes are scheduled to go into effect and to true up their projected charges to correct for differences between actual and projected costs occurring during the past rate year. Because the true-up period examines only costs actually incurred, it includes costs incurred before the Form 1240 is filed and does not coincide exactly with the previous year's projections. 4. The inflation adjustment applies to the non-external cost portion of an operator's rates. Operators filing FCC Form 1240 must base the inflation adjustment on quarterly figures based on changes in the Gross National Product Price Index ("GNP-PI") as published by the Bureau of Economic Analysis of the United States Department of Commerce. The Commission develops an annualized inflation factor for each quarter of a calendar year from the GNP-PI and publishes it shortly after the quarterly GNP-PI is released, usually between three and four months after the end of the quarter, depending on the schedule of the Commerce Department. Operators calculating the inflation factor for a true-up period or periods use the appropriate quarterly figure for each month in the true-up period to calculate an average inflation factor for each true-up period. If the Commerce Department or the Commission has not yet published an inflation adjustment factor for some months in a true-up period, operators may use the most recently available quarterly adjustment factor for those months. Operators calculating projected period inflation use both the inflation factor for each true-up period and the inflation factor current at the time the rate form is prepared and filed with the LFA. 5. On September 29, 1997, Time Warner filed an FCC Form 1240 with each of the LFAs involved here to justify increases in its BST rates beginning January 1, 1998. When Time Warner transmitted its forms, the most recently available inflation factor of 2.70% was for the first quarter of 1997. The Commission released the inflation factor for the second quarter of 1997, 1.77%, on October 10, 1997. In its Appeals, Time Warner argues that the franchising authorities improperly updated, or "refreshed," its Forms 1240 with the new inflation factor, and reduced its 1998 rates as a result. 6. Time Warner correctly states that an LFA should not find a rate unreasonable solely because more current inflation data has become available by the time the LFA reviews a cable operator's rate submission. Since a cable operator must give its LFA 90 days notice before implementing rate adjustments, allowing LFAs to refresh a cable operator's inflation calculation with new quarterly inflation data released during the review period would result in adjustments for most, if not all, BST rate changes. This could delay otherwise permissible rate changes or require changes in already-implemented rate changes, causing needless confusion to subscribers and increased administrative costs for the cable operator. On the other hand, if a rate is unreasonable on its face or has to be adjusted for reasons other than the availability of a more current inflation figure, e.g., because the operator failed to provide correct information in its rate justification or failed to complete its rate justification form correctly, the LFA may recalculate the maximum permitted BST rate using the most accurate inflation information available at the time of its review. 7. Time Warner contends that the LFAs unreasonably adjusted its rates because new inflation information became available after Time Warner filed its rate forms. If Time Warner correctly prepared its rate forms, as it argues, this would end the matter. However, the reports prepared by the consultant for each of the LFAs raise questions as to whether this is the case. Time Warner submitted its Forms 1240 to each of the LFAs on September 29, 1997. The consultant's reports state that the 1997 true-up periods in Time Warner's Forms 1240 run through December 31, 1997, more than three months after Time Warner prepared its rate forms. The true-up period should indicate real, not projected, cost data. Because operators must file Form 1240 at least 90 days before an increase takes effect, the period for the true-up will not coincide with the previous year's projection. Information about actual costs incurred between the filing and planned implementation dates for the new rates belongs in the next true-up. We will remand the local rate orders addressed herein for action consistent with this Order. V. ORDERING CLAUSES 8. Accordingly, IT IS ORDERED that the Cities' local rate orders shown in Appendix A ARE REMANDED to the respective Cities for actions consistent with this Memorandum Opinion and Order. 9. This action is taken by the Acting Chief, Cable Services Bureau, pursuant to authority delegated by  0.321 of the Commission's rules. 47 C.F.R.  0.321. FEDERAL COMMUNICATIONS COMMISSION John E. Logan Acting Chief, Cable Services Bureau Appendix A Rate Appeal Local Rate Order Petition for Review of Local Rate Order (February 19, 1998) (Chatham County, NC) Order Finding TWC's 1998 Proposed $7.66 Basic Service Tier Maximum Permitted Rate as Unreasonable and Setting the BST MPR at $7.49, Chatham County, NC (January 20, 1998) Petition for Review of Local Rate Order (February 19, 1998) (Orange County, NC) Order Finding TWC's 1998 Proposed $9.04 and $8.20 Basic Service Tier Maximum Permitted Rates as Unreasonable and Setting the BST MPRs at $8.84 and $8.02, Orange County, NC (January 20, 1998) Petition for Review of Local Rate Order (February 19, 1998) (Apex, NC) Order Finding TWC's 1998 Proposed $9.66 Basic Service Tier Maximum Permitted Rate as Unreasonable and Setting the BST MPR at $9.46, Apex, NC (January 20, 1998) Petition for Review of Local Rate Order (February 19, 1998) (Garner, NC) Order Finding TWC's 1998 Proposed Basic Service Tier Maximum Permitted Rate of $9.30 as Unreasonable and Setting the BST MPR at $9.11, Garner, NC (January 20, 1998) Petition for Review of Local Rate Order (February 19, 1998) (Wake Forest, NC) Order Finding TWC's 1998 Proposed Basic Service Tier Maximum Permitted Rate of $9.52 as Unreasonable and Setting the BST MPR at $9.32, Wake Forest, NC (January 20, 1998)