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                                Before the
                     Federal Communications Commission
                          Washington, D.C. 20554

In the Matter of:                    )
                                     )
DISTRICT CABLEVISION, L.P.           )           File No. CSB 0390
                                     )
Appeal of a Local Rate Order by the  )
City of Washington, D.C.             )
(CUID DC0002)                        )


                      MEMORANDUM OPINION AND ORDER

   Adopted:  June 8, 1998                          Released:  June 11, 1998

By the Acting Chief, Cable Services Bureau:

I.     INTRODUCTION

  1.    Pursuant to Section 76.944(b) of the Commission's rules, District Cablevision, L.P.
("DCLP"), a franchised cable operator, has filed an Appeal from a local rate order ("Rate Order") adopted
by the City of Washington, D.C. ("City") on February 28, 1997.  The issue is whether DCLP may recover
from subscribers deferred taxes that it accrued before the initiation of cable rate regulation in 1993.  The
City filed an Opposition to the Appeal and DCLP submitted a Reply.  DCLP also filed a Request for Stay
of Local Rate Order, which is moot because this Order resolves the case on its merits.  For the reasons
stated below, we deny DCLP's Appeal.

  2.    Under the Communications Act, the Commission reviews appeals of rate orders issued by
local cable franchising authorities ("LFAs").  When considering appeals, the Commission will not conduct
a de novo review, but instead will sustain the 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.

II.     BACKGROUND AND PLEADINGS

  3.    A cable operator that does not face effective competition may confront regulation of its
rates for installation, equipment, and service.  In such situations, an operator must justify its rates by
filing particular forms, including FCC Form 1205, with its local franchising authority.  Form 1205 is used
to determine rates for equipment and installation, and, among other things, requires an operator to reduce
its ratebase by the amount of any deferred taxes it accrues from the accelerated depreciation of equipment.

  4.    Deferred income taxes represent the tax benefit enjoyed by regulated entities that
depreciate rate base assets on an accelerated basis for tax purposes, but that establish rates based on the
regulatory presumption that rate base assets are depreciated on a straight-line basis.  Straight-line
depreciation results in a longer depreciation schedule than does an accelerated depreciation method. 
Initially, when rates are calculated using straight-line depreciation, the presumed tax liability for regulatory
purposes exceeds the actual tax liability that results from the operator's use of accelerated depreciation
for tax purposes.  Eventually, the operator's use of a shorter depreciation schedule for tax purposes than
for regulatory purposes will have the reverse effect.  The initial "savings" that results from the use of a
shorter depreciation schedule for tax purposes than for regulatory purposes is referred to as deferred taxes,
because the tax liability is deferred to a later date.  

  5.    Cable rates are calculated as if the operator were subject to the tax liability that would
result from the use of a straight-line depreciation schedule.  As a result, the operator using straight-line
asset depreciation for regulatory purposes and accelerated depreciation for tax purposes receives revenues
from subscribers today for an income tax liability that it will not incur until a later date.  In the early
years, this difference in depreciation methodologies will result in an over-collection of revenues that the
operator needs to pay its current tax liability.  These excess revenues are viewed as subscriber-provided
funds, which are available to the operator at no cost to fund the future payment of its deferred taxes. 
The Form 1205 addresses the over-recovery of revenues by requiring operators to deduct deferred tax
balances from the equipment rate base.  Consequently, rates are reduced by an amount equal to the
deferred taxes multiplied by the rate of return on the rate base.  The requirement to reduce the rate base
by the deferred tax balance is premised on the assumption that the operator has included the tax expense
in its rates even though the amount was not payable to taxing authorities.  In these instances, since the
operator has use of these "no cost funds" provided by the ratepayer, an adjustment is made to the rate base
for an appropriate reduction to the revenue requirement.

  6.    In its Appeal, DCLP states that it complied with this Form 1205 requirement and reduced
its initial equipment rate by its existing deferred taxes.  According to DCLP, the dispute that gave rise
to the Appeal concerns allegedly "unfunded" deferred taxes that it accrued before cable rate regulation
began in 1993.  DCLP claims that its existing deferred tax balance is unfunded because, before rate
regulation, it did not collect any excess revenue from subscribers to fund the future payment of deferred
taxes; instead, it collected only the money it needed to pay its actual tax liability at that time.  DCLP's
so-called unfunded deferred tax balance represents the difference between DCLP's actual tax liability prior
to regulation, which it recovered from subscribers, and the operator's hypothetical regulatory tax liability
during the same period, which purportedly it did not seek to recover from subscribers.  

  7.    DCLP argues that, until recently, the Commission did not allow operators to recover their
unfunded, pre-regulatory deferred taxes.  Because the Commission provided no guidance, DCLP states that
it has treated the unfunded balance as an asset and amortized it.  This amortization is reflected in
DCLP's past and present Form 1205 equipment filings.  In its Rate Order, the City rejected this
accounting method as unauthorized under Commission rules, and, in its Opposition to the Appeal, asserts
that DCLP may not apply its own rate-setting theories if they conflict with the Commission's methods. 
DCLP contends that requiring it to restate its initial rate base would be administratively difficult,
particularly after several years of amortizing its unfunded deferred tax balance, and could leave it with
unrecoverable lost revenue and a sizeable refund exposure. 

III.    DISCUSSION

  8.    Initially, the Commission required operators to reduce the regulated rate base by the total
deferred taxes associated with the rate base investment.  Subsequently, we modified that rule to require
the reduction of the rate base by deferred taxes accrued only since the date the operator became subject
to rate regulation.  Stating that the deduction we first required was "premised on the regulatory
presumption that rates reflect the operator's use of straight-line depreciation," we concluded that the
presumption was not valid in the absence of rate regulation.  Accordingly, we modified our approach
to require operators to deduct deferred taxes from rate base only to the extent the deferred taxes were
accrued and became payable after the operator became subject to rate regulation.  Under the modified
approach, we have permitted operators to deduct their pre-regulation deferred tax balance from their
current deferred tax balance before they deduct deferred taxes from the rate base.  This results in a
smaller deduction to the rate base and, correspondingly, larger revenues.  Because the operator may earn
a return on those revenues until it actually incurs the tax liability, the Commission requires that this
amount, the deferred tax liability, be deducted from the ratebase so as to preclude a double recovery.

  9.    The City applied our rules correctly and ruled reasonably when it rejected DCLP's attempt
to recover deferred taxes as an amortized expense.  An operator may not recover deferred taxes that
accrued before the initiation of rate regulation.  Section 76.922(i)(7) makes this clear: "Deferred income
taxes accrued after the date upon which the operator became subject to regulation shall be deducted from
items included in the ratebase."  Our rules do not provide the remedy DCLP seeks, and the local rate
appeal process is not the proper vehicle for DCLP to seek modification of our rules.  In addition, DCLP's
depreciation practices and rate design methods prior to rate regulation were matters entirely within DCLP's
control and discretion.  The treatment DCLP seeks for the alleged unfunded deferred tax liability would
allow it to recover for future tax liability without adjusting its rate base.  Subscribers should not be
required to pay a penalty or subsidize TCI's future tax liability simply because TCI used accounting and
rate design methods prior to regulation that TCI now wishes to revise.

  10.   On this record, we find that DCLP has neither sustained its burden of demonstrating the
reasonableness of its rates nor demonstrated that the City acted inconsistently with the Commission's
rules.  DCLP's Appeal is, therefore, denied.

IV.     ORDERING CLAUSES

  11.   Accordingly, IT IS ORDERED that DCLP's Appeal IS DENIED.

  12.   IT IS FURTHER ORDERED that DCLP's Request for Stay IS DENIED as moot.

  13.   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