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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 ) ) Nevada State Cable ) Television Association ) File No. PA-96-001 Complainant, ) ) v. ) ) Nevada Bell ) Respondent. ) ORDER Adopted: June 16, 1998 Released: June 18, 1998 By the Chief, Financial Analysis and Compliance, Cable Services Bureau: 1. In this Order we address a complaint brought under Section 224 of the Communications Act by Nevada State Cable Television Association ("NSCTA") alleging that Nevada Bell has imposed unjust and unreasonable rates for cable television pole attachments ("Complaint"). NSCTA filed the Complaint on February 29, 1996. Nevada Bell's Response was filed March 29, 1996 ("Response"). NSCTA filed its Reply on April 18, 1996 ("Reply"). Section 224 empowers the Federal Communications Commission ("Commission") to adjudicate disputes between cable television system operators and utilities concerning alleged unjust and unreasonable pole attachment rates that no state regulates, such as Nevada. After consideration of the pleadings, we find that Nevada Bell's rates are unjust and unreasonable and that a refund is warranted. 2. NSCTA is an association of cable television systems that serves cable television subscribers in the State of Nevada. At various dates, members of NSCTA entered into Pole and Conduit License Agreements with Nevada Bell ("Agreements"). Pursuant to the Agreements, the members of NSCTA have attached distribution facilities to poles at the rate of $4.00 per pole attachment annually. In September 1995, Nevada Bell proposed a rate increase, to take effect in July 1996, from $4.00 per pole attachment per year to $6.95 per pole attachment per year. 3. Using information provided by Nevada Bell, and applying the formula established in Section 1.1409(c) of the Commission's rules, NSCTA calculates a maximum just and reasonable rate of $1.26 per pole attachment per year. NSCTA urges us to substitute this rate for the contractual rate of $4.00 and to order the appropriate refunds. Nevada Bell does not attempt to justify the proposed rate of $6.95, but proposes various rates of up to $5.99 per pole attachment per year which depend on the acceptability of arguments contained in their Response. 4. Negotiation in Good Faith. Section 1.1404(i) of our rules governs the procedural aspects of filing a complaint with the Commission. That rule does not specify particular efforts toward resolution that the parties must take prior to filing a complaint. It requires only the disclosure of any steps taken to resolve the disputes or reasons why such steps would be fruitless if none were taken. The parties are not required to engage in extended negotiations where the parties apparently are far apart in their analysis of the issues. 5. Nevada Bell indicates its preference for a negotiated settlement and urges the Commission not to intervene, but rather to require further negotiations between the parties. NSCTA, on the other hand, argues that further negotiations are not required under Section 1.1404(i) of the Commission's rules. NSCTA details its attempts to achieve a settlement. In September 1995, Nevada Bell proposed a rate increase to $6.95 per pole attachment, which was to take effect July 1, 1996. The parties started negotiations in November 1995. By letter dated November 20, 1995, NSCTA requested information required to file a complaint, to which Nevada Bell replied on December 26, 1995. By letter dated January 3, 1996, NSCTA provided substantial accounting and legal analysis of the issues in dispute and requested a response to their proposed resolution of the usable space and deferred taxes issues identified by Nevada Bell in previous correspondence between the parties. Correspondence was exchanged and numerous telephone conversations took place between the parties during January and February 1996. Nevada Bell's response by letter, dated February 20, 1996, indicated that they had retained outside counsel, had only begun a comprehensive review of the issues, and that a detailed response would be forwarded within two weeks. By letter dated February 23, 1996, NSCTA advised Nevada Bell that NSCTA considered the information provided by Nevada Bell insufficient after three months of negotiation. NSCTA interpreted the content of the responses received and delays associated with the letters to mean that Nevada Bell did not intend to negotiate a resolution of the pole rate dispute and advised Nevada Bell that a complaint would be filed upon receipt of the necessary certifications from the NSCTA members involved. An unsigned memorandum from Nevada Bell's counsel to NSCTA's counsel, dated February 27, 1996, acknowledged receipt of NSCTA's February 23, 1996 advisory and confirmed there were two outstanding issues: treatment of deferred taxes and usable space calculations. The Complaint was filed February 29, 1996. The record contains no further correspondence from Nevada Bell to NSCTA on these two issues. 6. NSCTA asserts further negotiations with Nevada Bell would be fruitless. In this instance, the Complaint meets the requirement of Section 1.1404(i) because it summarizes the steps taken by the parties to resolve the dispute and indicates why further steps toward resolution would be fruitless. We agree with NSCTA that they were not required to continue to attempt a settlement when, after several months of negotiation, there continued to be "two significant differences" between the parties. 7. Just and Reasonable Pole Attachment Rate. Section 1.1409(c) of the rules provides that the maximum "just and reasonable" rate for pole attachments is to equal the percentage of the total usable space occupied by the pole attachment times the sum of the operating expenses and actual capital costs of the utility attributable to the entire pole. This rule expressed as a formula, is as follows: Maximum Space Occupied by CATV x (Operating Expenses + Capital Costs of Poles) Rate = Total Usable Space 8. We generally calculate the sum of operating expenses and capital costs of poles by multiplying the net cost of a bare pole times the carrying charges, so that the formula becomes: Maximum Space Occupied by CATV x Net Cost of a Bare Pole x Carrying Charges Rate = Total Usable Space In the instant case, the parties' dispute centers on the total usable space and the accumulated deferred taxes used in computing the net cost of a bare pole. 9. Total Usable Space. Total usable space is defined as the space on a utility pole above the minimum grade level usable for attaching wires, cables and associated equipment. Section 1.1404(g)(11) of our rules allows a rebuttable presumption of 13.5 feet to be used in lieu of the actual measurement of usable space. We will deviate from the 13.5 foot presumption of usable space only when it is refuted by an actual pole survey or a valid statistical study. In order to determine whether an actual pole survey or statistical study is valid, we will look to data representative of the actual average usable space based on actual field measurements of an appropriate sample of all poles. Our formula for pole attachment rates does not limit the usable space portion because of the joint ownership of poles. 10. Nevada Bell asserts it should be allowed to calculate different usable space figures for its solely-owned poles and its jointly-owned poles. Nevada Bell operates some of its poles under a Joint Pole Agreement with Sierra Pacific Power Company ("Sierra Pacific"). In its calculations for jointly-owned poles, Nevada Bell subtracts "minimum ground clearance" from the "maximum height of attachment from ground clearance" to derive its usable space figure, because of the space allocation between the parties to the Joint Pole Agreement. Nevada Bell calculates usable space for solely-owned poles by subtracting "depth of set" and "minimum ground clearance" from pole height. 11. Nevada Bell attempts to refute the Commission's 13.5 foot presumptive usable space using data based on a pole database ("Pole Database") containing data on 21,040 poles with pole attachments throughout the state. Nevada Bell states that the Pole Database represents in excess of 84% of all poles with attachments, yet, certifies that 46,473 equivalent poles are the subject of this dispute, with no explanation how it arrived at this number. Using space allocations from the Joint Pole Agreement and numbers and height of poles from the Pole Database, Nevada Bell calculates its usable space as 4.84 feet on a pole. 12. NSCTA counters that usable space, by definition, is not affected by the Joint Pole Agreement, and argues the Pole Database is not sufficient to support a departure from our usable space presumption. NSCTA asserts the Pole Database is not based on an adequate sample of poles with cable attachments, and therefore does not provide a valid average actual usable space figure. The Pole Database of 21,040 poles represents data on only 45% of the 46,473 poles in controversy. As a result, NSCTA argues, since the requirements to rebut our presumptions are well established, Nevada Bell has not complied with those conditions. 13. We find that Nevada Bell has not provided information about the actual average amount of usable space, or the total number of poles as required by Section 1.1404(g)(5-8) and (h). Furthermore, Nevada Bell uses the information they do provide inappropriately. Nevada Bell incorrectly calculates usable space by improperly adjusting our formula for its jointly-owned poles using its various "maximum height of attachment from ground clearance" figures. The definition of usable space includes all the usable space on a pole regardless of ownership. Therefore, we find that Nevada Bell's pole data are incomplete and not a valid statistical survey from which to determine an average usable space for use in rate calculations different from our presumption of 13.5 feet. Moreover, our rules require the utility provide an accounting for all poles, whether solely or jointly-owned. Although Nevada Bell states in its Response that it was "planning an actual physical polesurvey in coordination with Sierra Pacific," no supplemental or actual pole survey has been submitted in this matter. Based on the information available, we are unable to reconcile the data provided and Nevada Bell's assertions. 14. Net Deferred Operating Income Taxes. Nevada Bell submits certain required data to the Common Carrier Bureau under the Uniform System of Accounts for Telephone Companies at Part 32 of the Commission's rules. Under Section 32.22(a) telephone companies are required to provide certain pole related information regarding tax effects of book/tax temporary differences in Accounts 4100 and 4340. Our formula for net cost of a bare pole includes a figure for net deferred operating income taxes, also known as accumulated deferred taxes, that is derived by adding Accounts 4100 and 4340. The sum of these two accounts is then multiplied by the ratio of gross pole investment to total gross plant investment to calculate the net deferred operating income taxes for poles. These accounts are included in the 1994 ARMIS Reports provided to NSCTA by Nevada Bell. Account 4110 shows a negative net current deferred operating income tax of a $4,356,000 and Account 4340 shows a positive net noncurrent deferred operating income tax of $35,801,000. The sum of these Nevada Bell accounts is $31,445,000. 15. In computing its maximum reasonable rate for pole attachments, Nevada Bell challenges our current rule and believes our approach to calculating deferred taxes to be imprecise and inaccurate. Nevada Bell creates its own alternative modifications to the accumulated deferred taxes figure of our formula based upon a depreciation situation it asserts is specific to its company. Nevada Bell proposes to calculate the deferred tax based on their specific net plant and tax basis for poles. Nevada Bell defends this approach with the explanation that a substantial amount of book depreciation has occurred because its gross pole plant is composed of poles which date back to the 1930's and that data to support this approach is maintained by them under the Uniform System of Accounts for Telephone Companies at Section 32.22(b). However, for tax purposes, the poles are depreciated using average service lives and are not fully depreciated since they have not reached the end of their useful lives. This has resulted in an excess of book over tax depreciation which has led to an accumulated deferred tax debit balance for Nevada Bell's poles. Alternatively, Nevada Bell suggests an approach whereby deferred taxes could be allocated based upon net plant, i.e., gross plant investment less the related book depreciation reserve. 16. NSCTA opposes Nevada Bell's attempts to unilaterally modify the Commission's adopted formula methodology. NSCTA asserts that a departure from the established methodology would be unjustified in this case," because Nevada Bell's argument is solely based on timing" and Nevada Bell's own expert on the issue admits that the situation is temporary and that it will "come back together over time." NSCTA points out that we have repeatedly refused to alter the pole rate methodology on arguments similar to those raised by Nevada Bell. 17. We decline to waive our existing methodology to adopt either of Nevada Bell's suggested approaches to calculating accumulated deferred taxes. Our formula for accumulated deferred taxes on poles divides the gross pole investment by the total gross plant investment, then multiplies that fraction times the total accumulated deferred tax. We believe that this formula is consistent with Congressional intent to provide a fair but expeditious methodology for calculating just and reasonable pole attachment rates. We also reject Nevada Bell's modification because adjustments to one account would necessitate adjustments to other accounts and "unduly complicate the pole attachment rate calculation process without materially increasing its accuracy." We will, therefore, use the publicly available data submitted in Accounts 4100 and 4340 from the utility's annual regulatory reports to calculate the net deferred operating income taxes as part of the formula to determine the net cost of a bare pole. 18. Maximum Just and Reasonable Pole Attachment Rate. By inserting our findings (as set forth in Attachment A to this Order) for the usable space and accumulated deferred taxes variables in our pole attachment rate formula, we arrive at a maximum just and reasonable rate of $1.26. Thus, based on the facts presented, under Section 224 of the Communications Act and our underlying rules, $1.26 is the maximum just and reasonable rate per pole attachment, per year, that Nevada Bell may charge. As noted, however, Nevada Bell was charging $4.00 per pole attachment, per year, during the period from the filing of the Complaint, February 29, 1996, to June 30, 1996, and $6.95 per attachment, per year, from July 1, 1996 to the present. Consequently, we find that Nevada Bell's pole attachment rates, effective February 29, 1996, are unjust and unreasonable. 19. Accordingly, IT IS ORDERED, pursuant to Sections 0.321 and 1.1401-1.1413 of the Commission's rules, 47 C.F.R. 0.321 and 1.1401-1.1413, that the Complaint of Nevada State Cable Television Association IS GRANTED to the extent indicated above. 20. IT IS FURTHER ORDERED, pursuant to Sections 0.321 and 1.1410(a) of the Commission's rules, that the annual rate of $4.00, effective February 29, 1996 to June 30, 1996, for each pole attachment arising out of the Agreements between Nevada Bell and Complainant IS UNREASONABLE. 21. IT IS FURTHER ORDERED, pursuant to Sections 0.321 and 1.1410(a) of the Commission's rules, that the annual rate of $6.95, effective July 1, 1996 to the present, for each pole attachment arising out of the Agreements between Nevada Bell and Complainant IS UNREASONABLE and IS TERMINATED, effective upon the release of this Order. 22. IT IS FURTHER ORDERED, pursuant to Sections 0.321 and 1.1410(b) of the Commission's rules, that the annual rate of $1.26 for each pole attachment IS SUBSTITUTED for the existing rate in the Agreements described in paragraph 2, effective upon release of this Order. 23. IT IS FURTHER ORDERED, pursuant to Sections 0.321 and 1.1410(c) of the Commission's rules, that Nevada Bell SHALL REFUND, within thirty (30) days of release of this Order, to Complainant that portion of the amount paid in excess of $1.26, plus interest to the date of refund, for service received from February 29, 1996 to June 30, 1996. 24. IT IS FURTHER ORDERED, pursuant to Sections 0.321 and 1.1410(c) of the Commission's rules, that Nevada Bell SHALL REFUND, within thirty (30) days of release of this Order, to Complainant that portion of the amount paid in excess of $1.26, plus interest to the date of refund, for service received from July 1, 1996 to the present. FEDERAL COMMUNICATIONS COMMISSION Elizabeth W. Beaty Chief, Financial Analysis and Compliance Division Cable Services Bureau Attachment A Pole Attachment Formulas and Calculations NSCTA v. Nevada Bell PA 96-001 Maximum Rate Space Occupied by CATV (A) 1 Total Usable Space (B) 13.5 Net Cost of a Bare Pole (C) $30.07 Carrying Charge Rate (D) $0.5647 Maximum Rate (A\B)xCxD $1.26 Net Cost of a Bare Pole (1) Gross Pole Investment $14,665,000 (2) Depreciation Reserve $12,210,000 (3) Net Current Deferred Operating Income Taxes ($4,356,000) (4) Net Noncurrent Deferred Operating Income Taxes $35,801,000 (5) Net Deferred Operating Income Taxes (L(3)+L(4)) $31,445,000 (6) Gross Plant Investment $468,619,000 (7) Net Deferred Operating Income Taxes (Poles) [L(1)/L(6)]xL(5) $984,042 (8) Net Investment (Poles) (L(1)-L(2)-L(7)) $1,470,958 (9) Net Investment (Bare Pole) (L(8)x95%) $1,397,410 (10) Number of Poles 46,473 (11) Net Cost of a Bare Pole (L(9)/L(10)) $30.07 Carrying Charge Rate (1) Administrative Charge 0.1178 (2) Maintenance Charge 0.0204 (3) Depreciation Charge 0.2572 (4) Taxes 0.0580 (5) Return on Investment 0.1113 (6) Total Carrying Charge (L(1)+L(2)+L(3)+L(4)+L(5)) 0.5647 Administrative Charge (1) Total G&A Expenses $29,151,000 (2) Net Plant Investment $247,492,000 (3) Administrative Charge (L(1)/L(2)) 0.1178 Maintenance Charge (1) Maintenance Expense $30,000 (2) Net Investment (Poles) $1,470,958 (3) Maintenance Charge (L(1)/L(2)) 0.0204 Depreciation Charge (1) Depreciation Rate 0.0258 (2) Gross Pole Investment $14,665,000 (3) Net Investment (Poles) $1,470,958 (4) Depreciation Charge (L(1)x(L(2)/L(3)) 0.2572 Taxes (1) Total Current and Deferred Taxes $14,362,000 (2) Net Plant Investment $247,492,000 (3) Taxes (L(1)/L(2)) 0.0580 Return on Investment Authorized by State Regulatory Commission 0.1113