******************************************************** NOTICE ******************************************************** This document was converted from WordPerfect to ASCII Text format. Content from the original version of the document such as headers, footers, footnotes, endnotes, graphics, and page numbers will not show up in this text version. All text attributes such as bold, italic, underlining, etc. from the original document will not show up in this text version. Features of the original document layout such as columns, tables, line and letter spacing, pagination, and margins will not be preserved in the text version. 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: ) ) Cox Communications San Diego, Inc.) CUID CA0329 ) File No. CSB-A-0364 Appeal from a Local Rate Order of the) City of Chula Vista, California ) MEMORANDUM OPINION AND ORDER Adopted: August 3, 1998 Released: August 4, 1998 By the Deputy Chief, Cable Services Bureau: 1. Before the Cable Services Bureau ("Bureau") is an appeal filed by Cox Communications San Diego, Inc. ("Cox") of a local rate order issued by the City of Chula Vista, California ("City"). In its rate order, the City disapproved the basic service tier ("BST") rate increase Cox sought after upgrading its Chula Vista cable system. Cox argues in its appeal that the City erred in disapproving the rate adjustment. The City has not filed an opposition. For the reasons stated below, we grant Cox's appeal and remand this matter to the City for further proceedings consistent with this decision. I. STANDARD OF REVIEW 2. Under our rules, rate orders made by local franchising authorities may be appealed to the Commission. In ruling on appeals of local rate orders, the Commission will not conduct a de novo review, but instead will sustain the franchising authority's decision as long as a reasonable basis for that decision exists. The Commission will reverse a franchising authority's rate decision only if it determines that the franchising authority acted unreasonably in applying the Commission's rules. If the Commission reverses a franchising authority's decision, it will not substitute its own decision but instead will remand the issue to the franchising authority with instructions to resolve the case consistent with the Commission's decision on appeal. II. THE APPEAL 3. Cox upgraded its plant serving Chula Vista and neighboring communities in the San Diego, California area in two stages. In 1990 and 1991, it increased system capacity in Chula Vista to 450 MHz. In 1995 and 1996, Cox replaced its entire system, increasing its capacity in Chula Vista from 450 MHz to 750 MHz. Cox activated 550 MHz of the total capacity. It proposed to recover the costs for 1995-1996 rebuild attributable to the activated capacity by adjusting both its BST and cable programming service tier ("CPST") rates. Cox filed FCC Form 1235 with the City in order to support its proposed BST rate adjustment for the upgrade with an abbreviated cost-of-service showing. At the same time, it filed FCC Form 1240 to reflect other cost-based adjustments to its maximum permitted BST rate. 4. The City approved the cost-based adjustments to Cox's maximum permitted rate but disapproved Cox's upgrade-related increase. The City's action was based on a report from its consultant and also the written recommendation of its staff. The consultant found no benefit from the upgrade because Cox did not add new channels to the BST, and he disagreed with Cox's cost allocation methodology. He, therefore, recommended that the City disapprove the upgrade-related increase. The City's staff also recommended disapproving the upgrade rate increase. 5. Cox argues that the City erred in denying Cox any recovery for the upgrade costs shown on its Form 1235. According to Cox, it demonstrated to the City that its upgrade to a fiber-rich plant will provide substantial benefits to BST subscribers through improved system reliability and better picture quality. It argues that, because it replaced the entire system, it should treat all 550 MHz of activated capacity, which is 73% of the upgraded plant, as an improvement. It also argues that it should allocate the costs between BST, CPST, and other services on the basis of total channels on the system, not just channels added as a result of the upgrade. III. DISCUSSION 6. In Implementation of Sections of the Cable Television Consumer Protection and Competition Act of 1992: Rate Regulation and Adoption of Uniform Accounting System for Provision of Regulated Cable Service ("Cost Order"), the Commission concluded that cable operators making significant upgrades should be allowed to establish the upgrade costs through an abbreviated cost-of-service showing and add an upgrade surcharge to their rates otherwise determined pursuant to the Commission's benchmark and price cap methodology. The Commission concluded that allowing abbreviated cost-of-service showings and surcharges for network upgrades is an appropriate way to implement the goals of the 1992 Cable Act. Permitting abbreviated cost-of-service showings could promote the availability of diverse cable services and facilities, encourage economically justified upgrades, and reduce regulatory burdens, while ensuring reasonable rates for regulated services. 7. Before a cable operator can recover upgrade costs through an abbreviated cost-of-service showing, the Commission requires: (1) that the upgrade be "significant" and require added capital investment, such as expansion of bandwidth capacity and conversion to fiber optics, and for system rebuilds; (2) that the upgrade benefit subscribers through improvements in the regulated services subject to the rate increase; (3) that the upgrade rate increase not be assessed on customers until the upgrade is complete and providing benefits to subscribers of the regulated services; (4) that the operator demonstrate its net increase in costs, taking into account current depreciation expenses, likely changes in maintenance and other costs, changes in revenues, and expected economies of scale; and (5) that the operator allocate the net increase in costs in conformance with the cost allocation rules for cost-of-service showings, to assure that only costs allocable to regulated services are imposed on subscribers to those services. Pursuant to authority delegated by the Commission, the Bureau developed FCC Form 1235 to permit operators to show they have met these requirements. A. Benefit to Subscribers 8. The issue in this case is whether the City reasonably applied the Commission's second and fifth criteria requiring subscriber benefit from the upgrade and the proper cost allocation when rejecting Cox's upgrade surcharge in its entirety. Cox argues that its investment benefits subscribers by providing enhanced reliability and improved signal quality for all services and that additional BST channels are not required before a benefit to BST subscribers can be found. We agree. The Cost Order requires that subscribers benefit through "improvements in the regulated services subject to the rate increase," without specifying the kind of the improvements required. FCC Form 1235 requires that an operator state whether the upgrade meets minimum technical specifications described in the Instructions for Part I, Line A.1 of the form. The instructions provide that an operator other than a small system operator meets the minimum specifications if the upgrade increases usable bandwidth to at least 550 MHz capacity with upgrade capability to 750 MHz, fiber to node or beyond, and no more than 1,500 homes per node. If the operator answers "yes", "the upgrade will be deemed `significant' and a benefit to subscribers of rate-regulated cable services." Only if the operator answers in the negative must it make an affirmative showing as to how the upgrade will be significant and will benefit subscribers. 9. Cox certified on its Form 1235 that it met the Commission's minimum technical specifications, and this certification is undisputed in the record. The record shows that Cox rebuilt its system to 750 MHz and activated 550 MHz of the capacity. Cox's Vice-President Technical Development explained to the City's consultant that the operator increased number of fiber optic nodes from nine to 143; decreased the number of amplifiers in cascade to six; reduced the number of homes served by a node from about 12,000 per node to under 800; and installed fiber optic "rings" to enable the system to continue to operate in case of a fiber failure. As a result, the carrier to noise ratio improved from 45 before the upgrade to 48 after the upgrade, reflecting improved signal quality. The number of outages per month decreased from 14,909 in the 17 months before the upgrade to 700 in the first 3 « months after the upgrade, reflecting improved system reliability. Subscribers are presumed to benefit from improved service quality and reliability when an operator meets the minimum technical specifications, and no showing of additional channels of service is required. The City's conclusion that there is no subscriber benefit because Cox did not add channels to the BST is inconsistent with the showing specified in FCC Form 1235 and is not reasonable. B. Allocation of Costs 10. The Cost Order and section 76.922(j) of the Commission's rules provide that the cable operator should allocate upgrade costs in conformance with the Commission's cost allocations rules for cost-of- service showings. Implementation of Sections of the Cable Television Consumer Protection and Competition Act of 1992: Rate Regulation and Adoption of a Uniform Accounting System for Provision of Regulated Cable Service, Second Report and Order, First Order on Reconsideration, and Further Notice of Proposed Rulemaking ("Final Cost Order") clarifies that a cable operator may include in its rate base only the plant that is used and useful; namely, plant in service to send signals to customers. Plant that is not currently used and useful is excess capacity and should be excluded from the rate base. In addition, cable operators must allocate the plant in service between regulated and unregulated services based on a reasonable measure of the current usage of the plant. Only plant used and useful in the provision of regulated services should be included in the rate base. This ensures that subscribers to regulated tiers are not forced to subsidize plant that is used solely for premium or other unregulated services. 11. Section 76.924(f)(6) of the Commission's rules specifying cost allocation requirements provides for direct allocation of costs incurred exclusively to support a specific service cost category or the equipment basket wherever possible. Section 76.924(f)(7) allows the operator flexibility in determining specific allocators and allocation schemes that achieve reasonable results when direct allocation is not possible. Wherever possible, common costs for which no allocator has been specified by the Commission are to be allocated based on direct analysis of the origin of the costs. Where this is not possible, common costs shall, if possible, be allocated based on indirect cost-causative linkage to other costs directly assigned or allocated to the service cost categories and equipment basket. Where neither direct nor indirect measures of cost causation can be found, common 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 attributable. The cost assignments and allocations made on the worksheets for FCC Form 1235 are to be made in accordance with section 76.924(f). Cox's FCC Form 1235 shows that the costs it seeks to recover were incurred primarily for the plant or were related to the plant. 12. Cox allocated its plant and related costs to regulated services, including BST, in two steps. First, it determined the costs associated with its excess capacity by taking the ratio of unactivated capacity to total capacity and subtracting that percent of its upgrade costs from the total upgrade costs. Because it did not activate 200 MHz of the 750 MHz of capacity it constructed, Cox subtracted 27% of its costs. Cox then allocated the residual 73% of its costs among regulated and unregulated services on the basis of the total channel count by tier after the upgrade. Because 18 of the 74 activated channels were in the BST, Cox allocated 24.32% of the residual costs to the BST. 13. The City's consultant viewed the amount of upgraded capacity as 300 MHz, the difference between the total system capacity before and after the Cox rebuilt the system, rather than the full 750 MHz Cox had constructed. He viewed the used and useful portion of the capacity as 100 MHz, the difference between the amount of activated capacity before and after the rebuild, rather than full 550 MHz Cox had activated. Because Cox had not activated 200 MHz of its upgraded capacity, the consultant recommended that 66.67% of the upgrade costs be excluded. He then recommended against allowing Cox any recovery of the upgrade costs from BST rates because Cox did not add channels to the BST after the upgrade. 14. Cox argues that the City erred in considering only the incremental increase in system capacity and channels resulting from the upgrade. We agree. The Commission explicitly stated that the upgrade surcharge option is available for significant upgrades, such as the expansion of bandwidth capacity and conversion to fiber optics, and for system rebuilds, which Cox has done. The Commission did not limit the option only to costs attributable to incremental changes in the capacity of a system after a rebuild. The City's consideration of only the incremental increase in capacity is inconsistent with the Commission's express intention. 15. The methodology Cox used in allocating costs to used and useful plant and to regulated tiers is consistent with the methodology the Commission described for measuring excess capacity and for reasonably measuring the current usage of tangible plant in the Final Cost Order and with the methodology applied in Bresnan Communications Co. The City's allocation of all the costs of the rebuild to the incremental increase in capacity does not recognize that some of the costs were incurred in replacing existing facilities and, therefore, is not a reasonable allocation of costs between the used and useful plant Cox has built and activated and the excess capacity Cox has not activated. The City's view that costs can be allocated to the BST only if channels are added to the BST disregards the benefits to subscribers of all tiers of service, including BST subscribers, from the improved service quality and reliability resulting from the rebuild. The City's effort to impose all of the rebuild costs on services other than the BST disregards the extent to which the costs originated or were caused by improved BST service and, therefore, is inconsistent with the requirement of Section 76.924(f)(7) of the Commission's rules that the origins or causes of common costs should be considered to the extent possible in allocating costs. Cox is entitled to allocate costs to the BST and recover those costs from BST subscribers whether or not it added new channels to the BST. IV. CONCLUSION 16. The City's rate order denying Cox any recovery for the upgrade costs attributable to the BST is inconsistent with the Cost Order and section 76.922(j) of the Commission's rules allowing a cable operator that invests significantly in upgrading its system, as Cox has done, to justify an increase in its rates to recover the costs of the network upgrade without having to make a full cost-of-service showing. The rationale underlying the rate order disregards the benefit to BST subscribers from Cox's rebuild and is inconsistent with the Commission's cost allocation rules in section 76.924(f)(7). For these reasons, the City's denial of any upgrade surcharge is not reasonable, and the matter is being remanded to the City for further proceedings consistent with this decision. 17. ACCORDINGLY, IT IS ORDERED that the Appeal of Cox Communications San Diego, Inc. filed November 21, 1996 IS GRANTED and that the matter IS REMANDED to the City of Chula Vista, California for further proceedings consistent with this decision. 18. This action is taken by the Chief, Cable Services Bureau, pursuant to authority delegated by sections 0.321 and 1.106(a)(1) of the Commission's Rules. FEDERAL COMMUNICATIONS COMMISSION John E. Logan Deputy Chief, Cable Services Bureau