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(1) (a) (i) 1) a)D )DDDFrfJ$ a2Paragraph R!1. a. i. (1) (a) (i) 1) a)D )DDDFrfK/` ` ` a3Paragraph R!1. a. i. (1) (a) (i) 1) a)D )DDDFrfL:` ` `  2wMuNuOGvPva4Paragraph R!1. a. i. (1) (a) (i) 1) a)D )DDDFrfME` ` `  a5Paragraph R!1. a. i. (1) (a) (i) 1) a)D )DDDFrfNP  ` ` ` hhh a6Paragraph R!1. a. i. (1) (a) (i) 1) a)D )DDDFrfO[   a7Paragraph R!1. a. i. (1) (a) (i) 1) a)D )DDDFrfPf  2<Qwx\z~f ցa8Paragraph R!1. a. i. (1) (a) (i) 1) a)D )DDDFrfQq "i~'K2^$(8<><q*"xxxxWWxxxWWkkxxxsignificant upgrades should be allowed to establish the upgrade costs through an abbreviated costof xNservice showing and add an upgrade surcharge to their rates otherwise determined pursuant to the  S- x{Commission's benchmark and price cap methodology. Z {OR- xԍ9 FCC Rcd 4527, 467476. See 47 C.F.R.  76.922(j)(5). Unlike the benchmark/price cap element of a cable  xoperator's rate, the upgrade surcharge will not be adjusted for inflation but will be a fee charged over the useful life of the improvement determined in accordance with the Commission's costofservice requirements. The Commission concluded that allowing  xabbreviated costofservice showings and surcharges for network upgrades is an appropriate way to  ximplement the goals of the 1992 Cable Act. Permitting abbreviated costofservice showings could  xpromote the availability of diverse cable services and facilities, encourage economically justified upgrades,  SJ -and reduce regulatory burdens, while ensuring reasonable rates for regulated services.=J  {O-ԍId. at 467475.=  S - ` x7.` ` Before a cable operator can recover upgrade costs through an abbreviated costofservice  S - xshowing, the Commission requires:= | {O-ԍId. at 467576.= (1) that the upgrade be "significant" and require added capital  x investment, such as expansion of bandwidth capacity and conversion to fiber optics, and for system  x.rebuilds; (2) that the upgrade benefit subscribers through improvements in the regulated services subject  xto the rate increase; (3) that the upgrade rate increase not be assessed on customers until the upgrade is  xcomplete and providing benefits to subscribers of the regulated services; (4) that the operator demonstrate  xLits net increase in costs, taking into account current depreciation expenses, likely changes in maintenance  xand other costs, changes in revenues, and expected economies of scale; and (5) that the operator allocate  xzthe net increase in costs in conformance with the cost allocation rules for costofservice showings, to  xlassure that only costs allocable to regulated services are imposed on subscribers to those services.  Sj- xPursuant to authority delegated by the Commission,:j {O-ԍId. at 4676.: the Bureau developed FCC Form 1235 to permit  SB-operators to show they have met these requirements.B {O- xԍSee Public Notice, Cable Services Bureau Develops System Upgrade Form, 11 FCC Rcd 5554 (Cab. Serv. Bur. 1995).  S-x A.` ` Benefit to Subscribers  S-  S- ` x8.` ` The issue in this case is whether the City reasonably applied the Commission's second and  xfifth criteria requiring subscriber benefit from the upgrade and the proper cost allocation when rejecting  xLCox's upgrade surcharge in its entirety. Cox argues that its investment benefits subscribers by providing  S*- x.enhanced reliability and improved signal quality for all services and that additional BST channels are not  S- xrequired before a benefit to BST subscribers can be found. We agree. The Cost Order requires that" ,`(`(88k"  S- xsubscribers benefit through "improvements in the regulated services subject to the rate increase,"L {Oh-ԍCost Order, 9 FCC Rcd at 4674.L without  xspecifying the kind of the improvements required. FCC Form 1235 requires that an operator state whether  xthe upgrade meets minimum technical specifications described in the Instructions for Part I, Line A.1 of  S- xthe form.UZ yO-ԍFCC Form 1235 at 2, Part I. A. 1 (Feb. 1996).U The instructions provide that an operator other than a small system operator meets the  S`- xzminimum specifications if the upgrade increases usable bandwidth to at least 550 MHz capacity with  S8- xupgrade capability to 750 MHz, fiber to node or beyond, and no more than 1,500 homes per node.8 yO - xԍFCC Form 1235, Instructions for Completion of Abbreviated Cost of Service Filing for Cable Network Upgrades, Instructions for Part I, Qualifications for Upgrade Rate Adjustment, at 5 (Feb. 1996). If  xjthe operator answers "yes", "the upgrade will be deemed `significant' and a benefit to subscribers of rate S- xregulated cable services."1B {O -ԍId.1 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.  Sp- ` Sx9.` ` Cox certified on its Form 1235 that it met the Commission's minimum technical  xspecifications, and this certification is undisputed in the record. The record shows that Cox rebuilt its  x<system to 750 MHz and activated 550 MHz of the capacity. Cox's VicePresident Technical Development  xexplained to the City's consultant that the operator increased number of fiber optic nodes from nine to  xj143; decreased the number of amplifiers in cascade to six; reduced the number of homes served by a node  xfrom about 12,000 per node to under 800; and installed fiber optic "rings" to enable the system to continue  S - xto operate in case of a fiber failure.c  yO-ԍAppeal, Exhibit 2 (Declaration of Stephen Gautereaux) at 2.c As a result, the carrier to noise ratio improved from 45 before the  xupgrade to 48 after the upgrade, reflecting improved signal quality. The number of outages per month  xdecreased from 14,909 in the 17 months before the upgrade to 700 in the first 3  months after the  S- xupgrade, reflecting improved system reliability."d  {O - xJԍId. See Bresnan Communications Company, DA 972033 at  27, 1997 WL 580823 (F.C.C.) (Cab. Serv. Bur.  xreleased Sept. 22, 1997) (operator meeting the minimum technical specifications and certifying that the BST and  xxCPST will see improved picture quality as a result of the rebuild was found to meet the technical requirements for acceptance of its upgrade justification). Subscribers are presumed to benefit from improved  xservice quality and reliability when an operator meets the minimum technical specifications, and no  xshowing of additional channels of service is required. The City's conclusion that there is no subscriber  xbenefit because Cox did not add channels to the BST is inconsistent with the showing specified in FCC Form 1235 and is not reasonable.  S-x B.` ` Allocation of Costs  S- ` Qx 10.` ` The Cost Order and section 76.922(j) of the Commission's rules provide that the cable  xoperator should allocate upgrade costs in conformance with the Commission's cost allocations rules for  Sz- xcostofservice showings.fzN  {Oh'-ԍCost Order, 9 FCC Rcd at 4675; 47 C.F.R.  76.922(j).f Implementation of Sections of the Cable Television Consumer Protection and"z,`(`(88"  xjCompetition Act of 1992: Rate Regulation and Adoption of a Uniform Accounting System for Provision  S- xof Regulated Cable Service, Second Report and Order, First Order on Reconsideration, and Further Notice  S- xof Proposed Rulemaking ("Final Cost Order") clarifies that a cable operator may include in its rate base  S- xLonly the plant that is used and useful; namely, plant in service to send signals to customers.H yO-ԍ11 FCC Rcd 2220, 223637 (1996).H Plant that  Sb- xlis not currently used and useful is excess capacity and should be excluded from the rate base.bX yOZ- xԍFor costofservice purposes, plant that is fully constructed and that will be used to provide regulated service  {O"-within 12 months may be included in the rate base. Final Cost Order, 11 FCC Rcd at 2236. In  xzaddition, cable operators must allocate the plant in service between regulated and unregulated services  xbased on a reasonable measure of the current usage of the plant. Only plant used and useful in the  xprovision of regulated services should be included in the rate base. This ensures that subscribers to  xregulated tiers are not forced to subsidize plant that is used solely for premium or other unregulated services.  SJ - ` x 11.` ` Section 76.924(f)(6) of the Commission's rules specifying cost allocation requirementsDJ  yO-ԍ47 C.F.R.  76.924(f)(7).D  xprovides for direct allocation of costs incurred exclusively to support a specific service cost category or  xthe equipment basket wherever possible. Section 76.924(f)(7) allows the operator flexibility in  x0determining specific allocators and allocation schemes that achieve reasonable results when direct  S - x.allocation is not possible. B {O-ԍ47 C.F.R.  76.924(f)(7); see Cost Order, 9 FCC Rcd at 45354; Final Cost Order, 11 FCC Rcd at 2268 . Wherever possible, common costs for which no allocator has been specified  xby the Commission are to be allocated based on direct analysis of the origin of the costs. Where this is  xnot possible, common costs shall, if possible, be allocated based on indirect costcausative linkage to other  xcosts directly assigned or allocated to the service cost categories and equipment basket. Where neither  xdirect nor indirect measures of cost causation can be found, common costs shall be allocated to each  xservice cost category based on the ratio of all other costs directly assigned and attributed to a service cost  xcategory over total costs directly or indirectly assigned and directly or indirectly attributable. The cost  xassignments and allocations made on the worksheets for FCC Form 1235 are to be made in accordance  x\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.  S- ` _x 12.` ` Cox allocated its plant and related costs to regulated services, including BST, in two steps.  xFirst, it determined the costs associated with its excess capacity by taking the ratio of unactivated capacity  x=to total capacity and subtracting that percent of its upgrade costs from the total upgrade costs. Because  Sz- xit did not activate 200 MHz of the 750 MHz of capacity it constructed, Cox subtracted 27% of its costs.fz yO!-ԍAppeal, Exhibit 6 (letter from Fitzsimmons to Smith) at 4 n.7.f  xzCox then allocated the residual 73% of its costs among regulated and unregulated services on the basis  xof the total channel count by tier after the upgrade. Because 18 of the 74 activated channels were in the  S-BST, Cox allocated 24.32% of the residual costs to the BST.d  yO&- xԍAppeal, Exhibit 3 (Cox Form 1235) at 7; Exhibit 5 (Public Knowledge Report) at 2. Fortyone channels were in the CPST; 15 a la carte and premium channels were classified as "other." " ,`(`(88k"Ԍ S- ` ԙx 13.` ` The City's consultant viewed the amount of upgraded capacity as 300 MHz, the difference  xbetween the total system capacity before and after the Cox rebuilt the system, rather than the full 750  x>MHz Cox had constructed. He viewed the used and useful portion of the capacity as 100 MHz, the  xdifference between the amount of activated capacity before and after the rebuild, rather than full 550 MHz  x\Cox had activated. Because Cox had not activated 200 MHz of its upgraded capacity, the consultant  xyrecommended that 66.67% of the upgrade costs be excluded. He then recommended against allowing Cox  xjany recovery of the upgrade costs from BST rates because Cox did not add channels to the BST after the  S-upgrade.~ yOP- xԍAppeal, Exhibit 5 (letter from Public Knowledge, Inc. at 23). The consultant also noted that Cox had reported  xCPST channel additions for which it had previously adjusted its rates. Because these additions were made available  x;by the upgrade, he was concerned that Cox would be recovering twice, under the previous rate adjustments and again  xin the upgrade cost allocated to the CPST. Thus, he recommended that the City file a complaint against the CPST  {Op - xrate adjustment attributable to the upgrade. Id. at 3. The City did file a complaint. The Bureau found that Cox's  {O: - xCPST rate increase attributable to the upgrade was not unreasonable and denied the City's complaint. Cox  {O -Communications, DA 962070 (released Dec. 11, 1996).  S- ` x 14.` ` Cox argues that the City erred in considering only the incremental increase in system  xcapacity and channels resulting from the upgrade. We agree. The Commission explicitly stated that the  SH - xupgrade surcharge option is available for significant upgrades, such as the expansion of bandwidth capacity  S - xand conversion to fiber optics, and for system rebuilds,L  {O-ԍCost Order, 9 FCC Rcd at 4675.L which Cox has done. The Commission did not  xlimit the option only to costs attributable to incremental changes in the capacity of a system after a  xzrebuild. The City's consideration of only the incremental increase in capacity is inconsistent with the Commission's express intention.  SX- ` ox15.` ` The methodology Cox used in allocating costs to used and useful plant and to regulated  xtiers is consistent with the methodology the Commission described for measuring excess capacity and for  S- x1reasonably measuring the current usage of tangible plant in the Final Cost Order and with the  S- x>methodology applied in Bresnan Communications Co.d!Z {O"- x-ԍFinal Cost Order, 11 FCC Rcd at 223637; Bresnan Communications Co., DA 972033 at  28 (operator's  x=allocations of rate base and expense costs were adjusted based on channel ratios following its upgrade because operator's tier charges were based on those ratios).d The City's allocation of all the costs of the  xLrebuild to the incremental increase in capacity does not recognize that some of the costs were incurred in  x\replacing existing facilities and, therefore, is not a reasonable allocation of costs between the used and  xuseful plant Cox has built and activated and the excess capacity Cox has not activated. The City's view  xthat costs can be allocated to the BST only if channels are added to the BST disregards the benefits to  xsubscribers of all tiers of service, including BST subscribers, from the improved service quality and  S- xreliability resulting from the rebuild. The City's effort to impose all of the rebuild costs on services other  xthan the BST disregards the extent to which the costs originated or were caused by improved BST service  xand, therefore, is inconsistent with the requirement of Section 76.924(f)(7) of the Commission's rules that  xthe origins or causes of common costs should be considered to the extent possible in allocating costs. Cox  ST- xis entitled to allocate costs to the BST and recover those costs from BST subscribers whether or not it"T !,`(`(88"  S-added new channels to the BST.N"Z {Oh- x<ԍSee Marcus Cable Associates, L.P., 12 FCC Rcd 23216 (Cab. Serv. Bur. 1997) (upgrade costs were properly  xallocable to the BST and the CPST, although the cable operator added new channels only to the CPST and elected to recover the costs only from the CPST).N  S-  S- IV.xCONCLUSION  S-  S`- ` x16.` ` The City's rate order denying Cox any recovery for the upgrade costs attributable to the  S8- xBST is inconsistent with the Cost Order and section 76.922(j) of the Commission's rules allowing a cable  xoperator that invests significantly in upgrading its system, as Cox has done, to justify an increase in its  x.rates to recover the costs of the network upgrade without having to make a full costofservice showing.  xThe rationale underlying the rate order disregards the benefit to BST subscribers from Cox's rebuild and  xis inconsistent with the Commission's cost allocation rules in section 76.924(f)(7). For these reasons, the  xjCity'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.  S - ` Ax17.` ` ACCORDINGLY, IT IS ORDERED that the Appeal of Cox Communications San Diego,  xInc. 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.  SZ- ` x18.` ` This action is taken by the Chief, Cable Services Bureau, pursuant to authority delegated  S2-by sections 0.321 and 1.106(a)(1) of the Commission's Rules.N#2 yO-ԍ47 C.F.R.  0.321, 1.106(a)(1).N x` `  hh@FEDERAL COMMUNICATIONS COMMISSION x` `  hh@John E. Logan x` `  hh@Deputy Chief, Cable Services Bureau %KH   %KH